Why Natural Gas Vehicles Won't Decrease Oil Dependence, Part VII

by: Eamon Keane

Pickens has a $100 bet with Cramer that the NATGAS Act (HR 1835, S 1408) will pass by Memorial Day. Yet no one discusses what's in the bill. The analysis goes no further than this jingoistic one-liner:

It's cleaner, it's cheaper, it's abundant, and it's ours.

Who could argue with that? Why aren't the markets already using natural?

Last week a Ford (NYSE:F) representative mentioned that the fuel infrastructure would be very expensive. Pickens replied:

Make the transition or use foreign oil.

This is what passes for debate about NGVs.

The bill appeals to a wide constituency - liberals (nat gas has lower emissions), economic conservatives (lower current account deficit) and security hawks (lower dependence on foreign oil). This might explain why the bill has 137 co-sponsors in the house and Harry Reid is on record that he'll try slip it into another bill somewhere.

Reading through the legalese, here's what appears to be in HR 1835:

  • 50c/gallon tax credit for CNG & LNG until 2027
  • $100,000 tax credit for new LNG trucks until 2027
  • $100,000 tax credit for new refuelling stations until 2027
  • $4,000 tax credit for anyone who makes a CNG or LNG car/truck
  • Up to $30m/year for NG R&D
  • By 2015, half of all new government vehicles must operate on CNG or LNG

Ordinarily, libs would be against it because it's corporate welfare. It would usually be anathema to conservatives of all stripes also, because it involves government picking the winner. However each constituency finds something to like, and so let's pass it. This would represent a fairly radical tilting of the transport playing field for the next 20 years. The fact that it is this advanced with zero - zero! - analysis is disturbing, though not surprising. Ethanol legislation was passed based on the same foreign oil premise. There were no unintended consequences and ethanol is competitive without subsidies today.

Requiring government vehicles to use alternative fuels has been tried before. Specifically, the 1992 Energy Policy Act, which stated

75 percent [of the federal fleet's purchases] in fiscal year 1999 and thereafter, shall be alternative fueled vehicles.

As I understand it this turned out to be too expensive and was ignored.

The main plank of the Pickens Plan is to convert the heavy duty diesel fleet to natty by 2020, which supposedly would 'cut OPEC in half'. The cost of the infrastructure hasn't been estimated, but I think I can get a ballpark figure. From one of CLNE's earning transcripts:

The biggest and best example of that is the port station. In the case of a port station which will obviously be in the LNG side of our business, those can be 3 million, 4 million, 5 million LNG gallons a year and those cost $1.5 million or $2 million relative to a CNG station that for that same $1.5 million, it may do 1.5 million or 2 million gallons a year just simply because it’s limited by the amount of compressor capacity that it has at the site.

Using $1.5m for 5m LNG gallons, you have $0.3m/m LNG gallons. For the diesel fleet, using the 10.5 tcf from Part II, that would require 140 billion LNG gallons. So that's $42bn for the truck infrastructure. That's acutally not that much.

However, there's every indication that truckers do not want LNG. Retrofitting diesel trucks limits range to 350 miles. This would be unacceptable for the vast majority of ton-miles. The main source of LNG demand is the Port of Long Beach. They have air quality issues there, and have a $1.6bn clean vehicles fund. The Port Authorities state:

The average cost of new diesel truck is approximately $109,700 [LNG trucks cost $40k - $70k more]. Accordingly, there are several choices available to those who would purchase clean diesel trucks meeting the CAAP standards. The large number of choices is also good for the purchaser since it affords opportunity for market competition to positively influence pricing. As a result, diesel trucks offer a more favorable cost-effectiveness for reducing emissions than LNG with cost-effectiveness of approximately $14,300/ton and $27,000/ton, respectively.

Bizarrely, though, the port decided to heavily subsidise LNGs and LNG fueling infrastructure in the name of 'fuel diversity'. The implied value of fuel diversity is off the charts.

There is also no, absolutely zero, competition for LNG fueling infrastructure. Clean Energy (NASDAQ:CLNE), Boone's company, are on their own. Pickens owns 54% of CLNE. CLNE is basically a federal and state subsidised company ($115m to date) which still manages to lose money. Pickens supports the company because his heart is in the right place and he wants to move America off foreign oil.

No one is asking whether the trucking industry wants to change. The American Trucking Association comes across decidely cool in this November 2009 fact sheet. Here are some excerpts:

Notwithstanding the fact that natural gas is less expensive than diesel fuel, the additional capital cost associated with purchasing natural gas trucks compared to diesel trucks makes natural gas a challenging economic alternative for most trucking companies. Due to the competitive nature of the trucking industry, significant financial incentives would be required to address the higher cost of natural gas trucks, before they can be considered a viable alternative to diesel trucks.

The second major obstacle to the use of natural gas as an alternative fuel for the trucking industry is the lack of a competitive refueling infrastructure. Most long-haul trucks are not centrally refueled and do not travel regular routes...LNG trucks must be refueled at specialized stations that are configured for the specific truck.

It is not sufficient to have a single LNG vendor with stations built at strategic locations along key freight corridors. Absent a competitive refueling infrastructure, trucking companies could face unreasonably high prices at individual retail LNG stations that have no competition in a particular geographic area. While competition exists in the natural gas industry, the high barriers to entry for retail LNG refueling stations may slow the development of a competitive refueling infrastructure. A competitive LNG refueling model would require the presence of multiple entities selling LNG in the same geographic area.

Some fleets have experienced significant problems with LNG fuel tanks.... The pressure relief valve built into the tank vents natural gas into the atmosphere, which affects the amount of fuel available for use and offsets the environmental advantages of using LNG.... In fact, depending upon ambient temperatures, an LNG truck could vent most of its fuel over a 7-10 day period. The venting of methane from trucks parked over an extended period could result in a net increase in greenhouse gas emissions compared to diesel fuel.

An LNG truck equipped with two 119 gallon tanks has an operating range of approximately half of the typical diesel long-haul truck. These tanks are extremely heavy and negatively impact truck productivity for those fleets that haul freight at the truck’s legal weight limit.

A natural gas engine may require injectors to be replaced more frequently than a diesel engine, which increases operating expenses. For spark ignition natural gas engines, replacement of spark plugs, ignition modules and various sensors also add additional maintenance costs.

They conclude:

If Congress enacts financial incentives to ensure that the price of an LNG truck is equivalent to a diesel truck and that cost-effective LNG refueling facilities can be constructed, then LNG trucks may be a viable alternative for the small segment of the industry that is centrally-refueled.

Not exactly a glowing endorsement to its members. As things stand, CLNE would hold a monopoly, which would be unacceptable for truckers. But maybe they'll be made an offer they can't refuse with the goody bag in HR 1835.

Disclosure: No positions