HomeMy WebLinkAbout07.g. Authorize purchase of natural gas from Shell Energy for 2019 7mgm
Central San .
BOARD OF DIRECTORS
POSITION PAPER
Board Meeting Date: May 18, 2017
Subject: AUTHORIZE THE GENERAL MANAGER TO AGREE TO PURCHASE
NATURAL GAS THROUGH AN EXISTING SERVICE AGREEMENT WITH
SHELL ENERGY NORTH AMERICA, LP, FOR THE PERIOD OF
JANUARY 1, 2019, THROUGH DECEMBER 31, 2019, UP TO 1,000
DECATHERM PER DAY AT A PRICE NOT TO EXCEED $4.25 PER
DECATHERM
Submitted By: Initiating Dept./Div.:
Clint T. Shima, P.E. Operations Department Plant
Senior Engineer Maintenance / Reliabi ty Engineering
REVIEWED AND RECOMMENDED FOR BOARD ACTION:
N. Meyer, Plant Maintenance Division Manager �►
A. Sasaki, Deputy General Manager w
Roger S.Bailey
General Manager
ISSUE: Board authorization is requested for the General Ma ager to agree to
purchase natural gas (NG).
BACKGROUND: This recommended action aligns with the Central San's Strategic
Plan, specifically Goal No. 3, to be a fiscally sound and effective water utility; Strategy 1
to conduct long-range financial planning.
Central San 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 consumes approximately 80 percent of Central San's NG, and is
operated to stay below the 25,000 metric tons carbon dioxide equivalent greenhouse
gas threshold to 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 Central San.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day
of NG. Each transaction typically is for one-third of the total amount or 333 dth per day.
For 2017, staff has purchased 1,000 dth per day at an average Citygate price of
$3.50/dth. The remaining 200 dth per day will be purchased at the end of the month at
market price.
In May 2016, the Board authorized the General Manager to agree to purchase NG
through December 31, 2018, at a price not to exceed $4.50/dth. In the last year,
forward NG strip prices for 2018 remain in the $3.00 to $4.00/dth range. Market prices
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POSITION PAPER
Board Meeting Date: May 18, 2017
Subject: AUTHORIZE THE GENERAL MANAGER TO AGREE TO PURCHASE
NATURAL GAS THROUGH AN EXISTING SERVICE AGREEMENT WITH
SHELL ENERGY NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY
11 2019, THROUGH DECEMBER 31, 2019, UP TO 1,000 DECATHERM
PER DAY AT A PRICE NOT TO EXCEED $4.25 PER DECATHERM
are favorable for purchasing due to above-average NG supplies. The five-year average
of two-year forward pricing was $4.14/dth; therefore, a not-to-exceed price of $4.25/dth
is appropriate. If the spot market price of NG remains at or near$3.00/dth, Central
San's average burner tip price for NG for Fiscal Year (FY) 2016-17 will be
approximately $4.55/dth for a total expenditure, including the added cost of
transportation ($1.15/dth) of $1,956,500. The FY 2016-17 budget for NG is
$2,000,000.
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 2018 is approximately
$3.40/dth. For calendar year 2018, Central San has agreed to purchase one third
(333 dth per day) of the normal amount at a price of $3.30/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 2018.
Pre-purchasing allows staff the flexibility to respond to market changes. Locking in a
fixed price for NG can insure Central San 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
agree to purchase NG for the period of January 1, 2019 through December 31, 2019 at
a price not-to-exceed $4.25/dth. By authorizing gas purchases through 2019, Central
San will be able to take advantage of future favorable pricing changes, thus stabilizing
the energy budget for the next three years. The General Manager will keep the Board
apprised of NG purchases.
ALTERNATIVES/CONSIDERATIONS: Central San could purchase all NG at market
price each month or other frequency, or Central San could agree to purchase just one
year in advance.
FINANCIAL IMPACTS: Purchasing NG each month at market price presents a risk of
market price volatility and excessive Central San expenditures. Based on past
experience, pre-purchasing NG can result in significant cost savings.
COMMITTEE RECOMMENDATION: The Engineering and Operations Committee
reviewed this position paper on May 9, 2017 and recommends the approval of the
position paper.
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POSiTION PAPER
Board Meeting Date: May 18 2017
subJect: AUTHORIZE THE GENERAL MANAGER TO AGREE TO PURCHASE
NATURAL GAS THROUGH AN EXISTING SERVICE AGREEMENT WITH
SHELL ENERGY NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY
17 2019, THROUGH DECEMBER 31, 2019, UP TO 1,000 DECATHERM
PER DAY AT A PRICE NOT TO EXCEED $4.25 PER DECATHERM
RECOMMENDED BOARD ACTION: Authorize the General Manager to agree to
purchase NG through an existing service agreement with Shell Energy North America,
LP, for the period of January 1, 2019 through December 31, 2019 up to 1,000/dth per
day at a price not to exceed $4.25/dth, which does not include transportation service
costs.
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