Convert me if you can: Few homes left for natgas switch

Reuters News
|
Posted: Feb 17, 2012 3:58 PM
Convert me if you can: Few homes left for natgas switch

By Edward McAllister

NEW YORK (Reuters) - Half of Tiverton, a small town on Rhode Island's broken coastline, is enjoying the benefits of an American natural gas boom by heating living rooms, water and stoves with the cheap fuel.

The other half isn't.

Residents in the north end of the seaside idyll, nestled in a bay near the Massachusetts border, are receiving the lowest heating bills in years this winter thanks to record nationwide natural gas supply.

Streets away in the south, just beyond where the gas pipeline network ends, households are paying up to twice as much for the heating oil and propane delivered for their boilers. And it looks like it might stay that way.

Homes on the pipeline grid, in Tiverton and across the United States, have been converting to natural gas for years to catch lower prices. The number of homes burning oil for heat has halved since 1975, government data shows. The decline has quickened over the past five years as gas prices slumped.

But with few plans to extend the grid, the U.S. residential market is nearing saturation. Most of those who have the option of using gas have already made the switch, even in Tiverton.

"There are a few (homes) left near the gas grid that are on oil, but only a few," said Paul Dupont, a supervisor at Phil's Propane Co that delivers to a few thousand customers in Tiverton. "There have been a lot of conversions -- natural gas is beating heating oil by a long shot," he said.

THE PRICE IS RIGHT

The motive is simple: the cost of heating a home in the U.S. Northeast with natural gas this winter will be about $900, less than half that of a home on heating oil (above $2,300), according to Energy Information Administration projections.

The same logic that has convinced millions of homeowners to make the switch is now affecting decisions in corporate boardrooms, with U.S. industrial consumers from truck makers to chemical firms looking to convert to gas-based energy.

Some homeowners are still rushing this year to make the change, convinced that spending up to $10,000 to replace their old heating oil tanks with cleaner, more efficient natural gas burners is a safe bet as gas prices collapse to their lowest levels in a decade and crude oil hovers above $100 a barrel.

But it may be the last throes of a fading trend.

"You have to assume that we are getting saturated because the price signal has been so clear," said Bob Brackett, senior energy analyst at Bernstein Research in New York.

The number of U.S. households running on heating oil has already fallen by 20 percent since 2005 to about 7 million, according to the EIA, as gas from prolific shale deposits swamps the market and offers hope for decades' worth of cheap supply.

Despite the economic incentive, homeowners in more remote areas -- or even densely populated places like Manhattan -- have few alternatives to fuel delivered by tanker. Increasingly, they are the only ones left not heating with gas.

National Grid, which operates the gas pipes in Tiverton, has no plans to extend its lines there or elsewhere on its northeast network, given the expense of adding just a few more customers, sometimes in remote areas, said company spokesman David Graves.

"For the most part we are working inside the limits of the natural gas grid," Graves said. "We are not going out into the countryside because with the density of the population you don't get much return."

A SLOW CHANGE

The shift from gas to oil has slowly reshaped energy markets, gradually eroding the seasonal swings in oil prices when winter demand for heating fuel in the Northeast -- the world's biggest consumer market -- becomes a dominant factor.

Distillate fuels, which in 1975 heated more than 22 percent of U.S. homes, now account for about 7 percent. Northeast consumption of high-sulphur heating fuel, used predominately in households, fell to about 500,000 bpd last winter, nearly half what it was a decade earlier, EIA data shows.

The change has had a smaller impact on the vast natural gas market, which is less susceptible to fluctuations in the residential use that accounts for less than a fifth of U.S. demand.

Even if all homes running on heating oil switched to natural gas, it would add little more than 1 percent to U.S. gas demand, analysts said, far from the amount needed to pull U.S. gas prices off their current lows.

And greater efficiency has managed to keep household demand stable despite the number of consumers rising consistently since the 1980s.

CONVERT ME IF YOU CAN

Switching homes requires plugging in a gas line, getting rid of the old oil burner, and inserting a new heating system. It also includes some expensive extras such as lining chimneys. The cost for a residence is anywhere between $6,000 and $10,000, according to experts, a price range at which many homeowners balk.

Conversion rates are already on the decline in some of the region's wealthier areas and near major cities where the gas grid is well established, experts say.

Some notable exceptions remain, however.

Change is slow in Manhattan, despite an initiative by New York Mayor Michael Bloomberg to phase out the dirtier grades of fuel oil. The high cost of switching, the logistics of converting large buildings with hundreds of apartments, and the disruption of placing new lines in a busy metropolis all hamper progress.

"While we are seeing increased requests for gas, due to its competitive price advantage to some of the other fuel choices, such as oil, the customer's cost to convert ... is still a hurdle for many," said Joseph McGowan, manager of the gas customer conversion group at ConEdison in New York, which saw conversions decline between 2008 and 2010.

PSE&G, which serves nearly three-quarters of New Jersey's population, does not expect the share of customers heating with natural gas to rise much beyond the current 85 percent, a company spokeswoman said.

"A lot of the low hanging fruit has already been picked," said Richard Meyer, energy analyst at the American Gas Association. "Extending lines to more customers can be economically challenging."

LATECOMERS

Still, a number of utilities are experiencing a lot of switching activity that some see continuing while oil prices remain high. Heating oil prices, which are tagged to oil prices, are about four times higher than U.S. gas prices.

Yankee Gas, Connecticut's largest gas distributor, converted a record 2,000 single family homes and multi-unit apartments to natural gas last year, double 2010 levels.

It is not alone. National Grid, which provides power to millions of homes in the Northeast, has doubled its conversions since 2009 and did more than 15,500 last year, according to figures provided by the company.

Massachusetts-based New England Gas Company, which doubled its conversions last year to 150, expects further increases this year.

If households can switch, the benefits could be seen long term. With decades of home grown supply, natural gas prices are unlikely to rise fast for a number of years.

(Editing by Jim Marshall)