Source: Detlef Schobert
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 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.