Will Natural Gas Move the Transportation Sector?

Deck: 

It has already changed the utility and manufacturing industries.

Fortnightly Magazine - October 2015

After Volkswagen got caught cheating on its emissions tests, it triggered a different discussion - just what fuels are the cleanest ones to burn in the transportation sector. While the VW cars in question used diesel, other alternatives to oil exist, namely natural gas. But is petroleum unstoppable and would the added demands on natural gas force home-heating prices to rise?

As the developing world expands, the demand for transportation fuels will only grow. And oil, undoubtedly, will remain the dominant presence in the transport sector, although there is plenty of room for competition - something to which the oil companies are not averse. In fact, they are investing in natural gas production and specifically liquefied natural gas, or LNG.

LNG is best used with heavy duty trucks while compressed natural gas, or CNG, is used to power passenger vehicles and corporate fleets. The momentum, however, will be slow mainly because of a nascent infrastructure to support such a movement. Might things change?

Royal Dutch Shell, for example, expects the global demand for LNG to double to 400 million tons by 2020 and potentially to climb to 500 million tons by 2025. Meeting this demand will require an industry investment of $700 billion, it says.

While the price of a barrel of oil has fallen to the roughly $50 range, natural gas is generally less expensive - especially when used for transportation. Petroleum prices are now about $2.50 a gallon, whereas LNG prices would equate to about $1.50 a gallon.

"There's a big push now to use natural gas as transportation fuel and especially for heavy-duty trucking," says Greg Dolan, chief executive officer of the Methanol Institute, at a conference sponsored by RTI International in Washington, D.C. "But it costs a lot to get a fleet up to par: seven years before a return is realized."

"There needs to be a mandate or a regulatory incentive," adds Anne Korin, co-director of the Institute for the Analysis of Global Security. Beyond LNG and CNG, both Korin and Dolan say that methanol is an excellent alternative because it is easy to make from ethanol or biogas, which are derivatives of natural gas.

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Right now, there are more than 10 million natural gas vehicles in the world, with about 1.3 percent of those, or 130,000 of them, in the United States, says NGVAmerica. About 20 percent of public transit buses in the U.S. now run on CNG, and trucks hold potential for greater LNG use. Domestically, natural gas comprises only about 1 percent of the fuels used in vehicles.

Cost remains a major consideration. Here, the American Trucking Association has been working with U.S. lawmakers to help subsidize this conversion. President Obama is in favor of using government's levers to help make the transition to cleaner burning fuels but the fiscal hawks say that taxpayers cannot afford it.

What else may block the road? With greater demand for natural gas comes greater prices and more ecological concerns. In fact, environmental groups are worried about excessive and harmful drilling. The Obama administration, meantime, has moved to allow U.S. exports of LNG, while claiming that controversial "fracking" techniques can be properly regulated.

"Fracking will improve the air quality because natural gas is cleaner than coal or oil," says Korin, also an advisor to the United States Energy Security Council.

Within the electricity sector, natural gas is expected to take market share from coal. Both make up slightly more than 30 percent of the electricity portfolio mix, although the panelists at the RTI International conference suggested that coal could inch its way back up if natural gas prices were to spike.

U.S. chemical makers worry that an increased demand for natural gas at home and from abroad would drive up their cost of doing business - a real concern for a group that consumes nearly 22 billion cubic of natural gas a day. Indeed, 246 new chemical plants and $150 billion in new investment are planned here, all of which is happening because of newfound shale gas supplies, or unconventional natural gas that is embedded in rock formations a mile or more beneath the earth's surface.

In a free market society, it would seem only logical to allow the "unrestricted" flow of goods and services - an argument that appears to be winning out. And that includes the LNG terminals that had been set up to "receive" that commodity before the shale boom here. Now, companies like Dominion Resources and Sempra Energy want to convert them to export terminals and sell abroad, which would make those projects viable and put people work.

While the added demand will push prices up, most experts say that the industry will continue to expand and utilities will proceed to add gas-fired generation as long as natural gas prices remain under $6 per million Btu. Among the companies positioning themselves to access those inexpensive supplies are General Electric and Siemens, both of which make the compressors and steam turbines used for power generation and in manufacturing.

"The ability to access gas at cheap prices is an incredible advantage," especially in the petrochemical businesses where we work, says Alberto Rostagno, marketing manager for General Electric, in an interview. "You could not think about this five or six years ago when this (petrochemical) industry was dead in North America."

Coming full circle, can natural gas do for the automotive sector what it has done for manufacturing and electricity generation? In theory, the potential is there to transform both automotive economics and to reduce harmful emissions.

And if there is money to be made doing it, the oil sector won't block it. It will take part in it, especially because natural gas is often discovered alongside oil exploration, only to be "flared" as an unwanted byproduct because the infrastructure does not yet exist to transport it.

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At present, though, global oil supplies are outstripping the demand for it, which has caused a 51 percent fall in oil prices over the last four years. And that's had two effects: deterring new investment in transportation alternatives while also working to keep U.S. natural gas prices relatively low.

Producers could choose to dig out the natural gas and to use it increasingly for transportation, which would then help keep oil prices low. But large vehicular fleets would then be less-inclined to convert over to natural gas, unless they would be provided incentives. Or, drillers could leave both the oil and natural gas in the ground until they would become more economical to develop.

"We are the swing producers in the world," says Vikram Rao, executive director of the Research Triangle Energy Consortium and a consultant to RTI International. "We determine oil prices more than OPEC."

Despite the attention that VW brought to the matter, natural gas will only have a modest effect on the transportation sector in the near term. But its current effects on both manufacturing and electricity generation will continue to be profound, providing both economic and environmental benefits.