U.S. Natgas Engine Sales Lagging Fuel's Steep Price Plunge

Natural gas-fueled engines, touted as a clean, low-cost alternative to diesel, continue to struggle for acceptance in the U.S. transportation sector despite a surge in gas production that has sent the alternative fuel's domestic price plunging.

U.S. natural gas prices closed on Friday at $3.766 per million British thermal units, down 42 percent since February. At its current levels, natgas is about $1.50 a gallon cheaper than diesel fuel, according to the U.S. Energy Information Administration. For U.S. railroads alone, which consumed 3.6 billion gallons of diesel in 2012, the potential savings are huge.

Yet more than a year after Warren Buffett's BNSF Railways Corp generated big headlines with a plan to test a handful of natgas locomotives, the railroad has made no large follow-up purchases of the technology.

The slower-than-expected adoption has forced key manufacturers, including General Electric Co and Caterpillar Inc, to focus on niche markets for their engines while they wait for higher-margin customers such as railways and maritime shippers to make the switch.

Experts say a number of factors, like the high initial cost and the extended payback periods involved, have slowed adoption.

David Ross, a vice president for demand development at EQT Corp, a Pittsburgh-based company that produces, compresses and distributes natural gas, said the lack of a natural gas refueling network as extensive as the one that exists for diesel has also been an obstacle.

"It's still not there," Ross says of the service station problem. "But it's heading in the right direction."

A steep decline in crude oil prices over the past few months, which sent diesel prices lower across the country, has added to the challenge, making it easy for customers to do nothing.

Last month Westport Innovations, which makes a key natgas engine technology used by Caterpillar, Volvo AB and Delphi Automotive Plc, slashed its outlook, citing a delay in new program launches by customers.

Yet the industry's biggest players insist their products are gaining traction in the marketplace. The wins are just not occurring in areas like transport where swift adoption was expected because of the huge potential cost savings.

Caterpillar, which has sold more than 100,000 of its 3500 series diesel engines in recent decades, has successfully retrofitted nearly 1,000 of those units to burn both diesel and natural gas for customers in the energy drilling and pumping business.

GE has sold more than 3,000 of its Jenbacher-brand gas engines to farmers, who use them to provide power and heat for flower and vegetable greenhouses.

"It isn't going nearly as fast as the hype had people expecting," says Joel Feucht, Caterpillar's general manager of gas engines.

"But it's probably going faster than most people appreciate."

(Reporting by James B. Kelleher in Chicago; Editing by David Greising, Alden Bentley and Marguerita Choy)