Dual Fuel Capabilities - More Valuable Than You Thought

Hi all,

Until natural gas prices started to collapse in late 2008, it was common for large facilities to optimize between fuel oil and natural gas based on the price of each fuel. Since Nov. 2008,  burning natural gas has been a no-brainer and any dual fuel activity has been centered around utility interruptible programs, not economic optimization. The natural gas prices experienced in the Northeast over the last ten weeks makes me think that many end users exposed to spot natural gas rates may want to revisit their dual fuel strategies. 

The delivered costs of No. 2 and No. 6 fuel oil vary based on customer location and purchase quantities, but generally speaking the current delivered price in the Northeast for Nos. 2 and 6 fuel oil are $24/MMBTU and $16/MMBTU, respectively. For the last several years, natural gas prices have almost invariably been below the price of fuel oil, but as the graphic below demonstrates, there have been several days this winter when burning oil instead of natural gas would have been economic for anyone exposed to spot gas rates.

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Although every facility will have different opportunity costs and operational constraints around their ability to switch fuels, lets walk through the economics for a hypothetical oversimplified customer. Lets presume that we have a facility that burns 500 MMBTU/day and purchases natural gas with an energy supplier. Lets presume that the gas supply contract is based on a gas daily spot price plus a fixed $/MMBTU fee and that this customer can switch fuels instantaneously with no opportunity costs. If this customer is located in the New York City area and buys natural gas based on the Transco Zone 6 NY price benchmark, they could have saved either $22,000 or $42,000 by burning Nos. 2 or 6 fuel oil, respectively on days when the Transco Zone 6 NY index exceeded the price of fuel oil. If this customer is located in New England and buys natural gas based on the Algonquin City Gates price benchmark, then they could have saved either $24,500 or $75,000 by burning Nos. 2 or 6 fuel oil, respectively on days when the Algonquin City Gates Index exceeded the price of fuel oil. I've found that the more sophisticated natural gas suppliers (e.g., Hess, Sprague) are good at helping customers execute a dual fuel strategy, but if this winter is a harbinger of things to come in the physical gas market, I'd dust off your dual fuel policies and procedures.