HomeMy WebLinkAbout09.b. Pre-purchase of natural gas from Shell OilBoard Meeting Date: March 20, 2014
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, 2015,
THROUGH DECEMBER 31, 2016, AT A PRICE NOT TO EXCEED $6.00
PER DECATHERM
Submitted By. Initiating Dept. /Div.:
Craig H. Mizutani, P.E. Operations Department / Plant
Senior Engineer Maintenance / Maintenance Engineering
REVIEWED AND RECOMMENDED FOR BOARD ACTION:
C. Swanson, Director of Operations
R. Saitey
General Manager
ISSUE: Board authorization is requested for the General Manager to pre - purchase
natural gas (NG).
RECOMMENDATION: Authorize the General Manager to pre - purchase NG through a
service agreement with Shell Energy North America, LP (Shell Energy), for the period of
January 1, 2015, through December 31, 2016, 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, pre -
purchasing NG can result in significant cost savings. The budget for fiscal year 2013-
2014 is $2,185,000.
ALTERNATIVES /CONSIDERATIONS: The District could purchase all NG at market
price each month or other frequency.
BACKGROUND: The District uses approximately 430,000 dths of NG annually (or
roughly 1,200 dth per day) 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 80 percent of the District's NG purchased. The
District's cogenerate system is operated to stay below the 25,000 metric tons CO2
equivalent Greenhouse Gas limit and avoid mandatory offsets. This is done by
monitoring fuel use and adjusting the input of PG &E imported electrical power. If NG
prices stay below $10.00 /dth, then continuing to generate power for the Plant is a cost
benefit to the District.
Typically, the District pre - purchases approximately 1,000 dth per day of NG. For 2014,
staff has purchased approximately 667 dth (or two thirds of the District's normal pre-
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POSITION PAPER
Board Meeting Date: March 20, 2014
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, 2015,
THROUGH DECEMBER 31, 2016, AT A PRICE NOT TO EXCEED $6.00
PER DECATHERM
purchase amount) at an average Citygate price of $4.30. The remaining 333 dth was to
be purchased at the end of the month at market price.
For the past year, NG prices have remained in the $4.00 to $5.00 /dth range. Through
October 2013, prices remained low due to abundant natural gas supplies resulting from
hydraulic fracturing (fracking). This winter, prices have varied wildly as the record cold
weather in the eastern half of the United States (polar vortex) created record NG
demand for heating and power generation and the natural gas supply system was
crippled due to the cold weather. Due to the natural gas supply issues, Shell Energy is
not allowing customers to carry an imbalance at the end of the month and therefore, the
remaining one third of the pre - purchased NG is being purchased at the beginning of
each month based on a monthly index price, which is averaging $5.60.
The recent price surges are not expected to last once the winter is over. It is anticipated
that after May, prices will return to pre- winter levels. Furthermore, prices for future years
have not been greatly affected by the short-term price spikes. The current pricing for
one -year strips of NG for 2015 is approximately $4.90 /dth. If the price of NG remains at
or near $5.00 /dth, the District's average burner tip price for NG for fiscal year 2013-
2014 will be approximately $5.09 /dth for a total expenditure, including the added cost of
transportation ($0.80 per dth), of $2,105,000.
It is expected that after the winter, natural gas prices will return to pre- winter prices of
below $5.00 per dth. The District will look into purchasing another 333 dths per day for
the period May through December 2014. Assuming prices fall, the District will start
considering making a purchase for calendar year 2015 natural gas starting in May.
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 pre - purchase NG for the period of January 1, 2015, through December 31,
2015. By authorizing gas purchases through 2016, 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.
RECOMMENDED BOARD ACTION: Authorize the General Manager to pre- purchase
NG through a service agreement with Shell Energy, for the period of January 1, 2015,
through December 31, 2016, at a price not to exceed $6.00 per dth.
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Prepurchase 03- 20- 14.doc