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Don't Bet the Farm on Natural Gas

Sara E. Wright
May 8, 2012

Natural gas is in the air these days, and investors can't seem to get enough of the smell. Still, a foul wind could yet blow away some of this exuberance. Let's look at where the natural-gas story may give pause and see how you can hedge your bets.

This gas is all about natural
The notion that natural gas' use as a transportation fuel would yield significant environmental benefits in the form of reduced greenhouse-gas emissions drives the fuel's charmed story. This is a core pitch element of Clean Energy Fuel (Nasdaq: CLNE  ) , a darling of the investor community here at The Motley Fool. The company is building "America's Natural Gas Highway," meant to provide the necessary infrastructure for widespread adoption of natural gas across vehicle classes.

All that is well and good. No objections here. But there's a tiny detail that could make this story smell a little less rosy: methane leakage. It's hugely important, and no one is talking about it.

And you thought CO2 was bad?
Natural gas blows away petroleum- and coal-based fuels when it comes to reduced carbon dioxide emissions. Things get more interesting with methane, the primary molecule in natural gas. Methane is a far more harmful greenhouse gas than CO2, and some studies show that if that methane leaks before it's burned, it may be so damaging as to cancel out any benefit from natural gas' CO2 reduction.

Leaks happen all along the natural-gas production cycle, from drilling to piping to fueling. No one seems to know right now what percentage of the total volume of natural gas actually leaks in any given system. Yet that magic number determines whether or not natural gas is, in fact, more environmentally friendly than alternative fuels. The EPA estimates the average leakage rate at 2.4%. If that's true, it's good news, because the rate only needs to be better than 3.2% to beat coal.

But natural gas wouldn't really be replacing coal. We need to look at transportation fuels, specifically gas and diesel. A sobering study published in the April 9 Proceedings of the National Academy of Sciences finds that methane leakage would need to be below 1.6% to make natural gas more climate-friendly than gas in passenger vehicles. The comparison to diesel-powered trucks is even rougher: Leakage would have to be two-thirds lower than the EPA estimate for there to be a climate benefit. Yikes.

Don't get me wrong; natural gas still has plenty going for it, especially its abundance, affordability, and domestic availability. But its environmental cred is important, and losing it would be no small matter. You'd think something like that would turn up in, oh, maybe the risk section of a 10-K. Clean Energy Fuel makes but a cursory mention of the matter, and only in the most general terms. How 'bout that.

Back to basics?
So if natural gas isn't all it's fracked up to be, where else should we look? I present to you the humble diesel fuel, making a comeback in vehicles near you.

Diesel engines have always been more efficient than their gas-powered cousins, but they suffered a hefty image problem. Technological developments over the past decade have changed things, and diesel is enjoying a revival. Government and industry leaders have described the advent of ultra-low-sulfur diesel fuel in late 2006 as a "game-changer." The EPA is so convinced that it just announced more than $9 billion in financial support to clean-diesel projects. Particularly in the area of long-haul trucking, clean diesel looks to be an altogether better bet than natural gas.

General Motors (NYSE: GM  ) is casting its lot with diesel. The company recently announced that it would develop a diesel-powered version of its Chevrolet Cruze, up for its debut in 2013. The company also intends to offer a die