Will Natural Gas Become a Popular Fueling Option in the US?
By Zain Abbas - June 25, 2013 |
When natural-gas spot prices crossed the $4 mark (per MMBtu), many people started to think that soon natural gas would reach a price level where it may not remain a cheap substitute to diesel (as transportation fuel) or coal (as feedstock). Their opinion was strengthened when US legislation passed a bill in which natural gas will be liquefied (essentially turned into LNG) and exported.
However, natural-gas spot prices have recently been declining (14% in two months). In this situation, one can easily understand that natural-gas supplies are abundant in the US, and it may take some decades before natural gas becomes as expensive as its alternatives. However, many people often question why natural gas has not become a popular fueling option in the U.S. despite its favorable economics. The huge gap between gasoline prices and natural-gas prices automatically makes natural gas a cheaper alternative.
The actual answer lies in the fact that the natural-gas industry has become a victim of the "chicken or egg" issue. Which will come first: natural gas vehicles or the fueling stations needed to power them?
A “chicken or egg” issue?
Before making any comment on the natural-gas players, we need to understand the natural-gas industry dynamics. Three main groups have an important role to play in this industry: 1.) Auto original equipment manufacturers (OEMs), 2.) fuel providers, and 3.) the final users of the natural-gas-driven vehicles.
The dilemma of "chicken or egg" in this industry tells us that not a single player out of these three groups is willing to take the first step to bring a change in the industry. The giant fuel providers like ExxonMobil and Chevron have hardly contributed to this industry. They believe that given that the final consumer has hardly embraced natural-gas-driven vehicles, investing in natural gas will not be a profitable venture.
On the other hand, the final user is not buying natural-gas-driven vehicles due to the lack of natural-gas fueling infrastructure. No one wants to end up in the middle of a highway with an empty fuel tank. The third group, the auto OEMs, is not taking serious interest in this industry due to a lack of demand from the final user.
Therefore, we need to evaluate the current triangle of these three players in the industry. It is interesting to note that there are a few exceptions to the ‘chicken or egg’ issue.
Exceptions to ‘chicken or egg’ issue
Clean Energy Fuels (NASDAQ: CLNE) has taken a bold step by actively developing the natural-gas fueling infrastructure. The company has received $450 million worth of new investments that it plans to direct toward this project. One of its important lenders is Chesapeake Energy.
The company plans to build 150 natural-gas fueling stations in the U.S. by the end of 2013. Clean Energy Fuels already built 70 stations in 2012 (according to the set target) and is well on its way to constructing another 80 this year.
Another milestone achieved by the company is its agreement with General Electric. According to the agreement, Clean Energy Fuels will buy GE's technology that will be used in liquefying natural gas to supply to its filling stations. GE has agreed to lend Clean Energy Fuels $200 million to buy two GE-made plants equipped with the aforementioned technology. MicroLNG, the name of the technology, is a small modular system that will help to lower the temperature to -260 degrees Fahrenheit in order to liquefy the gas.
Clean Energy has strategically placed most of its LNG stations near truck stops of Pilot Flying J, the largest truck-stop operator in North America. In this way, not only will Clean Energy be able to benefit from the existing network of Pilot Flying but will also be able to gain a competitive advantage over any other competitor in the long run.
Westport Innovations (NASDAQ: WPRT) is another natural-gas company that has not made a single cent of profit since its inception, just like Clean Energy Fuel. However, the future for this company is extremely bright. This company is one of the very engine players that have taken a serious interest in the natural-gas industry. In fact, it is the only engine technology provider that is a pure-play on natural gas (100% exposure to the fossil fuel).
Westport has established partnerships with most of the major OEMs operating in the United States. In the light-duty category, the company is working with Ford to produce engines for F-series trucks. Westport also signed an agreement with General Motors to develop advanced engineering technology for engines in the light-duty trucks category. Further, Westport provides natural-gas engines to Volvo's V7 wagons. This allows Westport to reach the European market as Volvo has 16% market share in Sweden and 1.5% in Europe.
Perhaps, there's nothing as important for the company’s success as its joint venture with Cummins (NYSE: CMI) which is known by the name of Cummins Westport, or CWI. Through CWI, Cummins has also contributed to the gradual nourishment of the natural-gas market. The truck market is desperately waiting for CWI’s new 12-liter engine that is expected to be rolled out in the next couple of months. Many companies like United Parcel Services have committed to buy trucks fitted with this 12-liter engine. This might be the second most successful product after the super hit 8.9-liter engine that CWI introduced in 2009.
Final word
Both Clean Energy and Westport are poised to benefit from an increased natural gas adoption rate. With, the natural-gas prices below $ 4 and the recent rally in the WTI Crude oil prices (crossed the $90 barrier), natural gas remains a very attractive option for the final users that are waiting for companies like Clean Energy and Westport to provide them with adequate infrastructure and a wide variety of natural-gas vehicles to conveniently switch to natural gas.
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