Eric Slifka Offers Encouraging Words

EDITORS NOTE: Eric Slifka, CEO of Global Partners LP, delivered the keynote address at the recent Southern New England Energy Conference, held in Newport, R.I. The following is a transcript of his remarks.

Let me begin by thanking President Chris Herb and the entire Association for the opportunity to speak with you this afternoon. Before I get into my prepared remarks, we started out as a family home heating oil company in the retail business. My grandfather started in the business. We had one truck. That was in the ‘30s. My dad went into the business in the ‘50s and got on a truck and started driving. My grandmother was doing the books. So, we had a real small company at the time. We grew because we kept looking for opportunities, and the thing that really is amazing about this industry is it continues to evolve. It continues to change. With that change comes opportunity, and so it’s incumbent on all of us to figure out where those opportunities exist and then drive to be successful in those seams of business that five or ten years ago you could have never imagined being in.

For us, we were never heavily in the crude oil business, but today we’re one of the largest mover of logistics, providing logistics for producers and refiners around the country, moving a couple of hundred thousand barrels a day, but that was because we saw the market evolving, the market changing and took that opportunity to go and do something different. Now, of course, some of those risks were measured before we did it, but had we not been open to doing things differently we could never have to the place we are today. With that, let me going on these prepared remarks.

Chris, I know that you’ve invested tremendous time and energy since joining CEMA in 2001 to make this organization the most effective voice possible for your membership. And I want to acknowledge your passionate leadership and skillful communication. Not only has your political background benefitted CEMA, but so too has your earlier career as an executive with the American Red Cross. I mention the Red Cross only because I’m sure more than a little blood has been spilled at the Capitol Building in Hartford over the past 13 years, You’ve had to fight tirelessly on behalf of the state’s heating oil and propane dealers, gasoline distributors and energy consumers.

Since being appointed CEMA’s president in March 2013, you have cast a bright light on the state government’s misguided efforts to create energy policy in Connecticut. This policy, instead of being inclusive of all energy sources, picks winners and losers. It is this shortsightedness that creates risk for government and consumers alike. A policy of diversification of sources is a balanced approach to an ever-changing energy landscape.

Without question, the “politics first” approach demonstrated by Connecticut Governor Malloy’s Comprehensive Energy Strategy is an example of the way in which our industry is often perceived as dirty and easily expendable – a pair of brown shoes in a world of tuxedos.

So it was heartening earlier this year to read this headline over a Forbes column by contributor William Pentland: “Winter 2014: How Fuel Oil Saved the Day in New England.” Mr. Pentland’s article discusses the technical conference put on in April by the U.S. Federal Energy Regulatory Commission. The purpose of the conference was to examine the effects of 2014’s historical cold weather on the Regional Transmission Organizations and Independent System Operators, which operate and manage the nation’s electric grid. This grid can consume heating oil, diesel residual fuel, gas and other fuels to generate electricity.

Now, few of us will forget the winter of 2014. January ushered in the historic Polar Vortex as several harsh cold weather events strained the natural gas and electric power markets, creating unprecedented market volatility. Spot natural gas prices throughout the Northeast surged to new records, as the severe weather and already existing pipeline constraints created bottlenecks that further snarled gas delivery.

Spot prices at the Algonquin Citygate in Boston hit $34 per million BTU. This is equivalent to about $4.70 a gallon. On top of that you add LDC charges and that’s roughly $5.00 a gallon. This is early January, and the it crested to $73 per million BTU. That’s over $10 a gallon. Now, I think they key here is, if anybody had thought this was a possibility five years ago or three years ago, they would have said, “Nope. We’re finding natural gas everywhere. It’s going to be the cheapest fuel to use and consume.” You know: Natural gas is American made, oil isn’t. Think about the rhetoric, and how that plays now in today’s world. There’s lots of natural gas, but there’s also lots of oil in the U.S., so it’s a very different world existing just from a few years ago, and that makes it very difficult for policymakers to keep up with the changes, because they don’t necessarily see it happen as quickly.

When you talk about the prices, just for comparison, this was about 12 times the average spot price at the majority of other hubs during the same period. The winter cold spells spared few parts of the U.S. But as the Federal Energy Regulatory Commission pointed out in its post-winter analysis, New England did not experience as many weather-related energy problems as other areas of the country. Why? Our diversification was the key reason, as fuel oil was available as an alternative source to, primarily, natural gas. While natural gas was in short supply due to weather delays and a lack of pipeline capacity, distillate fuel again proved its value for both commercial and residential customers.

The majority of the region’s oil infrastructure operated at full capacity for much of the season, while natural-gas-fired plants produced far less than their capacity, according to ISO New England, which oversees the day-to-day operation of the region’s power grid.

Last winter, according to ISO, natural gas prices exceeded oil prices on 57 percent of winter days, and during cold periods, the oil units accounted for almost one-quarter of the region’s electricity. This compares with an average of just one percent at other times. Through its Winter Reliability Program, ISO-New England procured some three million barrels of oil, and the vast majority of it – 88 percent – was burned.

As Pentland pointed out in his Forbes column, “If anything, oil seems likely to become more – not less – critical for maintaining reliability in the near-term future.”

Unfortunately, in Connecticut and across New England, that message seems to be falling on deaf ears, as state governors and their representatives engage in private discussions with the natural gas industry and push for homeowners to convert their heating systems en masse.

Putting aside for the moment the ethical responsibilities of our elected leaders, for policymakers, government officials and consumers, the message from winter 2014 should be clear: Diversification of all energy sources is the most effective policy for our elected officials to pursue. A policy in which the value of one energy source is placed over another puts the entire system at risk. The answer is not to place all of the region’s chips on a single energy bet. Only by maintaining a strong, stable and diverse supply of products – heating oil, diesel, propane, electricity, natural gas and biofuels – can we be assured that prices will remain competitive, businesses will be able to compete on a level playing field, and consumers will receive the most cost-effective energy possible.

While Governor Malloy and other state leaders talk of wanting clean, cheaper and more reliable fuel, the irony is that heating oil already meets those specifications, just like gas or other products. It is made here by American workers and American refiners – with U.S., American-found crude. The end result is a product that is as clean, if not cleaner than natural gas. It’s really important for us as an industry to educate not only the consumers to these facts, but also the state and local governments and elected officials, because they’re working in an older vision of where oil and energy came from and how it made its way to the U.S.

They’re not looking at it today and thinking, “Oh, this is domestic.” It’s found here in the U.S. It’s found in Canada, and it’s actually safe and local, and it’s building jobs. It’s growing the economy. It’s one of the main reasons over the last five years that this economy has had any growth at all. It’s all this domestic energy resurgent.

As business owners, you have shown courage and leadership in embracing new products and technologies with the power to enhance the lives of residents across the region. The low-sulfur requirements that went into effect this summer in Connecticut, Rhode Island, Massachusetts, Vermont and New Jersey are a significant step toward changing the customer perception of oil heat as a dirty dinosaur. To the contrary, from an environmental standpoint, the new sulfur specifications put us on a far more competitive and environmental plane as the region moves toward a target 15 ppm in 2018.

Although home heating oil demand in the Northeast has fallen over the past decade, the region remains far and away the largest user of heating oil nationwide. Four out of every five U.S. homes heated with oil are located in the Northeast. An estimated 25 percent of homes in the Northeast – about 5.3 million – use oil as a primary source of heat, and 4 percent use propane. In other words, there not only is still a significant share of the energy business worth fighting for, but, in my view, ground to be gained, as well.

Among the topics I’ve been asked to address this afternoon is the impact of the new 500 parts-per-million standard on the availability of product, as well as the price. While I don’t have a crystal ball, it’s safe to say that the industry is sufficiently prepared for this change. Though price spreads continually expand and contract based on a variety of market factors, I expect supply to be sufficient to meet this winter’s demand.

And really, what’s driving that? Once again, it’s all this oil – crude oil in particular – that we’re finding, as well as natural gas, that are going in to running our domestic refineries. So where our refineries historically may have been shutting in and consolidating, now those refineries are running at full tilt, and the U.S. refining business is one of the most efficient in the world and are low-cost producers of products around the world, so the U.S. has lots of diesel it’s producing, and it’s actually exporting quite a bit of it as well. So the U.S., from the standpoint of “Can we meet these commitments and these demands?” we’ve never been better positioned to do that. Trucking and getting it to the customer, there may be some constraints there, but certainly the oil itself can be produced locally. It’s just the price has to attract it to keep it in the market.

You may recall that New York reduced its maximum sulfur content for heating oil to 15 parts per million two years ago, and as a result, sufficient volumes of ULSD are available in New York Harbor. That was followed by the NYMEX’s move to switch its standard futures contract for heating oil to 15 parts per million beginning in May 2013. What’s significant about the new contract is that it changes the physical makeup of the products stored in New York Harbor, which is the delivery point for NYMEX futures contracts.

I want to remind us all that using a lower-sulfur product is not the only way to change the consumer’s perception of oil heat and improve margins. We need to change the conversation with those consumers, which will serve to educate the consumer, eliminate misperceptions about our industry and help restore the competitive balance everyone in this room wants to achieve. It’s important to promote the use of additives to treat the deposits that have been collecting in the bottoms of your customers’ tanks for years. The cost of theses additives is measured in tenths of points per gallon, not cents per gallon. Interestingly, there is a national additive requirement for gasoline.  I think it would be helpful if we had that same requirement for heating oil.

Today, the United States is the largest producer of oil and liquid natural gas products in the world. The International Energy Agency projects that by the end of the decade North America will have the capacity to become a net exporter of oil liquids. Such claims would have been hard to imagine only a short time ago. But new technology and equipment have generated significant production opportunities across regions including the Bakken in North Dakota, Montana and Western Canada, as well as the Permian and Eagle Ford Basins and many others.

The tremendous increase in shale oil and gas production in the mid-continent and the eastern U.S. has prompted a number of companies to propose costly natural gas pipeline expansions to New England. The problem is that these projects may end up being subsidized by the ratepayers themselves.

For our part, Global has focused its efforts on using one of America’s safest, most reliable and cost-effective transportation resources – the 140,000-mile American freight rail system – to transport crude oil, ethanol and other products to the East and West Coasts. During the past several years, we have built an origin-to-destination network of storage and distribution assets extending from the U.S. mid-continent to New York and Oregon. We have forged agreements with infrastructure companies to deliver crude oil by pipeline from the wellhead to our terminals in North Dakota.

Our wholesale marketing of liquid petroleum products in the Northeast is supported by 9.2 million gallons of bulk terminal capacity, much of it in Massachusetts and New York.

In addition to developing our midstream logistics, we continue to expand and enhance our portfolio of gasoline stations and convenience stores, the majority of which are located in New England. We are investing in the region’s motor fuels business on multiple fronts, from store raze-and-rebuilds and site enhancements to co-branding initiatives and new food service offerings at our Alltown convenience stores.

We are expanding our business opportunities through investments in fuels such as propane, ethanol and biodiesel, which we believe will become increasingly important products for our industry.

One of the important lessons I have learned as a CEO is that it is critical to communicate a value proposition to your customers. You are not simply selling distillates or gasoline. You are providing a solution to address your customers’ energy needs, whatever those may be.

There are still a few places in the U.S. where milk is delivered in glass bottles. The connection between that business owner and consumer is special. The product is special. And while I’m not suggesting that you get into the dairy business, my point is that, as New England heating oil dealers, you have a unique advantage that does not exist within any other segment of the home energy market: regular, face-to-face communication with your customers. You know your customers by name. You have created a relationship that’s 24/7, whether it’s 70 degrees and sunny or the ground is blanketed with three feet of snow.

It’s an incredible upside to being in an old-fashioned business. Try contacting the natural gas or electric utility for a service call. You never know who’s going to show up at your door, or how many days it’s going to take them to get there. But our industry is different. The one-to-one relationship between the dealer and the heating oil consumer is perhaps the most valuable tool you have to grow your customer base and increase your level of business. And let me add, we hope that we at Global have built the same kind of relationship with you, one founded on good communication, reliable service and high-quality products.

So by all means, invest in marketing your business, whether it’s through making your website more customer-friendly or adding products and services that your customers have been asking for. And if you don’t know, ask. Doing so can pay big dividends in long-term loyalty.

Along the same lines, I also want to put in a plug for NORA, the National Oilheat Research Alliance. NORA, a federally funded organization reauthorized by Congress earlier this year, provides education to industry professionals and consumers on the oil heat industry. NORA is required to spend at least 30 percent of its budget on research and development of new oil heat products, systems and solutions. And that research benefits all of us. NORA’s research agenda includes understanding how oil heat compares with other products, improving the consumer’s understanding of Bioheat® and developing more energy efficient equipment and practices. I encourage you to take advantage of NORA’s resources and participate in the organization’s professional events.

I also want to stress the importance of supporting the American Energy Coalition, a grassroots organization that advocates for oil heat and oil heat dealers. The AEC’s mission is quite simple: to help consumers understand the benefits and advantages of heating oil, while correcting the misperceptions and misleading information disseminated by utilities. Please support the AEC in its efforts to unite dealers, trade associations, manufacturers and other stakeholders as we work together to sustain our business.

In closing, let me say that, although our business faces a number of challenges, I know that, together, we can successfully navigate these by continuing to reshape the industry in a way that benefits dealers, suppliers and consumers. I also know we can be a powerful force that changes our industry for the better. I look forward to working with all of you to achieve those positive results.

Related Posts