Battle of the Fuels: Will Natural Gas Replace Diesel?

The U.S. Energy Information Administration (EIA) administrator, in his March report to the Committee on Energy and Natural Resources of the U.S. Senate, stated that EIA analysis shows that during the next 25 years, natural gas will grow dramatically in use by freight trucking and other commercial transportation modes.

Source: EIA, Annual Energy Outlook 2014.

The New York Times profiled the freight truck natural gas conversion process in an April 2013 article and recently reported plans by the Obama Administration to impose tough new fuel efficiency standards for big trucks, potentially reducing diesel's competitiveness.

In addition, NGV Today, the publication for the natural gas vehicle market, reported this month that, based on EIA data, the price spread advantage of natural gas over diesel should improve through the projected period out to 2040. NGV Today concluded that:

The projected growing price spread advantage from natural gas coupled with predictable natural gas prices should increase confidence among fleet owners that if they convert their fleets from diesel to natural gas, the savings on fuel that they are seeing today will not simply continue over the coming two decades, but actually increase.    

Not so fast! The world may not cooperate
Natural gas, as compressed natural gas (CNG) or as liquefied natural gas (LNG), is already used in a limited number of trucks as test vehicles, or to meet contract obligations with customers demanding cleaner burning vehicles. Natural gas currently does burn cleaner than diesel, and the current U.S.-based diesel gallon equivalent (DGE) price comparison does favor natural gas.

However, while no one can predict the future, digging a bit deeper into the data can allow us to better anticipate the future, and the future may not be quite so bright, as currently believed, for natural gas as a diesel replacement.

There are two key fundamentals that affect the long-term potential of natural gas replacing diesel:

  • The DGE price of natural gas verses diesel
  • The capital cost of a natural gas powered truck verses a diesel powered truck

The DGE price of natural gas verses diesel
The EIA estimates that natural gas will maintain a favorable price ratio to crude oil (the source base for diesel) through 2040:

Source: EIA, Annual Energy Outlook 2014.

However, this ratio is based on current and expected U.S.-based pricing. The same EIA report also states that U.S. natural gas exports are expected to increase by nearly four times during the same period, along with a nearly 30% reduction in U.S. imports of natural gas. Taken together, this will create significant demand, even on abundant U.S. supplies of natural gas. More importantly, the U.S.-based price of natural gas is likely to be heavily influenced by, and closely approach, the global price of natural gas. The EIA report admits to this:

In general, future U.S. LNG exports depend on a number of factors that are difficult to anticipate, including the speed and extent of price convergence in global natural gas markets, the extent to which natural gas competes with oil in U.S. and international gas markets, and the pace of natural gas supply growth outside the United States. 

The Federal Energy Regulatory Commission, in its World LNG Landed Prices July 2014 update, clearly shows that current global prices for natural gas are much higher than U.S.-based prices, which are the lowest reported. Prices in Asia and South America are as much as three times the U.S. price. In fact, we can see these anticipated affects already occurring in other parts of the world. The Australian Broadcasting Corporation (ABC), reports that Australian natural gas prices are expected to triple by 2021, and Australian electricity generators are actually switching back to coal as it currently has a price advantage over natural gas. ABC reports:

Australia's liquefied natural gas export bonanza could come at a cost-higher prices locally. That's because energy companies can get more money for exported LNG than selling the gas domestically.  

Australia may be modeling the future of U.S. natural gas exports and their impact on U.S. prices. If so, and U.S. prices do approach global prices, natural gas will have little to no price advantage over diesel.

The capital cost of a natural gas-powered truck verses a diesel-powered truck
JOC.com, a provider of shipping data and analysis, reports that the capital cost of trucking with natural gas can be twice the cost of investing in diesel. In a June trucking logistics analysis, they report:

The cost of natural gas trucks is a major impediment. Without subsidies from state or local governments, CNG-powered trucks can cost almost twice their diesel equivalents...

Even with a $54,000 per truck grant, the CNG truck still costs 40 percent more than the diesel unit.

JOC also reports that the infrastructure is not yet in place:

The scarcity of accessible fueling stations is a major roadblock to expanding the use of CNG and LNG as over-the-road truck fuels. There are only 716 public CNG fueling stations and 54 LNG stations in the U.S., according to the Energy Information Administration.

Taken together, the potential rise in natural gas prices coupled with the capital costs of converting from diesel to natural gas may not favor a long-term conversion of fuels in the trucking industry.

Investor takeaway
A number of established companies are investing in the future of trucking with natural gas. The current conventional wisdom suggests that this market segment should offer opportunity. However, deeper analysis indicates that this opportunity may currently be supported only by environmental advocacy and government policy. As such, it may be fleeting. Cummins in partnership with Westport Innovations has developed natural gas engines that are in trucks being purchased by United Parcel Services. Our own Fool report provides more details here. Bloomberg also reports that UPS will build 50 fueling stations to support the natural gas fleet.     

Clean Energy Fuels is already investing in fueling stations throughout the country. Clean Energy Fuels reports that it's America's largest provider of natural gas for transportation, with nearly 500 fueling stations in most U.S. states. Clean Energy calls its fueling station network America's Natural Gas Highway. This highway is limited compared to diesel stations, and it may be the only fueling option for a long-haul natural gas truck.

Fuelish conclusion
The media, environmental advocates, and the current government analysis and direction are certainly gung-ho for natural gas as the new transportation fuel. However, there are capital costs and global indications that the current and future economics of converting trucking fleets to natural gas may not exist in the near- and long-term future. Only time will tell, but for investors it bodes well to take a long, deep look before jumping into these waters.

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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 July 28, 2014, at 10:01 PM, PeteH66 wrote:

    Two things I find overly conservative: the 2015-2015 segment on the USEIA chart, and the entire last third of the article. Post 2015, the USEIA chart shows heavy-duty truck use of NG skyrocketing. Why the wait, when the effective difference today, for fleet owners deciding which engines to buy now, is a 25% or better savings using NG over diesel? (And noting that GE Capital is offering financing for the more expensive NG engines to fleet owners who sign fuel contracts w/CLNE.)

    Long story short, fleet owners (like any biz owner) are looking to the future. The author is using data based on the past. Give me more of the data future-looking biz owners rely on, and your article becomes more useful.

  • Report this Comment On July 28, 2014, at 10:02 PM, PeteH66 wrote:

    Oops: that should be "the 2015-2025 segment", and "Post 2025".

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