Will Natural Gas Vehicles Ever Arrive?

The North American energy boom has made a large dent in oil imports, with the U.S. becoming a net exporter of oil products for the first time in more than a decade in 2012. This is a product of more than just increased production -- it's also a product of reduced consumption:

US Crude Oil Production Chart

US Crude Oil Production data by YCharts

This fall off in domestic oil consumption is likely to continue, especially with a burgeoning market for natural gas vehicles set to further curb our thirst for oil. Is this a trend that investors can benefit from? Let's take a look. 

Chicken or the egg?
The challenge for natural gas transportation is a simple lack of infrastructure. Oil companies have been reticent to build out a refueling network with no vehicles on the road burning compressed natural gas. This has been the cycle that has controlled the market for years, especially since oil has been a relatively cheap source of fuel for most of the past century, and the technology to get to domestic gas reserves cheaply didn't exist. Enter fracking, and Clean Energy Fuels (NASDAQ: CLNE  ) . 

Fracking opened up massive domestic reserves of gas, while Clean Energy Fuels began working with so-called "return to base" fleets, such as buses, refuse trucks, and local delivery fleets to provide consistent and cheap access to compressed natural gas as an alternative to more expensive and more pollutive diesel. Today, the domestic diesel market is about 25 billion gallons per year, and Clean Energy (the largest LNG and CNG fuel supplier) delivered just under 200 million gallon-equivalents of natural gas in 2012. 

Needless to say, the opportunity in diesel is massive. Hence the company investing heavily in building out a refueling infrastructure, its so-called "America's Natural Gas Highway" to fuel 18-wheelers featuring Westport Innovations'  (NASDAQ: WPRT  ) engines, being co-built with partner Cummins. Just launched this summer, the 400-horsepower version of the ISX12 G engine will sell less than 1,000 units in 2013, and about 2,500 units of all versions. 2014 estimates of all versions of the ISX12 G are closer to 10,000.

At an average 15,000 gallons of fuel consumed yearly, that's another 150 million gallon-equivalents of natural gas on the market, just next year alone. 

But that's just for truckers, right? What about small vehicles?
The stations will largely be co-located at Pilot/Flying J truck stops, and heavily feature LNG (liquefied natural gas), which isn't as practical for a car or pickup as compressed natural gas (CNG.) However, neither Clean Energy Fuels, or partner and competitor General Electric  (NYSE: GE  ) , are ignoring the market for autos -- especially when one considers that the domestic gasoline market is in excess of 130 billion gallons, which absolutely dwarfs the diesel market. Many of Clean Energy's LNG stations will be able to provide both CNG and LNG, while GE's "CNG in a Box" system -- which competes with Clean Energy's offerings to some extent -- is a simple solution that will allow fleet operators to  more easily incorporate compressed natural gas vehicles into their fleets, and municipal natural gas providers to offer retail natural gas to consumers. 

While Clean Energy Fuels and GE (through GE Capital to help fleets finance vehicles, and using GE technologies like "MicroLNG" in its liquefaction facilities) are partners, this pits the two companies head-to-head, as Clean Energy subsidiary IMW manufactures CNG compressors and refueling components that fleets and fuel sellers would use similar to GE's "CNG in a Box." Integrys Energy Group is making an effort to carve out a piece of the CNG fuel market as well, with its Trillium CNG subsidiary, currently operating around 60 public and private stations and offering only CNG.  

However, neither Trillium CNG, Clean Energy's  IMW, or CNG in a Box much matter without vehicles. 

In comes the automakers
Ford 
(NYSE: F  ) and General Motors  (NYSE: GM  ) are both working with Westport Innovations to develop bi-fuel engine systems, primarily focused on heavy-duty pickup trucks for now. The reasoning for targeting trucks first is an extension of why Clean Energy has targeted "return to base" first: addressable market. With the refueling infrastructure just beginning to be rolled out, a system that can burn both gasoline and CNG eliminates "range anxiety," and pickups have space for multiple fuel tanks. Add in that that fleets which operate the larger vehicles that work well on CNG usually also have a fleet of trucks for support purposes, and bi-fuel pickups tend to make great sense for the first wave of adoption. 

As of this writing, GM's Sierra 2500HD and Chevy Silverado 2500HD are available with bi-fuel engines, and GM will have a bi-fuel version of its Impala sedan available for both retail and fleet customers in 2014. Ford's F250, F350, F450, F550, and F650 trucks are available with the Westport WiNG bi-fuel engine. Additionally, Ford's full range of E-series vans and wagons, plus the Transit Connect  are available with CNG engines powered by Westport subsidiary BAF technologies. 

Final thoughts
The domestic market for converting both fleet and individual vehicles to compressed natural gas is enormous; but it's still in the early stages with most of the focus being on fleets for now. As uptake among fleets grows, the expansion of refueling stations will in turn drive demand from consumers looking to get in on the cost savings and environmental benefits of compressed natural gas (not to mention the potential for in-home refueling -- but that's for another article.) Simply put, there's massive growth ahead. Is your portfolio set to take advantage of it?

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Read/Post Comments (23) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2013, at 9:52 AM, SirDuude wrote:

    Author of article needs to get updated info on changes made on CNG tanks. They've gotten smaller and lighter making range less of an issue for both cars and trucks. LPG is a big hassle due to its 5 day life in the tank, the need to keep it cold, and the difficulty refueling even when you can find a refueling station for LPG.

  • Report this Comment On November 19, 2013, at 11:39 AM, TMFVelvetHammer wrote:

    >>Author of article needs to get updated info on changes made on CNG tanks. They've gotten smaller and lighter making range less of an issue for both cars and trucks. LPG is a big hassle due to its 5 day life in the tank, the need to keep it cold, and the difficulty refueling even when you can find a refueling station for LPG.<<

    I'm pretty plugged-in on the current tech with CNG tanks. But that doesn't alter the fact that LNG (not LP) is better for specific applications. CNG is in fact the better fuel for automobiles -- no doubt, due to the hazards of refueling LNG and the evaporation problem (not a problem for a busy truck fleet; sitting idle for a week IS.)

    And while the materials for CNG tanks has improved, there are still real challenges that limit it as a viable alternative to gasoline. And that's the real competition to CNG. Not LNG.

    Let's be honest about that; after all, CNG and LNG are the same thing in different forms.

  • Report this Comment On November 19, 2013, at 11:56 AM, skat5 wrote:

    Older vehicles that do not have fuel injection are easily convertible to use cng but the epa stands in the way with exorbitant licensing fees charged to garages for each make and model, clearly designed to create a barrier to using this cleaner burning fuel in older cars, which are likely those having the worst mileage and causing the most pollution. Innovative solutions such as creating neighborhood cpg fueling stations perhaps funded by home owners associations or gas utilities in conjunction with community banks or credit unions are nowhere to be found either. This would produce the sort of widespread wealth effect that is talked about but seldom acted on.

  • Report this Comment On November 19, 2013, at 12:59 PM, 153fish wrote:

    Fiat has a variety of Bi-Fuel gasoline/CNG vehicles currently available, just not in USA, I can understand why they don't sell them here.

  • Report this Comment On November 19, 2013, at 1:23 PM, TCInFlorida wrote:

    CNG takes 4x the space as the equivalent amount of gasoline. This is not a problem for trucks, but it is an unavoidable limiting factor for cars. The CNG Honda civic has the large CNG tank in what used to be the trunk and provides about 250 mile range.

  • Report this Comment On November 19, 2013, at 1:32 PM, RichardRocks wrote:

    The company that will benefit most in the naturel gas vehicle market is Quantum Fuel Technologies

    and the stock has been rocketing the last month with rumors of huge contracts with GM. The future is now!

  • Report this Comment On November 19, 2013, at 1:37 PM, coolstud wrote:

    Can you please explain this a little more,

    "The challenge for natural gas transportation is a simple lack of infrastructure."

    I live in Minnesota. I, and nearly everyone I know, have a natural gas line directly into their home. I don't know of anyone with a gasoline line to their home. The situation was the same when I was living in Mi, Oh, and Il. Is it just the south were this is an issue?

    Also, when flex fuel vehicles started becoming available (e85) I never really heard about this infrastructure problem and lack of e85 fueling stations. And in just a couple of years the pumps started showing up everywhere. (In spite of the fact it has turned out to be more expensive than normal gasoline.) Why would it be so much more difficult for natural gas?

  • Report this Comment On November 19, 2013, at 2:31 PM, xls wrote:

    Here's a Youtube video that describes a model that explains why U.S. gasoline (and oil) consumption has dropped. It's worth watching. The last one third of the video is the best part.

    https://www.youtube.com/watch?v=XJLtsfeHbvg

  • Report this Comment On November 19, 2013, at 2:34 PM, TMFVelvetHammer wrote:

    >>I live in Minnesota. I, and nearly everyone I know, have a natural gas line directly into their home. I don't know of anyone with a gasoline line to their home. The situation was the same when I was living in Mi, Oh, and Il. Is it just the south were this is an issue?<<

    I'm in Southern California, but I'm from the South. This isn't so much about home infrastructure as it is about infrastructure when traveling.

    Home systems are an interesting piece of the puzzle, and there are several companies that make them. Part of the issue is the low pressures that municipal gas systems operate at don't support being able to fill a CNG tank in anything like a reasonable amount of time. We are talking hours and hours to fill up. That's fine overnight, but it will take a change in habits for 99% of people.

    However, Tesla (in a way) has shown that it's something people will do -- "plug in" the car every night to fill it up with energy.

    But that's the big infrastructure problem WRT what you're talking about- low pressure and low volume of delivery from municipal systems just can't keep up with the demand of filling a high-pressure car tank.

    Will this change? Time will tell.

  • Report this Comment On November 19, 2013, at 3:47 PM, expoiltthespread wrote:

    It is ironic that the article did not mention Fuel Systems Solutions (FSYS) the only player in the space that is actually making any money.

  • Report this Comment On November 19, 2013, at 3:47 PM, pebear wrote:

    Forget the cars, when will I be get gas service to my house? Why doesn't the government put pressure on the gas companies to expand service and get 99% of America off of oil for heat and on gas. We would be energy independent if we were all on natural gas for heat instead of oil.

  • Report this Comment On November 19, 2013, at 3:55 PM, expoiltthespread wrote:

    FSYS is the only alternative energy stock with a Motley Fool Caps rating of four stars or better.

  • Report this Comment On November 19, 2013, at 4:40 PM, TMFVelvetHammer wrote:

    >>It is ironic that the article did not mention Fuel Systems Solutions (FSYS) the only player in the space that is actually making any money.<<

    Considering that the company's EPS (earnings per-share) has actually been negative since early 2011, I'd ask that you check your sources. I've done little by way of research, so maybe they are non-GAAP positive earnings. But the GAAP numbers (what the SEC and IRS care about) are showing it to be losing money.

    But with that said, I do like the company and it has tremendous growth potential. I just didn't cover it in this article. I'm sure I'll talk about it at some point.

    Thanks for your comments.

  • Report this Comment On November 19, 2013, at 4:57 PM, chuckbob57 wrote:

    CNG has arrived. 60% of garbage trucks purchased are CNG. Impala CNG is coming in 2014. 30-40,000 CNG commercial vehicles have much more and impact than Teslas, Leafs, Volts etc.

  • Report this Comment On November 19, 2013, at 5:50 PM, TMFVelvetHammer wrote:

    chuckbob57,

    I think the future of energy for transportation will continue to develop into a mixed bag of both natural gas and electric, as well as gasoline and diesel.

    Don't rule out anything, and don't expect any one energy source to become dominant.

    The energy future is going to be very diversified.

  • Report this Comment On November 19, 2013, at 8:52 PM, Jib76 wrote:

    If the International Energy Agency is right about how short-lived the productive life is for fracked natural gas and oil wells then just when large numbers of natural gas powered vehicles hit the road, NG supplies will peter out and gasoline prices will go through the roof. Sounds like the opportune time for Flex Fuel vehicles and E85. Just saying.

  • Report this Comment On November 19, 2013, at 9:11 PM, TMFVelvetHammer wrote:

    Jib76,

    The IEA also says there's more than 250 years of viable and accessible reserves based on 2012 production levels. So there's a lot of gas out there.

    Just sayin...

  • Report this Comment On November 20, 2013, at 1:18 AM, doctorofcredit wrote:

    Why can't regular LPG tanks just be used?

  • Report this Comment On November 20, 2013, at 1:41 AM, NOTvuffett wrote:

    cng makes a lot of sense for fleet vehicles in a metro area. like electrics, range is limited, so it will probably not be a practical option for most consumers anytime soon.

  • Report this Comment On November 20, 2013, at 7:04 AM, Abalam wrote:

    Why concentrate your efforts on refuelling stations that are not there? Refine the natural gas into diesel,

    It burns much cleaner and oh the infrastructure is already there! Don't try and reinvent the wheel!

    http://m.news-journal.com/mobile/business/shell-considers-ga...

  • Report this Comment On November 20, 2013, at 7:10 AM, JRP3 wrote:

    LNG makes sense for large trucks, CNG does not make sense for passenger vehicles because you end up wasting so much of the inherent energy in the fuel. It's much more efficient to use NG in large generating power plants to replace coal, and then use the power to charge far more efficient EV's. Combined cycle NG plant operates at 60% efficiency, with a 7% transmission line loss, 10% charging loss, and 10% driving loss, = 45% fuel efficiency. Compare that to the 20% driving efficiency alone of most internal combustion engines, then also subtract the energy used in compressing the fuel to fit into a vehicle tank, which averages around 7kWh's for every 100 miles of range.

  • Report this Comment On November 30, 2013, at 7:51 AM, nobst wrote:

    I am concerned the record levels of oil production in the US delays the feasibility of natural gas vehicles. While I remain optimistic about the prospects of WPRT, I might cut my position in half because it's been a lousy performer.

  • Report this Comment On December 06, 2013, at 3:54 PM, GirlsUnder30 wrote:

    nobst

    I don't think now is the time to be cutting. Anyone who read http://caps.fool.com/Blogs/why-is-westport-is-scary-over/730... more than 18 months ago would have been saved from its underperformance.

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