HomeMy WebLinkAbout08.a. Authorize prepurchase of natural gasCentral Contra Costa Sanitary District
BOARD OF DIRECTORS 'a•
POSITION PAPER
Board Meeting Date: July 7, 2011
Subject: AUTHORIZE THE GENERAL MANAGER TO PREPURCHASE NATURAL
GAS THROUGH A SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2013,
THROUGH DECEMBER 31, 2014, AT A PRICE NOT TO EXCEED $6.00
PER DECATHERM
Submitted By: Initiating Dept. /Div.:
David J. Reindl, P.E. Plant Operations Department
Senior Engineer Maintenance Engineering
REVIEWED AND RECOMMENDED FOR BOARD ACTION:
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D. Reindl A. Grieb M. Orr Jam M. Kelly,
General Manager
ISSUE: Board authorization is requested for the General Manager to prepurchase natural
gas (NG).
RECOMMENDATION: Authorize the General Manager to prepurchase NG through a
service agreement with Shell Energy North America, LP (Shell Energy), for the period of
January 1, 2013, through December 31, 2014, at a price not to exceed $6.00 per
decatherm (dth).
FINANCIAL IMPACTS: Purchasing NG each month at market price risks market price
volatility and excessive District expenditures. Based on past experience, prepurchasing
NG can result in significant cost savings. The budget for fiscal year 2011 -2012 is
$2,750,000.
ALTERNATIVES /CONSIDERATIONS: The District could purchase all NG needs at the
end of each month or other frequency at market price.
BACKGROUND: The District uses approximately 444,000 dths of NG annually for the
treatment plant's cogeneration system and as backup fuel to landfill gas in the multiple -
hearth furnaces and auxiliary steam boilers. The cogeneration plant uses approximately
95 percent of the District's NG purchased.
For the past year, NG prices have remained in the $4.00 to $6.50 /dth range. This price
trend was consistent during the downturn in the economy. EPA regulations, the concern
over water quality and health impacts associated with fracking, and increased safety
concerns over nuclear power could cause future NG prices to rise.
An analysis has been conducted on greenhouse gas (GHG) impacts on cogeneration, and
it has been determined that the CO2 limits can be managed by balancing cogeneration fuel
N: \POSUP \Board of Directors \Board - Position Papers\2011 \Natural Gas Prepurchase - 3 yr 07- 07- 11.doc
POSITION PAPER
Board Meeting Date: July 7, 2011
subject: AUTHORIZE THE GENERAL MANAGER TO PREPURCHASE NATURAL
GAS THROUGH A SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2013,
THROUGH DECEMBER 31, 2014, AT A PRICE NOT TO EXCEED $6.00
PER DECATHERM
consumption with imported electrical power to stay below the 25,000 metric tons CO2
equivalent limit and avoid mandatory offsets. If NG prices stay below $10.00 /dth, then
continuing to generate power for the Plant is a cost benefit to the District.
In February 2009, the Board of Directors authorized staff to purchase NG through calendar
year 2012. Staff has purchased approximately 85 percent of the District's NG needs for
2011 and 2012 at $5.90 and $5.69 /dth, respectively. The remaining 15 percent is being
purchased on the spot market, which has moved within the range of $4.17 to $4.70 within
the last 90 days. If the price of NG remains at or near $5.50 /dth, the District's average
price for NG for calendar years 2011 and 2012 will be approximately $5.85 /dth for a total
expenditure, including transportation, of $2,597,400. The budget of $2,750,000 for fiscal
year 2011 -2012 reflects higher spot market for fiscal year 2011 -2012, but lower
prepurchase price.
The prices change daily, but continue to reflect significant market weakness from more
than adequate reserves and limited increases in demand. The current pricing for one -year
strips of NG for 2013 is $5.40 /dth. Mr. Cameron Raether, the District's gas consultant from
Valtech, has recommended that the District should consider delaying the forward
purchasing of NG. By accepting marginally more risk with monthly pricing fluctuations, the
District can take advantage of the short term pricing and avoid the premium associated
with long range purchases. By authorizing the General Manager to make NG purchases
through 2014, the District can save on current spot market pricing or lock in future pricing if
the market changes.
Locking in a fixed price for NG can insure the District against an upside cost; there is a
market risk if prices go down, but staff believes the down side benefit is less than the
upside risk. Accordingly, staff recommends Board authorization to allow the General
Manager to prepurchase NG for the period of January 1, 2013, through December 31,
2014. By authorizing gas purchases through 2014, the District would be able to take
advantage of future favorable pricing changes, thus stabilizing the energy cost for the next
three years. The General Manager will keep the Board apprised of NG purchases.
The Budget and Finance Committee reviewed this matter at its July 5, 2011, meeting.
RECOMMENDED BOARD ACTION: Authorize the General Manager to prepurchase NG
through a service agreement with Shell Energy North America, LP, for the period of
January 1, 2013, through December 31, 2014, at a price not to exceed $6.00 /dth.
NAPOSUP \Board of Directors \Board - Position Papers\2011 \Natural Gas Prepurchase - 3 yr 07- 07- 11.doc