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Summary:

So with natural gas prices so low – under $2 per thousand cubic feet for the first time in April — it’s worth taking a look at whether natural gas could play a larger role as a transportation fuel.

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This story first appeared on GigaOM Pro, our premium research service (subscription required).

Natural gas dipped below $2 per thousand cubic feet in April, the first time in a decade, driven by the expansion in hydraulic fracking, a mild winter and the fact that the U.S. market is largely closed to outside demand because we cannot yet export natural gas at scale. So with prices so low, it’s worth taking a look at whether natural gas could be play a larger role as a transportation fuel.

At today’s natural gas prices of about $2.40, the price is equivalent to about $14 per barrel of oil, which translates to about a $1.50 less per gallon when compared to gasoline. The trade off, of course, is that natural gas vehicles are more expensive and the return on investing in a natural gas vehicle has to be paid back over time. Natural gas vehicles are more costly mostly because of the materials used in the gas tanks, which have to either hold highly pressurized compressed natural gas (CNG) or very cold liquid natural gas (LNG). And while there’s a market for new natural gas vehicles, a big part of the market is conversions of gasoline vehicles to natural gas vehicles.

The president of natural gas industry trade group NGV America, Rich Kolodziej, participated in a webinar with Pike Research last week and laid out some of the economics of natural gas vehicles. Looking at the 2012 Honda Civic Natural Gas, for example, which runs on CNG and has a range of 248 miles, Kolodziej noted that it’s $6,000 more expensive than the gasoline powered Civic.

At an annual gasoline usage rate of 1500 gallons, the cost savings for the CNG Civic is $2250, resulting in a payback period of about 3 years to make up for the extra cost of the natural gas version. 1500 gallons a year is a lot of gas, but Kolodziej is imagining a passenger CNG vehicle as being used for commercial use and would have double or triple an individual’s use.

It’s interesting to consider the possibility of light duty natural gas vehicles, but much of the excitement about natural gas is in the medium and heavy duty market, everything from garbage trucks to delivery vans where you have one centralized location where the vehicles are parked every night and can be refueled.

In the conversion category, Kolodziej is most optimistic about converting diesel powered vehicles to dual use natural gas/diesel vehicles. Changes in EPA rules have made it more feasible to do these conversions. There are 8 million diesel vehicles on the road today, and the conversion technology works by having the engines idle on diesel but accelerate on natural gas, resulting in about 60 percent of energy use coming from natural gas.

Whichever technology comes online to facilitate the entry of natural gas as a vehicle fuel, the infrastructure situation must be addressed. There are about 150,000 gas stations in the U.S. and only about 1100 natural gas stations. About 15-20 stations are being built each month, not nearly enough growth to support vehicle expansion.

Kolodziej commented that “initially we can’t be all things to all people.” The “return to home” vehicle market where fleet vehicles are parked at the same location every night has been and will continue to be an easier market entry point. But infrastructure buildouts are beginning to focus on “spokes,” placing natural gas refueling stations at strategic points between hubs like Los Angeles and San Francisco to assist predictable and routine trucking routes. Clean Energy Fuels announced in January that it would build 150 LNG stations at truck stops and create a network where there was an average of about 250 miles between stations.

Challenges aside for the natural gas vehicle industry, the environmental benefits of natural gas have been somewhat overstated. The carbon emissions reductions are likely lower than previously thought because there’s evidence that natural gas wells leak methane, a potent greenhouse gas. Combusting natural gas does emit less particulate matter when compared to gasoline.

Additionally, I do not believe natural gas prices will stay where they are. Prices are low because we’re not yet exposed to global demand, but once export terminals come online natural gas extracted domestically will be sold abroad as the Energy Information Administration projects the U.S. will be a net LNG exporter by 2016.  Put another way, all the investors leading the hydraulic fracking charge aren’t doing it to sell natural gas at 2 bucks. They want a global market for natural gas.

Time will tell, but if infrastructure grows and natural gas stays reasonably priced, we’ll see more medium and heavy duty trucks running on natural gas. Throw in some cheaper gas tanks via materials innovations, and we may just have a market here.

Image courtest of Detlef Schobert, Gerry Dincher, andersbknudsen.

  1. Corey Carroll Tuesday, June 19, 2012
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  2. Lindsworth Horatio Deer Tuesday, June 19, 2012

    Cheap natural gas: Could it be a transportation fuel? Like Duh-uh?? It can be used for Motor Vehicle fuel in the form of Auto LPG. already the case in Jamaica and Dominican Republic

    http://bit.ly/MKpSpu

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    1. I think the question is not, could it technically be used? Obviously some people are already using it. The question is, will it turn into a substantial market?

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      1. All signs today point to yes, it will turn in to a substantial market…for heavy-duty fleets. It’s already moving in that direction.

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  3. The questions isn’t can it be a transport fuel, of course it can. The rit question is should it be a transportation fuel and fora interim transition period of for the long term. The answer to that it depends on which sectors you are considering and how much you want costs exposed to the international markets that are developing for natural gas and the resulting price volatility that hurts consumers and puts money in the coffers of the petro states that nationalize the assets, producers that control supply and transport companies that control availability to the end use states. This dynamic may be 3, 5 or 10 years away but it’s coming And pretty soon gas will be another version of oil. let’s focus or resources on developing transport and electricity systems that are free from fuels and e tyranny of those that control access to the fuels (national and corporate)

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  4. There is a real down-side to developing a greater demand for natural gas. We shouldn’t encourage the practice of hydraulic fracturing (fracking) of rock strata because we don’t have a clue what may happen to the ground water resources (pollution or just plain disappearance). In addition, natural gas is just another source of sequestered carbon that should be left alone….. we do not need another source of carbon dioxide; we need alternative sources of power. Right now!

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  5. Karen Kazaryan Tuesday, June 19, 2012

    It’s quite popular in ex-USSR countries primarily for small trucks and buses. Armenia uses natural gas on vast majority of vehicles

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  6. Westport innovations needs at least a head-nod in this post.

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    1. Agreed! The Shell MOU with TravelCenters is also going to play a significant role in developing the market in the midwest. That was also worth a mention in this post.

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      1. Truth. Between that and Westport’s deals with Caterpillar, Volvo and now Ford, we should see some serious traction in coming years.

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  7. With the World Health Organization’s announcement last week that diesel exhaust does (not maybe) cause lung cancer, hopefully stricter air quality regulations will come online in the near future. That can help further develop the natural gas for transportation market. Natural gas fuel today is fairly (not entirely) comparable to diesel so we know it can replace dirty diesel. We’ve already seen substantial growth in the market over the last two years; in two more years, the market will be even more mature. 2014 may be a game changer for natural gas.

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  8. What are the economics of NGV’s at higher $$/MMBTU (prices will not stay below $3/MMBTU for long as demand for NG continues to increase)? A more interesting metric would be the parity price at which NG as a transport fuel is equivalent to traditional gasoline. Would also be curious to know the cost differences (fixed and variable) between a roll out of NGV’s as fleet vehicles vs. using PEV’s or PHEV’s. Can anyone comment?

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    1. Craig Dickson Wednesday, June 20, 2012

      One gge (gallon of gasoline equivalent) is 126 cubic feet of natural gas. Assuming 1,000 Btu/cf (natgas can vary between 950 & 1100 Btu/cf), that means one gge of CNG equals 126,000 Btu or 0.126 MMBtu.

      So, the cost of one gge is equal to 12.6% of the cost of a MMBtu or Dth, which are the units that natgas is traded in the US.

      At $3.00/Dth, that’s 37.8 cents/gge.
      At $6.00/Dth, that’s 75.6 cents/gge.
      At $9.00/Dth, that’s $1.13/gge.

      Even with a vastly increasing natural gas price, CNG makes economic sense.

      The largest cost of providing CNG is the purchase and installation of the compressor & dehydration equipment at the station. Private companies in OK are selling CNG for $1.59/gge & making money doing it, so one can assume that the fixed and operating cost of CNG station are currently around $1/gge (excluding the cost of the natgas).

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  9. For us old guys this is somewhat reminisent of the attempted move to alternaive fules in the 1970s.
    Just when it appeared that we would be getting serious about alternate fuels, vast new reserves were discovered and deals struck with Sadi Arbia. Alternative collapsed and from an envirnmental point of view we were right back to square one. We hope this time around that electric is strong enough not to be side tracted, it would be a disaster to put it on hold for natural gas.

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