Natural gas normally gets a great deal of attention as a feedstock for power generation: As the U.S. makes the gradual transition from coal, natural gas has taken center stage in the spotlight because it burns more cleanly than coal. Read more
Paul Harvey was a conservative icon in radio news during the mid to end of the 20th century. While I often differed with the substance of his commentary, he was a welcome travel partner when driving, particularly on a long trip. What I liked most about him was that he generally articulated his views without being malicious, and his voice was just wonderful. He sounded like a symphonic rap musician, using iambic pentameter.
One of Harvey’s favorite phrases was here’s “the rest of the story.” Remembering it, gives me a wonderful opening for this column.
This week there were several optimistic articles on natural gas growth this past week . One article in particular caught my eye. The piece described the expanded, but still relatively low, market penetration of natural gas as a transportation fuel. Given the cost and environmental benefits of natural gas, I was pleased to read the content and see the numbers and quotations. But in Paul Harvey’s terms it did not tell “the rest of the story”!
Yes, natural gas is making inroads into the trucking industry, even among buyers of new cars, asserts the article. “The boom in natural gas production in the U.S. has ignited a revolution in the auto sector that could reshape the way Americans fuel their vehicles, market participants and analysts said in a week-long special on FOX Business.” ClearView Energy Partners, the Newport Beach, California company that is building fuel stations along major interstate trucking corridors, will likely facilitate the growth of natural gas as a fuel in trucks. It will provide one of the missing pieces that have impeded natural gas’ popularity — fear of running out of fuel. “About 25% of the truck market could convert to natural gas by 2020, according to a report by Citigroup…eight in 10 new trucks Waste Management brought in 2012 were powered by natural gas.” Your friendly bus driver’s bus is increasingly likely to run on natural gas.
“Only a tenth of a percent of natural gas consumed in U.S. last year was used for fuel in vehicles, according to the Energy Department. Of the more than 15.2 million natural gas vehicles on roads across the globe, [only] about 120,000 are in the U.S.” Natural gas clearly hasn’t taken off yet as a transportation fuel in the U.S. Kevin Book, ClearView’s managing director of research indicates that, “I think you look at locomotives, also a very interesting and potentially large market, and also some of the marine applications before you start talking about smaller passenger cars.” I suspect his negative perceptions of natural gas as a competitive fuel in cars stems from the present costs of CNG passenger vehicles and the present absence of CNG fuel stations — a possible temporary problem if ClearView’s commitment to develop a natural gas highway could extend to private automobiles. We have had many successful freedom movements in this country. There would be only relatively marginal costs to extend the capacity of the natural gas highway’s fuel stations to include CNG availability for all consumers of natural gas vehicles and to assure availability of natural gas derivative fuels like ethanol. If you build it, many of the 17 million FFVs now on the road will come and more will follow, given what’s presently on the (near term) horizon.
Here is more of “the rest of the story,” à la Paul Harvey. One of the most innovative programs to stimulate the use of natural gas, CNG, was initiated by Gov. Hickenlooper and Gov. Fallin. Under their nonpartisan umbrella, 22 states have agreed to replace older cars, when they are due to retire, with CNG cars. Their commitment will create a large pool of CNG purchases over the next few years. Detroit has agreed to work with the states and both the governors and carmakers want to use the effort to produce a less expensive CNG car for American households.
But there is more! Two companies, Coskata, Inc. and Celanese have had success in converting natural gas to ethanol and are both striving to commercialize and define strategies to market their product. If they are successful, other companies will follow in light of historical “copycat capitalism.” The result will be a fuel that will be environmentally better and clearly cheaper than gasoline. The result will also be increased demand for fuels like E85, which will generate consumer purchases of FFVs and the conversion of existing, older cars. It may also open up the pockets of investors concerning the support for future E85 pumps. If ethanol becomes popular because of price and environmental objectives, can methanol be far behind (excuse me, Percy)? Freedom to choose what you drive and what fuel you use on the high and bi ways of this nation would be consistent with the American way and creed.
What would you say about an investment opportunity where your product is four times cheaper than the commodity it is trying to replace and there are 77 million potential customers waiting to use it?
Does that sound like something that you would like to put your money into? Well that’s the opportunity that awaits anyone willing to invest in the infrastructure and technical changes needed to substitute natural-gas-based ethanol for foreign-fuel-based gasoline in our cars.
A full-fledged prospectus was presented this month by Miles Light, professor at the Leeds School of Business at the University of Colorado Boulder, in a report called “Natural Gas Based Liquid Fuels: Potential Investment Opportunities in the United States,” written for the recent Goldman Sachs Energy Summit.
Professor Light lays out the situation in very clear terms: “Low natural gas prices and new technology present an opportunity to market and sell liquid fuels in the form of ethanol and methanol to U.S. consumers. Per unit of energy, oil is almost four times more expensive than natural gas. This implies a potential arbitrage opportunity to convert natural gas and natural gas liquids into a liquid fuel. In the U.S., 14.5 million vehicles can currently utilize ethanol fuels. These are the so-called ‘Flex Fuel’ vehicles. Another 16.1 million FFV ‘Twins’ can utilize ethanol with a software upgrade, and 46.9 million conventional fuel vehicles can potentially be converted for $150-$250 each. In all, this presents 77.75 million light duty vehicles, or 31.8% of the national light duty fleet, that would potentially purchase natural gas liquid fuel, if prices were attractive.”
You’ve undoubtedly heard the phrase, “If we can capture just 2 percent of this market…” Well, this is it. There are opportunities up and down the line, from auto mechanics performing flex-fuel conversions on conventional engines to major corporations building plants to convert natural gas to ethanol.
What Light is talking about here is the wholesale substitution of a portion of our natural gas resources for the oil we import in order to run our transportation sector. True, we’ve cut down on imports so they now make up less than half of our consumption for the first time since the early 1990s. But what people are missing is that we still pay the same amount for that oil because the price keeps rising. This continues to put a $380 billion dent in our trade balance every year — not to mention that much of this money goes to countries that actively support hostile actions against America and its friends and allies around the world.
So what would it take to make this transition? There’s certainly been a lot of activity to date. However, most of it has concentrated on utilizing compressed natural gas (CNG) and liquid natural gas (LNG). T. Boone Pickens’ Clean Energy Fuels is in the process of building a “CNG Highway” to service long-haul trucks from coast to coast. He’s already completed the first leg from Los Angeles to Houston. Those big 18-wheelers have room for the larger gas tanks and travel fixed routes along the Interstate Highway System that can be serviced by relatively few filling stations.
But passenger vehicles are a completely different matter. They travel everywhere and would require a whole new national infrastructure to fill their tanks. The auto companies have already offered a few CNG models but they haven’t sold well. It’s the chicken-and-egg problem — people won’t buy cars before the stations become common and the stations won’t be built until there are enough cars on the road.
With ethanol, however, there is already an infrastructure in place. The country is presently outfitted with 2,394 gas pumps dispensing E85, a mixture of 85% ethanol and 15% gasoline. (The gasoline is there just to start on cold mornings.) Most of these are concentrated in the farm belt but they’re starting to make their way into major cities on the East and West Coasts as well.
The point is this: these stations have been set up to handle corn ethanol. This is the result of the 35-year government effort to promote biofuels. But Light suggests that these stations could just as easily dispense ethanol made from natural gas. No new technology would be necessary, nor would it require any special permission from the government. (Methanol, which is a little easier to synthesize than ethanol, has a greater toxicity and would require some additional approval from the Environmental Protection Agency.)
So according to Light, this is where the investment opportunities lie. The conversion of natural gas to ethanol is the first and most important step, but Coskata, Inc. already has a working facility and Celanese Corporation is converting coal to ethanol in Indonesia. Light estimates that, at current and foreseeable prices, the return on investment could be as high as 46 percent.
Then there are all the intervening steps. “Alongside the core ethanol production opportunity, there are several related supply-chain developments projects, such as production facility development, ethanol fuel marketing, fueling station upgrades, blending facility expansions, and vehicle update kits,” he writes. All are well within the range of private investment. No government subsidies or mandates would be required.
In other words, the conversion of significant portions of our auto fleet to natural gas presents a whole world of opportunity just waiting for imaginative, ambitious investors to take advantage.
I have been a fan of Resources for the Future (RFF) since my early days in Washington many years ago. While the organization’s reports won’t keep you awake at night nor can they easily convert into a Bollywood movie, they generally provide sound nonpartisan analyses of resource and environmental issues. In this context, the Fuel Freedom Foundation (FFF) retained RFF to independently study the potential economic, environmental and national security gains from replacing a portion of domestic gasoline use in the light-duty fleet with various natural gas-based fuels such as ethanol or methanol.
The request reflected the relatively large price differential between the growing supply of natural gas and gasoline and FFF’s assumption that natural gas-based fuels (ethanol and methanol) could not only offer the U.S. security benefits, they would be cheaper and cleaner than gasoline. If FFF’s assumption was right, public and private sector strategies to encourage the conversion of older vehicles to FFVs and to increase the production of new FFV vehicles in Detroit would seemingly be in order. Similarly, finding financially feasible ways to produce, develop, distribute and successfully market natural gas-based alcohol fuels would appear quite sound.
RFF’s study was completed last September and is available online.
I have read the document many times. It is compelling because it honestly portrays gaps in information and uncertainties concerning public policy and regulation, technology, geography, price trends, competition, and availability as well as access to natural gas-based fuel. Indeed, embedded in the report is the fact that policymaking in public, nonprofit or private sectors or predictions concerning consumer behavior is never perfect. As complexity increases, decisions often require reliance on perfectibility over time, rather than perfection in the present time.
Apart from RFF’s marshalling of available, relevant data and its related analysis, the study’s conclusions are supportive of leadership groups and leaders who seek an “alternative path” in support of the use of natural gas-based fuels and the conversion of older cars to flex-fuel vehicles.
What RFF concluded is that the only replacement fuel currently available to the more than ten million FFV E85-capable vehicles “does not have a cost advantage at the pump over conventional gasoline.” But assuming companies like Coskata, Inc. and Celanese are able to deliver on their financial modeling, live tests and price predictions concerning the production and distribution of natural gas-based ethanol, owners of FFVs, including owners of new and older converted vehicles could see cost benefits near $1 per GGE (gasoline gallon equivalent) in the very near future.
This is no small benefit. It will be particularly important to low and moderate-income folks, permitting them more choices when it comes to jobs, housing and other basic needs. It will also reduce the strain caused by reduced economic and income growth on middle class households. RFF also indicates, with somewhat less certainty as to how much, that there will likely be environmental benefits.
Making this new replacement fuel path viable will require the EPA to lower the costs of certification of kits that help convert older cars to FFVs, and to sanction relatively simple software adjustments, particularly for newer FFVs and their twins (not the human kind but automobiles whose engines reflect FFF characteristics. This path will also need the EPA and advocates of natural gas-based ethanol to work together to develop a vehicle-testing procedure for older cars that is both cost efficient, sound and hopefully, relatively quickly. Finally, it will necessitate a fuel market that reduces, if not eliminates, the almost monopolistic conditions generally imposed by oil companies and often supported, at least implicitly, by government policies and regulations.
Consumers, clearly, would benefit from more competition at the pump and from more pumps devoted to replacement fuels. Auguste Comte, the great 19th century philosopher and founder of positivism, never saw a gasoline station, but his simple motto, “Love as a principle [need for increased natural gas-based flex fuels and need for flex-fuel cars], the order as a foundation [development of policies and infrastructure for natural gas-based fuels and increased FFVs] and progress as a goal [extend consumer choice]” nicely frames RFF’s narrative. In turn, RFF’s study, while recognizing the value of renewable fuels, supports an alternative, natural gas-based replacement fuel as well as a vehicular pathway to help achieve national, regional and local economic, social welfare and environmental benefits. It’s near July Fourth. Let’s move toward freer increased choices among fuels and increased vehicular capacity to use them.