Canada has stolen a march on the United States, the world's largest propane exporter, by supplying domestically sourced propane to Hawaii when U.S. producers cannot do so because America does not have access to ships legally qualified to handle the job.

The inaugural propane cargo from Pembina Pipeline Corp.'s new 25,000-b/d Prince Rupert LPG export terminal on Watson Island in British Columbia, lifted by Handysize LPG carrier Pertusola on April 14, is being delivered this week at multiple ports on the Hawaiian Islands.

This is the first batch of North American propane to officially land on the Pacific Ocean archipelago, some 2,000 miles from the U.S. mainland. Sources believe Prince Rupert in coming months could funnel a regular flow of Canadian LPG to the Hawaiian Islands.

America's inability to meet the propane needs of one of its own states stems from the Jones Act, a 1920 federal law that restricts waterborne commerce between one U.S. port and another to ships built, flagged, owned and crewed by the U.S.

The cost of constructing a commercial oceangoing ship in the U.S. could exceed that for comparable ships in South Korea or Japan by a magnitude of five or more. This results in "import substitution" for a number of commodities, including propane, whereby domestic industry imports the product on foreign-flagged ships while the equivalent portion of domestic production is exported, also on foreign-flagged ships.

This practice bypasses the lack of domestic shipping, but is not cost-efficient. However, with domestic waterborne volume needs described as "marginal at best," no Jones Act gas carrier (LPG, LNG and ethane vessels) has been built in the U.S. since 1980.

As a result, while U.S. propane exports set new records on the back of booming shale production and export terminal expansions, Hawaii is left to import from smaller suppliers such as Trinidad, Argentina and as far as West Africa.

Puerto Rico, and even places on the mainland without good pipeline or rail connectivity such as New Hampshire, face a similar situation.

Hawaii Shippers Council president Michael N. "Mike" Hansen has led efforts to secure a limited exemption from the Jones Act for foreign-flag ships to carry LPG to Hawaii. "Such an exemption would improve energy availability and lower energy costs for areas of the nation not served by pipeline," Hansen said.

Prince Rupert Could Herald a New Trend

Canada now could provide Hawaii with some supply security. Prince Rupert is capable of loading Handysizes that typically hold 100,000-120,000 bbl of propane, unlike larger export docks that handle 550,000-bbl-capacity very large gas carriers (VLGCs) that are economically viable for long-haul voyages.

"The relatively short distance from Prince Rupert to ports in Hawaii makes the development of Pembina's terminal a far more efficient supply chain that could materially benefit the local market," Hansen said. Prince Rupert at this stage could load two Handysizes a month and it would not be surprising to see at least one of these routinely head to Hawaii, commented another trade source.

The receiver of imports in the state is The Gas Company LLC, d.b.a. Hawaii Gas, the state's only franchised gas utility and a Macquarie Infrastructure subsidiary. Hansen said Hawaii Gas in the recent past has imported an LPG cargo approximately once a month.

IHS Markit Waterborne statistics show The Gas Company's LPG imports totaled 112,000 bbl during calendar 2020, down from 435,000 bbl in 2019. In contrast, the U.S. exported an all-time record 551.51 million bbl of propane (1.507 million b/d) in 2020, up from 478.73 million bbl (1.312 million b/d) in 2019.

Italian-flagged gas carrier Pertusola arrived at Hilo Harbor, Hawaii Island (the "Big Island") on April 26 for a partial cargo discharge. She is scheduled to call at two additional ports this week -- Nawiliwili Harbor on Kauai Island and Kahului Harbor on Maui Island.

Italian-flagged Handysize Marigola loaded another cargo at Prince Rupert on April 22. The AISLive service provided by IHS Markit's Maritime Portal this morning listed Hilo Harbor as the ship's intended destination with projected arrival May 5.

Pembina by presstime had not responded to an OPIS request for comment on Prince Rupert's inaugural cargoes.

Midwest Could Face Brunt of Impact

With Canadian propane exports ramping up, trade attention has turned to the fallout on U.S.-Canadian propane balances. Experts believe the impact is likely to be muted for now, but Hawaii's gain is likely to be the U.S. Midwest's loss.

Canada is a much smaller market than its southern neighbor, but Canadian propane has traditionally provided a safety valve for the American heartland whenever tightness loomed, particularly during fall crop-drying and in winter.

These supplies are railed in.

Things began to change two years ago as Canada got a waterborne option. The VLGC-capable AltaGas-Vopak export terminal on Ridley Island, B.C., debuted in May 2019 and is now up to some 50,000 b/d. Prince Rupert's 25,000 b/d adds to these flows.

In terms of inventories, the Midwest (PADD2) is at a cyclical low. Energy Information Administration (EIA) statistics show PADD2 propane stocks on April 16 stood at 10.1 million bbl, down from the Sept. 25, 2020 peak of 27.83 million bbl.

Canadian propane stocks are cyclically healthy despite a month-on-month drop from March to April. The Canada Energy Regulator (CER) pegged national stocks at 5.26 million bbl on April 1, 2.59 million bbl higher year on year. Western Canadian stocks stood at 3.3 million bbl compared with 1.8 million bbl a year ago.

These numbers suggest an immediate fallout from Canadian waterborne flows may be unlikely. However, one expert suggested that, given this year's more urgent need for the Midwest to build stocks by October, Canadian flows to Hawaii could become a factor.

"It is simple math," he commented. "Hawaii will benefit [from Prince Rupert flows], but likely at the Midwest's expense."

Canada's propane demand is expected to rise over this decade. This assumes Pembina's planned Prince Rupert expansion fructifies, and propane dehydrogenation (PDH) plants planned in Alberta for Inter Pipeline and Pembina's currently suspended Canada-Kuwait Petrochemical Corp. project eventually begin operations.

This suggests the Midwest, and America in general, may not be able to count on Canadian propane to fill the gaps as before.

"It is death by a thousand cuts," remarked the trade watcher on the longer-term implications for U.S.-Canada propane balances.

 

--Reporting by Rajesh Joshi, rjoshi@opisnet.com;

--Editing by Michael Kelly, michael.kelly3@ihsmarkit.com

 

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