HomeMy WebLinkAbout04.c. Authorize pre-purchase of natural gas from Shell Energy North America for calendar year 2018 Central Contra Costa Sanitary District 4. c.
' BOARD OF DIRECTORS
POSITION PAPER
Board Meeting Date: May 19, 2016
Subject: AUTHORIZE THE GENERAL MANAGER TO PRE-PURCHASE NATURAL
GAS THROUGH A SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2018,
THROUGH DECEMBER 31, 2018, AT A PRICE NOT TO EXCEED $4.50
PER DECATHERM
Submitted By: Initiating Dept/Div.:
Clint T. Shima, P.E. Operations Department/ Plant
Senior Engineer Maintenance / Relia ' ' y Engineering
REVIEWED AND RECOMMENDED FOR BOARD ACTION.
A. Sasaki, Deputy General Manager t ...� n
N. Meyer, Plant Maintenance Division Manager ' Roger S.Bailey
General Manager
ISSUE: Board authorization is requested for the General Mana r to pre-purchase
natural gas (NG).
BACKGROUND: This recommended action aligns with the District's Strategic Plan,
specifically Goal No. 4 to be a leader in the wastewater industry; Strategy 1 to use
sustainable practices that minimize waste, maximize resources, protect the ratepayer,
improve the community, and embrace innovation.
The District uses approximately 430,000 decatherms (dth) 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 System uses approximately 80 percent of the District's NG purchased.
The Cogeneration System is operated to stay below the 25,000 metric tons CO2
equivalent greenhouse gas limit and avoid mandatory offsets. This is accomplished by
monitoring fuel use and adjusting the input of Pacific Gas and Electric's imported
electrical power. When NG prices stay below $10.00/dth, then continuing to generate
power for the Treatment Plant is a cost benefit to the District.
Generally, the District pre-purchases approximately 1,000 dth per day of NG. Each
pre-purchase transaction typically is for one-third of the total amount, or 333 dth per
day. For 2016, staff has purchased 1,000 dth per day at an average Citygate price of
$3.86/dth. The remaining 200 dth per day will be purchased at the end of the month at
market price.
In April 2015, the Board authorized the General Manager to pre-purchase NG through
December 31, 2017, at a price not to exceed $6.00/dth. In the last year, forward NG
strip prices for 2017 have fallen and remain in the $3.00 to $4.00/dth range. Market
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POSITION PAPER
Board Meeting Date: May 19, 2016
subject: AUTHORIZE THE GENERAL MANAGER TO PRE-PURCHASE NATURAL
GAS THROUGH A SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2018,
THROUGH DECEMBER 31, 2018, AT A PRICE NOT TO EXCEED $4.50
PER DECATHERM
prices are favorable for purchasing due to abundant NG supplies resulting from
historically high production and mild winter weather on the west coast. The five-year
average of two-year forward pricing was $4.44/dth; therefore, a not-to-exceed price of
$4.50/dth is appropriate. The recent low prices are not expected to last for a prolonged
period. If the spot market price of NG remains at or near$3.00/dth, the District's
average burner tip price for NG for Fiscal Year (FY) 2015-16 will be approximately
$4.08/dth for a total expenditure, including the added cost of transportation ($0.50/dth)
of $1,969,400. The FY 2015-16 budget for NG is $2,365,000.
Forward NG prices include a premium and are not as greatly affected by short-term
price changes. Current pricing for one-year strips of NG for 2017 is approximately
$3.55/dth. For calendar year 2017, the District has pre-purchased two thirds of the
normal pre-purchase amount at an average Citygate price of $3.55/dth. NG prices tend
to be lower during the shoulder seasons of spring and fall. Staff will continue to monitor
the NG markets to make a purchase for the remaining portion of 2017.
Pre-purchasing allows staff the flexibility to respond to 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
pre-purchase NG for the period of January 1, 2018, through December 31, 2018. By
authorizing gas purchases through 2018, the District will 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.
ALTERNATIVES/CONSIDERATIONS: The District could purchase all NG at market
price each month or other frequency, or the District could pre-purchase just one year in
advance.
FINANCIAL IMPACTS: Purchasing NG each month at market price presents a risk of
market price volatility and excessive District expenditures. Based on past experience,
pre-purchasing NG can result in significant cost savings. The budget for FY 2015-16 is
$2,365,000.
COMMITTEE RECOMMENDATION: The Engineering and Operations Committee
reviewed this position paper on May 10, 2016, and recommended the approval of the
position paper.
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POSITION PAPER
Board Meeting Date: May 19, 2016
Subject: AUTHORIZE THE GENERAL MANAGER TO PRE-PURCHASE NATURAL
GAS THROUGH A SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2018,
THROUGH DECEMBER 31, 2018, AT A PRICE NOT TO EXCEED $4.50
PER DECATHERM
RECOMMENDED BOARD ACTION: Authorize the General Manager to pre-purchase
NG through a service agreement with Shell Energy North America, LP, for the period of
January 1, 2018, through December 31, 2018, at a price not to exceed $4.50/dth, which
does not include transportation service costs.
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