The Answer To The Oil Dilemma? Natural Gas - Part 1 Of 2

by: Robert Kientz

Natural gas is making a big comeback. I don't mean the price yet, but the use of it as a vital fuel in the economy. Natural gas is right now the only fuel we have that can be used as a substitute for oil in transportation energy. Hydrogen is but a dream and electric cars are failing because they lack the features people are used to in gas engines. Those options are still on the table, but they are future options and not in the here and now. Natural gas will be the complementary transportation energy to oil of the now and near future until a we find a better technology that doesn't require enormous trade-offs to implement.

Natural gas in the US is so cheap it has become a substitute for coal in grid power. And coal is still really cheap. The advances in fracking gas have increased supplies and production rates of gas to the point that it is the cheapest and cleanest of the fossil fuels, which came at the right time. As I wrote in Beyond Thunderdome, oil is getting harder to drill and therefore more expensive. We have enough left for the short term, but it is high time we identify serious alternatives if we don't want to go back to driving horse and buggies.

The CIA estimates we have over 6 quadrillion cubic feet of proved natural gas reserves worldwide. Quoted:

Proved reserves are those quantities of natural gas, which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions.

A quadrillion is a lot of something. The number is hard to imagine even in the era of trillion this and that. A quadrillion is still a 1000 times a trillion. Here is a quadrillion dollars on pallets stacked against the tallest building in the world, Burj Dubai. Now think of every dollar bill as a cubic foot of natural gas, and the resource image gets several iterations larger.

Natural gas is in abundance at the moment, and it may help address our most pressing current energy dilemma, transportation fuel. We are lucky and should count our blessings here. If we didn't have this cheap and clean fuel, our entire life quality paradigm would change much more quickly than it already is.

Natural gas reserves are distributed fairly well globally with some denser concentrations in Russia and the middle east.

The US has quite a large store by itself. See the following chart provided by the Energy Information Administration in their Annual Energy Outlook presentation.

BP has done the work for us on global gas demand and supply.

As we can see, production keeps up with demand quite nicely without a huge spike in the price. There was a short term demand spike in natural gas a few years ago, but production ramped so fast that the spike is now a trough.

And now for another chart by the EIA showing that US production is humming right along as well.

The argument is clear: Natural gas is our best current alternative transportation fuel. But how much of an impact can natural gas make in the this energy space?

We have to start with some assumptions to answer this question. One, that my hypothesis about thorium is correct and cheaper, cleaner grid energy is on the way in a relatively short time frame (5-7 years), meaning coal and natural gas eventually get edged out as primary grid power. We have to also assume, for the next few paragraphs, that there are no infrastructure and conversion costs to natural gas switchover in cars and trucks. We'll get to those costs in a bit, but for now I want to ignore them to give the best case scenario for natural gas adoption as a transportation fuel source.

At current global oil usage and growth rates over the last 25 years (1.6% growth annually), we double our use of fuels every 45 years. That doesn't seem significant at first until you realize we have already been through the first couple of doubling periods and are advancing on another.

Note that while some economies in the emerging world are increasing rate of fuel usage faster, at the end of the day, the global needle hasn't moved much the last couple of decades.

So how long can natural gas last? We have to figure out how much oil is used for transportation, and then compare that with what our Gasoline Gallons Equivalent (NYSE:GGE) available in natural gas.

Here is a chart showing the typical breakdown in US crude oil products for every barrel of oil produced.

About 72% is used in diesel and gas products for cars and trucks. We'll ignore jet fuel for now as the conversion of jets to natural gas is not immediately likely.

We know the world uses about 88 million barrels of oil a day, so about 63 million barrels per day are for car and truck transportation uses. Each barrel has 42 gallons, so we come up with 2.6 billion gallons of gasoline/diesel per day or roughly 960 billion gallons of gasoline/diesel per year.

The GGE of natural gas for 1 gallon of gasoline is 126.7 cubic feet. Given that we have 6.5 quadrillion cubic feet of gas reserves, that equates to 51 trillion (6.5 quadrillion / 126.7 GGE ).

With 51 trillion GGE, the world could transport itself at current usage, plus current usage growth of 1.6% per year, for 250 years. That's quite a reservoir of energy we can draw from. I think this is what changes the debate on oil as our primary source of energy.

Now back to costs. Popular Mechanics estimated that a gas station would spend about $750,000 on conversion costs to a natural gas system. We have about 130,000 gas stations in the US. So, it would cost around $97 billion to convert every station. Of course, the costs would be spread out over a number of years, or even a decade.

How much does it cost to convert a vehicle? People have done it for about $1000 themselves for a 2-gallon unit allowing 50 miles per fill-up. For about $1600, a person can convert to a 5.5 gallon system that would more than take care of daily driving needs for the vast majority of people. Installed professionally, $2500 would be the tops anyone would pay to convert their car to a gasoline / natural gas hybrid.

It has also been reported that prices are much cheaper in third world countries who have higher rates of natural gas cars already on the road, meaning costs fall pretty quickly as more units are installed and more mechanics know how to install them.

The average savings of natural gas per GGE, based upon gasoline and natural gas pump rates, is currently sitting at around $1.00 or so per gallon. Depending on the system and options used to install the conversion, payoff could be between 2-4 years on a car getting 25mpg at 15,000 miles per year. I could think of worse investments.

The world has over 1 billion cars, according to the Huffington Post. Assuming all cars have to be converted using a $1500 system, that is a price tag of about $1.5 trillion for the entire world's fleet.

New CNG cars cost anywhere from $3500 to $5000 more than their gas counterparts, but given economies of scale, that number should come done substantially given a large move to CNG vehicles.

Then we have the infrastructure. Natural gas pipelines are not cheap. But, 64% of the world's pipelines are already for natural gas compared with 17% for oil. The US has an extensive pipeline network.

Natural gas pipeline construction costs are about $60k per inch mile, according to the Intrastate Natural Gas Association of America (INGAA).

At current rates, between 1000 and 1500 miles of new pipe are expected to be built between in the US and Canada now and 2030, given current rates. At least $160 billion in pipeline expenditures are expected annually until 2030 including the arctic pipelines needed.

If the nation converts it's fleet of cars and trucks, this can be expected to increase significantly. Pipelines are by far the safest way to transport natural gas, through trucking it around regionally shouldn't be ruled out.

The INGAA estimates current pipeline costs in three scenarios.

It is impossible to tell what the total pipeline expenditures would be for a conversion process of the world's fleet of cars over to natural gas from oil, but it would conservatively be in the hundreds of billions of dollars.

If we just estimate a $2 trillion total, all-in cost of oil to NG conversion, we are probably in the right ballpark. If we compare that to the $1.2 trillion the US alone has spent on wars in the Middle East, then about 60% of that world conversion cost could have been paid for already. We would have been well on our way.

The numbers are big, but so are the payoffs. Natural gas is cleaner and very abundant. We have enough oil to get us through a transition to natural gas, or looked at another way, we have two fuels to use for transportation for the foreseeable future. That is not a bad situation to be in, and it is certainly not as apocalyptic as many analysts make it out to be.

If our anticipated grid solutions in thorium nuclear work out, we will have plenty of safer and cheaper energy options for us and a few succeeding generations to use.

Look for Part 2 of this series in which I will discuss some investment opportunities that capitalize on the growing global shift to natural gas.

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