Mixed, Manufactured, or Liquefied Petroleum Gas Production and/or Distribution

SIC 4925

Industry report:

This industry classification includes establishments involved in manufacturing and/or distributing manufactured gas, liquefied petroleum gas (LPG), or mixtures of manufactured gas with natural gas. Examples include blue gas, coke oven gas, manufactured gas, synthetic natural gas from naphtha, and liquefied petroleum gas distributed through mains. Establishments involved in the sale of liquefied petroleum gas in steel containers are classified as SIC 5984: Liquefied Petroleum Gas (Bottled Gas) Dealers.

Industry Snapshot

Manufactured gas, liquefied petroleum products (LPG), and gas mixtures play an important role in specific industrial applications and in places beyond the reach of natural gas pipelines. Some of the most widely used manufactured or liquefied petroleum gases include coke oven gas, water gas, naphtha gas, acetylene, propane, and butane. Coke oven gas and water gas are both derived from coal. To make coke oven gas, vapors are collected from heated coal and then purified. Water gas is produced by forcing steam through hot coal or coke. Naphtha gas is made from crude petroleum. Acetylene can be made from water and calcium carbide or by breaking apart methane molecules. Propane and butane are both natural gas liquids. They are typically separated from methane during natural gas processing.

Demand for propane, one of the most commonly used LPGs, is highly cyclical. Used primarily as heating fuel, propane volumes increase and decrease dramatically during the winter and summer months, respectively. Propane supply was low heading into the 2007-2008 winter season, prompting Guy Caruso, administrator for the Energy Information Administration, to issue a "yellow flag" for U.S. propane inventories. The cost of propane fluctuates with the price of crude oil, which was at all-time highs in the late 2000s.

The petroleum feedstock industry is largely dependent on the overall petroleum industry, which resulted in high oil prices and increasing demand driving prices higher in the mid- to late 2000s. The United States depended heavily on Asian imports of numerous manufactured gases to meet demand. In addition, a short supply of coke was adversely affecting the steel industry in the mid-2000s.

Propane sales for all industry sectors fell 3.4 percent compared to 2007 sales. Propane demand totaled 9.9 billion gallons in 2008, with California consuming the most at 633.1 million gallons, a decline of 2.8 percent over 2007. The second largest consuming state was North Carolina with 550.5 million gallons, 2.1 percent below 2007 levels. Michigan came in third with 531.5 million gallons, down 21.9 percent compared to 2007. Rounding out the top five were Illinois with 494.5 million gallons falling 13.8 percent and Iowa with 463.8 million gallons, down 6.2 percent.

Propane supply experienced some logistical challenges in both 2008 and 2009 winter months. The industry admitted that if mild March temperatures hadn's occurred, the industry may had experienced outages. In 2010, imported propane volume was expected to run parallel to 2009 levels.

Background and Development

Although the ability to produce manufactured gas from coal dates back to the early years of the 1600s, the technology to use it commercially did not develop until the closing years of the eighteenth century. In Great Britain, William Murdock was the first to make large-scale application of gas lighting. Murdock installed outside factory lighting and 900 gas lamps in British cotton mills. In subsequent years, coal gas increased in popularity for municipal lighting. In 1817, Baltimore became the first U.S. city to contract for gas street lighting.

The gas industry grew during the 1800s, until the introduction of electric lamps drew lighting customers away from coal gas. The manufactured gas industry lost more customers during the early 1900s as natural gas became more widely available. By the early 1960s, the volume of natural gas sold was about 50 times greater than the volume of manufactured gas. By 1990, manufactured gas accounted for only about 1 percent of the gas consumed in the United States.

The decline of the manufactured gas industry continued in the 1990s as the popularity of natural gas increased. Notwithstanding, there remained a market for manufactured gas. For example, in 1997, Indianapolis Power & Light (IP&L) converted some of its coal-burning boiler units to steam boilers using coke-oven gas. The utility signed a 20-year agreement to purchase the coke-oven manufactured gas from Citizen's Gas & Coke Company in Indianapolis. The conversion from raw coal burning was expected to reduce air pollution of sulfur dioxide emissions by 2,200 tons per year.

The increased presence of liquefied natural gas (LNG) in the market facilitated distribution to areas previously out of reach and led to numerous closings of manufactured gas plants. Nationally, these closed plant sites were considered potential environmental hazards due to the presence of numerous toxic substances that may have been manufactured or buried there. In 2003, the estimates of abandoned manufactured gas plants in the United States that posed possible environmental hazards ranged from 1,000 to 50,000.

During the early 2000s global demand for liquefied gas products was growing, especially in Asia, where demand nearly tripled since 1985. According to the National Propane Gas Association, U.S. consumption of propane in 1999 was 19.6 billion gallons. Of that total, 9.8 billion gallons were used by the industrial, chemical, and utility industries; eight million gallons were consumed for residential, commercial, and recreational use; 1.4 billion gallons were used in agriculture (primarily for grain drying); and 0.4 billion were used in internal combustion engines.

During 2002 the LPG market was slowly recovering from the U.S. recession that combined with unusually warm weather patterns in large North American markets to create an oversupply and drive prices down. Prices for petroleum were running in the mid-$20 per barrel range during the second quarter of 2003, and the oil industry was beginning to show signs of recovery.

Use of propane grew slowly in the United States in the early 2000s. According to the National Propane Gas Association, in 2002 the United States consumed 19.9 billion gallons of propane for consumer, commercial, and industrial use. The total industry was valued at $30 billion. Approximately 6.5 percent of U.S. homes (6.9 million) used propane as the primary method of heating.

Low stocks and high crude oil prices drove the price of propane up between 2004 and 2005, with the average Midwestern propane customer paying about 22 cents more per gallon. By the spring of 2005 supplies were running about 9 percent ahead of the previous year, but continued high crude oil prices kept prices high. The residential and commercial sector continued to use the most propane, accounting for 43 percent of demand, followed closely by the petrochemical industry, which accounted for 40 percent of demand. Other main sectors were farm use (8 percent), industrial use (6 percent), and transportation (3 percent).

Supplies for other manufactured gases, including coke oven gas, naphtha gas, and acetylene were tight and prices were strong in the mid-2000s. Imports numbers were increasing to meet demand. Shortages of coke caused the price to double between 2002 and 2004. China, one of the leading producers of manufactured gases, was also rapidly increasing its use, accounting for nearly one-third of global demand in 2004.

The use of propane in the United States had dropped by the late 2000s, with nearly 11 billion gallons consumed annually, according to the National Propane Gas Association. In the winter of 2007-2008, propane users could expect to pay approximately $221 more than the previous winter, said Guy Caruso, administrator for the Energy Information Administration.

According to the research firm Energy and Environmental Analysis Inc., energy consumption in U.S. households indicated flat propane sales. Although the number of propane customers actually increased nationwide from 2000 to 2006, consumption was down because of warm weather, higher prices, and improved appliance efficiencies. Moreover, electricity had taken some market share from propane in the Southeast.

Current Conditions

One leading coke producer, Indianapolis Coke called it quits after 100 years blaming sluggish demand and foreign competition, not to mention a $17.6 million loss in 2006. "Steep declines in the U.S. steel and auto industries over the past decade have resulted in greatly reduced demand for domestically-produced coke," Citizens Gas & Coke stated in April 2007, adding that "Unfortunately, the plant can no longer compete in a world coke market greatly impacted by foreign steel and coke producers, who pay very low wages while not having to meet the stringent environmental standards we face."

According to the U.S. Energy Information Administration, propane supply was 20 percent lower in July 2010, compared to the same time in 2009 as a result of lessened demand for fuels and petrochemicals as the economic recession intensified worldwide during 2009. In fact, June 2009 propane inventories were at high levels not seen since 1981, while inventories were on track to reach an additional 10 to 15 million barrels by the winter season.

During the winter of 2010, Northeast residential propane prices climbed 45 cents per gallon, with New England paying $3.28 per gallon and Central Atlantic prices stood at $3.37 per gallon, while the Midwest was spared with only a 29 cent increase. New York State witnessed the largest increase of 56 cents per gallon, as that region faced supply issues due to a broken pipeline.

Going into January or 2011, low stocks and elevated crude oil prices drove the price of propane up. Propane demand within the commercial sector was projected to grow between 2011 and 2015 once the economy rebounds, especially when it comes to the conversion of fuel oil to propane in the Northeast region. While demand for propane is expected to increase through 2020, it will be gradual at best.

Industry Leaders

One of the largest distributors of manufactured gas in the United States was Gasco. Gasco, originally named Honolulu Gas Company, was established in 1904 to provide gas service to Hawaii's largest city. Hawaii, being separated from the contiguous United States, was never linked to the mainland's transcontinental natural gas pipeline grids. Gasco was purchased from BHP Hawaii Inc. in 1997 by Citizens Electric for $100 million. However, in late 1999, parent company Citizens Utilities decided to sell off its interest in Gasco and focus instead on telecommunications. In December 2004, Gasco Energy, now based in Englewood, Colorado, began trading on the American Stock Exchange. In 2006 the company agreed to acquire Brek Energy.

Another leading company involved in the production of manufactured gas was Indianapolis Coke, the manufacturing division of Indiana-based Citizen's Gas and Coke Utility, the only gas distribution utility in the United States that still mixed coke oven gas in its send-out product. Serving approximately 266,000 customers, the company produces a variety of coke mixtures for industrial use by pouring a raw coal mixture into ovens 50 feet wide and 15 feet tall, heating it to over 1,800 degrees Fahrenheit, and baking it in the absence of air for 26 to 30 hours. Once produced, the coke is cooled and sized according to whether it was to be used in the steel, mineral wool, sugar beet, or secondary smelting industry.

According to LPGas magazine, the top five retailers of propane in the United States in 2006 were AmeriGas, Ferrellgas Partners LP, Heritage Propane, Suburban Propane Partners LP, and Cenex Propane.

Gasco Energy Inc. reported revenues of $22.2 million in 2007, surging to $41.9 million in 2008, before leveling back to $21.1 million in 2009 with 28 employees. Gasco's explorations are centered on Utah's Uinta Basin and Wyoming's Green River Basin. Citizen's Gas and Coke Utility announced the closure of its Indianapolis Coke manufacturing division, the direct result of a decrease in demand coupled with foreign competition.

According to LPGas magazine, the top five retailers of propane in the United States in 2009 were AmeriGas, Ferrellgas Partners LP, Heritage Propane, Inergy LP, and Suburban Propane Partners LP.

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