Heavy oil conversions although forced by regulation, can be an attractive option

Over the past few years mayor Bloomberg has spearheaded his green initiative coming up with ideas that supposedly improve the overall environmental conditions in NYC. One of the most substantial initiatives implemented was the ban of the use of heavy oils in New York City. Despite the lack of a plan on how to see this achieved, the plan was implemented a little over a year ago. By the end of the current triennial certificate for all boilers in NYC, all heating plants must be converted away from the use of burning 6 oil. The regulatory change also calls for the elimination of burning 4 oil by the year 2030. The industry challenged the regulatory change, correctly pointing out that the ban would cause an undue hardship on thousands of small building owners across the city and that Con Edison would be unable to meet the supply necessary to feed the new demand on conversion to natural gas heating plants. In addition, the eventual decrease in revenue and burning of oil is certain to result in the termination of hundreds of oil truck drivers over the coming years. Still, despite the challenges, mayor Bloomberg's administration rolled forward, implementing the change. At this time, building owners are under the gun, faced with a small timeframe to ensure their heating plants are in compliance. An owner must convert away from 6 oil immediately. So what is an owner whose plant burns 6 oil to do? There are a series of questions an owner must ask himself at this time. The first major question is: Gas or oil? In an ideal world, it would be far easier to simply convert to 4 oil for the medium term (at least until 2030!). The cost to do so involves the retrofitting of some plumbing parts, including the removal of the boiler's sidearm heater. These costs can range in the vicinity of $7,000-$15,000. This would allow the owner to continue to use the same oil tank and to have all else continue as is. However, in the current economic energy environment, the cost to burn oil and the volatility of the oil market results in natural gas prices that are nearly 50% of the cost of oil. Converting to gas becomes an extremely attractive option. In addition, a simple conversion from 6 to 4 yields no benefits in the stabilized housing industry. No major capital improvement is possible. No J-51 tax abatement is possible. Converting past 4 oil to 2 oil is a little more complicated. 2 oil requires certain testing of the oil tank, as concerns over spills are far greater due to the increased liquidity of the product. In addition, it is possible your burner can only burn 6 and 4 oil, and not 2 which would require a new burner. In addition, keep in mind that the lower the grade of oil, the higher the price, so 2 oil will result in higher oil prices for the long term. So if we consider converting to gas, we need to examine a few other factors. A gas conversion may or may not require a new burner. If not, the cost of a conversion is still significantly higher. The conversion will need to include significant gas plumbing, bringing the supply into the building and to the burner itself. The cost of such a conversion will run into the tens of thousands and may even run as high as $75,000. This number does not take into account one other factor. Con Edison may charge for bringing gas to the building in the street if there is not sufficient supply. This number is often $0, but can range into the thousands. I have even heard cases where the number runs into the couple hundred thousand dollar range! Another factor that complicates the conversion is that if a building converts to gas, it must have its chimney stack examined to ensure that it will not allow any fumes to seep into the building. In most cases, the chimneys of buildings built in the 1930s or earlier are likely to have terra cotta chimneys which will often be in satisfactory condition. The scoping to check the condition and an associated cleaning will probably cost less than $5,000. The section of the chimney above the roof line is likely to have damage, and the replacement of that section with a simple steel extension will probably be $10,000-$15,000. If the original chimney is brick, there is a greater chance of issues. The replacement of the entire chimney with a straight steel chimney inside will likely cost over $50,000. Still, owners must consider that even the outlay of $100,000 or more may be an investment worth making, as a typical building may be able to recoup the payback in only 2-4 years time depending on its fuel consumption. When possible, owners in rent regulated housing should seek to replace their equipment, as the benefit of a major capital improvement rent increase, coupled with the extensive fuel savings should result in a payback that is extremely attractive. For owners who do not have funds readily available there are various subsidy and loan programs available through Con Edison and even through low interest loan programs. Although the burden of this new regulation is disappointing and unfair to owners, the timing of the discrepancy between oil and gas make the gas conversion option extremely attractive. If an owner chooses not to perform a conversion, the adjustment to 4 or 2 oil is still required. Owners who need assistance should also be aware that many consultants out there can assist in the conversion for an affordable amount. Matthew Engel, CPM, is vice president of Langsam Property Services Corp., New York, N.Y.