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Will Pittsburgh be the center of a CNG revolution?

The EQT compressed natural gas (CNG) fueling station in the Strip District of Pittsburgh may one day be remembered as the place where the CNG revolution began.

Located just north of downtown, The Strip is a gritty combination of commercial warehouses and aging factories being converted by gentrifying young professionals into housing. Somehow, that’s turned out to be the perfect combination for pioneering a market for CNG vehicles.

In 2011, EQT, a $14 billion gas company operating in the Marcellus Shale formation, opened up the first public-access CNG station in the Pittsburgh area. To date, more than half of the nation’s CNG stations have been private affairs designed to service fleet vehicles. UPS, FedEx, and Ryder Trucks have been in the lead.

But EQT saw a wider opportunity. Right away the company suggested that the many small companies in The Strip start converting to natural gas. Then it started targeting the growing number of local nonprofits. EQT also counted on the fact that some young professionals would be adventurous enough to experiment with a new fuel source. Finally, it set an example by converting 15% of its own fleet to CNG.

It worked. Two years later, EQT has been forced to add four new nozzles and is now planning a further expansion. The company is also working with various Pittsburgh organizations, public and private, to expand the reach of CNG throughout the region.

EQT is not the only competitor in the field. Chesapeake Energy Corporation, the nation’s second largest gas producer, plans to commit $1 billion by 2021 to encourage CNG adoption in western Pennsylvania. Southwestern Energy, the nation’s fourth largest gas producer, is also planning a similar initiative.

If all this is happening in Pittsburgh, it’s no accident. The city has a long tradition of developing fossil fuels, stretching back to the coalmines of the 19th century and Col. Drake’s oil well in nearby Titusville. But in this latest development, the mighty Marcellus is playing the leading role.

Last month, the output in the Marcellus surpassed 15 billion cubic feet per day, an increase of 400% over the last four years, according to figures released by the Energy Information Administration.

Moreover, production does not show any signs of slowing down. As the EIA reported last week:

The rig count in the Marcellus Region has remained steady at around 100 rigs over the past 10 months. Given the continued improvement in drilling productivity, which EIA measures as new-well production per rig, EIA expects natural gas production in the Marcellus Region to continue to grow. With 100 rigs in operation and with each rig supporting more than 6 million cubic feet per day in new-well production each month, new Marcellus Region wells coming online in August are expected to deliver over 600 million cubic feet per day (MMcf/d) of additional production. This production from new wells is more than enough to offset the anticipated drop in production that results from existing well decline rates, increasing the production rate by 247 MMcf/d.

In addition, the EIA recently projected that consumption of natural gas in the transport sector will rise by a factor of 20 over the next 25 years.

Natural Gas Consumption

Yet even the EIA’s optimistic predictions do not envision a very big role for natural gas in automobiles. Rail freight plays a bigger part than that envisioned for automobiles, which are grouped under the category of “light-duty vehicles.”

All this shows that natural gas is never going to make any real headway in substituting for foreign oil unless we start converting it to liquid fuel – methanol, ethanol, or butanol – that can be easily slotted into our current gasoline infrastructure.

But the potential is there. Last month Yuhuang Chemical, a subsidiary of the $5 billion Shandong Yuhuang Chemical Co., Ltd., of Shandong Province, China, announced plans to invest $1.85 billion in a methanol plant in St. James Parish, Louisiana that will produce 2 million tons of methanol annually by 2018. Right now, 80% of that methanol is targeted for export to a world market that currently consumes 65 million tons per year.

But if we keep working on methanol and ethanol conversion, more than a small portion of that might end up making it to that gas station in Pittsburgh. Or maybe someone will be inspired to build a methanol conversion plant right in the heart of the Marcellus itself.

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.