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Making market inroads
September 1, 2009 By: Brian Richesson LPGasFuel oil is the king of the Northeast, but its reign over the region’s market share shows signs of slipping. Propane is gaining momentum here and poised to make its presence felt. Some say it’s already happening.
The Northeast, which includes the New England and Middle Atlantic states, uses fuel oil mainly for home heating. Of the U.S. households using fuel oil for home heating, about 76 percent are located in the Northeast, according to the Energy Information Administration (EIA).
Still, the overall benefits of propane are becoming hard for fuel oil customers to overlook. In fact, fuel oil conversions in the Northeast might offer propane the highest growth potential in the residential and commercial sectors, says the 2009 Propane Market Outlook, an assessment of market trends, threats and opportunities facing the industry through 2020. ICF International prepared the analysis for the Propane Education & Research Council (PERC).
“There’s definitely been some erosion in the oil business, but fuel oil has not declined that much. More or less, propane has grown substantially,” says Rick Card, general manager of D.F. Richard Energy, a fuel oil and propane marketer in Dover, N.H. “The fuel oil business is still a viable part of our business – it’s going to be a good, steady business for a while – but long term we definitely felt there was more growth potential and uses of propane than we maybe envisioned 30 years ago.”
In Maine, where marketers have gotten real traction replacing fuel oil furnaces, 2007 propane sales jumped 48.9 percent from 2006, to almost 129 million gallons, according to the American Petroleum Institute. The other New England states also saw increases in propane sales during this time frame, including New Hampshire (22.8 percent), Connecticut (20.3), Rhode Island (12.2), Vermont (5.2) and Massachusetts (2.3). In addition, New Jersey (49.4), Pennsylvania (15.2) and New York (15.1) experienced an upswing in propane sales.
“A lot of our customers live on the coast of Maine and don’t have basements in their houses for reasons of topography,” says John Peters, president of Downeast Energy in Brunswick, Maine. “That would require an outside fuel tank, meaning they have to burn kerosene or propane – and propane would be the fuel of choice.”
Downeast Energy is mainly a fuel oil marketer, but its propane business has picked up substantially in the last 15 years, Peters says. His customers are using propane for water heaters and space heaters, and some are converting their home systems to propane.
“It’s just a terrifically convenient fuel,” he adds.
Joe Rose, president of the Propane Gas Association of New England, says these gains in the Northeast are coming at the expense of fuel oil. The shift is the result of a combination of factors, he adds, as propane is energy efficient, clean, versatile, affordable and perceived as a domestic product.
“Propane has made steady strides in the last 10 years, and quite frankly, PERC has raised the awareness of propane’s versatility,” says Rose, who has noticed an increase in fuel oil marketers also selling propane. “The propane guys in T-shirts raised the awareness level that propane existed and the industry went out and sold it.”
The price is righting itself
So what is fueling this propane infusion in the Northeast? A number of factors are at play, including price, propane’s versatility in the home, its environmental and tax benefits, and customer awareness.
Historically, the average price of propane to residential customers has generally exceeded the average price of fuel oil, according to the Propane Market Outlook. But in the long term, propane prices are expected to become more competitive. This, in turn, would provide continued opportunities for propane in the residential and commercial heating markets in the Northeast.
“Heating oil cost-per-Btu was tough to beat for a lot of years compared to propane,” Card says. “Last year when the commodities market went crazy, heating oil followed, where propane didn’t quite as much. Consequently, the cost-per-Btu got a lot more favorable for propane for the first time in many years.
“Another advantage of propane, it definitely follows supply-and-demand economics versus the commodity speculating that influences oil,” Card adds. “Propane seems less volatile. It doesn’t have the crazy fluctuations of pricing as we experience in the heating oil business.”
The EIA short-term residential energy price forecast, from May 2009, reflects the collapse of high crude oil prices. This resulted in a steep decline in propane and distillate fuel oil prices in the fourth quarter of 2008 and first quarter of 2009. Propane prices still did not decline as fast as fuel oil prices during the swing. However, ICF International is predicting a competitive advantage for propane due to long-term structural issues.
“When prices were approaching $4 or $5 a gallon for heating oil, we received a significant amount of calls. Once those prices dropped, those calls have diminished,” says Bill Curcio, executive vice president of propane retailer Eastern Propane Corp. in Oak Ridge, N.J. “Price is a very big determinant on which direction they go.”
Card adds, “That extreme price volatility of heating oil created a fair amount of interest in people converting. It made them stop, take a look and think about things a little more.”
Paraco Gas of Rye Brook, N.Y., also fielded an increase in calls last year when oil prices spiked and customers inquired about converting their existing fuel oil equipment to propane, says Mike Gioffre, vice president of sales and marketing. He says the company sees opportunities in replacing customers’ systems at the right time.
“We’ve seen a lot of systems that have lived their lives and need to be replaced and instead of putting in another oil system consumers are weighing their choices,” Gioffre says. “The majority of opportunity is coming with new systems.”
Versatile fuel
In addition to evening out propane and fuel oil prices, consumers are learning about the many uses of propane. Whereas fuel oil is relegated to home heating and water heating applications, propane can be used for these applications and many others inside and outside the home.
Recent American Housing Survey data covering the Northeast from 2005 to 2007 shows a 15.8 percent increase in the number of households using propane for one or more end uses. From 2003 to 2007, propane’s use in space heating, water heating and cooking all increased, the data shows.
This versatility offers marketers the potential to sell more propane to customers who use both propane and fuel oil in their home. In the Northeast, many propane customers use propane for cooking, water heating and clothes drying, but not for space heating, the Propane Market Outlook notes. In fact, more than 2.5 million existing propane customers could convert to propane heat, including more than 1 million customers in the Northeast who are likely heating with fuel oil, the report adds.
“There is a large base of propane customers without all of the propane applications,” says Michael Sloan of ICF International. “The key opportunity we see is in the Northeast where the number of propane homes that use propane for heating is much lower than the homes using propane for cooking or water heating. Those homes are a significant opportunity to displace fuel oil in heating markets in New England.”
Battle for market share
Opportunities also exist for propane in new home construction, even with the current downturn in the economy. While the Survey of New Construction shows piped natural gas as the top heating fuel in new home construction in New England, it and fuel oil have seen a downward trend since 2000. Propane, meanwhile, has made considerable advances in New England, jumping from a 5.7 percent market share in 2002 to 22.5 percent in 2007. According to the report, this gain in propane’s market share is likely attributable to two factors – strained fuel oil supply issues in the region and the price disparity between fuel oil and propane, as the competitive gap between them has closed.
A similar trend holds true for the Middle Atlantic states of Pennsylvania, New Jersey and New York. Survey of New Construction data shows fuel oil market share declining from 18.6 percent in 2004 to 5.5 percent in 2007. While propane has performed consistently during this period, electricity and natural gas have grown in this region. And because of a more moderate climate in the Middle Atlantic, electricity is perceived as a larger competitive threat. Yet, propane remains positioned well for conversion opportunities.
“Builders in the new construction market are looking for ways to differentiate their homes and planning for the future,” Sloan says. “That means right now is a prime opportunity to make inroads with builders to use propane. Even though new construction is down … opportunities continue to be there in the future, and the propane industry needs to be involved in planning for that and prepared when the housing market turns around.”
From the field
Many propane marketers in the Northeast say they have noticed propane making an impact in new home construction. Some also pinpoint propane’s added use in commercial applications – another potential growth segment forecasted for the industry.
“We do a lot of our new business in new construction,” Card says. “Years ago new homes in this area had oil heat, but the last few years all of our builders do propane in the new houses. Propane used to be for hot water, space heating, cooking and drying and now it’s also transitioning to central heating.”
Someone buying a new home with a propane-based system will have “one fuel to cook, run your dryer, heat your water and your gas logs. It’s a very versatile fuel,” says Steve Burrows, delivery manager for Buckley Heating & Cooling in Peace Dale, R.I. The longtime fuel oil company began selling propane in 2001 at its customers’ request.
Curcio says propane’s increase in Eastern Propane Corp.’s New Jersey region is especially true in new construction. “It probably happened 10 or 15 years ago when we saw the trend starting to go toward propane,” he says. “You see builders preferring propane over oil. It has to do with the benefits of propane and the environment, but it also has to do with the expense” and the economic advantages of a high efficiency propane furnace or boiler.
“It’s the builders steering [customers] in that direction, especially where we are,” adds Mike Hurley, owner of Hurley Brothers, a propane and fuel oil marketer in Lake Placid, N.Y. “Any houses going up by the water are putting gas in so they never have to worry about oil tanks leaking into the lake.”
While Hurley says he hasn’t noticed many full system conversions in older homes, his company has increased propane sales through commercial conversions – hotels and camps. Hotels are converting due to fluctuations in the energy market and camps are converting for environmental reasons and to receive better insurance rates, Hurley says.
“You constantly hear that oil is a dirty fuel,” Gioffre says. “People are frustrated because it’s expensive to maintain. We sometimes even hear complaints that fuel oil heating systems are very noisy. The number one thing is environmental concerns, especially with respect to buried tanks.”
Oil tanks are located in a resident’s basement or garage, and some are buried under ground. There are more maintenance requirements with fuel oil, Burrows notes, as one must maintain nozzles and filters. Propane just goes through the regulator and is combusted without any residual effects, he says.
Marketers also say tax benefits and rebates offered to propane customers are helping the industry expand in the Northeast. At Downeast Energy in Maine, an energy adviser will inform customers about those clean-fuel benefits of propane as they consider their options.
“Our whole energy system as we move forward is based on clean fuel, and gas is a clean fuel,” Rose says. “Manufacturers put all of their research dollars into making better gas widgets, whether it’s a furnace or water heater – something to run cleaner or save energy. We [the propane industry] have been a real benefactor of that.”