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CHS builds propane terminal to help compensate for Cochin Pipeline loss

HANNAFORD, N.D. — CHS Inc.’s new rail-fed propane terminal west of Hannaford,
N.D., is coming together — an important step as the industry ramps up to fill a
void left by the discontinuation of the Cochin Pipeline terminal east of
Carrington, N.D.

CHS is one of the region’s bigger players in the propane business, delivering
propane that dozens of cooperative suppliers then deliver to their retail
customers.

The new facility will operate around the clock. The terminal, at 711 109 Ave.
Southeast, will be the biggest propane unloading facility in North Dakota and
the largest tank farm in the region.

The propane company uses the loop track to access a new spur that can handle
up to 48 cars. The new CHS terminal is operated and maintained by Central Plains
Ag, itself a 50-50 partnership between CHS and West Central Ag of Ulen, Minn.The
new propane facility will start functioning with three 90,000-gallon tanks — a
total of 270,000 gallons initially. On April 3, the construction crews had
pressurized and flared the tanks, verifying that the welds and valves were good,
burning out the impurities in preparation for filling. Initially, the tank farm
was planned for only five tanks, but in December, the plan expanded to a dozen.
Phase two expansion, set for this summer, will be fully in place for fall
harvest and heating in 2014.

The facility will be able to handle groups of six cars at a time, once the
plant is fully operational. The terminal can load up to six trucks an hour,
using two bays — theoretically more than 100 trucks per day.

The propane terminal makes the complex unique in the region.

The “loop” handles 110-car trains and was built to accommodate the Central
Plains Ag Services dry fertilizer facility, on its west side. The fertilizer
plant was built in 2009 at 25,000 tons and has since expanded to 40,000 tons. In
2012, Central Plains built an elevator on the east side of the circle — 1.3
million bushels in concrete storage, another 1.5-million-bushel bunker and then
1.3-million-bushel steel tanks.

Ben Jacob, manager of Central Plains, says the propane facility should be
welcomed, considering the propane shortage felt last fall and winter.

“We’re trying to keep up with the producer, and, to do that, we have to be as
fast as them and have to be able to supply what they need,” he says.

 

Filling the void

Drew Combs, CHS vice president of propane, says the company is investing $24
million in new facilities in North Dakota, Minnesota and Wisconsin,
predominantly because of the Cochin pipeline change.

Originally, CHS had planned only an $18.3 million investment, but Combs says
the company beefed up its plans after the difficult grain drying season in 2013
and rail delays that caused a serious propane shortage.

“We decided we were light on tankage to help crop drying, but you can’t build
a church for Easter Sunday. You’ve got to be prudent with the dollars you have.
We got approval to spend an additional $6 million for storage.”

CHS has also secured long-term throughput agreements, adding rail service and
expanding service agreements with Canadian Pacific Railway and Burlington
Northern Santa Fe Railway to serve Hannaford, as well as expansions in
Fairmount, N.D., Glenwood, Minn., and Rockville, Minn., and a new terminal to
serve western Wisconsin and eastern Iowa.

Mike Rud, executive director of the North Dakota Propane Gas Association in
Bismarck, says rail transportation is a “big wild card” in how the industry
responds to the loss of the pipeline. Several marketers are looking to put in
additional storage.

Rud says he’s heard that there are companies considering buying the Cochin
storage site in Carrington, N.D., but he didn’t know how it would be filled. He
says Hess Corp. is also coming on line with a 16,000-barrel-per-day production
facility near Tioga, N.D., which would be roughly similar to the amount pulled
out of Cochin during last year’s major corn drying season.

 

Cochin capacity

Combs says the Cochin Pipeline reversal is only one of several pipeline
changes that have occurred to satisfy markets for moving oil and other
byproducts out of the Bakken and other oil formations across the country,
largely available because of new horizontal drilling techniques.

Another example in another part of the country is Texas Eastern Petroleum
Pipeline Co., now owned by Enterprise Products Partners LP. The company has
converted a line that once carried propane and other products to now transport
ethane from Pennsylvania back to Texas to the petrochemical market.

In North Dakota, Cochin Pipeline had been the primary propane supplier.

The 1,900-mile 12-inch diameter pipeline is owned by Kinder Morgan Energy
Partners LP of Houston. It operates between Fort Saskatchewan, Alberta, and
Windsor, Ontario, including five terminals. The pipeline recently has carried up
to 50,000 barrels of propane per day, but delivered around 16,000 barrels to
Carrington during harvest, Rud says. The pipeline includes 31 pump stations and
five U.S. propane terminals and runs through seven states.

Kinder Morgan says it will to go to about 95,000 barrels, carrying “light
condensate” westbound from Kankakee County, Ill., to Canada. The company is in
the final processes of purging the pipeline, preparing for shipments to move
north on July 1.

Other sources for propane to make up for the Cochin loss exist. Combs says a
separate key pipeline origination hub and storage location in Conway, Kan.,
brings propane and other products up various pipelines in South Dakota and
western Iowa, Minnesota and central Iowa, as well as Illinois and Wisconsin. The
Conaway area has 30 million barrels of propane storage, and CHS owns or leases
part of it.

Separately, Kinder Morgan last September announced it would sell its propane
terminal in Benson, Minn., to Alliance Energy Services of North Kansas City, Mo.
Alliance bought the tank farm — previously supplied by the now-reversed Cochin
Pipeline — for $5 million. It supplies 75 million gallons of propane per year
and has a storage capacity of 1.4 million gallons — slightly larger than CHS’
facility in Hannaford. Alliance says it will install rail delivery and will
start operations in June.

 

Changing market

Combs is careful to emphasize that CHS is building in Hannaford and elsewhere
to “serve our own customers and to allow them the ability to grow their demand
base.”

Combs notes that CHS is not trying to serve 100 percent of the market the
Cochin pipeline had been supplying.

“Our demand fills the glass to … say, 50 percent,” Combs says, declining to
speculate on what part of the market CHS accounts for. CHS also has a huge truck
transportation fleet that will fill in some of the gaps, Combs says. The co-op
has been investing $5 million to $10 million a year in increasing the truck
transport end of the business.

Agriculture and even heating markets are up and down, compared with other
markets, Combs says. Crop drying can account for zero to 60 percent of the
propane use in this region in a given year, depending on drying needs.

Propane will continue to be a relatively cheap and viable fuel for grain
drying and heating. Farmers and other consumers need to know that the market has
completely changed from how things have been for the past 50 years.

Farmers typically avoid investing too soon in their propane needs, but Combs
notes it is typically seasonally cheaper in the summertime, so the decision
becomes more obvious. In the fall of 2013, farmers suffered from spot shortages
of propane, especially when they hadn’t done much forward-contracting of the
fuel.

Farmers in the region had done little drying in the previous two years and so
underestimated their needs for the fall of 2013. When they tried to get more
propane in the middle of the season, retailers were faced with a tricky juggling
act and some farmers went as far as Nebraska to bring in transport trucks.

 

,b>Reconsider needs

“You look at the demand for propane and it’s like saw teeth on a saw — from
lows in summer to peaks in winter,” Combs says. “Traditionally, the product has
shifted into the market from November to February, but the product won’t be
there unless consumers move them into place from April to September.”

Combs says farmers need to fundamentally reconsider their storage needs,
particularly with the recent rail problems. Rail delivery is often not as
reliable as pipeline delivery and adequate storage will be crucial.

As a rule of thumb, the industry is advising farmers and others to maintain a
total of 14 days of use on hand on their farms. Most have far less than
that.

CHS boosted its incentives to the co-op retailers, allowing them to pay for
new tanks through purchases of propane from the company.

“We have to change our thought process in that we need to preposition it at
the end-user level in the future, versus thinking of it as a ‘just-in-time’
demand resource,” he says. Buying and storing propane comes with a carrying
cost.

Propane marketers are talking with federal and state governments, shifting
the timing of low-income heating assistance programs to help consumers afford
supplies. They want the governments to fund it in the summer, rather than
waiting for the fall.

 

Import to export

As little as three years ago, propane was being imported into the U.S. from
sources in Canada, through the North Sea and the Arabian Peninsula. “It was a
U.S. commodity, but now it’s a global-based commodity on propane,” Combs says.

In 2012, the U.S. was capable of exporting 200,000 barrels of propane per
day. In 2014, that will climb to 400,000 to 500,000 barrels per day. The
majority of that capacity was added last fall.

“By 2020, we will export 1.2 million barrels of propane a day,” Combs says.
To compare, U.S. production capacity currently is 1.7 million barrels.

“Now we have become an export nation,” Combs says. “Even though we’re
bringing in Canadian imports, Canada is now moving product to Mont Belvieu and
Houston, Texas, and facilities on the East Coast — taking propane molecules and
moving them to Europe, South America and Asia. Asia has the largest demand
requirement in the global climate.”