Natural Gas Can Keep Those Motors Running

Cheap natural gas is starting to revolutionise traffic on U.S. roads, cutting bills for some of the country's heaviest fuel users while reducing carbon emissions and other pollution.

The revolution is still in its very early stages. Gas remains a niche vehicle fuel, with last year's nationwide consumption less than the amount of gasoline and diesel dispensed in the tiny state of Vermont.

But gas consumption by motorists, taxis, refuse trucks, transit operators and logistics companies is growingly rapidly at a time when overall gasoline and diesel sales are flat.

Like other bold gambles on new technology, there is no guarantee that this one will pay off. But the steady rise in natural gas sales suggests that gas-fuelled vehicles are making progress.

Gas as a transport fuel is sometimes portrayed as a cottage industry, but the truth is rather different. Gas-fuelled vehicles have strong support from some of the biggest and most powerful names in truck manufacturing and petroleum.

Royal Dutch Shell (RYDAF) is constructing a network of natural gas fuelling stations at truck stops along the interstate highway system in association with TravelCenters of America, an existing truck refuelling operator.

Love's Travel Stops, Blu LNG, Kwik Trip, Questar Fueling and TruStar Energy are also adding gas-refuelling systems at locations across the United States as well as parts of Canada.

The concept has powerful strategic and financial backing from engine manufacturer Cummins (CMI), gas producer Chesapeake Energy (CHKVZ) and equipment maker and financing company General Electric.

Leading truck manufacturers including Freightliner, International, Kenworth, Peterbilt, Mack and Volvo all offer natural gas trucks using Cummins' ISX 12G engine, which one major fuel supplier hopes will be a "game changer" for the industry.

TRADE-OFFS

Gas-fuelled vehicles typically cost significantly more than conventional gasoline and diesel-powered equivalents, while fuelling stations dispensing compressed natural gas (CNG) or liquefied natural gas (LNG) to the public remain rare.

Set against these disadvantages, however, is the substantially lower price of natural gas.

Between 2011 and 2013 compressed CNG and LNG delivered cost savings of more than $1 per gallon on an energy equivalent basis compared with gasoline and diesel to California customers.

For individual vehicles and fleet operators that use a lot of fuel each year, the savings on fuel can more than offset the increased equipment costs and inconvenience arising from restricted refuelling infrastructure.

Switching to gas makes most sense for high-mileage vehicles and those with very large engines, which explains why taxi fleets, transit operators, refuse collectors, airport shuttles and trucking companies have shown the most interest in gas-fuelled engines.

SLOW START

Gas conversion, however, has been plagued with the teething problems typical in any new technology and there is still competition between companies promoting either CNG or LNG as the best fuel.

The transition has not been helped by early gas-fuelled engines not always being suitable for certain customer groups. Cummins, the leading engine manufacturer, supplied 8.9 lire and 15 litre engines suitable for LNG, but the former did not deliver enough horsepower and the latter was too large for efficient operation by most potential users.

Gas-fuel vendors are pinning their hopes on a new generation of 12 litre Cummins engines, led by the ISX 12G, to speed the spread of gas-fuelled vehicles.

Notwithstanding the problems, sales of gas as a road transport fuel are rising rapidly. Clean Energy Fuels, the leading provider of natural gas as an alternative fuel for vehicles in the United States and Canada based on sales volumes and the number of refuelling stations, has reported rapid and sustained growth in the amount of CNG and LNG sold since 2009.

Clean Energy Fuels sold almost 65 million gasoline gallons equivalent (GGE) of natural gas fuels in the second quarter of this year, up from 50 million in the same period of 2012 and 25 million in 2009.

CNG accounts for two thirds of the company's sales, but deliveries of both CNG and LNG have been rising steadily over the past five years (http://link.reuters.com/sat62w).

Roughly half of all natural gas sales for transport fuel are in California, according to the Energy Information Administration, and gas sales remain tiny compared with other fuels.

U.S. drivers purchased 174 billion gallons of gasoline and diesel last year, according to the Federal Highway Administration. So if Clean Energy manages to sell 170 million gasoline equivalent gallons in 2014, it will still amount to less than 0.1 percent of all U.S. fuel sales.

But Clean Energy has big ambitions and believes it is well positioned to capture expected future growth in demand for alternative-fuelled vehicles.

CLEAN ENERGY

The company owns, operates and supplies 516 refuelling stations dispensing CNG, LNG or biogas, up from 224 at the start of 2011.

Some of these stations are open to the public, but the majority are private stations operated on behalf of transit and refuse companies or other fleet operators.

In 2013 Clean Energy served 779 fleet customers operating approximately 35,000 natural gas vehicles and had fuelling stations in 39 states across the United States, plus the provinces of Ontario and British Columbia in Canada.

In the first six months of this year the company added another 43 CNG fleet customers, accounting for an extra 9.8 million gallons of sales, and 11 new LNG customers, adding an extra 6.5 million gallons.

Clean Energy has been building a network of refuelling stations along major transportation corridors, which it calls "America's Natural Gas Highway" (ANGH). The idea is to guarantee refuelling facilities for coast-to-coast trucking companies.

More than 80 ANGH stations have been built, though only a minority are open to the public, with the company waiting for customer demand to increase.

Building so much infrastructure has pushed Clean Energy deep into debt. The company posted a pre-tax loss of $60 million in the first half of this year, bringing total pre-tax losses since the start of 2011 to $271 million.

"We have a history of losses and may incur additional losses in future," the company admits, adding in regulatory filings that it might never achieve or maintain profitability and that investment in the business "involves a high degree of risk".

The company had consolidated debt of more than $600 million on June 30, according to its quarterly filing with the Securities and Exchange Commission.

Clean Energy is essentially a concept company dedicated to the idea that cheap gas could grab a significant share of North America's giant fuel market.

The main risks are that the company will run out of cash before natural gas vehicles go mainstream or oil prices fall enough to spoil the economics of switching.

But otherwise the concept is a good one. Gas is cheap and abundant in North America and the engine technology is mature.

Gas will not be suitable for all motorists, but for a group of the heaviest users there is a compelling argument for making the switch.
 

By John Kemp