Natural gas engines, in the emerging business environment, have a chance to displace diesel engines. The emission standards that will be implemented in 2010 will increase the relative cost of diesel engines. Natural gas supply in the USA and the imports of Liquefied Natural Gas (LNG) have increased dramatically in recent years and their prices have dropped. The fuel efficiency of natural gas engines has increased and is comparable to that of diesel engines. Diesel engines still have formidable advantages--their prices are lower and it is available more widely. With higher scales of production, natural gas engines could well tip the balance in their favor in 2010.
Natural Gas Engines
Currently, natural gas vehicles are predominantly used in the public sector, 20% of the 80,000 municipality buses use them. In the trucking industry, less than 1% of the 200,000 trucks have natural gas engines. They have also have found niche applications in refuse trucks (2,500), shuttle buses and delivery trucks (10-20,000), school buses (3,000) and light vehicle fleets (20,000).
Natural gas engines are expected to gain wider acceptance towards 2010 when their fuel efficiency is expected to rise to 95% of diesel engines. The newer engines increase the combustion efficiency by a richer mix of oxygen and fuel and by compressing the mixture before it is burnt. More air in the mix also reduces the NOx emitted after the gas is burnt. Diesel engines will emit 6 times more NOx than natural engines.
Emission Standards and Cost of Engines
By 2010, the emission standards for heavy and medium-duty diesel engines are slated to be far more stringent. Fleets are switching to natural gas engines to avoid the higher costs of environmental compliance required of diesel engines. According to Dee Kapur, the President of the International Truck and Engine, the cost of a medium-duty truck will rise by $5,000 to $6,000 to meet the 2007 emission standards and as yet an undetermined figure to comply with the 2010 standards. The cost of heavy-duty trucks will rise by $10,000. The ultra low-sulfur that would have to be used is reported to cost an additional 14-16 cents for every gallon.
Supply of Natural Gas
In the USA, the supply of domestically extracted natural gas is increasing and will encourage its use in transportation. According to a recent study of Navigant Consulting, supply of natural gas is increasing as unconventional sources of natural gas, shale gas, coal bed methane and tight gas, are developed. Navigant’s estimates show that unconventional natural gas supply increased by 65% to 8.9 Tcf per year in 2007 from 5.4 Tcf per year in 1998 while its share increased from 28% of total supply to 46% in 2007.
More recently, production has surged especially in Texas and Wyoming. The production increase is likely to be sustained because it is propelled by successful implementation of new technologies, i.e., horizontal drilling which is able to draw on natural gas deposits in shale. These technologies can tap into the large reserves of natural gas available in Barnett Shale deposits which were previously inaccessible.
In addition, supplies of liquefied natural gas are increasing dramatically. The USA is expected to increase its imports from 2.1 Bcf / day in 2007 to 12.8 Bcf / day in 2016. While in the past natural gas as a by-product of oil extraction was burnt, it is now stored as liquefied natural gas and increased transported and traded across the world.
At a time stock markets in the USA are expected to move sideways throughout 2010, the companies that have invested in their future and are poised to reap the benefits in the near term are most likely to see their stocks gain. Westport Innovations (NASDAQ:WPRT), a Vancouver based manufacturer of natural gas engines, fits the profile. It has gained market share in the market for natural gas engines in the size range of 5.9 and 8.9 liter. Over the last three years, it reinvested its profits to develop a market for heavy duty natural gas engines. Profits could rise sharply as expenses on market development decline and revenues from heavy duty vehicles increase.
The surpluses from CWI helped to fund the expenses for the development of heavy duty vehicles. In fiscal 2007 (ending March 31st), the operating margin was $8.7 million (after deducting $ 8 million in R&D which were expensed to comply with US Accounting rules) on sales of $58 million or 29% on sales (excluding the R&D expenses). The margin at $21 million (after excluding R&D expenses) dropped to 19% in 2009 with sales of $110 million. The company began offering a LNG solution for 15 liter engines in early 2007 through Westport Power Inc. The expenses incurred for development of the market for heavy-duty trucks led to an increase in losses from $10.3 million or $0.41 per share in 2008 to $24.4 million or $0.81 per share in 2009, expenses for heavy duty trucks increased by $12.6 million.
Overall, the market for heavy duty trucks plummeted from a peak of 284,000 units in North America in 2006 to 145,000 units in 2008. Westport’s own sales of heavy duty vehicles dropped from 69 in fiscal Q2 2009 to 14 in 2010 and the YTD from 70 to 28. Due to a weak economic recovery, overall heavy duty truck sales are unlikely to recover significantly. Westport, however, will benefit from the purchase by the Long Beach and Los Angeles ports, a market it has been able to enter, of 8000 natural gas trucks that will be purchased over the next five years. The DOE has also allocated funds for the purchase of 2800 vehicles for the Clean City program.
The cost differential between diesel and natural gas engines will narrow as owners of diesel engine trucks comply with more stringent emission regulations in 2010 and the Natural Gas Act, currently under consideration in the Senate, doubles the tax credit to $64,000. Surging supply of natural gas within the USA and imported LNG has increased the relative cost of diesel which now sells in the range of $5 a gallon in Southern California compared to $3.20 for natural gas.
- Quoted from, “The promise of natural gas as a transportation fuel”, Investor presentation, Westport Innovations Inc, 2008.
- The data is cited from “The compelling case for natural gas vehicles in public and private fleet applications”, by Mark Bentley, NGVAmerica.
- “Comparative costs of 2010 Heavy Duty Diesel and Natural Gas Engines”, California Natural Gas Vehicle Partnership”, July 2005.
- The figures were quoted in “The Great Discontinuity: Why Historical Studies are not a useful guide in making current and future heavy duty purchase decisions”, NGVAmerica, May 2006.
- “North American Natural Gas Supply Assessment”, Navigant Consulting, July 4th 2008.
- “After 9 years of no net growth through 2006, an upward trend began that generated 3% growth between first-quarter 2006 and first-quarter 2007, followed by an exceptionally large 9% increase between first-quarter 2007 and first-quarter 2008…..between the first quarter of 2007 and the first quarter of 2008,… supplies ( from Texas ) grew by an exceptionally high 15%. Other contributing regions included Wyoming with growth of 9%, Oklahoma with 6% growth, and Louisiana with 4% growth”, quoted from EIA
- In the late 1990s, about 40 drilling rigs, or 6%, were drilling horizontally. As of May 2008, the number of rigs drilling horizontal wells has grown to 519 rigs, or 28% of the total
- Natural gas reserves in the USA are now estimated at 211 trillion cubic feet up 27% over the last decade according to the data quoted in “Ability of the USA to compete in the Global LNG Marketplace”, American Gas Foundation, October 2008
- EIA, op cit
- Based on the construction of existing facilities for the construction of LNG plants, the world’s production of LNG is expected to double from 22.4 Bcf / day in 2007 to 49.4 Bcf / day in 2016 according to the report prepared by the American Gas Foundation, October 2008.
- American Gas Foundation, op cit