Challenges, Likely Effects of A Shift to CNG as Fuel
Casey Whelan and Aaron Evens
US Energy Services
Plymouth, Minn.
Should compressed natural gas (CNG) vehicles be in your commercial fleet's future? As an alternative to gasoline or diesel fuel, from a cost basis, the argument for CNG as a transportation fuel is compelling.
Increased numbers of commercial vehicles are being spotted on the road with signage proudly stating: "Powered by Clean Burning Compressed Natural Gas." The media are quick to point out the environmental benefits of natural gas vehicles, but the most attractive incentive for fleet operators is the fuel cost savings. A simple fuel to fuel comparison shows public fueling stations across the Midwest charging $1.80 per gallon equivalent of CNG, compared to $3.80-plus per gallon of gasoline or diesel. This $2.00 per gallon spread generates huge fuel savings for large users that have already switched to natural gas fuel for their vehicles. It also provides a huge financial incentive for fleet owners currently using gasoline and diesel to consider natural gas as a fuel alternative.
Despite the compelling economics of natural gas as a transportation fuel, consumers are not switching as rapidly as some expected. The reality is that fleet conversion from liquid fuels to natural gas comes with several significant barriers to entry including: high capital costs of equipment, limited engine choices, lack of adequate public fueling options, and an uncertain continuation of the commodity price spread. Given these market barriers, large scale conversion from liquid fuels to CNG has been slow to develop, but is clearly gaining momentum.
Economics drives a vehicle – or at least the choice of fuel in the tank. Though fuel savings are real and significant when switching to natural gas, large capital investments must be made in order to realize these savings.
Incremental capital requirements come in two forms. First, a price premium is associated with purchasing CNG vehicles. The typical added cost ranges from $30,000 to $60,000 per vehicle. For the most part, this premium is related to CNG fuel storage and not the engine itself. Second, fueling infrastructure is expensive. A customer-owned facility can cost $1 million or more, depending upon size, inlet pressure, fueling lanes, and dispensing rate.
Since most businesses have limited capital budgets, CNG vehicles and fueling facilities need to compete with other capital projects as well as fit into a company's overall strategic objectives. Capital requirements can be reduced by using a local retail CNG station. However, the cost of gas will be higher per gallon in order for the seller to recoup the capital investment. In addition, the CNG user loses control over fuel pricing under the public fueling option because there is not yet a robust, liquid, transparent CNG pricing market.
Although commercial vehicle technology (engine and storage) has come a long way in embracing CNG, there are only a few niche markets that are currently able to effectively and economically utilize existing CNG engines. A great example is the refuse hauling industry. Trucks go on prescribed routes each day and return to the same location each night. These mid-size commercial vehicles are able to utilize widely available 9L dedicated CNG engines. Increasingly, new refuse haulers are fueled with natural gas.
Heavier tractor-trailers used for transport and distribution of goods generally require the torque of a 12L or larger engine. Dedicated 12L CNG engines have hit the market and are starting to be manufactured on a large scale, however, availability remains limited, the waitlist is long, and only one manufacturer (Cummins/Westport) is in production. For some applications, even a 12L engine is not powerful enough (i.e. crossing the Rockies). For these applications, CNG does not offer a viable solution. Engine availability will continue to be a significant market constraint at least for the next few years.
The relative lack of public fueling stations also presents a daunting challenge. If a fleet converts vehicles to dedicated CNG engines, fueling options have to be available anywhere and everywhere a truck travels. That isn't an issue with a refuse fleet since they return to base each night. However, for the fleet that is "chasing load," there is a high likelihood a truck could be dispatched to an area without adequate fueling facilities.
Public CNG fill stations are beginning to appear throughout the US, yet countless sections of highway span hundreds of miles without the opportunity to refuel. While some retail fuel sales companies sense an opportunity with natural gas transportation fuels and are trying to enter the market as early as possible, many are waiting to see more of their client base embrace natural gas vehicles before investing the capital in compression and dispensing equipment. This presents a classic "chicken or egg" startup barrier for wide scale adoption of CNG as a transportation fuel.
The problem is compounded further when taking into account natural gas infrastructure. First, natural gas must be readily available, which isn't necessarily the case in rural areas. Second, the cost of compression equipment, as well as operating expenses for that equipment, increases with lower natural gas inlet pressure. Ideally, a compression station should be connected directly to a high pressure interstate pipeline. In reality, most of the US population is concentrated in urban areas served by low-pressure gas utility pipelines.
Referring to the refuse industry example, these infrastructure barriers are overcome by the hub-and-spoke type operation where the vehicles always return to base and can fill in the same location. Additionally, refuse trucks can refuel over night with lower speed compression mitigating the issue of low inlet pressure. As more CNG vehicles are added to trucking fleets and more fueling stations are constructed, this barrier will begin to be addressed. Our expectation is that high-traffic routes will continue to attract CNG stations and draw vehicles, while sparsely populated and traversed areas will continue to be dependent on liquid fuels.
The price of natural gas has been on a steady decline since 2008 with the market plummeting from $13.70/MMBtu to $1.90/MMBtu in 2012. The market has rebounded slightly since but is still a fraction of the price in 2008. Crude oil and gasoline/diesel prices have followed a decidedly different pattern. While liquid fuel prices corrected to the downside after the 2008 commodity bubble burst, they resumed an upward trend shortly thereafter. Crude oil prices have stayed in the range of $80 to $100 per barrel for the last few years.
This divergent price trend has been a catalyst for the growth of CNG technology and adoption of natural gas vehicles. The forward-thinking business manager must question, from a risk perspective, how long this price relationship will continue. The answer is that the markets will always fluctuate for various reasons, but this we know: new shale gas technology has changed the supply fundamentals and pricing models of natural gas permanently. Additionally, US consumption of natural gas is 100% produced in North America, while close to 40% of crude supply comes from overseas.
This global marketplace leaves crude prices at risk of economic instability from nations across the world. We expect the spread between natural gas and gasoline/diesel to be supportive of CNG as a transportation fuel for many years.
The economic viability of CNG as a transportation fuel is different for each potential adopter. While we can fairly easily estimate high-level potential savings, each of the barriers discussed must be fully addressed before a decision should be made to convert to CNG. Do you have the capital available to invest in CNG? Do current engines fit your requirements? Are fueling sources available along the routes travelled by your fleet? Do you believe the spread between natural gas and liquid fuels will continue at levels sufficient to pay back your investment? Once these questions have been satisfactorily addressed, it is time to move forward and convert some or all of your fleet to CNG vehicles.
US Energy Services strongly believes in CNG as a transportation fuel and acknowledges the barriers. We have helped numerous clients evaluate the opportunities and risks related to converting some or all of their fleet to CNG. Our services include initial feasibility studies, and later, detailed implementation services such as equipment RFPs, energy infrastructure contracting, supply sourcing, and on-going natural gas management. OGFJ
About the authors
Casey D. Whelan, vice president-strategic initiatives at US Energy Services, has been with the company for over 15 years and has worked in the industry for more than 25 years. He leads US Energy's CNG/LNG Consulting Services and the company's growing Biogas Management and Optimization Services. Whelan works with large, energy-intensive clients across North America helping them manage and reduce natural gas and electricity cots. He holds BS and MA degrees in economics.
Aaron Evens is an account analyst with US Energy Services. His primary role is to research and implement energy savings programs for new and current clients. Prior to US Energy, Evens served as a project engineer overseeing on-site management of utility-scale wind turbine project construction. He has a BA degree in business management.
