Natural gas looks to vehicle conversions for long-term support

Natural Gas Flash

The long term bullish case for natural gas gets stronger. Christine Buurma of Bloomberg writes "For AT&T Inc., the decision to introduce natural gas vehicles to the company's fleet in 2008 proved well-timed, as the price gap between gas and diesel soared to an all-time high that summer. The largest U.S. phone carrier began discussing a move away from higher-priced gasoline and diesel cars and vans the year before hurricanes Ike and Gustav disrupted energy output from the Gulf of Mexico. Now AT&T has 5,200 natural gas vans on the road, or about 7% of its fleet, as part of a plan to spend $350 million to replace about 8,000 gasoline-powered service vehicles over five years.

Fleet-owners from Ryder System Inc. to United Parcel Service Inc. are also switching as natural gas proves cheaper and cleaner. Gas prices have plunged 70% from a 2008 high, and are now at a 95 cent-a-gallon discount to diesel as advances in drilling technology have triggered a boom in production of the fuel from shale formations. Natural gas emits about 27% less carbon dioxide than diesel, Energy Information Administration data show.

"The economics are in favor of natural gas,” billionaire T. Boone Pickens said in a Dec. 19 phone interview. "During the oil crisis in the 1970s, it took only about five or six years for the U.S. truck fleet to switch from gasoline to diesel. It's going to happen that way for natural gas.” Pickens's Clean Energy Fuels Corp has 400 stations, up from 80 in 2003. Demand for natural gas from vehicles has doubled since 2005, according to NGVAmerica, an industry group in Washington.

There were 121,650 gas vehicles on the road in 2011, up from 117,074 in 2008, less than 1% of total registered vehicles, data from the EIA and the Bureau of Transportation Statistics show. About 23,000 natural gas vehicles may be sold in the U.S. in 2013, according to David Hurst, an analyst at Navigant Research in Troy, Michigan. That's a 19% increase over the 2011 total, the most recent year for which data is available from the EIA, the U.S. Energy Department's statistical arm.

Compressed natural gas averaged $2.94 a diesel-gallon equivalent at U.S. fueling stations in the week of April 22, according to Clean Energy Fuels. Diesel was $3.89 a gallon. The price gap has more than doubled from 45 cents a gallon in September 2005. Natural gas futures reached a record $15.78 per million Btu on the New York Mercantile Exchange that year after hurricanes Katrina and Rita curtailed supplies from the Gulf of Mexico.

Gas consumption in the transportation industry was about 400 million gallons of gasoline equivalent last year, double the 200 million in 2005, NGVAmerica data show. Gasoline demand was 134 billion gallons, according to the EIA. Fleet owners might save $25,000 a year on fuel costs, according to David Pursell, a managing director at adviser Tudor, Pickering, Holt & Co. in Houston. It would take more than two years to offset the higher initial cost of the vehicle. A fleet owner paying $65,000 more for a long-haul truck engine fueled by liquefied natural gas may see a 22% rate of return over the life of the vehicle, Pursell said.

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