A recent article in the Wall Street Journal quoted a Platts July delivery price on imported Asian LNG of $14.49/MMBtu. That compares with a recent price of only $3.58/MMBtu for natural gas in the US. Yet despite natural gas prices that are ~4x higher, China is beating the US at its own game: natural gas transportation.
Deployment of natural gas vehicles ("NGVs") in China is soaring. According to a Citi report, the number of NGVs in China grew by 48% in 2012 to reach 1.48 million vehicles. China could be on a path to become the world's largest NGV market according to Lux Research, a company specializing in research on advanced technologies. Lux predicts China could see annual sales of 540,000 NGVs by 2015; India would sit at second place with about 250,000.
China #1 : United States #17
While China transitioning away from oil (gasoline and diesel) is great environmental and economic news for the rest of the planet, it is informative to compare progress in the US with the fantastic gains the Chinese are making. NGV America currently ranks the US 17th in the world with less than 1% of the NGVs in use. With only 135,000 NGVs, the US has less than 1/10th the number of NGVs as does China.
These numbers are despite the fact that a very large percentage of the technology used for natural gas transportation: the engines, compressors, and refueling infrastructure are coming from the US or made in China with US (okay, and some Canadian...) know-how. One only has to look at recent earnings reports and press releases to get an idea of the stark contrast between the two country's pace of progress:
- Westport Innovations (WPRT), a Canadian maker of natural gas engines, said in its Q2 results that Cummins Westport shipped over 2,700 engines (+38%) while Weichai Westport (i.e. China) shipped 12,500 engines in the quarter.
Clean Energy Fuels (CLNE) announced a contract to supply 416 CNG compressors to China Gas for the construction of 310 CNG public access stations in China. Andrew Littlefair, CEO of Clean Energy Fuels said:
China has grasped the potential of natural gas as an alternative to gasoline and diesel fuel and is aggressively building the necessary infrastructure to realize this potential.
- Chart Industries (GTLS) has sold over 500 of its Orca mobile LNG delivery trucks to move natural gas from China's coastal LNG import terminals to the country's interior. Chart is capitalizing on China's goal to replace all diesel trucks to NGVs. Chart expects demand for these trucks to pick up in the US in late 2014.
Energy Policy - What is Wrong in the US?
Considering the US has the lowest natural gas prices in the world, and provides much of the technology needed to produce natural gas and enable its use in transportation sector, this begs the question: how can China be beating the US at its own game? The answer comes down to a big difference in energy policy and the make up of the two country's policymakers.
China's Engineers vs. US Lawyers
In China, engineers and scientists make up the largest percentage of policymakers. In China, engineers are admired. Engineering is considered a noble and valued profession. Former President Hu Jintao was trained as a hydraulic engineer. Premier Wen Jiabao is a geomechanical engineer. Xi Jinping studied chemical engineering. According to a Forbes article, 7 out of China's top 9 government officials were engineers in 2011.
Engineer Vs. Lawyer
The US is a much different story. According to the Congressional Research Service 170 members of the House and 60 Senators are lawyers. Out of a total of 435 U.S. Representatives and 100 Senators (535 total in Congress), lawyers comprise the biggest voting block of one type, making up 43% of Congress. 60% of the U.S. Senate are lawyers. 37.2% of the House of Representatives are lawyers.
When it comes to the role science, technology, and energy policy plays in the US's ability to compete with China in the 21st century, what does it say about the prominence of science and engineering atop China's government as compared with the lawyers dominating the US Congress?
This problem was made even worse in 2010 when the Supreme Court issued a stunning reversal on federal campaign finance laws, which removed limits on corporate campaign donations. It now appears good energy policy for ordinary Americans is dependent upon lawyers to turn down lobbyist money (a lot of it). What do you suppose the chances of that happening are?
It has been 5 years since I first published my strategic long-term comprehensive energy policy. The policy acknowledges the risks of a 21st century economy, which relies so heavily on oil for transportation - much of it imported. The energy policy also places a priority on leveraging the economic, environmental, and national security advantages of adopting natural gas transportation. The Chinese must have been reading. As a result, China is building the critical infrastructure to leverage the huge advantages of using natural gas in the transportation sector. The US is lagging far behind. Due to the nature of the two country's energy policy, and the makeup of its policymakers, I don't expect things to change much any time soon.
Summary & Conclusions
Despite the ~4x price advantage in natural gas, and the fact that much of the technology required is sourced from the US, China is trouncing the US in its adoption of natural gas transportation.
As a result, investors should focus on those companies with large exposure to the natural gas transportation revolution going on in China. For natural gas engines, consider companies like Cummins Inc. (CMI) and Westport Innovations. A good natural gas infrastructure play is Chart Industries.
For the natural gas commodity itself, I would suggest Chevron (CVX) and ConocoPhillips (COP), both of which are building large natural gas export capabilities from Australia to satisfy tremendous demand for LNG in Asia.
Chevron's massive Gorgon Project in Australia includes a 15.6 million tons per annum LNG export plant on Barrow Island. The first LNG cargo is due to be loaded in the first quarter 2015.
Conoco's existing Darwin LNG plant has an export capacity of 3.7 million tons per annum. COP is also in a partnership with Origin and Sinopec (SHI) to develop coal seam gas ("CSG") at the Australian Pacific LNG Project ("APLNG") which is scheduled to begin shipping LNG to Asia in 2015. The first two production trains at APLNG's facility on Curtis Island will have a capacity of up to 9 million tons per annum.
While geopolitical events like unrest in Libya and the drumbeat of war in Syria once again push up oil prices (with gasoline prices sure to follow), China is rapidly transitioning its transportation sector off of gasoline and diesel and onto natural gas. Natural gas is abundant, it's clean, and its cheap. As a result, China will have a huge competitive advantage over the US in the 21st century. For US investors, one way to make up for the lack of NGV and natural gas refueling options in your country is to invest in some of the companies mentioned in this article. What you lose at the pump paying for high priced gasoline, perhaps you can make up with capital gains on these stocks.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article was obtained from company documents and/or sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!