Oilheat's War of Attrition

Can oilheat compete with natural gas in the Northeast?
By Bryan Sims | January 18, 2012

For residents in the Northeast, winter is expected to be slightly colder than normal, on average, with below-normal precipitation and near-normal snowfall. In fact, according to the Old Farmer’s Almanac, November 2011-October 2012 Long-Range Weather Forecast for the Northeast, the coldest periods are expected to occur in late January, February and mid-March, with the snowiest periods expected in mid- to late January through late February.


But irrespective of what the colder temperatures might bring, one thing is certain: Northeasterners will be cozying up to heat that primarily comes in one of two forms—heating oil or natural gas—and the competition behind the scenes between the companies supplying those fuels seems to have reached a fever pitch. With aggressive marketing campaigns unveiled over the past year by each industry proclaiming their advantages over the other, one might ask: which fuel is the more clean-burning, efficient and cost-competitive fuel source to heat my home or business? Let’s look at the facts.


Currently, when it comes to rates, it would be hard to ignore the favorable price advantage natural gas has over its competitor. According to the Energy Information Administration’s Winter Fuels Outlook released in October, the EIA predicts that the average price for heating oil in the Northeast this winter (October 2011 through March 2012) may be the highest ever, nearly $27 per MMBtu ($3.71 per gallon), up from $3.38 per gallon the previous year, or more than double the projected average cost of natural gas ($12.93 per MMBtu).


Because diesel futures aren’t traded on world commodities markets, heating oil is often traded as a proxy, therefore the two products are closely linked and to a large extent subject to the volatile price swings of a barrel of crude oil, an aspect that has been the curse of the oilheat industry for nearly half a century, says John Huber, president of the Northeast Oilheat Research Alliance.


“We are essentially a price taker in that market,” Huber tells Biodiesel Magazine. “On the other hand, natural gas is a domestic product because it’s not priced internationally to the extent that the price of heating oil is tied to the price of a barrel of oil.”


Despite the price disparity natural gas enjoys, oil heat industry proponents contend that, historically, this wasn’t always the case. In fact, at one point, oilheat enjoyed a significant price advantage over natural gas 20 out of the last 25 years up until 2008 when the price of oil spiked to nearly $150 per barrel. But the price hasn’t stabilized since, says Michael Devine, CEO of Earth Energy Alliance, a Mass.-based organization that assists fuel oil marketers in rebranding their corporate image and increasing their current customer base through the marketing of Bioheat.


“We don’t lose [customer] base because somebody wakes up and has done the math on the difference between natural gas and heating oil,” Devine says. “One of the things that always kind of hurt the oilheat industry from a marketing standpoint was its economies of scale. What I mean by that is, for better or worse, natural gas is a utility that doesn’t have multiple competitions within its own space. Heating oil, on the other hand, has traditionally and still is marketed through independent family-owned entities so it’s always a bit challenging to get all the independent companies on the same message.”


Bioheat’s Edge on GHG Reduction


The message that’s clear to all oilheat dealers and that it continues to educate its current and potential customers on are the quantitative environmental advantages Bioheat holds over natural gas. Contrary to its name, the term “natural gas” is a misnomer. Natural gas is a fossil fuel and, its primary ingredient, methane, is one of the world’s worst and most potent greenhouse gases. Coupled with questionable underground extraction and drilling methods such as hydrofracking in the Marcellus Shale region, increased imports and transportation of liquefied natural gas (LNG) from the Gulf to the Northeast, gas leaks from underground pipes, contamination in drinking water and the likelihood of explosions, oilheat holds a distinct advantage.


Launched in 2006 as the trade name given to a blend of heating oil containing between 2 and 5 percent biodiesel under the heating oil specification ASTM D396, Bioheat was the oilheat industry’s answer to providing a domestic fuel to lower emissions. And, according to Devine, the renewable component is “changing the paradigm” today when it comes to having an equal, if not better, environmental profile than natural gas.


“Would I be bullish in oilheat if it were not for biodiesel? Absolutely not,” Devine says, “but biodiesel provides a lot of what oilheat was lacking for so many years and I see there’s an opportunity with what’s happening in these industries for a resurgence because we still have over 300 dealers in the Northeast and we’re still distributing close to 8 billion gallons, most of it in the Northeast, and the infrastructure is there.”


One of the things that makes the oilheat industry unique is its voluntary effort to continually strive to improve the environmental profile of the fuel. In 2010, NORA, in partnership with the National Biodiesel Board, formed a Bioheat Steering Committee to evaluate how to get approval for higher biodiesel blends in oilheat, with the ultimate goal of reaching 20 percent. In 2010, Huber says one of the investigations involved a study that successfully compared a ULSD/biodiesel blend with 12 percent biodiesel fired in a high-efficiency, noncondensing, oil burner and a natural gas condensing boiler. The study, according to Huber, determined that the B12 blend delivered equal, if not lower, annual CO2 emissions than a natural gas condensing boiler.


“When we did the research we asked, if you look at the global warming potential of oilheat versus natural gas, at what level of Bioheat and biodiesel blends with ULSD do natural gas and heating oil become equivalent for greenhouse gas emissions?” Huber says. “That’s where the 12 percent comes in. When we say we’re at 12 percent, we’re equivalent to natural gas from a greenhouse gas standpoint; anything above that we’re better.”


According to Michael Ferrante, president of the Massachusetts Oilheat Council, Bioheat continues to be oilheat’s hallmark in a counterstrike campaign against aggressive marketing attacks from natural gas utility companies. Ferrante says his state is at the epicenter of an aggressive gas utility campaign from United Kingdom-based National Grid, which owns four different natural gas utilities in the state. Formerly KeySpan Energy Delivery, National Grid serves more than 8,000 residential customers and thousands of commercial customers.


To illustrate the point, Ferrante played a sound byte from a radio ad from National Grid during Biodiesel Magazine’s Bioheat Northeast event held in Pittsburgh in October. The commercial, he says, was cleverly worded to “confuse” listeners into thinking oilheat is “dirty” and “expensive.” The unfortunate part about the commercial, Ferrante says, “is that most of it is true,” he says. While his oilheat members may not have the robust marketing budget of National Grid, which spent roughly $700,000 on the radio commercial spot reaching roughly 1 million homeowners, MOHC is working with the American Energy Coalition on a radio spot to promote oilheat and the benefits of using Bioheat.


The NBB also launched a Bioheat workshop held at Citi Field in New York City this fall to empower oilheat customers who want a better, cleaner fuel. Also, on Oct. 24, Bioheat ads blanketed city buses and subway systems. Radio commercial spots also began airing on six highly rated CBS stations. Additionally, dealers at the workshop were the first in the nation to receive the “Bioheat marketing playbook,” which offers a comprehensive breakdown of the definition, production, advantages, benefits and market overview of Bioheat, as well as a sales and marketing strategy for registered Bioheat dealers.


 “Natural gas utilities have done a good job at spinning this tale,” Ferrante says. “Even if we did have a price advantage, we still have to burnish our image and we still have to send that Bioheat message out contained within that message. There’s only a couple of ways to clean our fuel and that is blend it with biodiesel and use an ultra-low sulfur diesel blendstock as the base product. I think once we do that with biodiesel, we have an incredible story to tell, but it gets lost when you have to battle the natural gas utilities.”


Customer Service: Core Strength


Although the heating oil business might be considered old-fashioned, one of the oilheat industry’s core strengths lies in the exceptional customer service delivered with its product. This is something that clearly trumps price disparity, according to Danny Falcone, regional wholesale manager for Ultra Green Energy Services LLC.


“The exuberance of a good price never outlasts the bad taste of poor service,” he says. Falcone adds that the level of trust between dealer and customer is a unique characteristic that natural gas is without. In fact, some relationships are multigenerational. Falcone says oilheat providers like UGES across the country typically have keys to homes for deliveries in case homeowners aren’t home, which speaks volumes about the valued intimate relationships an oilheat dealer has with its customers. 
“I probably have 200 house keys in my possession for deliveries,” Falcone says.


The personal touch that comes from the oilheat industry likely never comes through more than in a time of crisis, according to Ferrante, such as when Hurricane Irene swept inland over the Northeast last year and caused many to lose heat and power. Ferrante says that oilheat providers were able to restore heat to thousands of homes where natural gas utilities couldn’t.


“I think the utilities showed that during a time of real need they’re not equipped to handle the service needs,” Ferrante says. “Our service is another thing—we want to be able to tell customers that if you’re looking at natural gas, you better be keenly aware that they’re not as nimble or don’t have a service-driven approach like we do. That means a lot to people in this day and age. We have to capitalize on our skill set and that’s one of them.”


Another customer service advantage, Devine explains, are the flexible payment options that oilheat providers offer to their customers. For example, customers have the choice to pay by credit card, do direct billing or pay a fixed price. 


“It’s a much more customer-friendly environment than doing business with a natural gas utility,” he says. “When you call an oilheat provider oftentimes you’re going to have someone pick up the phone on the other end and they may know your name and you may know theirs. That’s never going to happen with a utility. I think we’re starting to move into a time now where that’s becoming less palatable, particularly in times of crises due to natural disasters.”

Author: Bryan Sims
Associate Editor, Biodiesel Magazine
(701) 738-4974
bsims@bbiinternational.com

 
 
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