Will natural gas alleviate Maine's energy woes?

When natural gas from a pipeline starts flowing into UPM Madison's heating furnaces late this year, it will be a fuel conversion several decades in the making and a move General Manager Russ Drechsel expects will boost the paper mill's competitiveness.

“We first looked at this 30 years ago, and today it has become a reality,” says Drechsel of the switch from oil to compressed to liquefied and now to pipeline natural gas. While he would not reveal the savings the magazine-grade paper mill expects from the changeover, he says even a savings of 10% would have been more than enough to make the investment. But by his estimates, the mill could see a much better return than that. Drechsel says natural gas will cost about one-third less than oil on a per ton basis. Still, he's opted for a dual-burner system, with the memories of oil price fluctuations and natural gas shortages last winter still fresh in his mind.

“We'll keep our capacity to burn oil so if the market does change and fuel oil becomes less expensive, we could burn it. So we're not walking totally away from oil,” he says.

Drechsel's story is playing out in businesses and homes alike through Maine, which ranks 49th in the nation in terms of the number of homes heated by natural gas, according to the U.S. Department of Energy. Only 4% of Maine homes are heated with natural gas compared to 51% U.S.-wide. Most Mainers, some 80%, heat their homes with oil, followed by propane at 5% and electricity at 4%. Various sources quote cost savings of anywhere from 35% to 50% in converting from oil to pipeline natural gas, which for a consumer paying $3,000 to heat his home for a season means up to $1,500 less for fuel. That has some companies and consumers signing up for natural gas as soon as it's available.

“It's like the wild, wild west,” says Chris Green, president of heating, ventilation and air conditioning company Mechanical Services Inc. of Portland, which expects to add a couple million dollars this year to its fuel-conversion business, comprising 10% of the company's revenue. Gas conversions are boosting business quickly for HVAC companies like Green's: he's also looking to hire four to six more workers.

“We have a lot of inquiries for quotes for gas conversions every day. It's like the gold rush right now. Everyone is getting in on it,” he says, adding he expects the trend to continue for several more years.

While natural gas promises cheaper fuel bills, deliveries uninterrupted by snow piles and a cleaner alternative to oil, it also can dramatically impact the bottom line of both homes and businesses. When Katahdin Paper Co. closed its Millinocket mill in 2008, it cited record oil prices that had doubled the mill's fuel costs. Drechsel says his company's use of natural gas has made the biggest favorable financial impact on his mill over the past five years. Energy is the biggest factor for the mill, for both heating and electricity. Right now, the mill is only using natural gas for heating and not to generate electricity. The mill first converted to liquefied natural gas, then to compressed natural gas and now is moving to pipeline natural gas.

“It secures longer-term viability for any industry if you can lower your cost of energy by one-third,” he says. “It makes you more competitive on the world market.”

He's not alone in that sentiment. Two other Maine paper mills, Sappi Fine Paper's Somerset mill in Skowhegan and Huhtamaki Inc. in Fairfield and Waterville, have also signed on as anchor customers for the Kennebec Valley natural gas pipeline now under construction by Augusta-based Summit Natural Gas of Maine, which expects to complete its $350 million, 68-mile main pipeline from Augusta to Madison by mid-October. Summit and Maine Natural Gas of Brunswick are competing head-on to supply gas to state and municipal buildings and to homeowners in the Kennebec Valley and elsewhere, with the aim of reaching both commercial and residential customers. Maine has no territories for the suppliers, so they compete in the same markets. The other two approved natural gas distributors in Maine, Unitil and Bangor Gas Co., also are scooping up customers in Maine's major cities. There's even anecdotal evidence from real estate agents that buyers are expressing preferences for homes with natural gas.

For George Paton, director of facilities at the Hyde School in Bath, the payback for the gas conversion was fast. The school contracted with Maine Natural Gas to connect to the company's gas line one block away that runs from Brunswick to Bath Iron Works. He says the school converted 90% of its campus to pipeline natural gas a year ago, paying Mechanical Services $200,000 for the conversion. Hyde School had been spending about $400,000 a year on oil and propane, but now spends about $200,000 for natural gas.

“That's a one-year payback,” Paton says. “It really helps the bottom line of the high school.” Recouping the cost of conversions takes anywhere from four months to four years, according to various industry estimates.

In July, Bangor Gas Co.'s parent, Gas Natural Inc., said it was making a major push to expand in Maine. It signed an agreement with Global CNG to provide natural gas to that company's CNG loading station in Bangor. Bangor Gas also started converting a 60-mile section of the Loring Pipeline north of Bangor to transport natural gas, and secured Lincoln Paper and Tissue as its anchor customer in June. The pipeline also provides access to more residential customers.

Gas Natural CEO Richard Osborne said in a statement that his company has made great progress in converting the liquid pipeline it acquired in 2012 into a natural gas pipeline, avoiding the significant expense of laying new pipe.

“This will add 60-miles of main to our system and [has] enabled us to gain a major industrial customer,” he said. In September 2010 the company bought, through its Penobscot Natural Gas Co. subsidiary, a leasehold interest in a 189-mile pipeline corridor easement running from Searsport to Limestone known as the Loring Pipeline. The company planned to start supplying natural gas to the CNG facility in August.

Step-by-step

Drechsel says UPM Madison attempted around 1990 to set up its own natural gas pipeline to tie in with the Maritimes and Northeast Pipeline, one of the two major pipelines in Maine, the other being the Portland Natural Gas Transmission System. But that approach proved to be too expensive. Drechsel couldn't justify the investment based on the fuels' price difference, even though the Iraqi invasion of Kuwait doubled oil prices to $40 per barrel from July to October in 1990.

Spot oil prices have kept climbing almost steadily since then to $110 today, according to the U.S. Energy Information Administration. By comparison, natural gas spot prices have averaged $4 per million British thermal unit since 1990. Using comparable measurements of dollars per million Btu for various fuels in Maine during the week of Aug. 5, the Governor's Energy Office figured the price of fuel oil at $24.73, natural gas at $17, propane at $28.58, wood pellets at $14.55, cord wood at $10.50 and electricity at $43.96.

The Madison mill converted to LNG two years ago, and this past spring changed to CNG. It aims to have the pipeline natural gas flowing in December.

“Pipeline natural gas is more reliable in terms of running a truck over a road versus having gas in a pipeline,” Drechsel says. Still, he says CNG has been lower priced than oil.

“LNG to CNG to pipeline natural gas were all steps. Each was an improvement over oil,” he says. “There are very few things we've done or have been capable of doing that would have as much of an impact on the industry as converting to natural gas in the last five years.”

Another benefit with natural gas is its environmental impact.

“Environmentally, our footprint is so much better,” says Drechsel. “We've gone from 600 tons of sulfur dioxide emissions per year to maybe 10-20 tons, which is negligible. And our carbon dioxide emissions went from 90,000 tons per annum to 45,000 tons. And nitrogen oxide emissions dropped from 150 tons to 100 tons annually.”

In the Kennebec Valley, for example, he says the savings of the UPM Madison, Sappi and Huhtamaki combined are about half a million barrels of oil per year, which at an average 35% savings at $100 per barrel amounts to $17.5 million in reduced costs for all three mills.

Still, Drechsel remains concerned long term about the development of the natural gas pipeline infrastructure out of state to support bringing natural gas into Maine. Last winter, the transmission constraints in the natural gas pipeline through New England proved problematic in Maine, spiking prices temporarily in the coldest months of the winter. There have been other concerns as well, including the Deep Panuke platform off of Nova Scotia, which is three years behind in starting production, he says.

Verso Paper Corp. cited high transportation costs for natural gas in its first quarter earnings report.

“While the price of natural gas increased slightly year over year, we saw delivery charges surge primarily due to constraints in the New England delivery network during this period of higher demand,” company President and CEO David Patterson said in a prepared statement when the results were released in May. “On a year-over basis we experienced a negative impact of almost $22 million relative to the gas cost at our Maine facilities.”

The new Maine Omnibus Energy Bill (HP 1128 or LD 1559), which became law in June, aims to address these restrictions with a measure to partly finance pipeline construction in southern New England to make more natural gas available to Maine.

The cost to convert

For homeowners, the cost to convert from oil to natural gas can run anywhere from $1,000 to replace a burner assembly to $6,000 to replace the entire furnace, according to Eric Earnest, vice president and chief operating officer of Summit Utilities Inc., Littleton, Colo., the parent of Summit Natural Gas of Maine. However, there is some help available. The Maine Public Utilities Commission has approved a conversion incentive plan for Summit that provides up to $1,500 per customer in rebates, or up to $2,000 in a community that gives Summit property tax relief. Customers in the state's Low Income Home Energy Assistance Program can get up to $4,000. There also is up to $750 available for energy audits and basic home energy conservation work.

Summit has focused on rural states like Colorado, Missouri and Maine. Earnest estimates there are 54,000 potential customers in the Kennebec Valley, where Summit's pipeline will connect to the Maritimes & Northeast Pipeline. With the Kennebec Valley pipeline scheduled to go online this fall, he expects to get about 2,000 customers this year, primarily commercial but about 800 of them residential. The company expects to supply service to 17,000 customers by the fourth year of the project, and up to 48,000 by the tenth year.

Throughout the build-out, Earnest expects to create a lot of jobs.

“More than 500 people are working seasonally this year through the construction season, which runs April to November. Those are 500 full-time jobs with benefits,” he says. A typical crew along the highway has 20 people. The company currently has 38 people working at its office in Augusta, but has seven more positions open.

Rural Maine options

Right now, Summit is focusing on supplying natural gas through pipeline in the ground only, because that is less expensive. Competitor Maine Natural Gas plans to supply both pipeline and CNG.

“Our strategy is to provide natural gas distribution service wherever feasible. We're not handcuffed to pipe,” says Darrel Quimby, vice president of Maine Natural Gas, a subsidiary of Iberdrola USA, which also owns Central Maine Power Co.

For smaller rural areas, Maine Natural Gas has an agreement with Xpress Natural Gas to deliver CNG to pipelines Maine Natural Gas installs in towns.

“We're exploring opportunities to do this in rural communities,” he says. “We are one of the few utilities looking at trucking and a pipeline.”

Maine Natural Gas is still small, with 14 employees and eight contractors, but it can leverage resources at its affiliates to do accounting and other tasks, thus keeping its employee count low, Quimby says.

“Natural gas will continue to grow in Maine,” he predicts. “We'll see a big sprint in the next two to three years as Waterville and Augusta have access to gas.”

He says the dynamics of the natural gas industry are changing because of the Marcellus Shale beds in nearby New York and Pennsylvania.

“Until Marcellus Shale [extraction], New England was at the end of the [natural gas] pipeline, but now it's at the beginning,” Quimby says.

He expects prices and supplies to be somewhat unstable until the transmission tightness is resolved in the next two-to-five years.

“Even with higher prices, you're still saving 30%-40%,” he adds. “And heating oil prices are not dropping in Maine.”

One somewhat unexpected consequence of mining natural gas from shale beds is that some areas of the Marcellus Shale produce wet gas that is rich in hydrocarbons like propane. The result is a larger supply of propane.

“Propane is pretty cheap now and is a very attractive fuel for a lot of people,” says Green of Mechanical Services.

Read more

Western Maine natural gas line delayed

Maine delegation urges swift action on natural gas rate proposal to give businesses certainty

Report indicates region needs more natural gas

Madison Mill production schedule in further flux