Switching to natural gas | Investment rolls in amid clean-water worries

Two years ago when Peter Taggart learned that his local gas utility was installing a natural gas pipeline right by an apartment building he owns, he signed right up. His 10-unit, 128-year-old building had an oil burner from the late 1980s that had been regularly pumping out $5,000 to $5,500 annual oil bills. Plus, Taggart, who owns a green-building construction company, says he was attracted to natural gas's lower carbon-dioxide emissions. After spending $12,000 to buy a new gas boiler and circulating system, and adding $2,500 worth of insulation to the building, Taggart pushed his heating bill down to between $2,000 and $2,800 a year, he says.

Taggart is by no means an outlier. The University of Southern Maine converted the central heating plant at its Portland campus to natural gas last winter for $270,000, saving about $315,000 in utility costs, according to Bob Bertram, executive director of the university's facility management. Now USM is spending $100,000 more to convert oil burners to gas in 10 other campus locations. And when L.L.Bean switched its Freeport facilities to natural gas last year, it went from burning 200,000 gallons of heating oil a year to zero, according to a company spokeswoman. By October, Bath Iron Works, too, will be hooked up to natural gas. The shipyard claims its changeover from oil will shave its carbon footprint by a third.

After about a decade of quietly powering Maine through the electricity grid, natural gas has in the past couple of years become a more prominent player in the state's heating sector, following its price fall. In May, the natural gas wellhead price was $4.12 per thousand cubic feet, slipping from a high of $10.79 per thousand cubic feet in July 2008, according to the U.S. Energy Information Administration. Relatively new discoveries of natural gas found in underground deposits in the United States and abroad, along with advances in extraction technology, have natural gas suppliers predicting a steady supply for decades to come, helping to keep prices low — a claim that is not without its doubters.

The confluence of higher, unstable oil prices and lower natural gas prices has driven a surge of new and proposed natural gas investment in Maine. In late August, the Maine Public Utilities Commission gave its first nod of approval to a Portland-based company attempting to build what will be Maine's largest natural gas network: an $80 million, 60-mile natural gas pipeline stretching from Richmond, through Augusta, and up to Madison. Unitil, a New Hampshire-based gas provider, this spring launched a $60 million, 14-year project to upgrade its pipeline infrastructure in Portland.

Meanwhile, Maine's three utilities — Unitil, Maine Natural Gas in Brunswick and Bangor Natural Gas — are all experiencing a spike in customer calls. "We're extremely busy because of the price differentials between oil products and natural gas," says Darrell Quimby, vice president of Maine Natural Gas. "Potential customers have been more active asking for natural gas."

Natural gas users in Maine still just make up a fraction of the population. In 2009, the latest data available, Maine had 29,706 natural gas users: 20,806 residential customers, 8,815 business customers and 85 industrial customers in the regions where natural gas is available: Greater Portland, Lewiston-Auburn, Kittery, Windham, Gorham, the Brunswick area and the Bangor area.

But natural gas is 30% to 50% cheaper to burn than oil these days, according to Quimby, accounting for its rise in popularity. "It's a lot easier to sell 200 to 300 conversions than it once was," he says, despite the initial capital investment. Converting an oil burner to natural gas for an average-size house or small business costs in the vicinity of $2,000 to $5,000, while buying and installing a new system might run between $4,000 and $8,000, or higher depending on whether greater efficiency measures are added.

Jon Kunz, manager of marketing and sales for Bangor Natural Gas, says his company's growth was steady from the late 1990s, when the utility was formed, to 2008. Then demand, especially from homeowners, accelerated. He anticipates adding 1,000 new customers this year, about twice as many as prior years' averages. The company has 22 employees after recently hiring two engineers.

"Commercial businesses have always been looking for natural gas," Kunz says, "but now we're seeing more residential customers requesting service, and that comes from the publicity … People realize the supply is there, the price is stable and it's a domestic product."

Yet, natural gas, like every fuel source, comes with downsides. As more gas becomes available and more people see natural gas as superior to oil and as a potential economic development tool, energy experts warn that its growing prevalence could eclipse investment in renewable energy. Detractors also warn that the price we pay for natural gas comes with significant environmental degradation where it is extracted with hydraulic fracturing, or "fracking," from shale formations, such as in the Marcellus shale that spreads across parts of New York, Pennsylvania and West Virginia. Plus, while natural gas emits less carbon dioxide than oil, it is, in the end, still a polluting fossil fuel.

Angus King, wind developer and former governor of Maine, says while he supports natural gas and backed the arrival of a major natural gas pipeline into Maine during his term in office, he's adamant that natural gas should not be considered the salve to our energy crisis. "The danger is right now the natural gas prices are so low that practically no other energy source can compete, whether it is wind, solar, nuclear or whatever," he says. "My concern is we go from over-dependence on oil to gas, and being overly dependent on one commodity, over which you have no control because there's none that comes from within your state, is dangerous. A diversity of sources is always better."

Building out natural gas

In late 1999, gas began flowing across Maine through the newly built 685-mile Maritimes & Northeast pipeline connecting Canada to New England. With the availability of gas, five new power plants across the state came online to generate gas-fired electricity. Today, natural gas produces almost half of Maine's electricity and helped move us beyond our coal and oil habit. However, Maine is still the country's most oil-dependent state, with roughly three-fourths of its housing stock fixed on heating oil.

Ken Fletcher, director of the Office of Energy Independence and Security, says he's seeking ways to facilitate bringing more natural gas to Maine as part of the state's agenda to diversify its energy sources. He says the state is trying to provide gas suppliers with "a little more support and incentive," and points to the Finance Authority of Maine's recent $5.3 million loan assurance to Woodland Pulp Mill in Baileyville to help its $12 million conversion from No. 6 oil to natural gas. The project involves building a 5.3-mile pipe from a feeder line to the mill. The Legislature this spring also passed a bill allowing the Woodland project to be overseen by a state agency rather than a federal one, speeding up the project's timetable considerably, according to mill spokesman Scott Beal. By converting to natural gas, Beal says the mill, which employs 320, will avoid burning 10,000 gallons of oil a day, or about 10.3 million gallons a year, and decrease its nitrogen dioxide emissions by 60%.

Fletcher says he's also looking strategically at how to build more gas networks here. "Principally what we're looking at and discussing with gas suppliers is where are the logical areas to bring pipes," he says. "We're looking at any area that has manufacturing or relatively large commercial facilities that utilize oil."

Central Maine, where Kennebec Valley Gas Co. is trying to build the new 60-mile natural-gas system, is one of those areas, Fletcher says, with big power users like Sappi Fine Paper in Skowhegan, Madison Paper and Huhtamaki in Waterville. The state could help this project by agreeing to be one of the company's anchor tenants, he explains, and convert state buildings to natural gas to help justify an expensive build-out of pipelines to downtown Augusta.

Now that the PUC has given its initial approval to Kennebec Valley Gas Co.'s proposal to extend natural gas from Richmond to Madison, it is stimulating hopes there for an economic development boost. Ken Young, executive director of Kennebec Valley Council of Governments, says the region's lack of alternative fuel puts it at a competitive disadvantage with Portland, Lewiston-Auburn and Bangor, which have natural gas.

But the Kennebec Valley project could be a daunting undertaking. Kennebec Valley Gas Co.'s principals, Richard Silkman, Mark Isaacson and Anthony Buxton, are seeking $75 million to $80 million in financing, from banks and infrastructure investment equity, "pools of capital that are more patient and look at longer-term investment," Silkman explains.

What will help the company drum up investment is the assurance of anchor customers, Silkman says, such as the capitol complex, paper mills, hospitals, universities and manufacturers — "the ones that have a significant heating or process load and are burning propane or oil today." The typical pattern with natural gas utilities is to sign up a few major customers before extending lines to smaller commercial and residential users.

The developers are also seeking tax breaks from the 12 municipalities through which the new pipeline would be thread. So far, details of the proposed tax-increment financing deal are sketchy, but Silkman says it will involve sizable tax breaks for 10 years, followed by a smaller tax cut in the next five years. Silkman says he's preliminarily calculated the pipe could generate roughly $1.3 million a year in total property taxes.

"We have a lot of fixed costs, we have to convert people over time to natural gas," Silkman says, explaining that it is easier to initially convert those on propane to natural gas and a bit harder to convince oil-using customers to invest in a conversion. "Our cash flows are more constrained initially than later on, and anything we can do to lower operating costs initially is important to us," he says.

While many of the 12 communities appear to favor a tax gift, there is at least one holdout. Madison's town manager, Dana Berry, says his town has decided granting the TIF is not in its best interest. "We're not sure how many jobs the pipeline will generate, and that is one of the criteria the town has used to grant TIFs," Berry says.

Mike Roy, Waterville's city manager, says Waterville has given indications of support for the project. "I've been concerned for a very long time about the large number of existing TIFs in the city," he says, "but where this one offers the hope of reduced energy costs, I think we have to look very, very carefully as to how important it is to the economic growth in the region."

Natural gas worries

Although natural gas today promises relief from high heating costs and a possible shot-in-the-arm for Maine's economy, it has been criticized for being environmentally destructive and having an uncertain future.

Alan Septoff, research director of Earthworks, an environmental advocacy group in Washington, D.C., comes from a region within the Marcellus shale. "[Mainers] should be aware that their energy comes from somewhere, and when it comes from fossil fuels, Maine's energy comes at the expense of someone else's community," he says, "and that will be the case as long as loopholes exist in federal and state oversight that result in the kind of spills and contamination that have been in the news in the past five, 10 years."

From deep reserves in shale rock, natural gas has in the past few years been removed with a method linked to contaminated water sources, including rivers and underground aquifers. Hydraulic fracturing uses a huge volume of chemical-laden water to blast underground rock formations at high pressures to access the gas. Shale gas now accounts for roughly one-quarter of all U.S. production, according to the American Gas Association.

A hotly disputed New York Times story in June also suggested that gas companies' shale supply estimates in the United States might be bloated, leading potentially to a kind of dotcom meltdown. Silkman, however, counters that he adheres to other forecasts, such as the federal energy administration's, that predict natural gas will be a long-term, low-priced fuel prospect, with adequate and accessible domestic supplies.

The U.S. Energy Information Administration, in its 2011 energy outlook, projected natural gas from shale deposits to grow fourfold between 2009 and 2035, with oil prices rising simultaneously to $125 per barrel. The administration does warn, though, that "estimates of technically recoverable resources and well productivity remain highly uncertain … and are certain to change over time." In late August, the agency downgraded its estimate for the Marcellus shale by nearly 80%, following a report by federal geologists.

Despite natural gas' unknown future supply and price stability, its current affordability has impacted the renewable energy market. When natural gas prices are low, it pulls power prices down, according to Elizabeth Salerno, American Wind Energy Association's chief economist, which is chilling investment in renewable energy at the moment. "Low natural gas feeds into gas generation units, and power prices are lower across the U.S.," she says. "The other set of factors is that the load is not increasing — new demand for power is not really ramping up in the current economy. So if you have little demand for new power, we all take a hit on that, and there's a question of cost competition across the sources for power."

At the same time, Salerno points to some positive effects. "I think that what has happened with low sustained natural gas prices with wind is that it pushed us in the direction of trying to bring down costs," she says. "We've focused on squeezing down costs on manufacturing and production; we've seen prices come down on turbine pricing and cost of construction."

Angus King points out, too, that fossil fuels cannot guarantee the same predictability as renewable energy. "You're taking your chances on a volatile fossil fuel market that can change dramatically from year to year," he says. "I've always believed that what goes down must come up."

Rebecca Goldfine, Mainebiz staff writer, can be reached at rgoldfine@mainebiz.biz.

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