Natural Gas Transportation - Why Not?

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Includes: BP, COP, CVX, GAZ, PBR, STO, UNG, WPRT, XOM
by: Michael Fitzsimmons

In 2009 the United States imported 4.35 billion barrels of oil (63% of its total oil consumption) and as a result sent $265 billion dollars overseas to pay for it. In 2008 when oil reached $150/barrel and gasoline was sold over $4.50/gallon, the US imported 65% of its oil and sent $465 billion dollars overseas. Think of it, nearly half a trillion dollars left the country in 2008 alone for oil. Estimates for the next decade predict the US will send $10 trillion dollars overseas for oil. As Boone Pickens often says, this is without a doubt the largest transfer of wealth in the history of mankind.

As a person whose grandfather pumped Pennsylvania grade crude out of western New York oil fields, I grew up smelling crude oil. I marveled at the ingenuity of the old-timers’ engineering skills to pump oil and gas, gather it, and get it to market. My grandfather remained an independent back in the day when Rockefeller played hardball to drive the independents out of business. It may be surprising to some that I have been such an advocate of natural gas transportation in order to wean ourselves off oil. But what choice do we have? Every US president since Eisenhower has publicly stated the US must reduce foreign oil imports. Yet, in 1970 the US imported only 24% of our oil. At that time this dependence was considered a grave national security problem. Now that our dependence has grown to 65%, it is not only a national security problem of the highest level – it is an economic crisis.

I have made a lot of friends and acquaintances over the years of my natural gas advocacy work. The one common thread we all have, and the question I hear over and over is: why do US policymakers continue to ignore natural gas transportation? Why is such an obvious solution to the nation’s reliance on foreign oil not adopted? Why was none of the stimulus money spent on natural gas transportation infrastructure which would have created millions of good jobs and build an infrastructure that would pay dividends to all Americans for decades to come? Let’s try to answer these very simple questions by briefly looking at every possible angle.

Is There Enough Natural Gas Supply?

When I first started advocating natural gas transportation, the supply question was not so easily answered. However, when I looked at Alaskan and lower-48 natural gas reserves, low cost LNG supplies from a diverse number of sources, and the huge natural gas reserves being discovered worldwide, it looked as though supply would be adequate at least 30-40 years. It certainly seemed a more secure bet than a worldwide oil supply which will have trouble keeping pace with worldwide demand.

Since that time everyone is now quite aware of the shale plays which have been a complete game changer in the energy arena. It is now clear the US has enough domestic natural gas to supply home heating and industrial consumption as well as to replace all dirty coal electrical generation and power half the US car and truck fleet - all of this, for at least 100 years.

Despite a frigid winter and a nat gas rig count that was sharply curtailed in 2008/2009, the US nat gas inventory level is still 7% above the 5 year average. Natural gas supply is a light switch away in the US. The supply question has been answered – US domestic natural gas supplies are abundant.

I wrote a previous article on this topic which goes into much more detail on natural gas supply and demand figures. However, the U.S. shale plays are such a recent game changer, even that article is out-of-date with respect to newer and more positive supply data.

Is NGV Technology Viable?

I often get emails informing me that NGVs don’t work or aren’t powerful enough. Nothing could be further from the truth. NGVs have been around for decades and are a very mature technology. Oil exporting countries such as Brazil and Iran have adopted NGVs as quickly as possible in order to export more oil in the future (no doubt to the US). Both Ford and GM manufacture natural gas cars and trucks yet we cannot buy them in the United States. Westport Innovations (NASDAQ:WPRT) has partnered with Cummins Inc (NYSEARCA:CWI) to produce natural gas engines which are being shipped around the world. The partnership has agreements in place to sell powerful natural gas engines to heavy duty Mack, Daimler, and Volvo trucks. I have exchanged emails with many Honda Civic GX owners who love their cars. Pickens’ Clean Energy Fuels Crop (CNLE) has been successful in deploying natural gas fleets around the country. The response has been very positive and enthusiastic. Anyone who tells you NGVs don’t work simply doesn’t know what they are talking about.

Are NGVs Safe?

The most effective scare tactic used by that opposing natural gas transportation is the image of an exploding NGV or an NGV “bomb”. Yet there is not one credible study done by an independent source indicating that NGVs are statistically or significantly more dangerous than are gasoline powered vehicles. The conclusion appears to be that any accident horrific enough to puncture an NGV tank and cause an explosion would have also most likely have killed anyone in a gasoline powered vehicle as well. Also, it should be pointed out that unlike gasoline which spills and coagulates around a wrecked vehicle, natural gas simply vents to the atmosphere and away from the wreck and passengers. Many also seem to be unaware of various engineering techniques employed to address safety hazard in the natural gas refueling and delivery systems in NGVs. The bottom line is this: NGVs are a safe and secure mode of transportation. Ford (NYSE:F) and GM would not be manufacturing NGVs for sale if they felt they would be subject to safety liability lawsuits. Anyone who tells you NGVs are not a safe and secure method of transportation simply doesn’t know what they are talking about.

Are Natural Gas and NGVs Environmentally Friendly?

The “environmental purists” in the United States are making a crucial environmental policy mistake: they continue to lump the abundant, clean and cheap fossil fuel in the same category as the dirty and expensive fossil fuels (oil and coal). The label “fossil fuel” is proving to be difficult hurdle for them to negotiate with any sense of pragmatism or unbiased logic. According to the EPA, the Honda (NYSE:HMC) Civic GX natural gas vehicle is the cleanest internal combustion vehicle on the planet.

The Toyota (NYSE:TM) Camry CNG concept car shown here goes a step further in environmental friendliness by incorporating an electric motor similar to the Prius architecture. There is no plug-in battery recharge required as the natural gas engine recharges the batteries. Thus, this vehicle does not produce toxic coal emissions. I believe this electric/CNG vehicle is the single best transportation solution in existence today. Isn’t it ironic the US government won’t support the vehicle and therefore Toyota won’t manufacture it? Once again we have a fantastic non-oil based vehicle unavailable to US citizens. This is very disturbing.

Here are the facts: NGVs emit 30% less CO2 than do gasoline cars and trucks and 100% less of the toxic smog emissions. Natural gas electrical power generation emits 50% less CO2 and 100% less of the heavy metal toxic fly-ash coal plants are famous for producing. Electric cars built prior to a wind and/or solar infrastructure to recharge them should be viewed as tiny little coal plants travelling down the highway generating CO2 and heavy metal toxic particulates. Were a significant number of coal plants permanently shut down and replaced with natural gas generation, I would certainly have a more favorable view of 100% electric vehicles. For now and the foreseeable future, they are a simply a bad alternative.

Now, there have been some pollution concerns and incidences as a result of shale gas drilling and production. The most serious questions involve possible pollution of aquifers which provide drinking water. However, the fact is over 3.6 million oil and gas wells have been drilled in the U.S. through aquifers that are protected by surface casing with minimal damage to the nation’s drinking water. While no energy industry has a perfect record, there certainly have been no natural gas related pollution cases coming close to the magnitude of the environmental disaster caused by the coal fly-ash release in Kingston, TN or by the Exxon (NYSE:XOM) Valdez oil spill. Since natural gas adversaries will cling to any fear tactic in order to prevent adoption of natural gas energy policies, it is very important the major shale developers and the natural gas lobby address these environmental concerns by publishing and widely circulating all available data on the pollution impacts of shale drilling – both positive and negative. It is also important for them to work proactively with Congress and state and federal regulators to allay environmental fears and to agree upon a satisfactory regulatory framework in order to move confidently forward. The bottom line is that we know what coal (electric cars) and oil (gasoline and diesel vehicles) will do: more CO2, more toxic particulates, and more pollution of our lakes, rivers, and streams (not to mention our lungs). Natural gas is a clean fuel. It is much cleaner than either coal or oil; it is not even a close contest.

Are NGVs Economical?

NGVs are certainly more economic to operate than are gasoline or diesel powered internal combustion engines. Today, folks in Utah are filling up with CNG for around $1/gallon. In Oklahoma, it’s a little less than $1.50/gallon. Meanwhile gasoline is about $2.50/gallon. In 2008 when gasoline was $4.50/gallon, the savings were even greater.

Today, there is only one NGV available in the U.S.: the Honda Civic GX, and only then if you are lucky enough to live in a state in which Honda offers it and where you have CNG refueling stations. NGV conversion kits are expensive. Yet there is no fundamental reason why NGVs should be more expensive than gasoline powered cars and trucks. All we need is volume and price will take care of itself. Over the long run, NGVs are cheaper to operate, and run much cleaner than gasoline powered cars and trucks – meaning less money will be spent on maintenance related upkeep.

One reason Pickens is so successful converting fleets to run on CNG instead of gasoline is pure and simple economics: NGVs save money for their owners and for fleet operators.

Can I Refuel My NGV?

The “Phill” is a natural gas refueling appliance that can connect to your natural gas line and be hung in your garage. This would allow any American on the natural gas distribution network to refuel their NGV overnight while they sleep. Fuel Systems Solutions (NASDAQ:FSYS) bought the “Phill” intellectual property and manufacturing rights from Fuelmaker (the Canadian firm which invented the Phill and is now bankrupt). My sources tell me FSYS is planning on manufacturing the Phill in Italy, a country that is hot on the NGV bandwagon. What a pity such a device is not built in the U.S.A. – a country with such vast supplies of natural gas.

Aside from enlightened states such as Utah, California, and Oklahoma, there is a dearth of CNG refueling stations across the country. However, as I have said many times before, the multi-million mile natural gas pipeline grid in the United States which connects every major metropolitan area and homes where 130,000,000 cars and truck could be refueled in their garages every night is America’s single most competitive economic advantage. There is no other country in the world that comes close to such an evolved natural gas infrastructure. The Chinese would dearly love to own such an advantage and you can make damn sure they would be taking advantage of it instead of letting it sit around under utilized and unleveraged as we are here in America.

The lack of CNG refueling stations is not a technological or economic hurdle. It is a simply a very unwise policy decision by those in Washington, DC.

Summary

So there you have it: there are many reasons to adopt natural gas transportation, and no logical reason not to do so. There is plenty of domestic supply. NGVs are a reliable, safe, and mature technology. NGVs are environmentally friendly and a superior solution when compared to electric and gasoline or diesel powered cars and trucks. NGVs are very economical and indeed save money for individual owners and fleet operators. Technology exist today which allows NGV owners to refuel their vehicles at home in their garage. The only impediments are lack of NGV availability and lack of significant CNG refueling stations. However, both of these impediments are a result of unwise policymaking decisions – not any technical or other unsolvable hurdle.

Conclusion

Question: Natural Gas Transportation – Why Not?

Answer: it’s POLITICAL

And for the sake of our economy, our security, and the future of our planet, I will set a clear goal as president: In 10 years, we will finally end our dependence on oil from the Middle East.

— President Barack Obama

Like so many Presidents before him, it’s a promise that will not be kept. Notice that Obama singles out Middle Eastern oil. This alone is a clue that he doesn’t “get it”. It doesn’t matter where the oil comes from if not from within our own borders. Foreign oil is foreign oil and the money flows OUT of the country no matter where it ends up. Certainly we'd prefer to send it to friends, but from a balance of trade standpoint, the wealth simply flows out of the country. Period.

The truth hurts, but the Fitzman is going to give it to you straight. The U.S. has three major problems from which most others emanate:

· We have a two party political system which is completely dysfunctional. Both parties have proven themselves totally incapable of solving any major problem with pragmatic and logical policy initiatives. The Supreme Court has allowed special interests to own our elected “representatives” lock-stock-n-barrel. The great American middle class is forgotten.

· The Federal Reserve, in complete secrecy and without Congressional oversight or approval, is allowed to print money out of thin air and distribute it to its cronies. As if that weren’t bad enough, the Federal Reserve has complete power and control over credit and interest rates. Not only is the Federal Reserve an un-Constitutional bureaucracy, the fiat money it prints is also un-Constitutional (only tender backed by gold and silver is). The result is runaway deficit spending, a devaluation of our currency, and the ability to “fund” oil wars and other such unproductive endeavors.

· The U.S. is addicted to foreign oil and it is bankrupting the country while enabling the greatest transfer of wealth in the history of the planet.

We’ll focus here on the first one – political dysfunction. What is it about our political system that prevents us from adopting natural gas transportation?

We must first examine the power of the coal lobby. Ever since the disastrous decision made during the Carter administration to restrict natural gas to home heating, the coal industry has taken off and reaped enormous profit while polluting our way to “cheap energy”. As we all now know, the only way coal is cheap is if you don’t put a price on clean drinking water, healthy lungs, or a human body without cancer. But most Americans (including Barack Obama and Energy Secretary Chu) don’t understand this and are all too happy to embrace the myth and oxymoron of “clean coal”. People believe coal is clean if you remove the CO2 – we’ll just forget about the toxic heavy metal remnants and release those into the Tennessee River. So, we can understand how the power generation business is bought and paid for by the coal industry, but does that completely explain why natural gas is not being used in the transportation sector. I suppose it could since electric vehicles will require electricity to be recharged. And this is what the “environmental purists” don’t get about electric cars: they will require more burning of the dirtiest of all fuels: COAL. Which is exactly what Obama wants and why our President has never uttered these three words together: "natural - gas - transportation". It is also why our Nobel Prize winning Energy Secretary Chu is "agnostic" about natural gas transportation and our country's most abundant, clean, and cheap source of energy. And Chu is an *energy* secretary for crying out loud.

But electric cars aren’t here yet, they’re going to be expensive, and they’ll have range issues. So, what else is going on here? So foreign oil imports are not being reduced one barrel (except as a result of the great economic contraction, which is Obama's only successful method of reducing foreign oil imports). So, what other economic policymakers are involved here? Let’s take a look at the major players:

· Greenspan/Bernanke: Federal Reserve Chairmen

· Timothy Geitner: Treasury Secretary

· Jared Bernstein: Chief Economist and Economic Advisor to Obama

· Larry Summers: Chairman National Economic Council

· Paul Volker: Chairman Economic Recovery Board

· Peter Orszag: Director Office Management and Budget (OMB)

· Barney Frank: Chairman, House Financial Services Committee

· Karen Mills: Administrator Small Business Association (SBA)

· Jonathon Leibowitz: Chairman Federal Trade Commission (FTC)

· Gary Gensler: Chairman CFTC

These people are largely responsible for developing U.S. economic policy and "strategy". Now, I’ve Google’d each of these people and they are for the most part highly educated and qualified people. So, again the question: how could such a cast of smart people continually neglect natural gas transportation as an obvious and excellent solution to the country’s dependence on foreign oil?

In a rare moment of clarity, even Alan Greenspan finally admitted the Iraq war was all about oil. Of course, we cannot give him credit for this admission because it was made long after he left the Bush administration. Greenspan never once used his bully pulpit to actively support policies to reduce foreign oil addiction though he would give the issue lip service from time to time – almost as an unimportant afterthought. How can the Chairmen of the Federal Reserve (both Greenspan and Bernanke) not understand the dire threat addiction to foreign oil imports pose to the U.S. economic and financial well-being? It’s amazing, isn’t it?

Regardless, whatever the true reason the U.S. stays addicted to foreign oil, it’s clear the root cause must be political. Global warming? Hey, If Obama wanted to be the star of the recent global warming conference all he would have had to do was show up and announce with great fanfare that the U.S. was converting all coal plants to natural gas generation and was planning to build a natural gas refueling infrastructure to allow half the U.S. car and truck fleet to run on natural gas and thereby cutting oil consumption by 6-7 million barrels a day. That simple act would have made him a true star (not a fake star – like winning a Nobel Peace Prize for waging oil wars). The Europeans would have loved him. The Fitzman would have loved him. And the Chinese would have left with their mouths open, their eyes wide shut, and wondered how in the world they were going to compete with an American economy unburdened from the expense of foreign oil whilst China’s path is clearly on a road to duplicate America’s oil policy mistakes.

Investment Advice

Given America’s complete political and economic policy dysfunction, the generation of U.S. dollars out of thin air and backed by nothing, and the inability of the country to adopt a strategic long-term comprehensive energy policy like this one.

What is an American investor to do? I used to believe the answer was to invest primarily in oil companies and energy stocks. The events of the last several years have me rethinking this strategy. For one, I am (to quote our incompetent Energy Secretary Chu) “agnostic” on natural gas stocks. Like the CEO of EOG, I believe natural gas supplies are so abundant, without adopting a new demand driver like natural gas transportation prices are going to stay depressed for years to come. Take a look at Exxon Mobil’s purchase of XTO Energy (XTO) for $40 billion dollars. Wall Street quickly “rewarded” XOM by shaving off, you guessed it, $40 billion dollars of market value of the stock. Could it be the coal lobby is more powerful than even XOM? Or, could it be The Street sees XOM’s XTO purchase as a “do-over” for the huge investments XOM made in Qatari LNG long before the advent of the shale plays? Regardless, it doesn’t look bullish for natural gas prices. Neither does the natural gas legislation that has been languishing in Congress forever. So, here we are with abundant, clean, and cheap natural gas and we simply don’t know what the hell to do with it! What a broken country! But I digress – bottom line, I’ve made a U-turn: stay away from pure-play natural gas stocks.

Oil? Well, if you must invest in equities, yeah, long-term I still like oil stocks and only oil stocks: BP, COP, CVX, OXY, PBR, and STO are my favorites. And who can stay away from XOM with its best in class operational efficiencies even if the dividend is miserly?

However, realistically, once must consider the possibility that the U.S.’s economic, political, fiscal, and monetary policies are so bad that the entire system will collapse like other fiat money countries of past history. If that’s the case, oil stock certificates like those above will only be good for one thing (which I cannot say here since this is a family website). It seems that, at least politically, there is no fix to America’s broken two-party system unless there is some earth shaking event like famine or war on our own soil. In this case, what else can a person do but buy gold and silver bullion, build a garden, install a rain barrel or two, and stock up on dry goods and ammo? What a sad commentary that a citizen of the U.S. is even writing such depressing advice as this. However, looking at gun and ammo sales, as well as gold prices, I am obviously not the only one that feels this way.

On the other hand, the U.S. could enter an age of unbridled prosperity. We could create millions of good paying jobs building a natural gas refueling infrastructure and cars and trucks running on CNG. The billions of dollars now going overseas for foreign oil would instead go to U.S. companies, landowners, and farmers as royalty payments. This money would then be spent or reinvested here at home in domestic companies creating more jobs and more demand for goods and services. If only the U.S. economic policymakers listed above were forced to sit in front of a TV camera and defend their policies that keep America addicted to foreign oil. At the end of the day, it is these policy makers that are preventing America from throwing off the shackles of foreign oil.

Disclosure: Long BP, COP, PBR, STO, and gold and silver.