HEATING OIL OPERATIONS TURNING TO PROPANE SALES

HEATING OIL OPERATIONS TURNING TO PROPANE SALES

In what some observers say is a "join-'em-if-you-can't-lick-'em" attitude, many heating oil dealers, especially across the Northeast, have been adding propane to their operations over the past few years. By all accounts, the trend will most likely continue.

The National Propane Gas Association has no mechanism for determining the exact number of new entrants into the propane business, said Dan Myers, vice president of the Chicago-based trade association. But the anecdotal evidence suggests that increased numbers of heating oil marketers have crossed over into propane sales."I can tell you that from everything we have seen and heard, oil businesses, particularly in the Northeast corridor, have become propane dealers. This is due, in part, to the increasing preference by the public for gas," he said.

Indeed, heating oil dealers have been struggling for a number of years with defections of their customers to natural gas utilities. This has been particularly true for heating oil retailers from southern New Jersey all the way up through New England. Moreover, the natural gas industry has done well in the new home construction market as well.

Propane, which is extracted from natural gas or refinery gas streams, has benefited from this trend, according to Glenn Saunders, current president of the NPGA and also secretary and general manager of White Mountain Fuel Oil and Propane of North Conway, N.H. He said the family-owned business has been selling propane since around 1950.

Many vacation home buyers from metropolitan areas are familiar with natural gas and would choose to have their second residences heated by gas, he said. But in remote areas far from a natural gas pipeline, propane often becomes the fuel of choice, he said.

That factor has accounted for at least some of the impetus for the decision by fuel oil dealers to add propane to their operations, Mr. Saunders said. ''It will continue, and I think it is good."

Shane Sweet, vice president of the Vermont Oil Heat Institute, reported that around 60 retailers, or about 50 percent of the group's membership, now sell propane. Some of them have been in the business for around 15 years, getting into propane when the getting was good.

"In the 1980s, development really took off here with a lot of new construction. We don't have much natural gas to speak of in Vermont. Oil did well, but propane did, too," he said.

Propane sales are not that big a stretch for heating oil dealers for other reasons as well. Many people heat their homes with oil but use propane to heat hot water or for cooking. In a real way, oil dealers already have a customer base for propane.

"It's a natural fit in terms of delivery and service," said Doug Woosnam, president of Sinkler Inc., a heating oil dealership in Southampton, Pa., and chairman of the Petroleum Marketers Association of America's heating fuels committee.

Although Sinkler has not gotten into propane sales as yet - Amerigas, a large national propane dealer, "has a lock on the market in this area," Mr. Woosnam said - the company has not ruled out a future role for propane.

"It is a logical expansion in terms of delivery, storage, billing and customer relations," Mr. Saunders said.

Mr. Sweet agreed. "Operationally, things aren't that much different. The trucks are around the same size; you're pulling a hose to fill tanks and your servicing equipment," he said. Also, you have an opportunity to build a warm weather load, he said, especially in sales of propane for commercial cooking.

And, given that heating oil dealers have been looking for an edge in what has been an enormously competitive market of late, it is more than a little refreshing to "actually get paid for what is delivered in goods and services in propane," Mr. Woosnam said.

Moreover, all agree that margins are much better for propane than they have been for heating oil.

All of those reasons have turned the tide as far as oil retailers are concerned. Fred Sacco, executive director of the Fuel Merchants Association of New Jersey, said that propane has been "a prominent part of heating oil dealership diversification for quite a while and especially in the last few years. He estimates that around 50 of the association's 400 members now sell propane. The majority of those, he said, are in the more rural northwest and southeast areas of the state.

Still, there are some factors that may give pause to some heating oil retailers whose dealers are considering propane as an option.

"The largest barriers are the capital costs of the steel. In Vermont, you can't think about it unless you are willing to spend around $225,000," Mr. Sweet said.

He explained that each delivery truck may run around $60,000, a bulk tank facility may cost in the range of $60,000 to $70,000, and then there is the cost of the cylinders at customer locations. Unlike the heating oil business, propane customers rarely, if ever, own their own tanks.

"It's quite an investment," Mr. Saunders agreed. A 500-gallon tank may run around $1,000 installed, he said.

And, given the flow of the propane market, it appears that increased spending for additional storage capacity is becoming de rigueur. Mr. Saunders, who is in the process of adding storage at White Mountain, said it has been going on at an accelerated pace in the Northeast recently.

Although there has never been a propane supply shortage, said NPGA's Mr. Myers, there have been supply crunches caused by extremely cold weather and distribution problems from time to time. In December 1989, for example, a two- week bitter cold spell caused severe disruptions in the Northeast and down the East Coast. Last fall, there were supply problems in the Midwest because of early crop-drying requirements, he said.

"The propane infrastructure can be fragile. Drawdowns in Indiana for crop drying may mean less propane at the terminal in Selkirk, N.Y.," Mr. Myers said. Dealers need to have ample storage, for several days or a week, for adequate winter supply in case of a breakdown in deliverability, he said.