Large energy consumers in Northern New England have had it rough for the last few years. Natural gas prices have fallen drastically, but most of the region is cut off from natural gas pipeline infrastructure. Fuel oil and propane are the dominant fuels in this region, but both are very expensive on a $/MMBTU basis relative to natural gas. Although biomass can represent a low cost fuel option, burning biomass isn't for everyone. The result has been a major cost disadvantage for large energy consumers in large parts of Maine, Vermont, and New Hampshire. relative to their peers in the rest of the Northeast.
In the last two years, several entrepreneurial companies have emerged to address the energy challenges faced by the consumers mentioned above. They are NG Advantage and Xpress Natural Gas (XNG) and they deliver Compressed Natural Gas (CNG) via truck to the customer's property. The truck trailer has a tank that can hold approximately 350 MMBTU of CNG and the trailers are designed to be left on the customer's property while the CNG is being consumed. This relieves the customer of the need to install their own storage tank and when the CNG in the trailer is depleted, it is replaced with a full one. For a customer to switch, they only need to install burners capable of burning natural gas and the plumbing required to connect to the CNG trailer. Hexagon Lincoln's TITAN tanks are currently very popular for trailer mounted CNG delivery systems and there is a major backlog of orders for tanks and trailers due to the growth of the CNG business.
In addition to XNG and NG Advantage, Irving Oil and Global Partners have also entered the CNG business. Irving Oil is delivering CNG to customers in Eastern Maine from its CNG facility in New Brunswick. Global Partners LP has partnered with OsComp and Bangor Natural Gas to build a CNG compression station in Bangor, ME. This station is currently under construction and should be online in a few months. XNG opened its Baileyville, ME CNG compressor station in early 2013 and is planning to construct another one in Augusta, ME in partnership with Maine Natural Gas. NG Advantage's CNG facility in Milton, VT taps the natural gas lines that run from the Quebec border down to Burlington, VT. This part of Vermont is served by an extension of the Quebec Gaz Metro system. NG Advantage is currently planning to build another CNG facility in Pembroke, NH in partnership with Clean Energy Fuels. The Pembroke, NH CNG station could be online by spring 2014. The map below details the locations, current and planned, of CNG compression facilities serving New England.
Although CNG is less expensive than No. 2 fuel oil and propane, there are many costs that are unique to CNG. Delivering CNG requires a diesel fueled semi truck. If we presume that the average semi-truck gets approximately six miles per gallon and diesel costs roughly $3.75/gallon, then each mile of transport costs $0.625 in diesel fuel. The miles of transport required are actually double the distance between the customer and the CNG compression facility because the empty trailers must be transported back for refill after a full one has been delivered. In addition, to diesel fuel, wages for truck drivers and vehicle maintenance impact the per mile costs. At distances greater than 150 miles from the CNG compression facility, the economics of CNG are challenged as transportation costs start to climb well north of $1/MMBTU.
The other challenge facing CNG providers is cost volatility during the peak winter season. Each CNG provider is offering customers a fixed price per MMBTU (at least to our knowledge), but the wholesale cost of natural gas in New England during winter can swing wildly (see our previous post on that). Generally speaking, wholesale natural gas prices on the Maine and Maritimes pipeline will trade at a premium to Tennessee Zone 6 Dracut during cold weather. On very cold days, the CNG providers will potentially have exposure to spot natural gas prices that are higher than the contracted prices with their customers. Also, its unclear where the CNG providers stand if supplies become tight and the pipeline issues an Operational Flow Order (OFO) where certain users are restricted in their ability take natural gas. Each CNG provider has a risk management strategy in place, but the risk of tight supplies and elevated winter basis costs can't be totally controlled through hedging. This applies to the Merrimack valley lateral of the Tennessee pipeline as well. Customers who use natural gas on a year round basis are most attractive to the CNG providers as they can spread out the costs of supply during peak winter days over the entire year. For purely heating loads, we imagine the economics may be riskier if there is a very cold winter with multiple cold snaps.
NG Advantage's Milton, VT CNG facility is somewhat shielded from these issues since its natural gas supply comes from Canada. Ontario and Quebec do not have the severe basis risk and pipeline bottlenecks affecting the rest of New England so their wholesale supply costs will be less volatile. They are building a new facility in Pembroke, NH and this facility will face the same supply cost issues during peak winter as their competitors. Despite this, it will give them geographic proximity to the NH market where there is a lot of opportunity for CNG.
CNG is also creating some very innovative changes to the natural gas utility industry. Maine is unique in that natural gas utilities do not have exclusive franchise rights so getting service to new customers is critical for a utility like Maine Natural Gas who is competing with Summit Natural Gas of Maine for new service areas. This article describes how XNG is helping Maine Natural Gas build a "rolling pipeline" where CNG can supply a new local natural gas system that has not yet been connected to the larger Maine Natural Gas system. This partnership allows them to acquire and serve customers and build a market much faster than if they had to wait until all of their infrastructure was ready.
CNG is poised for explosive growth in Northern New England.................so long as natural gas stays cheaper than fuel oil or propane. We think it will in the near term, but the future is anyone's guess.
If your facility is considering switching to CNG and you'd like some assistance evaluating your options, call us. We can probably help.