Money Morning Mailbag: Emergent Natural Gas Market Improves U.S. Fleet Vehicles

[Editor's Note: We want to hear from you! Do you have a comment, a suggestion or story idea, or a question? Let us know at [email protected]. (**) And be sure to check back for responses to reader questions and comments.]

The global energy sector is shifting which means huge changes lay ahead for the U.S. natural gas market. Dr. Kent Moors, a career energy-sector consultant who works with governments and corporations throughout the world, says the United States' fragmented natural gas market is "about to become one global market, operating at the speed of light."

U.S. natural gas will play a major part in reducing greenhouse gas emissions by replacing older, inefficient coal plants. Its use is likely to double to 40% of the energy market over the next several decades, according to a study by the Massachusetts Institute of Technology.

The abundance of natural gas - especially shale gas, an unconventional source packed tightly in rock formations - in the United States has driven down natural gas prices, making the fuel more desirable. Shale gas has grown to 15%-20% of the U.S. natural gas output, and as companies design better drilling technology, shale gas reserves will be more easily attainable.

"Natural gas is becoming sexy again, with all this new technology to get the gas out of the shale," Kim Hill, director of the Sustainable Transportation and Communities group for the nonprofit Center for Automotive Research told The New York Times.

The growing popularity of natural gas led to one reader's observation of its use for transportation:

Question: I have seen UPS trucks running on natural gas.  If UPS can get their act together, can't the rest of the United States - at least for fleet vehicles?

 - Jennifer D.

The United Parcel Service, Inc. (NYSE: UPS) started deploying compressed natural gas (CNG) trucks in the 1980s and now says it operates one of the largest private fleets of alternative fueled vehicles in its industry. The alternative fuels it uses include CNG, liquefied natural gas (LNG), propane, electric and hybrid electric vehicles.

A National Renewable Energy Laboratory study conducted earlier this year found UPS saved 28% in fuel expenses, in addition to a carbon footprint that's much lower than its competitors.

Natural gas vehicles geared toward consumers can be much more expensive than their gasoline counterparts, but experts see fleet vehicles like buses and small delivery trucks as the likely candidates for a wave of natural gas conversions. These buyers purchase between 100 and 1,000 vehicles at a time for traveling short delivery-route distances.

But the conversion to natural gas still faces some expensive roadblocks that have kept other companies from following suit.

Factors like higher prices for alternative fuel vehicles, a lack of fueling infrastructure, and limited driving ranges, have hindered the acceptance of natural gas vehicles.

Trucks running on natural gas need to stop frequently to refuel; a diesel truck can travel an average of about 3-7 times more miles before refueling than a natural gas powered truck. And refueling stations are few and not evenly distributed throughout the United States.

The fueling infrastructure has failed to develop and has muted interest in natural gas-powered vehicles, but companies could be more inclined to convert if fueling was less of a concern.

"It's a chicken-and-egg thing," said Hill. "If there were a lot of delivery points, [automakers] would make the vehicles. And fuel providers say that if there were more vehicles, they would provide the fuel. You probably need some sort of government intervention to subsidize more fuel stations."

In 2008, trucks using natural gas made up only 0.3% of registered heavy trucks in the United States.

Still, the signs of transformation in the alternative-fuel fleet-vehicle market are rapidly increasing, and rising oil prices and government legislation requiring fewer carbon emissions will encourage the market's growth. The following are recent announcements of natural-gas conversions:

  • General Motors Co. last month reported it plans to include CNG and liquefied petroleum gas (LPG) vans in its 2011 lineup to meet customer requests for more environmentally friendly vehicles.
  • Clean Energy Fuels Corp. (Nasdaq: CLNE), the largest U.S. provider of natural gas to the transportation industry, this week announced that it signed a 10-year contract with the Los Angeles County Metropolitan Transit Authority (METRO) to operate CNG bus fueling facilities. METRO's CNG buses make up 95% of its total fleet.
  • More states are converting their refuse truck fleets to natural gas as they recognize the benefits of pollution and noise reduction. Maryland's Montgomery County plans to have all its vehicles operating on natural gas by 2012. 
  • A small pizza operation in Illinois opened an onsite natural gas filling station earlier this month to service its interstate fleet of eight CNG-powered delivery trucks. The owner expects to recoup the station's building costs in a year of fuel savings.

"We're listening to our fleet customers and dealers about offering options that help them achieve their business objectives," said Brian Small, general manager of GM's fleet and commercial operations, in a release. "The industry commitment to expand the CNG and LPG infrastructure in key fleet markets was an enabler to allowing us to introduce these options now."

The trend is going global as Japan this week said it has adopted a policy that supports natural gas vehicle transportation to reduce fueling costs and total carbon emissions.

The natural gas market's skyrocketing popularity will present new investment opportunities that Dr. Moors said investors cannot afford to miss.

Investors who follow the industry "will make more money in energy investments over the next several years than in any other sector during any other period in their lifetimes," said Dr. Moors.

"As we move out of the great world financial contagion of the last few years, this is not the same environment as it was going in," he added. "It will be a bumpy ride. But energy abundance - from multiple sources, in markets that operate more quickly and efficiently than before - will create untold wealth. The gains will be staggering."

(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

News and Related Story Links: