Another Setback For Natural Gas?

by: Alex B. Gray

I typically dislike any bill that comes out of Congress regardless of its contents unless it is abolishing a government program, agency or the current tax code. I am especially annoyed by bills that they feel compelled to attach those catchy names to so ignorant people, that is all of us in their mind, will know what they think we should know about the bill and nothing more.

This is the case with the New Alternative Transportation to Give Americans Solutions Act (NAT GAS). This bill was designed to encourage primarily transportation companies to convert their fleets from primarily diesel to the use of natural gas as a primary fuel. The bill allowed for tax credits of up to $65,000 per vehicle purchased. It also contained tax credits of up to $100,000 for service stations to buy the necessary equipment to allow for natural gas fueling. These credits were to help cover the increased cost of a compressed natural gas (CNG) or liquefied natural gas (LNG) vehicles. On March 13, 2012, the Senate voted 51-47 in favor of the amendment, however the threshold of 60 "yes" votes for inclusion was not met and therefore, the amendment was rejected.

It cannot be argued that the purpose of the bill was to initiate the conversion of trucks serving America over to CNG or LNG vehicles. That is already happening. However, many of these vehicles are fueled at privately owned fueling stations for local travel. What we are really talking about here is creating fueling demand in order for the private sector to be confident making major investments in infrastructure. While there are natural gas trucks on the road now, the fueling demand is not great enough to create a nationwide infrastructure to support cross-country travel. Currently there are less than 500 public natural gas fueling stations across the nation. This has been a major impediment for the transportation industry to make the switch to natural gas as a source of fuel.

T. Boone Pickens has been leading through his Pickens Plan to help move the United States away from foreign oil largely by the use of natural gas, but also through the use of wind and solar energy where it makes sense. He has been very vocal about his support for the NAT GAS Act that recently failed in the Senate.

On February 28, 2012, the Wall Street Journal (WSJ), owned by News Corporation (NASDAQ:NWS), published an opinion piece claiming that Mr. Pickens is pushing for subsidies for the production and purchase of vehicles that use natural gas for transportation. According to the WSJ piece, Mr. Pickens wants to hit taxpayers with a bill to help the transportation industry make the switch to natural gas at a cost of $5 billion. The WSJ goes even farther to say that the cost to taxpayers could reach $100 billion.

To support its point the WSJ pointed out that "there were no subsidies for Henry Ford to build the Model T." Well that may be true, but the WSJ fails to point out is that when Henry Ford established Ford Motor Company (NYSE:F) in 1903 and when in 1908 the first Model T hit the road, income taxes in their present form did not exist. The WSJ further defends its point stating that there were "no tax incentives for gas stations in every town in America". I will take the WSJ at its word that there were never any tax incentives for gas stations, but the interstate highway system certainly increased demand and paved the way for private investment to build in every town.

Lastly, the WSJ refers to these tax credits as subsidies. I believe the terminology is wrong. A subsidy is when a government grants or directly makes payments to an organization or person. On the other hand, a tax credit is a tax cut and just decreases the revenue received by the government from an organization or person. It may seem like semantics, but it very important to realize that this is not a spending bill, but rather a tax cut. What you call it just depends on what side of the issue you stand.

On March 7, 2012, Boone fired back with a response to the aforementioned WSJ opinion piece. Mr. Pickens made it clear that this country must reduce its dependence on OPEC oil and move to natural gas. On that point, I agree. Mr. Pickens goes on to point out what the WSJ piece missed is that in the Senate version of the bill (S. 1863), the tax credit is fully paid for by the same organizations benefiting from the credit through a surcharge and "it will not cost taxpayers a dime." This is where I part ways with Mr. Pickens and the NAT GAS Act. It is this notion that a tax credit must somehow be paid for with another tax or fee. If this is truly a tax credit, it should be the responsibility of the government to cut actual spending in order to pay for the decreased revenue. It is important to remember that a tax credit does not cost the taxpayer a dime. It only decreases the revenue taken in by the government.

Many will argue that Mr. Pickens has only one end game in mind by promoting the NAT GAS Act and that is financial gain. Mr. Pickens does own a substantial stake in Clean Energy Fuels Corporation (NASDAQ:CLNE) which certainly stands to benefit. You can learn more about CLNE in my previous article Industries And Stocks That Could Benefit From Low Natural Gas Prices. While financial gain may have certainly been his motivation in the past, at nearly 84 years old, it is most likely secondary. This is more likely about legacy and winning one for America.

I honestly would have believed just a few weeks ago that the current low natural gas prices and rising oil prices would be the pressure Congress needed to get this bill passed. There is little doubt that low prices will be the primary catalyst to drive the switch to natural gas over time even without a bill from Congress. However, knowing that the politicians will want to take credit for America's energy independence, I see another version of this bill finding its way to the floor of Congress again in the near future.

While the rejection of the bill will certainly not speed up the process of converting to natural gas, there are still ongoing private efforts to make the switch. The previously mentioned CLNE, which is the largest CNG and LNG fueling station operator in the United States, will certainly benefit from ongoing efforts to reduce the dependency on diesel and gasoline.

Natural gas producer Chesapeake Energy (NYSE:CHK) already has a vested interest in CLNE and has recently struck a deal with General Electric (NYSE:GE) to collaborate in the development of the infrastructure to facilitate the conversion to natural gas as a transportation fuel. These partnerships that CKE is developing may give it an advantage over other producers such as Cabot Oil and Gas (NYSE:COG). However, given the current status of the tax credits, all of the producers will feel the pain of over-supply in the near-term.

If the cost of diesel continues to move higher, long-haul truckers and other providers of transportation will be looking for ways to cut fuel expense with or without a tax credit from Congress. If the price gap encourages these operators to make earlier equipment purchases, the beneficiaries of this action will be engine manufacturers like Cummins, Inc. (NYSE:CMI) or Westport Innovations, Inc. (NASDAQ:WPRT). In addition truck manufacturers like Navistar International Corporation (NYSE:NAV), PACCAR, Inc. (NASDAQ:PCAR) and Volvo AB (OTCPK:VOLVY) should also see some upside.

While the passage of the NAT GAS Act would have certainly made the short-term investment prospects of the benefactors more appealing, the over-supply of natural gas and low prices still make the long-term investment prospects interesting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.