In an era of worrisome global warming events, it’s hard to argue with a transportation system that has proven to reduce particulate emissions by 95 percent compared to diesel engines and which also reduces carbon monoxide and nitrogen oxides by 75 percent and 49 percent, respectively. Those are the statistics UPS (NYSE: UPS) provides with regards to its 800 vehicles now running on compressed natural gas [CNG].
UPS has the largest private CNG fleet in the United States. Many cities in China could use the same clean air treatment. And like anything Chinese, natural gas consumption appears to be moving forward at breakneck speed.
Air pollution in Beijing and in many other rapidly growing Chinese cities has been a nagging ache in the side of China’s leadership. The recent growth spurt of automobile usage, replacing decades of bicycling, have further aggravated the untenable air climate. Combine this factor with Beijing’s mandate to clean up the air in time for next summer’s Olympiad, and the first appropriate target are the vehicles.
Although Beijing won’t convert its transportation fleet that fast, every little bit helps in the scheme of things.
According to the International Association for Natural Gas Vehicles, the most recent (and mostly outdated) statistics show more than 6.3 million natural gas vehicles [NGV] and over 10,000 NGV refueling stations. As of January 2005, China stood just behind the United States in global rankings for such vehicles, respectively eighth and ninth.
The number of NGVs compared to traditional gasoline- and diesel-powered vehicles is a drop in the bucket. But some of the more ambitious trade groups hope to reach a target of 50 million by 2020.
China offers the most immediate promise, which is probably what drove Boone Pickens to this marketplace. His California-based Clean Energy Fuels Corp (NASDAQ: CLNE) provides 200 fleet customers, which have about 13,000 NGVs, with the refueling capabilities for those vehicles with the company’s 168 natural gas fueling stations. By building distribution networks, corporate and government consumers can more readily access the natural gas to power their vehicles.
This fact is evidenced by the momentum of tiny China Natural Gas (OTC:CHNG), which is servicing the city of Xi’an in China’s Shanxi province. Maybe you’ve never heard of the town, but the city now boasts a population of about 8 million.
Compressed natural gas reportedly powers 20,000 taxis, 3,000 buses and 2,000 special purpose vehicles. Over the next three years, the city’s leaders hope to nearly double those numbers. China Natural Gas now has 23 CNG filling stations in the city and hopes to expand outside Xi’an and into Henan province. Since late April, the company’s shares have more than tripled in value.
Boone Pickens envisions a big opportunity in China’s natural gas for transportation purposes. Generally, gas is used to fuel electrical power plants or for cooking. We first brought up the accelerating use of NGVs in our recent publication, “Investing in China’s Energy Crisis”, because of China’s struggle to quickly and efficiently import sufficient oil to power its economy.
Face it, China has a massive energy appetite. Pickens remarked during a recent television interview, “The activity is unbelievable.” In previous articles, we compared China’s energy-consumption and expansion to the Anglo-American-European Industrial Revolution during the eighteenth century.
China’s Coalbed Methane Activity Intensifies
China has a huge appetite for foreign investment to develop all stages of the natural gas fuel cycle. We have focused our coverage on the front end of the cycle, especially on coalbed methane gas.
This makes sense for China as the country has one of the most plentiful supplies of undeveloped coalbed methane [CBM] gas on the planet. In addition, the country has a long tradition of coal mining and expertise. CBM comes from coal mines and China has the largest number of operating coal mines in the world.
Speaking with Phil Flynn of Alaron Trading in Chicago, he told us about China’s drive to power their transportation system with natural gas, “We are years behind China.”
He pointed out that switching over in the United States would become a nearly impossible venture. “We don’t have the supply,” he said. “We would have to drill under the Rockies and under the Great Lakes, and then we would still become dependent upon natural gas imports.”
China has already begun the country’s campaign for an energy crossover.
About twelve months after China’s National Development and Reform Commission (NDRC) announced it approved the country’s coalbed methane development plan, new developments have been parading across our radar nearly every week.
The commission targeted production to reach 10 billion cubic meters by 2010.
On June 27, Shanghai CIMIC Life invested $196 million to develop a coalbed methane project in Jiangxi province. Construction is already underway.
On July 4, China National Petroleum Corp began exploring a new coalbed methane discovery in the Xinjiang Autonomous region. On July 6, Shanxi Ganghua Coalbed Methane Corp began construction of China’s first large scale CBM project – a coalbed methane liquefaction project.
On July 8, a PetroChina (NYSE: PTR) subsidiary signed an agreement with Shanxi Energy Industries to develop a CBM site in northern China’s Shanxi province. The World Bank will finance US$80 million of the US$190 million project.
On July 20, the city of Shenyang, and capital of Liaoning province, announced it would begin increasing its coalbed methane consumption in the region’s heavy industries to help reduce the level of pollution in the area.
On July 24, China’s NDRC approved a proposal from the first foreign company to develop a coalbed methane mine in China’s Shanxi province. Asian American Gas is the first foreign company to obtain NDRC approval in 20 years, and the first to do so in partnership with state-owned China United Coalbed Methane [CUCBM] since this corporation was formed. The plan’s initial capacity was reported at 500 million cubic meters annually. We reported in late January that U.S. coal baron, E. Morgan Massey, had backed this company.
China is optimistic about the country’s coalbed methane reserves. Two years ago, Xu Dingming, a director of the NDRC’s energy bureau estimated that China’s CBM reserves were roughly equivalent to the country’s natural gas reserves.
In December 2006, China’s Ministers of Finance, Customs and Taxation agreed to introduce tax breaks to companies which imported equipment for the development of coalbed methane resources. This notice came after it was reported that China’s CBM-utilization had failed to meet the targeted 36 percent – falling short by nearly one-third.
Since then, state-owned companies and the government have been intensifying their efforts to accelerate CBM exploration and development in China’s coal fields.
Over the next twelve months, we expect these efforts to escalate CBM development to a more highly visible international level.
More Players Entering China’s CBM Sector
One of the problems in the United States, according to Phil Flynn, is complacency with storage numbers. “Natural gas storage is a buffer against supply,” he said. “But if we have extreme weather this summer or a long, cold winter, production can’t keep up with demand.” He pointed to the spike following Hurricane Katrina in the summer of 2005.
The Chinese don’t have this buffer. Instead, they are faced with either further straining the world’s energy sources by importing natural gas (and crude) or by developing their domestic energy fields.
The significant news from Asian American Gas, a privately held company which we previously covered, is encouraging for others now developing their projects.
Companies we’ve featured in the past – such as Far East Energy (OTCPK:FEEC), Green Dragon Gas [AIM: GDG] and Pacific Asia China Energy (OTC:PCEEF) – have moved their projects forward against a very bearish tide. We believe they are well-positioned to follow in the footsteps of Asian American Gas. Current output is modest at the company’s six test wells at 300 thousand cubic meters, but again, this is a nice start.
Many North American investors haven’t yet looked beyond their borders in developments for natural and coalbed methane gas projects. The price of natural gas in North America is relatively meaningless in Beijing or Xi’an.
These companies should benefit from China’s recent acceleration to obtain more methane gas, natural or CBM, to power their vehicles. The average bus consumes about 70 cubic meters of compressed natural gas per day [CNG]. A typical taxicab uses an average of 30 cubic meters CNG every day.
A strong selling point for the increased use of natural gas vehicles: the price of fuel. A hybrid vehicle, which also utilizes compressed methane gas, cuts the fueling cost by 60 percent.
How would the U.S. consumer feel about paying $1.20 per gallon instead of $3/gallon at the gas pump? Probably the same way – one cubic meter of compressed CBM gas is the equivalent of 1.13 liters of gasoline and retails for less than half.
As we pointed out in late June, institutions have begun investing in this sector. With the next round of conferences in North America, during the fourth quarter and early next year, we suspect more institutions should take China’s coalbed methane projects more seriously. ‘Celebrity’ names such as Boone Pickens, Morgan Massey and others provide a comfort level for many cautious investors. But then again, it is the pioneers who make the biggest money, if the projects materialize.
In early July, W.R. Hambrecht rated Clean Energy Fuels a “buy” with an $18 price target. During his recent television appearance, Pickens noted another two analysts picked up on the company.
And we couldn’t agree more with Pickens, judging from emails readers have sent us. Pickens thought people didn’t really understand the story, at first. Now as more have digested what is taking place, Pickens said, ‘they like the story.’
We completely agree with Pickens’ comments to reporters, saying, “We think that (natural gas refueling stations) will be very big business in China.” This development is not unlike the growth of cellular phones in China. The country skipped the enormous infrastructure implementation for traditional landlines and zoomed to mobile telecommunications. Judging from our communications, and from what others have told us, the clarity of reception and reliability surpasses the standards in North America.
Building more NGV refueling stations will help drive the demand to bring more natural and CBM gas into China’s distribution network. It will probably become a major trigger to capture both international media and investor attention for this sector. In our new book, we reviewed the number of Chinese auto manufacturers investing in hybrid cars, including at least one line which would be powered entirely by CBM gas. Replacing significant percentage of gasoline and diesel with natural and CBM gas for powering transportation vehicles (and yes, even jet fuel is past the drawing boards), would suggest a major paradigm shift for the world's most populous country.
While we take natural gas for granted in the United States, the Chinese have taken this fuel source very seriously and embraced it. By devoting their energies in developing their transportation systems with increased natural gas consumption, the country’s atrocious pollution history might also be reversed.