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 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 (CLNE 1.75%).
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' (WPRT +3.90%) 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 (GE +2.10%), 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 (F +3.46%) and General Motors (GM +4.19%) 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?
