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You can take a CNG-powered bus to the Super Bowl

The fans who flock to the Super Bowl on Sunday might not be thinking about air quality, but the city of Phoenix is.

Phoenix Public Transit and Valley Metro will ramp up the frequency of public buses on routes to the site of the game — University of Phoenix Stadium in Glendale, northwest of Phoenix — and downtown Phoenix, where many of the festivities for SB49 (we refused to use Roman numerals) will be held.

If you’re actually there, check here and here for more information about getting around. Even if you hate both the Seattle Seahawks and the New England Patriots and wish there was a way both of them could lose.

We won’t go into the many benefits of public transportation. Suffice to say that if you want to avoid headaches and exorbitant parking fees, take the bus or light rail.

We’re here to talk about compressed natural gas, which burns cleaner than traditional gasoline or diesel. Many municipal bus fleets around the country have switched to CNG, both because of the environmental benefits and because it’s dirt cheap.

Phoenix has the fourth-worst air quality of any U.S. city, based on particulate matter, so the city had incentive to run more of its buses on natural gas. Last year the city spent $61 million to buy 120 CNG buses as part of a campaign by the transit department called “Green and clean for 2014.”

The buses replaced ones that had been running on a combination of liquefied natural gas (LNG) and diesel fuel. Currently, of the 478 city buses, 120 run on CNG, 198 on LNG and 160 on diesel. Another 80 buses are scheduled to be purchased to replace those LNG ones, says Matthew Heil, a spokesman for the city of Phoenix.

“Because of where we live, people understand the necessity for alternative fuels, and the efforts to diminish the kind of pollution that we see,” Heil said.

Plus, the new buses are nice. “They’re pristine,” Heil said. “The Same kind of nice feeling you get when you have a new car.”

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Obama aims to cut methane emissions 45 percent

President Obama’s latest effort to mitigate the effects of climate change will be to crack down on methane leakage from oil and gas wells, The New York Times reported.

The EPA will announce new regulations this week aimed at reducing methane emissions by 45 percent by 2025, compared with 2012 levels. Final rules will be set by 2016, the newspaper reported, citing anonymous sources.

Obama, stymied by Republican opposition that stands to become more solidified now that the party controls the Senate as well as the House, has increasingly turned to executive action, skirting Congress, to deal with climate change. The administration says the Clean Air Act gives it the green light to issue such mandates.

Methane, the primary component of natural gas, sometimes escapes from oil and gas wells, in addition to pipelines. Although the gas accounts for only 9 percent of overall greenhouse-gas emissions, it’s 20 times more potent than carbon dioxide, another GHG that accounts for the majority of emissions.

The Natural Resources Defense Council applauded the proposed regulations, but the oil and gas industry said they’re unnecessary, since they’re already motivated to capture methane instead of allowing it to escape into the atmosphere. If it’s captured, it can be burned in power plants to generate electricity, making it a cleaner alternative to coal. Methane can also be used to fuel cars and trucks, as compressed (CNG) or liquefied (LNG) natural gas. It can also be converted into two types of inexpensive liquid alcohol fuels, ethanol or methanol.

Howard Feldman, director of regulatory affairs for the American Petroleum Institute, said:

“We don’t need regulation to capture it, because we are incentivized to do it. We want to bring it to market.”

That market would grow if the infrastructure for transportation fuels were expanded, creating more of an incentive to capture methane. The price of natural gas stood at $12.68 per million metric British Thermal Units (MmBTU) in June 2008, only to crash to $1.95 by April 2012. Last month the average was $3.43 at the Henry Hub terminal in Louisiana. Profit margins are still so low that oil drillers flare off much of it.

On the other hand — Steven Mueller, Southwestern Energy

steve-muellerLet’s apply a bit of Talmudic dialect to the visible dialogue now going on in the nation concerning decisions to drill for more natural gas and related considerations concerning the effect that using natural gas as a transportation fuel will have on the environment.

Now on the one hand, the price of natural gas, like gasoline, has significantly decreased over the past months and some producers seem to be abandoning or limiting production at least for a time. To many, drilling in shale seems too costly for so little revenue per thousands of cubic feet. Besides, they say there is now too much natural gas on the market for too little demand and available infrastructure to get it where it’s supposed to be. “After so much hype and billions of dollars of investment, the nation is deluged with gas and not enough pipelines…One energy company after another, year after year, has written down its investments in Arkansas and in Texas and Louisiana,” said Clifford Kraus in The New York Times.

So far, the Times’ description of the gas market is relatively similar to the analyses of most experts. But don’t despair; lately, the definition of “expert” has taken a beating in light of the lack of confidence in the stability and the almost weekly amendments to projections of natural gas supply and demand. However, because the national unemployment rate will go up significantly if we abandon experts, let’s not abandon them, for the time being. Let’s, however, not grant them grace, adoration and pedestal-like obedience. They need to do better concerning use of data and methodologies. Our knowledge concerning the natural gas profile is at best uneven and at worst…well, you insert the word.

Try looking on the other hand of iconoclast Steven Mueller, CEO of Southwestern Energy. Mueller does not believe that current data concerning the relatively depressed condition of the natural gas market should predetermine his own and his company’s decisions. His actions, some time ago, in buying shale fields cheap and in discovering new fields have turned Southwestern Energy into one of the top natural gas producers.

Mueller shares the view that the natural gas market is now down and that some companies are pulling out, at least temporarily, or reducing production. But where other producers and analysts see problems, he sees opportunities. According to The Times, Southwestern just put $5 billion down to develop 413,000 acres of reserves in the Marcellus and Utica shale fields of West Virginia and Pennsylvania. Similarly, he acquired another gas play in Pennsylvania for $300 million.

According to Mueller, gas will soon be moving up in price because of demand. He notes, “The situation is not as bad as the industry thinks it is….I am looking at it from a different angle and I think the odds are in my favor.”

Mueller seems like he is out of place using the other hand in the oil and gasoline industry. While his company’s activities are not without environmental problems and critics, he is unusual in that he has taken the lead among companies in searching for international and national solutions to methane leakage as well as extensive water usage with respect to fracking. Significantly, he has also seen benefits, where other natural gas industry titans have stayed mum, concerning the long-term use of natural gas for fueling hydrogen-fuel cars and for other transportation fuels. Additionally, Mueller views the continued conversion of coal-fired electric plants to natural gas as a done deal and a deal that will help sustain the industry and the environment.

Checking Google for recent stories about Mueller and other CEOs in the natural gas industry suggests that Mueller, contrary to most of the others, will soon be ripe either for sainthood or tenure at Mad Magazine. What? Me worry?

Sure, he has some critics who indicate his bet on natural gas is risky and a few, implicitly, suggest he will fail (some pundits and competitors no doubt would not be too sad if he does). Most Google entries, however, view him as somewhat of an outlier in the industry, whose commitment to growth has saved his company. They grant him the benefit of their respective doubts about his imperialism concerning acquisition of natural gas plays. Some view his environmental and GHG sensitivities as necessary in helping the industry move forward as a good or reasonably good citizen. Whatever he is or will be, Mueller will not be one to devote lots of time to the thought processes associated with on the one hand, on the other hand. He seems to like being a permanent on the other hand.

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Energy Quote of the Day: ‘Natural Gas is Often Described as a Bridge Fuel…How Long Should that Bridge Be?’

A new report released by the Canadian Pembina Institute and the Pacific Institute for Climate Solutions looks at British Columbia’s (B.C.) liquefied natural gas (LNG) strategy to serve the lucrative Asian gas market through the prism of global climate change in a carbon-constrained world. “Natural gas is often described as a bridge fuel. The question is, how long should that bridge be?” says Josha MacNab, B.C. Regional Director for the Pembina Institute.

Read more at: Breaking Energy

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Clean Energy Fuels sees daylight ahead

Wall Street was abuzz last week as Clean Energy Fuels, the leading supplier of natural gas for use in delivery and heavy-duty trucks, jumped 11 percent in one day after a long slump in which investors were questioning its business model.

“We’re at the very beginning of a major shift to natural gas for trucking – a shift that could take a decade before the growth slows – and Clean Energy Fuels is the leader in the market,” added Jason Hall of Motley Fool, who had been skeptical of the company in the past but is now turning enthusiastic.

“Natural gas vehicles are here to stay,” added James E. Brumley on SmallCap Network, in one of the many enthusiastic endorsements the company received last week. “So Clean Energy Fuels is very much a right-time, right-place idea. It’s not just that the company is the biggest and the best at what it does. There’s a market of scale for what it has to offer.”

It hasn’t been easy. The company, the brainchild of legendary oilman T. Boone Pickens, seemed poised for growth last year but suddenly hit a sudden downdraft in January. Skepticism grew over whether compressed natural gas (CNG) or liquid natural gas (LNG) would be the best substitute for diesel in heavy-duty trucks. The debate is really inconsequential since the two are interchangeable – LNG for large-scale storage and transport with some use in the biggest rigs and CNG for fueling smaller commercial vehicles. Nevertheless, the controversy drove down CEF’s stock price 25 percent since the first of the year.

“Much of the conversation in the investor community over the past six months has been dominated by the false idea that CNG and LNG were competing fuels,” wrote Hall in a recent evaluation. “But while we’ve been arguing, Clean Energy Fuels has been opening stations for trucks across the country. And the company is a leader in both.”

Once again, it seems to have been a case of investors becoming absorbed in short-term focus while ignoring the long-term prospects of the company. True, Clean Energy Fuels has not yet delivered a profit but its progress in building infrastructure to enable us to use significant portions of our natural gas resources as a substitute for diesel fuel has been significant. Here’s what the company has accomplished so far:

  • Clean Energy Fuels has delivered 800 million gallons of CNG and LNG to light and heavy-duty trucks.
  • The company has built approximately 500 fueling stations across the country.
  • It has installed over 1,500 compressors for delivering CNG to vehicles worldwide.
  • It has two LNG production plants.
  • It has 60 LNG tankers making 5,000 deliveries every year.
  • It has two renewable natural gas plants producing bio-methane.
  • It has 39 major airport fueling stations.
  • It now fuels over 35,000 trucks, large and small, with CNG each day.

As you can see, this is no fly-by-night operation. Whether the company is profitable or not right now, Pickens is obviously in it for the long haul.

Clean Energy Fuels’ long-term goal is a “CNG superhighway” that will offer fueling stations to long-haul trucks along all the major interstates that crisscross the country. But its major success to date has been in servicing fleet vehicles for delivery companies and municipalities.

  • CEF currently services 230 trucks a day for UPS with big plans for expansion.
  • CEF has contracts with Owens-Corning, Lowe’s, Proctor & Gamble and other commercial establishments’ fleet owners for their delivery vehicles.
  • Garden City Sanitation of San Jose has converted 23 refuse trucks to natural gas using CEF’s services.
  • CEF will be fueling Kroger’s new 40-unit fleet of LNG trucks later this year.

Analysts believe that refuse and delivery fleets, especially those that are garaged overnight and can be refueled at a central CNG station, will become one of the company’s major markets.

CEO Andrew Littlefield just announced a loss in revenues for the first quarter of 2014 but said this was because of the expiration of the federal volumetric excise tax credit (VETC), which had provided $26 million in 2013. Overall, the trend is definitely upward:

  • LNG fuel deliveries increased 22 percent to 16.7 million gasoline gallon equivalents.
  • CNG deliveries increased 16 percent.
  • When the VETC is excluded, overall revenues were up 43 percent. 
  • Sales of Redeem, the company’s renewable bio-methane product, increased 45 percent.

Sean Turner, COO for Gladstein, Neandross & Assoc., a leading consulting firm for the development of alternative fuels, notes that the NGV market in the United States is actually larger than in countries such as Argentina and Pakistan, which have been at it for a longer time. “While North America might lag behind in the adoption curve of other countries, natural gas usage per vehicle is actually near the top worldwide,” he said. “This is because other countries have tended to employ NGVs for passenger cars, whereas the U.S is now concentrating on medium-sized and heavy-duty trucks.” And as T. Boone Pickens likes to point out, natural gas will be unrivaled in this marketplace since electric vehicles cannot produce the torque needed to power those long-haul vehicles.

Whether all this makes Clean Energy Fuels a hot stock again is something Wall Street will have to decide. But in terms of moving America toward greater reliance on homegrown natural gas, the news is all favorable.

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CNG moves ahead on all fronts

The effort to substitute compressed natural gas for foreign oil in our gas tanks is moving ahead on all fronts across the country, in scores of municipal departments that are converting their fleets, in new gas stations that are opening and with entrepreneurs who are looking for ways to speed up the conversion.

Leading the pack is Clean Energy Fuels, T. Boone Pickens’ effort to put the nation’s natural gas resources to work in the transport sector. Clean Energy Fuels has targeted long-distance, heavy-duty trucks, which tend to stay on the Interstate Highway System and can be services at massive truck stops. In Pennsylvania, for instance, Clean Energy Fuels is building stations in Pittston and Pottsville that will serve trucks on heavily the traveled I-81 and I-476. They are scheduled to open later this year.

But much of Clean Energy Fuels’ real success is coming from the fleet conversion for major shipping firms that rely heavily on truck transportation. The company has had particular success with UPS. Fueling depots were recently opened in Oklahoma City and Amarillo, Texas. The carrier E.J. Madison, LLC has deployed a fleet of 20 long-haul LNG trucks that will utilize a CEF network of stations that stretches from Los Angeles to Jacksonville, Florida. Jacksonville is emerging as a hub of CEF activity as the company has opened a liquid natural gas (LNG) terminal there as well. LNG is more difficult to handle than compressed natural gas but has much greater energy density.

Rapidly expanding in Florida, CEF has just announced a grand opening of a CNG filling station that will service the Hillsborough Area Regional Transit Authority (HART), which provides public transportation throughout the Tampa metropolitan area. The opening kicks off a plan to convert HART’s entire fleet of public services buses and vans to compressed gas.

Just last week Clean Energy Fuels CEO Andrew Littlefair was in the news telling The Motley Fool that Tesla’s electric cars will not be in competition with CEF’s efforts. “Tesla and electric vehicles are really great for certain applications,” he told interviewer Josh Hall. “But hauling 80,000 pounds of cargo, natural gas is really well suited for that.”

However, even if Clean Energy Fuels doesn’t think CNG can compete with electric at the passenger-car level, others do. Last week the Wawa convenience store chain announced it will partner with South Jersey Gas to open CNG fueling stations in southern New Jersey. “Compressed natural gas gives us an opportunity to increase the convenience we offer our customers and positions us for the future as well,” Brian Schaller, vice president of fuel for Wawa told the press. “We’re excited about the growth potential.” With 600 stores on the East Coast from New Jersey to Florida, Wawa has plenty of room to grow.

Pennsylvania is becoming a hotbed of compressed gas progress as the state seeks to take advantage of the Marcellus Shale. The state has adopted a funding program to help businesses convert. One of the first to take advantage is Houston-based Waste Management, which received an $806,000 grant from the State Department of Community & Economic Development to switch 25 of its waste and recycling collection vehicles to CNG. Pennsylvania-American Water Company has also announced plans to convert its fleet with a $315,000 state grant. American Water, the largest water utility in the state, operates out of Scranton.

Nebraska is a long way from any natural gas drilling but the Uribe Refuse Services company of Lincoln has announced it will convert its entire fleet of 17 trucks to natural gas over the next few years. The first trucks were displayed in the city last week on Earth Day.

Oklahoma is a big oil-and-gas producing state and is making a major effort to convert state vehicles to natural gas. In 2011 Gov. Mary Fallin joined 15 other states in a multi-state memorandum of understanding committing them to purchase NGVs for the state fleet. The state now has 400 CNG vehicles and is pushing the federal government to convert its fleet in the state as well. Oklahoma is building CNG gas stations to match and now stands third in the nation behind California and New York.

The natural gas industry is putting its shoulder to the wheel on this effort. The American Gas Association and America’s Natural Gas Alliance (ANGA) have teamed up to sponsor “Add Natural Gas (+NG),” an effort that is encouraging entrepreneurs and mechanics to convert ordinary passenger cars already on the road to CNG. “Fleets across the country are already using natural gas vehicles to save money and reduce emissions,” says the group’s website. “However, natural gas can be used to fuel any vehicle. To demonstrate this, we worked with automotive engineers to add natural gas as a fueling option for some of the most popular vehicles on the market today.”

Performance CNG LLC is a Michigan startup that has been inspired to take up the initiative. The company recently had a hybridized 2012 Ford Mustang GT demonstrated as part of +NG’s campaign and is currently trying to raise $55,000 in capital on Indiegogo, an international crowd funding site. More than half the money would go to EPA emissions testing.

Not everyone is convinced that CNG is the way to go. Clean Energy Fuel’s stock has done poorly since January, based on investor skepticism that its market is not that big and that some liquid natural-gas based fuel – methanol of butanol – will prove easier to handl

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Ford Leads the Way

The Ford Motor Company stepped front-and-center in the effort to fine alternatives to high-priced imported oil last week with the announcement that it will offer compressed natural gas (CNG) tank as an option in the F-150 pickup truck, its most popular brand that currently sells 700,000 models a year.

Now it won’t come cheap. There’s a $250-$350 charge for the vehicle to come “prepped” from the factory. That means putting hardened valves, valve seats, piston and rings into the V6 engine. But after that, there’s a $7-9000 charge for installing the CNG tank in the cargo bay – made considerably more expensive than in Europe because safety standards are interpreted in a way that makes them much more expensive. This lifts the showroom price from $24,000 to around $32,000. That’s a big chunk but Ford swears you’ll make it back in three years by substituting fuels.

With the price of gas at around $3.80 per gallon and the oil-equivalent of natural gas at around $1.20, those savings should add up fast.  Of course all this assumes that the price differential won’t narrow to its traditional level, but that doesn’t seem very likely now. Electrical plants have shown a tendency to move quickly back to cheaper coal if the price of gas rises, but the difference between the crack spread and the spark spread seems to have separated permanently, much to natural gas’s advantage.

All this is good news for those looking to substitute some of our abundant natural gas for foreign oil in our transport sector.  In fact, there’s a lot of progress being made right now:

Clean Energy Fuels of Newport Beach, CA already has a network of 360 natural gas fueling stations at truck stops along Interstate highways and is trying to build a complete national infrastructure.  NGV stations cost $750,000 a pop but Clean Energy is looking at the long term.  The ready availability of filling stations will help spur the conversion of giant 18-wheel diesel haulers, which most people see as the ripest target for conversion.

Heavy-duty fleet vehicles are making rapid progress.  Buses and garbage trucks are in the forefront. Eight out of ten new vehicles bought in 2012 by Waste Management, the leader in the field, were powered by natural gas.

There are now 120,000 gas vehicles on the road in the United States, according to Natural Gas Vehicles of America, the trade group.  Unfortunately, this constitutes only a tiny fraction of the 15.2 million NGVs worldwide. Iran, Pakistan and Argentina, improbably, are the leaders. We’re behind in making the transition, but there’s plenty of room to catch up.

In a report issued in June, Citi Research estimated that one-quarter of the world’s present consumption of oil could be replaced by natural gas under present conditions. More than 9 million barrels per day could be replaced in truck transport, 2 million of these in the US. Another 3 million b/d could be opted out in marine transport and 200,000 b/d in railroad locomotives.

All this would be fairly easy to transact since it involves large commercial organizations with centralized decision-making.  Sooner or later, however, this approach is likely to run up against limits.  The stumbling block will be the vastly more decentralized system of private automobiles, which still consumes 60 percent of our oil and involves a car in every garage and a gas station on every other corner. Here the problem of building an infrastructure and achieving widespread distribution is much more difficult.

The problem comes because reformers are viewing natural gas as a fuel instead of a feedstock. Compressed natural gas (CNG) and liquefied natural gas (LNG) are the most readily available options – and both are legal – but in the end they are going to have their limits. It will make much more sense to use methane as a feedstock for the manufacture of liquids, methanol in particular.  These will be much easier to transport and will substitute for gasoline in current car engines with only minimum adjustment – nothing like the $8000 required for the F-150. Valero has just opted to build a $700 million methanol manufacturing plant in St. Charles, Louisiana in anticipation of this demand. All depends on whether the Environmental Protection Agency decides to give a go-ahead to use methanol in car engines. The matter is pending.

So the effort to use our abundant natural gas resources to reduce our dependence on expensive, unpredictable and unreliable foreign sources of oil is making headway. Ford’s decision to equip the F-150 with CNG is a beginning. But there’s more to come.

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The New York Times and Natural Gas- Is it the Moment?

The venerable Gray Lady, the NY Times, has in the recent past treated the possible use of natural gas and its derivatives (methanol and ethanol) as transportation fuels warily. Their primary focus has seemed to be on the environmental problems and economic opportunities related to fracking and the increased production of natural gas. Rarely did the Times cover or note in its editorials the increasing acceptance of natural gas, methanol and ethanol as a fuel to power vehicles. The importance of alternative fuels as part of national energy and environmental policies has not been granted significant visibility in the Times. The Times is still my favorite read over a cup of coffee.

But, surprise! Borrowing and taking liberty to amend the lyrics from the musical Jekyll and Hyde,   “this may almost be the moment…when The New York Times begins to send many of its doubts and demons concerning alternative transportation fuels on their way… this could be the beginning. The momentum and the moment may be coming together soon in rhyme.”

Paul Stenquist, a respected, frequent writer for the Times automobile section, wrote an Oct. 29 article titled, Natural Gas Waits for its Moment. The content of the piece was, in reality, not as ambiguous or speculative. Read it!  According to Stenquist, natural gas has arrived and this is its moment, or at least its soon-to-be moment. Sure there are problems to overcome, but to Stenquist, they seem relatively puny given where he thinks we are, and where he suggests we can be soon.

Stenquist opens his upbeat piece by indicating that “cars and trucks powered by natural gas make up a significant portion of the vehicle fleet in many parts of the world (Iran, Argentina, Italy, Brazil, and Germany).”  After noting the almost 2,000 natural gas stations in Argentina, he asks, “Is America next?”

Based on Department of Energy (DOE) information, Steinquist indicates that natural gas is about $1.50 cheaper than gasoline and diesel fuels for the same mileage, and that because natural gas burns clean, it requires less oil changes, and vehicle exhaust systems last longer.

Sure, the author notes that the initial cost of natural gas vehicles are significantly higher now than gasoline vehicles. But based on an apparent positive interview with a fleet manager from Ford, he indicates that increased sales or leasing volume could bring the vehicle price comparable to today’s conventional vehicles. The key issue Stenquist does not address, is when this will happen, and how long will it take?  But still he and his Ford colleague seem optimistic– perhaps a bit too optimistic, unless Detroit pulls a Steve Jobs; that is, just as Jobs did with the  iPhone, convince the public through marketing and technological innovation that cheaper cleaner natural gas vehicles are a “must” for consumers.

But wait, there’s more!  Stenquist, quoting from the Energy Department’s website, suggests that the environmental benefits of natural gas as a fuel appear to be immediate and important. Succinctly, natural gas vehicles have a much smaller carbon footprint than gasoline or diesel.

What remains, then, for the nation to benefit in a major way from use of natural gas as an alternative fuel?  Well for one, reducing carbon leakage during natural gas production and distribution. Progress is being made. Stopping or cutting back leakage has become a priority for both involved companies, and federal as well as state regulatory authorities.

Second, both car companies and the government acknowledge that using compressed natural gas in a conventional engine would result in degrading engine performance. However, retrofitting engines to use natural gas would increase the octane advantage of natural gas and lessen the density advantage of gasoline-reducing performance issues. Fully designed natural gas cars are still relatively rare and are, at this moment, significantly more costly than conventional cars. But with increased demand, as noted earlier, the costs would likely come down and make household purchase decisions easier. Interestingly, Governor Hickenlooper of Colorado(D) and Governor Fallin of Oklahoma(R) have put together a 22 state coalition. The group has committed to purchasing new natural gas cars to replace old cars in their respective fleets. Detroit has committed in turn to work on developing a less expensive natural gas car, given the market pool or demand created by the states. This effort deserves watching and will, if successful, hopefully, provide a path to cheaper natural gas vehicles for consumers.

Stenquist, correctly, points to the lack of natural gas fuel stations as a key obstacle to increased popularity of natural gas. But he is optimistic that technology now in place (or soon to be in place) will be able to link available natural gas pipelines to in home fuel machines. I, also, would hope that these fuel stations would be placed in parking garages and that they would be much cheaper than currently existing home refueling equipment.

I suspect that the natural gas movement will require more than a few moments; that is, it may take a bit longer to gain traction than implicit in Stenquist’s piece. But it’s nice to see a journalist link natural gas to transportation fuel in such an aggressive way as Stenquist. Now if the Times could only follow in the content of its editorial and op-ed pages.

It is hard to be critical of Stenquist’s piece since it’s almost a first for the NY Times. However, I am puzzled by the absence of any discussion of natural gas based ethanol and methanol as alternative fuels in his article. Both, likely, would be cheaper per gallon and per miles traveled than gasoline. Both would record more environmental benefits than gasoline, and both, if they are accepted in the market, would reduce dependency on imported oil. Perhaps most significantly, both, assuming appropriate government approvals, could be used almost immediately to fuel existing vehicles with relatively simple and cheap engine conversion kits. Think of it!  If we could add the trifecta: natural gas, ethanol and methanol –to fuel stations throughout America, it would provide needed competition to gasoline. Consumers would benefit by having access to lower cost fuel. The nation would benefit from improved environmental and Greenhouse Gas (GHG) conditions. America’s security and economy would be enhanced significantly. It would be a major win for the public interest and for America and Americans.

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Carnivals, peas and oil predictions

Earlier in my life, I volunteered as a carnival “barker” — you know, the guy who tries to inveigle passers-by to throw a ring around a bottle to win something for their date or children. At the time, most paid a buck, lost, and were happy as I was, because the funds went to charity. While I was at my station, I happened to see a would-be magician working the old pea trick. You know, you followed the pea in the magician’s open hand and when the magician closed his hands, you picked the hand that you believe covers the pea. Again, passers-by lost all the time, because his sleight of hand was faster than their eyes (or their brains and their eyes). Charity, once again, came out ahead.

What’s all this got to do with oil? Well yesterday, I was bemused by a piece in the Financial Times by Ed Crooks, titled “U.S. oil boom resets on shaky foundations.” Earlier this week another article in another respected paper quoted an expert that stated that America is now and will be in the future much less dependent on Middle Eastern oil because of the oil boom and its likely continuance into the future. Numerous papers have called the now and future oil boom the Saudization of America.

Which pea will be picked up tomorrow by the media — the oil is a shaky pea, or the oil is our country’s genetic future pea. Can we, as consumers, based on often different expert projections related to the supply and demand for oil, pick the right pea ahead of the media’s grand pronouncements concerning oil production and consumption? The answer, given the probability of frequent expert-related projection amendments, the different methodologies involved and, yes, in some cases the captive quality of the projector, is no. If it’s Monday, oil is our salvation and America’s oil largess will be a road to riches; if it’s Tuesday, oil salvation is uncertain and we will remain dependent on importing oil; if it’s Wednesday, you put two oil experts in a room and you get three or four or more future projections; and if it’s Thursday, oil analysts, including some of the best, throw up their hands and say we really don’t know where oil is going. How can we be sure, given all the complex variables? Why did I go to college to study research and statistics? I want my tuition money back.

Oil projections recently seem more an art than science. Paraphrasing Ralph Waldo Emerson, and in defense (just kidding) of what often seems like “one a day” projections, foolish consistency is the hobgoblin of foolish minds , and the King from The King and I, oil projections are a “puzzlement.”

More attention should probably be paid to the Financial Times article. The author indicates that a question hangs over the U.S. oil boom in relation to increasing production costs. “The effort required to squeeze the oil out of the rock, from which it will not flow easily, means that shale production has a relatively high cost, compared with the traditionally cheap to extract reserves of the Middle East.”

Up to this point, Crooks (while he is named Crooks, he is not really a crook, but a fine writer) has been easy to follow. Relatively high oil per barrel costs, he indicates, lead to investment in drilling and, as important, innovative fracking technology, products and services. Small and mid-sized independent firms seemed to flourish, given their cost efficient innovative production processes. Service companies supporting drillers and production firms positioned themselves well, given the oil boom. It all seemed like fun and games. Everyone made money and met investor or stockholder expectations. Dinners at fancy restaurants seemed the norm.

But Crooks maintains that with the fall in prices for natural gas in 2012, the oil related equipment and service industry quickly met its waterloo. “Capacity utilization for pressure pumping equipment dropped to just 74%. Prices for pumping services dropped an estimated 22% between the first quarter of 2012 and the third quarter of 2013.” It was tough time for service firms. Many tried to switch from gas to oil drilling, but over capacity and underutilization were pervasive.

Recently, things appear to be looking up for the service and equipment sector. Oil prices seem relatively stable, at least until tomorrow, and gas prices seem on the uptake. Interestingly, several respected industry spokespersons suggest that a rise in prices for equipment and activities is likely more dependent on the hope for significant LNG exports and assumed higher natural gas prices (and production) than on significant increases in shale drilling for oil. But as Crooks points out, gas producers and servicers’ gain is oil’s pain. An increase in prices for services and a reduction in equipment overcapacity, the article suggests will raise the costs of oil production and lead to more investor as well as producer caution concerning investment in new risky oil wells. Remember most experts indicate that the best sites for new oil drilling have been leased or acquired. “It is possible that U.S. shale oil can continue to thrive only if shale gas continues to struggle.”

Several of the assumptions in Crooks’ piece seem to reflect the same shaky foundations that he indicates weaken projections concerning the U.S. oil boom. For example,

  • Yes, hard-to-get-at oil from shale will cause producers pause when thinking about future development. It will be much more expensive than drilling from conventional, easy-to-get-at U.S. or Middle East reserves. Since oil is globally traded, we could see an increase in dependency on imports.
  • Yes, the service and equipment industry will be in better shape if the natural gas industry grows and thrives. The costs of its equipment and services will rise accordingly. However, the increases in the price of natural gas, if they occur, and, if they are sustainable over time, will probably be relatively small in terms of dollars and may not significantly affect oil production and decisions. Sure, there are similarities between oil and natural gas drilling equipment and services, and while they constitute a large share of the on-site drilling costs (40-70%), rapid technological improvements matched by improved management of drilling have and continue to occur, lessening cost impact by improving productivity. They may reduce the harm seen by Crooks that could come to the oil industry from increased service costs. Other related factors, such as global oil consumption, supply and per barrel costs, international tensions, environmental sensitivities, financial speculation and profit seeking etc., will probably affect oil industry opportunity costing concerning drilling — even more than the increased cost of equipment and services. Taken together, these factors often explain short term changing oil-per-barrel prices. A large anticipated and continuous increase or decrease in per barrel costs will provide a drilling marker for investors and producers — over $100 more wells, under $70 or so less wells and uncertainty in between.
  • Yes, exporting LNG will improve the economic condition of the natural gas industry; just as removing export restrictions on crude oil will improve the economic viability of the already thriving oil sector. But the impact of extended large LNG sales abroad will likely take years, given the need to gain regulatory acquiescence to develop infrastructure and product. Similarly, the likelihood of eliminating restrictions on crude oil exports remains politically iffy.

Concern with the health of the natural gas industry— whether from Crooks’ perspective, because he believes growing gas prices will help strengthen the oil boom’s foundation, or my own, because the increased use of natural gas and its derivatives, ethanol and methanol as transitional transportation fuels will help reduce GHG emissions and improve the quality of the environment as well as reduce the price of gasoline at the pump and enhance America’s security, is legitimate. I wonder why Crooks neglected to discuss natural gas as a transportation fuel and the need for competition in America’s gasoline market in his otherwise provocative article. But it seems his core objective in the piece was the health and well-being of the oil industry. A bit more balance would have served him and the readers well.

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Can the Marcellus give birth to CNG vehicles?

What if America had so much natural gas it didn’t know what to do with it?

Right now that’s the situation in the Marcellus Shale, the vast formation that underlies nearly all of Pennsylvania. There just isn’t enough demand for what’s available. And the same situation could be facing the entire United States in just a few years, according to speakers at the 2013 Natural Gas Utilization Conference held at the Omni William Penn Hotel in downtown Pittsburgh last week.

“Today there are 800 shut in wells in the Marcellus, waiting for an increase in price and improvements in infrastructure,” said Justin Carlson, manager of energy analytics at Bentek Energy of Colorado told the gathering. “By 2017, demand could dip below supply for the entire United States. We’re not doing enough to support growth. The market needs more users.”

Where could you find those new consumers? Virtually everyone agrees that there’s one market that is begging for greater natural gas use – the transportation sector.

Some companies are already looking for ways to do it. Last year Consol Energy Inc. and Praxair, Inc., a Connecticut-based manufacturer of industrial gases, was preparing to build a $2 billion plant to convert gas from the Marcellus into gasoline and diesel blends for use in cars and trucks. In the end, however, the economics didn’t quite work. “The project would have generated a positive rate of return but not the 12% that investors are looking for,” said Dante Bonaquist, chief scientist and corporation fellow at Praxair, who spoke at the conference. “We had to give it up.”

So absent a liquids option, most gas producers are opting for another technology – compressed natural gas. Leading the pack has been Chesapeake Energy, which set a goal to convert its entire fleet of vehicles to CNG by 2015. At the current pace it will hit the 80% mark in 2014. Last year Chesapeake’s Peake Fuel Solutions affiliate also partnered with GE to launch “CNG In A Box,” a package that compresses natural gas from a pipeline into CNG fueling stations so that small and large retailers can become vendors of natural gas. The package was introduced at the National Association of Convenience Stores 2012 annual convention.

“The 8-by-10-foot container is easy to ship and its modular design allows for plug-and-play,” said Bob Jarvis, spokesman for Chesapeake. “It makes pay-at-the-pump a familiar and secure experience.” GE already has a manufacturing plant up and running in Houston. On Sept. 17 it announced a memorandum of understanding with China’s Endurance Industries to deliver 260 CNGs In A Box to fuel China’s rapidly growing conversion to natural gas vehicles.

Last week, however, Chesapeake was forced to disband its seven-member Natural Gas Vehicle Task Force as part of an austerity-driven reorganization. But other companies may pick up the slack. “Chesapeake has been an important player in growing the natural gas vehicle market, but other companies and organizations have taken on that role now,” said Rich Kolodziej, president of advocacy group Natural Gas Vehicles for America.

Range Resources, another major player in the Marcellus, is also making an all-out effort to promote CNG vehicles. It recently closed a deal with GM to buy an entire fleet of trucks for its Pennsylvania operations. The company expects to save 40-50% of vehicle operating costs by switching from gasoline. With 180 trucks in the region, each carrying a 17-gallon tank, Range will save $3,000 each time its fleet refuels.

But is compressed natural gas the best way to go? The technology involves high-pressure tanks, both in storage and in your car or truck and involves a whole new infrastructure. Converting natural gas into methanol – a fairly simple process – would allow us to use the current infrastructure with only a few minor adjustments. Existing vehicles can be modified to use methanol for only a few hundred dollars and flex-fuel vehicles could use either methanol or traditional gasoline.

Methanol works better from the supply side as well. “The economics of methanol would have been more attractive,” said Bonaquist, of the Praxair-Consol Energy proposal that didn’t make it off the drawing boards. “The conversion and purification sections of the plant would have been less complex. It would have been particularly advantageous for smaller scale production.”

So what’s the problem? Well, unfortunately, putting methanol in your car hasn’t yet been approved by the Environmental Protection Agency. That makes it illegal. If the regulations could be changed, methanol would become a much easier route for moving the nation’s looming gas surpluses into the transportation sector. There could hardly be a more promising way of freeing ourselves from dependence on foreign oil.