Join The Motley Fool's Austin Smith for a chat with Sandeep Munshi, director of technology and development at Westport Innovations. Based in Vancouver, and with facilities in eight other countries, Westport is the industry leader in natural gas engines and vehicles.
Munshi is on the cutting edge of natural gas engine and vehicle development. He takes some time today to discuss the industry and where it's headed in terms of technology and IP, as well as what kinds of external changes will need to occur as natural gas gains traction in the North American market.
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Austin Smith: Hey Fools, Austin Smith here with Sandeep Munshi, the director of technology and development at Westport Innovations. Thank you very much for taking the time to sit down with us today.
Sandeep Munshi: Thank you.
Smith: Being director of technology at a technology -- and very advanced -- company, it's a tall order. How did you get involved?
Munshi: Well, it's a bit of a long story but I'll make it really short. I've been here for about 13 or 14 years. I studied at UBC and I knew about Westport, so a long time back when a chance or opportunity came, I applied to work here.
Since then, it's been great. It's been a great experience, a lot of good learning, and I really enjoy what I'm doing here on natural gas engines. It's all leading technology, so yes. I consider myself quite fortunate in that sense.
Smith: For those who aren't aware, from a technological aspect, what are the advantages to a natural gas engine compared to any of the other alternatives out there -- maybe traditional petrol, diesel, or electric?
Munshi: Natural gas as a fuel and natural gas engines, both, there are a number of key advantages. If you look at the fuel itself, natural gas is clean-burning, it's abundant. It's also available all over the world.
If you talk about North America, there are large domestic reserves, especially in recent years with the shale gas. The amount of natural gas that's available in the ground that can be economically extracted has grown significantly, so natural gas as a fuel does bring some of these advantages over traditional petroleum fuels.
One of the key advantages also is the market economics. Operationally, it's a lot cheaper to operate a natural gas vehicle compared to, say, gasoline or diesel today, in North America. You're looking at cost reductions -- fuel cost savings -- anywhere from 30%-50%, depending on jurisdiction and concentration.
Smith: From a pure engine performance aspect, it would look to be that something like an electric engine would have many of the same benefits as a natural gas engine; say, high torque on demand, low cost of operation.
I'm wondering how you think about that and maybe a company like Tesla, and whether or not their offerings are a threat to natural gas engines, or where they would stand in relation to the products that you guys are offering.
Munshi: Interesting question. Tesla, the whole story with electric vehicles or electric cars, it's a new technology. It's an emerging area of technology.
Yes, as you mentioned, electric cars do have some performance and efficiency benefits, but if you look at the overall scheme of things that comparison only goes so far because electric vehicles currently -- and hopefully in the near future -- are limited to urban transport, passenger cars, more light-duty vehicles.
Whereas, when we talk about natural gas we're talking from very small engines, light-duty passenger cars, to commercial vehicles, trucks and very large marine, locomotive engines, off-road, industrial engines, so the spectrum is very large when it comes to natural gas engines.
Electric vehicles are an application that's limited, as I say, to urban markets. That's one difference.
The other difference is, cost-wise, EVs -- or electric vehicles -- are significantly more expensive. Even though they are more efficient, what I read in the media the payback period could be much longer to recover the initial cost of the electric vehicle that you pay for.
These are some of the differences between, say, a natural gas vehicle and an electric vehicle.
Smith: I'm wondering if you have any thoughts, on sort of a macro level, on the implications -- particularly on the North American economy -- of mass natural gas vehicle adoption. What would that mean for North America, if there was suddenly a mass switch?
Munshi: Again, that's a pretty significant question. It's hard to answer.
Smith: And when you're done, the meaning of life would be great, as well.
Munshi: It's hard to answer in two short sentences, but I think it would be a paradigm shift if, as you suggest, there is a mass switch from traditional fuels and traditional modes of transportation to natural gas. It would mean basically a transition from a so-called liquid fuels infrastructure in our society to a gaseous fuel energy infrastructure.
Its implications -- in terms of the type of vehicles, the kind of technologies that would come online, the amount of investment it would attract, the innovation -- it's enormous. As I say, it's a paradigm shift. It's a very, very large change.
If that happened, it would be very, very exciting.
Smith: From a technological perspective, obviously natural gas vehicles right now are much more the application of heavy-duty, large engines.
What would we have to look for as retail investors, and as users, that may be a leading indicator of natural gas engines coming to smaller vehicles, on the individual level? What would we have to see that may indicate that that was coming?
Munshi: From a retail customer point of view, I would say some of the more obvious market indicators. Availability -- if you have a choice, availability of a large number of vehicles; there are a large number of models and manufacturers who offer natural gas cars or vehicles -- that would be a strong indicator that this is happening.
The growth in refueling infrastructure to go with that, that would be another indicator. And of course the operating economics and price of natural gas; if it continues to stay low, that continues to be a strong indicator.
Those are the indicators I would look for.
Smith: Are there any sort of technological hurdles as you make that shift from large engines to small engines that we should consider, or does it already exist?
Munshi: It's already happening. There are no specific or special hurdles, technologically speaking, to apply natural gas technology to smaller engines or smaller vehicles.
Yes, the type of engine technology that you would use would change from a heavy to medium or light-duty. It depends on the application. It depends on what the customer needs, but those things are happening. It has been done before.
From a technology point of view, I do not see any significant hurdles.
Smith: Most investors are really excited about Westport and the application of maybe train-based engines or marine-based engines. What different considerations are there when you look at natural gas engines in those spaces?
Munshi: Again, I would think the operating economics is one of the very strong... because these large applications are very large users of fuel, so the operating cost component over the life of those applications or vehicles is very, very significant. That, itself, makes it very attractive to switch to natural gas.
Additionally, there are emissions benefits that one would gain by switching to natural gas. From a greenhouse gas point of view, natural gas -- to speak in kind of an approximate manner -- about 20% less greenhouse gases, compared to traditional petroleum fuels. For a large fuel user like a marine or rail locomotive, that would mean very significant savings in greenhouse gas reductions as well.
Smith: Are there any sort of technological hurdles or any engineering barriers to that, or is the engine functionally basically the same?
Munshi: Again, technologies exist today. What we are doing with our heavy-duty engines, our HPDI technology, that is suitable also for larger engine applications.
Of course, as time evolves we will continue to investigate other methods of burning natural gas for all sizes of engines, and that includes large engines. There is always a continued technology innovation part to it.
In a nutshell, what we have today is applicable but of course as future goes, there would be other new ideas that would come up.
Smith: I'm wondering if you have any thoughts on... it would seem to be one of the biggest problems with mass natural gas vehicle adoption has been an availability problem. There just haven't been that many refueling stations, but we know that companies like General Electric have at-home fueling stations that customers could buy.
I'm wondering if you have any thoughts on that technology and what implications it would have for natural gas vehicles?
Munshi: Yeah, I believe until a point comes when there are enough refueling stations available, one probably would have to rely to a certain extent on ideas like home refueling, so they are important in a kind of a transition phase.
Again, the technologies exist. The question comes down to cost and the cost, as more and more people adopt these technologies, continues to come down so from a consumer point of view, this is happening.
Investment in, also, home refueling infrastructure is important until the point comes when a large number of stations are available. That would be the way to go.
Smith: Although this technology has existed for a while, there is still a lot of confusion on the retail level about the nuances of it. I'm wondering if you could explain, maybe, the differences between a compressed natural gas or a liquefied natural gas vehicle, and how people should interpret that.
Munshi: As a fuel, natural gas is natural gas. The CNG or the compressed natural gas versus liquefied natural gas terminology comes into the picture when you talk about storage of natural gas.
As the name implies, if you pressurize natural gas to high pressure -- the standard in the U.S. is 3600 pounds per square inch pressure -- that is the pressure at which gaseous natural gas is stored, and which is called CNG. It's generally stored in tanks; they are called CNG tanks.
Compared to that, LNG is another approach in which you basically liquefy the natural gas down to about minus 260 Fahrenheit. It's a cryogenic liquid. At that point, the natural gas turns into a cold liquid, and then it's stored as a cold liquid. That's called liquefied natural gas.
That's the main difference between CNG and LNG, as a means of storage.
Based on the physical characteristics of the fuel, whether it's in gaseous form or liquefied form, you need somewhat different storage containers. A CNG tank is very different from an LNG tank.
An LNG tank needs to be insulated because the liquid is very cold and you have to prevent external heat from the environment to come into it, so you have a double-wall insulation. Of course, none of this is new. It's been done for many, many decades, so it is not a new technology, but that's the difference between CNG versus LNG.
When you have to transfer the fuel, the CNG you generally would -- say if it's in a car -- the CNG is supplied directly to the engine. It doesn't require a change in phase or change in state.
It remains as a gas, whereas if it's LNG generally it needs to be vaporized and brought back into a kind of a vapor or a gaseous form before it's supplied to the engine. You do not generally supply a cold liquid natural gas directly into the engine, so it does require some vaporization using the engine heat.
That is how LNG is handled, and the CNG does not require vaporization. Those are the differences.
Smith: Because of those differences in CNG and LNG storage and the necessity to vaporize the liquefied natural gas back into a gaseous state, does that mean that compressed natural gas is the preferred fuel storage type on a vehicle for mass transportation?
Munshi: Not necessarily. Again, both have their own characteristics that make them more suitable for certain types of applications.
CNG, the gas is stored at ambient temperature and it can stay indefinitely in the tank -- indefinitely means a very, very long time. That way, it's simpler to handle and store.
But compared to that LNG, because it's a liquid, has a significantly higher energy density for a given volume, so in a given volume you can store a lot more energy. For large applications like medium and heavy-duty trucking -- especially when you're talking several hundred miles or larger -- LNG becomes more attractive as a means of storing.
Especially for fleet applications, where these vehicles are using fuel on a very regular basis, they come home from wherever they are. It's a kind of a centralized refueling facility. For those type of applications LNG -- for example, LNG trucks -- make a lot of sense.
That would be the way to look at CNG versus LNG.
Smith: From a technology perspective, what do you see as the biggest prohibitor, or the thing that's restricting natural gas vehicle adoption today?
Munshi: I don't see any single prohibitor that would prevent adoption. I guess with any technology, when you're talking shifting from traditional means of transportation or traditional technologies -- that includes diesel and gasoline engines -- it takes some time.
Just the inertia; you require the infrastructure, you require public awareness, you require the investment. It's kind of a merging of all these efforts that is required to transform the market from where it is today to where you want it to go.
That, itself, takes time. You have to be on your toes to meet those requirements, and I believe at Westport we are working toward that.
It's not just the technology. It's not just the fuel. It's not just the engine. It is the whole spectrum, from the supply chain, the technology, the customers, the environmental regulations; the whole gamut of things that go into making the natural gas as a success story.
I believe that effort needs to be there, and that needs to be continued in order to make that transition.
Smith: From an investor perspective, one of the most exciting things about Westport would seem to be your intellectual property and your big patent portfolio, but at some point the useful life of patents... they expire.
I'm wondering what you guys have done to preserve that intellectual moat around the company?
Munshi: Good question.
Over the years, Westport has been a leader when it comes to natural gas fuel and engine technology-related intellectual property portfolios. We have the largest number of active patents that relate to all the variety of the aspects of natural gas engines and fuel.
It includes the engine itself, the combustion in the engine, the fuel system, the after treatment, the specific components that go on a natural gas vehicle; the whole spectrum of technologies that make it into a natural gas fuel and natural gas engines.
We have patents active in all of these fields, and we continue to invest very significant resources in maintaining our leadership position when it comes to patents, new technologies, new innovations.
I would also say our proprietary knowledge, which is not always -- IP includes patents plus proprietary knowledge -- so there is that part. Yes, our patents that may be 15, 17 years old are coming close to expiring, but in the last 15 years, every year we continue to file for new patents.
The state of the art when it comes to natural gas engines is changing, is rapidly evolving, and we continue to invest and innovate in that space, so I believe that's an important consideration but we do not worry about it because we continue to invest and make sure that we maintain our leadership in this area.