HomeMy WebLinkAbout05. Authorize the purchase of Natural Gas through an existing agreement with Shell Energy North America Page 1 of 3
Item 5.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
MEETING DATE: NOVEMBER 18, 2021
SUBJECT: AUTHORIZE THE GENERAL MANAGER TO PURCHASE NATURAL GAS
THROUGH AN EXISTING SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF DECEMBER 1, 2021
THROUGH DECEMBER 31, 2023, UP TO 1,200 DEKATHERMS PER DAYATA
PRICE NOT TO EXCEED $8.00 PER DEKATHERM, EXCLUDING
TRANSPORTATION SERVICE COSTS
SUBMITTED BY: INITIATING DEPARTMENT:
CLINTSHIMA, SENIOR ENGINEER OPERATIONS-RELIABILITYENGINEERING
REVIEWED BY: NEIL MEYER, PLANT MAINTENANCE SUPERINTENDENT
STEVE MCDONALD, DIRECTOR OF OPERATIONS
Roger S. Bailey
General Manager
ISSUE
Board authorization is requested for the General Manager 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
fiscally responsible, and Strategy 1 to maintain financial stability and sustainability.
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. For 2021 when NG prices stay
below about$8.90/dth, continuing to generate electrical power for the Treatment Plant is a cost benefit to
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Central San.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. For 2021,
staff had purchased 666 dth per day at an average Citygate price of$3.06/dth. The remaining amount is
purchased during the month, or at the end of the month at market price.
In 2019 and 2020, the Board authorized the General Manager to agree to purchase NG through 2021 and
2022 at a price not to exceed $4.00/dth. However, during 2021 forward NG strip prices have been just
over$4.00/dth and has recently risen to over$7.00/dth. Nationally, NG prices have increased due to
inventory levels below the five-year average and strong demand despite higher costs. Other factors
include decreased NG production, Hurricane Ida disrupting NG in the Gulf of Mexico, and record liquefied
natural gas exports and prices as the world economies begin to emerge from the pandemic.
If the spot market price of NG remains at or near$7.00/dth, Central San's average burner tip price for NG
for Fiscal Year(FY) 2021-22 will be approximately$8.00/dth for a total expenditure, including the added
cost of transportation ($2.16/dth) of approximately$3,500,000. The FY 2021-22 budget for NG is
$2,200,000.
Forward NG prices normally includes a premium and are not as greatly affected by short-term price
changes. Current pricing for one-year strips of NG for 2022 is approximately$5.95/dth and for 2023 is
approximately$4.86/dth not including transportation costs. Central San has not yet made nominations for
calendar year 2022. NG prices tend to be lower during the shoulder seasons of spring and fall, but
generally increases in winter.
If prices keep increasing, staff will evaluate whether operating the cogeneration system remains a benefit
to Central San. The steam produced by cogeneration is also needed to drive the aeration blower system,
so replacement steam would need to be generated by the auxiliary boilers.
Pre-purchasing allows staff the flexibility to continue 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 December 1, 2021
through December 31, 2023 at a price not-to-exceed $8.00/dth. By authorizing gas purchases through
2023, Central San will be able to take advantage of future favorable pricing changes, thus stabilizing the
energy budget for the next three fiscal 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 item at its November 9, 2021 meeting and
recommended Board approval.
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RECOMMENDED BOARD ACTION
Authorize the General Manager to purchase natural gas through an existing service agreement with Shell
Energy North America, LP, for the period of December 1, 2021 through December 31, 2023, up to 1,200
dekatherms per day at a price not to exceed $8.00 per dekatherm, excluding transportation service costs.
Strategic Plan re-In
GOAL THREE: Fiscal Responsibility
Strategy 1—Maintain financial stability and sustainability
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