Natural gas prices on the rise as fuel oil prices go steadily lower.

[Tom Sawyer]

Pipeline bottlenecks that drove up natural gas home heating prices in New England last winter could cause trouble when the weather again turns cold, but oil prices that once climbed to record territory continue to fall.

That unusual sequence of events - higher prices for natural gas prices, which is promoted for its cost advantage relative to oil that's falling in price - was detailed by the U.S. Department of Energy's recent annual outlook. The wild card is the weather and how cold this winter will be.

Utilities began buying gas in April for the approaching heating season and prices in 2014 have averaged higher than last year, the U.S. Department of Energy said in its recent annual outlook. If temperatures plunge, federal officials project consumption will be down 3 percent while spending will rise by 6 percent over last year.

In contrast, weakening international demand helped North Sea Brent crude oil spot prices fall to an average of $97 per barrel in September, the first month Brent prices have averaged below $100 a barrel in more than two years. U.S. production also is at the highest level in nearly 30 years, federal energy officials say.

That's good news in the Northeast, where 23 percent of households depend on oil for heat. In the rest of the country, 5 percent of households use heating oil, the Energy Department said.

The agency's report relies on winter forecasts that will be warmer than last year, giving consumers of all sources of energy a break.

Nationally, projected average household spending for heating oil is 15 percent lower and reduced heating demand and higher prices contribute to natural gas spending that's also projected to be down, but by only 5 percent from last winter. Natural gas is still the cheapest heating source.

Declining oil prices are vindication to New England oil dealers who are fighting state officials seeking to expand natural gas pipeline systems when oil prices spiked several years ago. Oil dealers have insisted that higher oil prices in previous years were a natural response to market changes, and will decline in response to shifting supply and demand.

"It's 'I told you so,'" said Chris Herb, president of the Connecticut Energy Marketers Association, which represents oil dealers and sued state officials Friday, accusing them of violating state environmental laws to push through a plan favoring natural gas. "Government is horrible in predicting outcomes."

Jamie Py, president of the Maine Energy Marketers Association, which represents heating oil and other dealers, said oil prices have become more sensitive to rising and falling world demand than the frequent and destabilizing cycles of violence in the Middle East.

"There was a time when someone sneezed the wrong way in the Middle East you could see a spike," he said.

Chris Recchia, commissioner of the Vermont Public Service Department, said the benefits of natural gas over oil, such as the production of less carbon dioxide, make it a preferable source of energy. And the narrowing price gap "won't be there for long," he said.

New England states are seeking to rely more on natural gas, which in the past has been cheaper than oil. Toward that limited goal, the plan is working: Natural gas powered 45 percent of electricity generated in New England last year, down slightly from 52 percent in 2012, but up significantly from less than 30 percent in 2001, according to the Department of Energy.

But pipelines can't catch up with the greater supply, with power plants forced last winter to buy on the costly spot market that pushed up natural gas prices for consumers. It's not likely to change.

"Pipeline constraints still exist in the area and day-to-day price volatility is likely," the Energy Department said.

Although several pipeline construction plans are in various stages of development and planning, consumers shouldn't expect prices to fall soon because of the time needed to build pipelines. Prices are not expected to budge until 2017, Cunningham said.

"The question is, what do we do now?" he said.

More extensive storage of natural gas to ensure deliveries during periods of extreme cold would help utilities avoid high prices for emergency supplies, Cunningham said. A few dozen very cold days each winter put the biggest strain on supplies, he said.

"It's those 40-odd days that kill," he said.

Connecticut's largest utility, Connecticut Light & Power, plans for colder-than-normal temperatures by staggering purchases to include the off-season when the cost is lower, spokesman Mitch Gross said. It also stores reserves in a liquefied natural gas facility.

But Cunningham says the outlook for lower prices due to less severe weather is "something of a feel-good story."

"It's at least a prediction for some degree of relief," he said.

 

[DonL]

Around here Electric may be the best way to go.

And it is 100% efficient.


Solar heating can work here also.

 

[Sponsor]

 

[Dana]

Tom: Clipping Stephen Singers AP article (that ran in multiple papers this weekend) without attributing the source is technically a copyright violation, unless you edit it into a parody or something.

The gas problem for most of the utilities in New England is more of a storage issue than a pipeline capacity issue. The utility-owned power generators gas distributors don't want to spend the capital for local storage expansion unless they are able to somehow rate-base that capital cost, but since it's a lot of infrastructure for only short-term peaks it's hard to make the business case unless they can put the ratepayers on the hook for the cost. It's a tough argument with their regulators.

The merchant power generators put themselves at a competitive disadvantage if they spend the money on storage just to manage the 50 hours of wintertime peak loads unless they can get compensated with capacity payments for making those expenditures, which is also control by how states regulate capacity markets.

The pipeline companies are pushing to get that even MORE expensive infrastructure rate-based, even though it's far more expensive than a storage-only solution.

Both increased storage AND new pipeline infrastructure capital investments in this volatile energy market come with substantial asset stranding risk. My personal take is that a more targeted & prudent approach would be to compensate generator operators for local storage makes more sense for the rate payers, in almost every case. Where pipelines are being expanded to provide more space heating access it's not exactly clear that it makes sense to stick the ratepayers with the bill in every instance either, but in some cases, yes.

FERC order #745 would allow demand response (contracts to turn off equipment during those few peak hours) to compete in capacity markets and allow participants to bid against peak generators, but that was recently ruled against in a D.C. District court case brought by some coal-plant operators who figured (correctly) that it would reduce the amount they could collect in capacity payments. This has been appealed, and recently rejected, but the story isn't done yet- the FERC is likely to appeal. But in an enhanced demand-response program scenario it is highly LIKELY that a pipeline project currently being proposed in Massachusetts would become a stranded asset, but some storage projects would still make financial sense.

Even at this year's increased gas prices it's still much cheaper to heat with gas than with the modestly lower oil price. The market fundamentals have not changed- shale gas only pays off if the wells are also producing liquids (oil or propane etc), but without a floor price to oil somewhere north of $75/bbl it stops making financial sense. We can thank this year's drop in oil prices to the weakness of the European economy, and the slower than expected in growth in the Chinese economy resulting in lowered worldwide demand.

The national oil companies of the OPEC countries can still make money at $50/bbl (even if they can't pay their national budgets with oil at that price), but the oil companies going after shale oil would go broke on the shale projects, projects that are consuming an inordinate amount of their capital expenditures. If oil actually hits $50/bbl for long (not likely) the fracking will all but stop, and natural gas prices will have to rise since the gas by-product won't be as available. At $10-15/MMBTU the gas can pay for itself in some of the easier dry-gas shales and coal bed methane, but at the $4-6 range of recent years many of those won't fly.

Still, even at $6/MMBTU wind power has recently become competitive with combined cycle gas power generators, and since the cost of wind power is usually spelled out in 20-25 year power purchase contracts, it's turning out to be a very good hedge against gas price volatility for the large vertically integrated utilities.

Oil prices may have lost their volatility in the current world economic conditions, but the only way oil prices can continue to decline to anything like natural gas prices is if the world economy goes into an extended recession killing demand, taking the profits of the shale oil operators along with it.

 

[Tom Sawyer]

Saw gas at the pump, under three bucks

 

[Dana]

Me too!

So?

When heating oil has been under $2 for at least a year, let me know, eh? Last I looked it still has a way to go.

It might hit $3 if Europe goes off into full recession, but at $2 price point it will kill the frack biz, leading to another price volatility round when the world economy rebounds.

And $2 heating oil is what it would take to be anywhere near competitive with natural gas in New England- either that, or natural gas at $2.50/therm, delivered, which would be about 2x the current price in MA, where it's more expensive than the national average due to those pesky pipeline/storage constraint issues.

As long as crude oil is expensive enough to support the shale oil biz, we'll be swimming in cheap natural gas. If oil prices drop below that oil-profitability point for very long, natural gas prices will rise.

That point is estimated by most industry analysts to be somewhere between $75-100/bbl. (Some of that shale oil isn't profitable RIGHT NOW, even if some of it is still making something.)

But for now, the price trends on oil and refined products makes for happy (or at least less-unhappy) consumers. Price volatility works in both directions. I'm not expecting $2/gallon heating oil (if it ever hits that point) to be a sustainable price unless the world stops driving internal combustion cars.

The last time heating oil was running two bucks was about a decade ago, when crude oil was trading at ~$30-40/bbl:

Even some of the OPEC countries couldn't pump it out of the ground profitably at $30-40/bbl, but some could. Only severely curtailed world demand would balance with the pumping capacity still profitable at $30-40/bbl.

To re-work some of those fields for faster pumping rates would require massive infrastructure investment in those projects- it's easier and more profitable for the OPEC countries to just let the marginal cost of the tough-t0-get goods such as shale oil drive the world prices, since it triples or quadruples thier profits without having to invest much in their own resources.

So, enjoy the modest reprieve in prices while they last. The bottom price is still much higher than we would like, the way it was back the "good old days" of oil a decade or more ago.

 

[DonL]

This Gas price Drop is just to get your mind Off of the Real problems we have.

Gasoline is 2.50 here.

You can afford to come here to some of the best Hospitals in the World, And get Ebola directly from your Doctor.

Coming to a Walmart near You, Soon. 10 Cents off Gasoline Too.


Have Fun Everyone.

 

[Tom Sawyer]

The major energy suppliers are jockeying for position. 23% of households in the north east still rely on #2 fuel oil for heat. Many have gone to wood and wood pellets but government restrictions on wood stoves and the cost of wood have mitigated to some degree the savings there. Wood pellets are near impossible to get now because the factories producing them can't get enough raw materials so as usual, the homeowner is on the losing end of the stick.

 

[DonL]

The major energy suppliers are jockeying for position. 23% of households in the north east still rely on #2 fuel oil for heat. Many have gone to wood and wood pellets but government restrictions on wood stoves and the cost of wood have mitigated to some degree the savings there. Wood pellets are near impossible to get now because the factories producing them can't get enough raw materials so as usual, the homeowner is on the losing end of the stick.

What cracked me up a bit when I went to visit Ohio, Is that you could only burn wood if you were cooking Food.

People keep Hot Dogs and act like they are cooking them when the Law comes.


The Gov will make you use what they want, You have no choice, really. Unless you are really in the sticks.

 

[Dana]

The 23% percent that are using #2 oil are by and large those without access to the gas grid. Oil tends to track cheaper per MMBTU than propane, not everybody is willing to deal with bulk fuels like wood or pellets (or has access to them), so oil is one of a very few choices.

And it's pretty common to see not-so-huge homes going through $3000-5000 in heating oil per year. This year that might "only" be $2000-4300 this coming season. Similar homes heated with that natural gas in New England have been spending under $2000/year, many under $1500, and that's a regional price for natural gas much higher than the national average.

The year-on-year improvement in heat pump technology over the past 20 years has been phenomenal, and even in fairly cool areas like northern Maine (US climate zone 7) it's now possible to heat your home substantially more cheaply with heat pumps than with oil burners. Heat pumps are also close to being competitive with New England style natural gas (even at near-record low gas prices), despite higher than national average prices for electricity too. Those spending $3000/year on oil can typically offset more than half of that with a single 1-1.5 ton cold climate mini-split. The operating cost difference will pay for the mini-split in 5 heating seasons or less, even at this coming season's anticipated oil prices.

If the opposition to the large scale Cape Wind offshore wind farm evaporated, the peak wintertime stresses on the regional gas grids would be much abated by 2017, taking the wind out of the sails of the new pipeline proposals. There are many moving parts to the regional energy markets, and yes, they are INDEED jockeying for position. (Is it really any wonder that opposition to the wind farm is funded in part by members of the Koch family?) I don't see the #2 oil having an expanding their role in New England- it has been effectively priced out of the space heating market, after price has already driven oil down to being a single-digit percentage player in the electricity peaker power market in the region. Again, at $2/gallon #2 oil would at least have a shot. At the current $3.50-ish (or the $4+ of recent memory), not so much.

The bruhaha over new EPA standards for woodstoves is pretty much a tempest in a teapot- much ado about very little. It only affects the efficiency of new wood burners post-2015, and then only if the proposed regulations are implemented (still TBD- it's being litigated /negotiated). It does not apply to existing wood burners. State and local restrictions often go much further with wood burning restrictions with wood burning heating appliances- particularly outdoor wood boilers (many of which really ARE a local air pollution problem due the crudeness of the controls, which damper down to a smolder mode instead of modulating.)

People (including me) groused about it when the EPA put regs on woodstoves in 1988, but it in fact led to better average product offerings, yielding higher efficiency and a lowered risk of chimney fires etc, without a huge up-tick in equipment cost. It remains to be seen if that can be done with the proposed regulations. There are existence proofs of wood burners hitting north of 90% combustion efficiency, whereas a pretty-good current model wood stoves hit around 80%, give or take.

I assume the Ohio regs have to do with open fires outdoors, and not woodstoves(?). The particulate emissions of open hearth fireplaces or outdoor fire pits are about an order of magnitude higher than with an EPA-rated wood stove (under the 1988 spec, not the proposed new regulations) which can become an issue in more densely populated areas.

 

[DonL]

It is not over until the Fat Lady Sings.

The Price can spike at any time.


And most likely will if this winter is cold.

 

[Tom Sawyer]

October 14, 2014: Natural Gas in Northeast Hits Highest Price in 14 Years
Natural gas for January delivery in the Northeast is the most expensive it has been in more than a decade due to concern that pipelines may not be able to ship enough fuel, according to a recent article by Bloomberg

Supplies in the Northeast and Midwest are at the lowest seasonal level since 2000, according to government data, and the new pipelines being planned for New England won’t begin service until late 2016 at the earliest. Natural gas for January in New York is now selling for $13.60 per million British thermal units, more than nine times current prices. Last January, gas surged to a record $135 as frigid weather boosted demand beyond what pipelines could deliver.

“People are scared,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management, told Bloomberg. “The market is reflecting that despite prolific production growth in certain areas, the infrastructure has not been expanded to distribute that gas all the way across the country. There’s still a very real and very significant constraint.”

Gas for delivery to the Algonquin City Gates in New England next January was valued at $20.943 per million British thermal units on Oct. 3, a $16.86 premium to Henry Hub, according to Bloomberg Fair Value prices. A year earlier it was trading at a $8.498 premium, which means that prices look to be much higher this winter.

“We have seen basis very strong the last few weeks,” Kate Trischitta, Director of trading at Consolidated Edison Inc.’s wholesale energy trading unit, told Bloomberg. (Basis is part of the final cost for delivered fuel.) “After what they experienced last winter, no one wants to be caught short. The reality of very cold periods or very high demand periods is you are going to have very big basis swings.”

ISO New England Inc., which saw the highest average gas prices in the country last year, has expanded a reliability program that provides power generators with payments to cover costs for stockpiling backup fuels such as oil and liquefied natural gas to replace natural gas when it is unavailable or overpriced, Bloomberg reports.

New England’s reliance on gas-fired generation will increase this winter after two plants are taken off the grid. Entergy Corp. will permanently shut its Vermont Yankee nuclear reactor in the fourth quarter. Footprint Power closed its 720-megawatt Salem Harbor plant, fueled by oil and coal, in May to convert it to burn gas.

To read the Bloomberg article, click here.

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[Dana]

This is well understood- it means higher prices for electricity in the near term, but not an earth shaking prospect for those heating with natural gas. Residential retail natural gas may hit it's 2008 peak again, hitting the $1.70/therm range, but that's still significantly cheaper heat than $3/gallon heating oil.

$1.70/therm is $17.00/MMBTU (source fuel content)

$3/gallon oil is about $21.70/MMBTU (source), or about 28% more expensive than $1.70/therm gas. Even $2/therm gas (a price never seen in MA during winter, though it came close in January 2006) is cheaper than $3/gallon oil.

$2/gallon oil is about $14.50/MMBTU, which would mean $1.70 gas would be 17% more expensive than oil.

Let me know when heating oil dwells in the $2 range for a few successive heating seasons so's I can remember to sharpen my ice skates.

If either the pipeline or gas-grid storage infrastructure gets built the retail price of natural gas-delivered will probably stay in the buck-fifty range, and electricity prices will fall a bit. If much local gas storage at powerplants under the ISO-New England reliability program gets built (as referenced in the article), both gas and electricity prices will fall (gas somewhat more than electricity.) The existing pipeline infrastructure in MA is enough to handle the average load, just not the peaks, which is why buying (much cheaper) storage makes more sense than some of the wilder gas-grid expansion proposals that are being floated out there.

If electricity & gas prices rise as much as predicted and stay there, privately owned solar PV becomes cost effective for almost everyone at residential-retail rates in MA (even without the 30% federal tax subsidy), and at the wholesale (or even retail) price wind-power becomes quite a bit cheaper than gas.

How much cheaper? Under a 3 year fixed price power purchase agreement I can get 100% wind power at my house through resellers at about a 4-5 cent/kwh discount below big utility standard-mix residential rates, once the newly approved rate hike goes into effect in a few weeks. (This week wind contracts are still slightly more expensive than the standard mix rate. Come 1 November it'll be into a whole new territory.) The utility biz isn't a total free-market under decoupling, but it's more competitive than it was back when the utilities here were mostly vertically integrated entities.

Gas & oil pricing have always been volatile (gas more than oil) and the futures markets are even MORE volatile than the actual spot-market prices. The fundamentals driving the $/MMBTU difference haven't shifted, which is why the massive rush toward gas has resulted in more bottlenecks in the distribution chain. But those bottlenecks are not permanent.

Spot market prices north of $100/MMBTU driven by peak power generation loads such as those seen during the polar vortex event last winter don't have as large an effect on residential gas prices, since most of that gas by the distribution utilities is paid for in multi-year contracts, whereas the electric utilities are limited to shorter contract terms with their suppliers by utility regulators.

 

[Tom Sawyer]

But you get 140,000 btu's from #2 fuel oil and only about 87,000 from nat gas. Most gas equipment is still running in the high 80's efficiency which is where most oil equipment is also running. However, an investment of 8 to 15 thousand will get you a gas mod con capable of 96% provided it closely matches the load and will actually condense. I would say that less than half the mod con boilers installed as retro-fit are actually running anywhere near 96% so to do it right the investment will be considerably higher as alternitave types of radiation and it's associated piping need to be installed. Basically, to get maximum performance from the boiler, the entire baseboard system needs to be replaced. Hard to realize a decent ROA on those terms. When I run numbers for conversions I typically find that the actual ROA is out of bounds and most times the equipment will be obsolete or beyond repair long before the conversion is paid for. The lifespan of these mod cons is not particularly good and in fact, it's particularly bad. Reminds me of all those solar systems that crapped out long before they were paid for.

 

[Dana]

"But you get 140,000 btu's from #2 fuel oil and only about 87,000 from nat gas"

Calling BS on this one.

My prior $/MMBTU calculations factored in the BTU/gallon and BTU/therm. The calculations assumed 138,000 BTU/gallon source BTU for #2 oil, which is closer to the average than 140,000 BTU/hr, but we won't quibble about a 1.4% difference (or will we?).

The very definition of a "therm" is 100,000 BTU. Using 87,000 would be a net-number on a pretty-good cast iron boiler. Comparing a slightly inflated 140,000 BTU/gallon source BTU to an 87,000 BTU/therm net BTU is a very sloppy heavy thumb on the scale, and nothing like a legitimate running of the numbers.

There isn't much to argue about here- it's arithmetic. L'aritmetica non è un opinione. (At least accordin' to the Italians. )

It's not legal to install a gas-burner with an AFUE rating less than 82% anymore, and 85-86% AFUE cast iron is cheap, no more expensive than an 85-86% oil boiler ( the typical AFUE of oil burners.) But lets' go ahead and run some net $/MMBTU numbers.

$1.70/therm gas (the highest price it ever reached in the past 10 years), comes out a $17/therm gross- if you want to assume 78% AFUE, that would be $21.80/MMBTU-net.

$3/gallon oil ( cheaper than the average oil price over the past 10 years), is $21.70/MMBTU gross, and at 85% AFUE would be $25.53/MMBTU-net.

That is 17% more expensive than even a crappy old gas burner with a standing pilot ignition.

If you're talking newer non-condensing equipment at 85% AFUE for the gas burner, that's $20/MMBTU net, more than a 20% discount from $3 oil.

I agree that at least half the mod-cons out there are running well below 96%, primarily due to oversizing & microzoning, not necessarily from lack of upgrading the radiation. It's not always the case that the radiation would need to be replaced or upgraded to gain the efficiency benefits of a condensing gas boiler, but that clearly has to be factored in when considering a condensing boiler. More often than not baseboard systems are fully capable of handling the design heat load with 140F water, but if they've microzoned the thing to death or oversize the boiler it's a problem. Those are system design problems for cast-iron boilers too- oil boilers in particular, since even the smallest oil boilers are ALL oversized for even the whole-house loads, let alone an individual small zone.

Investing in radiation upgrades may be an investment in enhanced comfort, but it's fair to say has a pretty crummy IRR from a strictly financial investment point of view, especially at buck-a-therm gas.

A secondary issue that still affects the margins is the relative cost of maintaining an oil boiler vs. gas-fired cast iron. There's no question that oil burners require more maintenance to stay on track with their nameplate efficiency numbers.

 

[Tom Sawyer]

How many mod cons do you think will last 20 years?

 

[Dana]

Probably not as many as mod-cons as mid-efficiency gas burners, but still a good many. The mod-cons sitting there short cycling 15-20 burns/hr on micro- zone calls probably won't make it to age 10, but those reasonably matched to the zone-loads will likely see age 20 and beyond.

The mid-efficiency cast-iron gas boilers will probably still be there 30, maybe even 40 years, even though they're pretty much junk by then. I've seen plenty of decrepit one time ~80% D.O.E. efficiency gas boilers that are north of 50, but their true steady state efficiency is probably more like 70%, and their as-used AFUE lower still.

Why, what's your take?

 

[Tom Sawyer]

Well you see, therein lies the problem. Those mod cons lasting ten years or less are costing folks 8 to ten grand to install so in most cases the ROA is dismal if not non existent. Sadly, it's a trade off between efficiency and longevity. For the money a two or three pass cast iron boiler is going to give the most bang for the buck and many European installers are indeed going back to higher mass boilers at the same time.

 

[Dana]

I agree that the badly done mod-con installations are something of a financial disaster for the buyers, delivering far less than delivered. But it's fair to point out that it's an installer problem, not an equipment problem.

The same idiots installing oversized mod-cons would also make the same mistakes with cast iron, but with a somewhat lower efficiency hit (albeit from an already lower efficiency), and lower likelihood of completely trashing the thing in 10 years by short cycles (though the wear and tear WILL increase maintenance cost.) I've seen radiant floor installations that trashed brand new boilers in under 3 years from condensing return temps, but that too is an installer problem, not an equipment problem. There are too many real hacks out there, but as long as the boiler lasts the warranty period they don't generally get taken to task for their butchery.

Europeans have more options when it comes to hydronic heating at modest loads, with both hydronic heat pumps and mod-cons with lower output than the typical fare here, as well as high quality modulating hydronic pellet-boilers.

I'm not aware of any data supporting the notion that there is a mass-migration in the industry back toward high-mass cast iron there though.

 

[Tom Sawyer]

Honestly, even properly installed and adjusted, the lifespan of the typical mod con is only about 10 years and a lot of that has to do with the properties of stainless steel and aluminum.

 

[Dana]

Got any third party data that backs up that assertion? (My sample size is small, but I don't personally know anyone who has had a mod-con flat out fail in 10 years. Though there is plenty of credible internet scuttlebutt about aluminum heat exchangers failing, I haven't seen it.)