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Compressed Natural Gas: Key to American Energy Independence?

by: Paul Killinger August 26, 2008 | about stocks: CLNE / F / GM / HMC / UNG    

Paul Killinger

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In previous posts we've written about the prospects for natursal gas [NG] powered vehicles, and their potential to reduce America's reliance on imported crude oil and increasingly expensive gasoline and diesel fuel.

Currently there are only about 150,000 CNG (compressed natural gas) cars and trucks operating in the U.S. out of some 5 million worldwide, mostly in public vehicle fleets. Unlike the radical new electrics, they work on simple, decades-old technology. Moreover, existing vehicles can easily be converted to run on CNG as well.

So what's the problem then? Why don't we just "gas up" and go, shed our dependence on foreign oil and save money at the pump at the same time? Well, if you're familiar with the "chicken and the egg" syndrome, that axiom applies here precisely.

We have two interrelated problems, if you will. We need cars and trucks that run on CNG (ideally both CNG and gasoline), and we need public filling stations to refuel them. While neither of these difficulties are insurmountable, they will require investments from both automakers and the natural gas industry.

Billionaire oil man T. Boone Pickens has become engaged in this dilemma. His answer is to build massive wind farms, thereby freeing up enough NG off the nation's electric grid to operate millions of cars and trucks. He is building LNG (liquefied natural gas) terminals, which will fuel heavy trucks ("18-wheelers") newly designed to operate on this fuel. This is especially welcome in California, where clean burning LNG will replace foul-smelling, polluting diesel rigs.

But what about the rest of us? The first thing we need is a commitment from the automotive industry to build "dual-fueled" (CNG + gasoline) cars and trucks once more. This isn't a significant hurdle, since the Detroit 3 all built such "dual-fueled" fleet vehicles between 2000-05. While they never caught on with the price of gasoline at $2 a gallon or less, they will now.

More difficult is the refueling question. CNG filling stations require major capital investments, and their success is dependent upon having large numbers of vehicles to refuel. This is already working commercially in Utah and Oklahoma, two states which produce NG themselves. Drivers there buy the only CNG fueled vehicle now built in America, the Honda (HMC) Civic GX, and clamor for existing used "dual-fueled" cars and trucks they find on e-Bay. No wonder, since they fill up for the equivalent of less than $1 per gallon!

Energy companies in NG producing states like Louisiana and Texas have repeatedly looked at making such investments, but every time they've gotten close the price of oil has cratered. This shouldn't be a problem in the future, however, as it is increasingly unlikely we'll ever see the price of gas at less than $3 a gallon again.

In conclusion, NG powered vehicles have been around for a long time. But it took the vision of a Texas oil man, T. Boone Pickens, to call attention to the fact that they could play a decisive role in decreasing our dependence on foreign oil, while at the same time helping to improve our air quality. Now all we need is for American capitalism to follow up and take advantage of this opportunity.

Disclosure: None

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This article has 56 comments:

  •  
    Aug 26 07:32 AM
    I have read 5-7 words of it,maybe you are right.
    My PensonGHCo. statement shows I make 6500$ since going long October NG yesterday at 7.80$.
    I look forward to significant shorts liquidation out there in the coming weeks and days,my only problem is selling to early.Sometimes I sell at 10000$ profit when another 1-2 hours would double it.
    At least I am happy to make good money trading,as I have no vision nor idea if NG vehicles will ever hit the street.My Mercedes E Class Avantgarde is excellent benzin super car and I am not willing to drive T Boone Picken's futuristic vehicle just yet.I respect and love the man and feel very sorry for him to lose trading NG,it was the liquidation on Crude Oil that triggered this crazy NG sell.It will shoot up again,don't worry dear Pickens.
    Reply
  •  
    Aug 26 07:42 AM
    Don't underestimate the value of having the OEMs produce NG vehicles in the past. That means all the safety, emissions, packaging, hardware and durability issues have been addressed. The vehicles were sold to fleets that had their own refueling facilities. Being able to purchase NG at the corner station is really the only thing left to make the concept acceptable to the public - look how many turned away from diesel vehicles because they could only purchase diesel fuel at a truck stop.

    This is the perfect example for the government to step in a front the costs of adding NG to every gas station. With the lower cost, people will buy it, since there is really no downside consumers will see.
    Reply
  •  
    Aug 26 07:50 AM
    Does the $1/gal price quoted in the article include all existing state, local and federal levies?
    Reply
  •  
    Aug 26 08:01 AM
    This really get my goat. Everybody and his brother, from the federal government on down to the municipalities, not to forget the corporate bandwagon, has something to say about energy (oil) shortage, and of course global warming.
    But when you go to a rat ass country in Eastern Europe, and see gas stations that pump natural gas (propane), and lots of small cars that use it, you may be forgiven to have concluded that in the US, we are experiencing an artificial, may be an induced crisis. Apparently anybody who is in position to do something about it, does not really take it seriously.

    I mean using natural gas as fuel is not only cleaner, but virtually doubles the supply base for the driving public.
    Reply
  •  
    Aug 26 08:41 AM
    Cristian - let your goat rest. propane (C3H8) is an entirely different fuel from natgas (predominantly methane (C1H4). Propane is vastly superior in terms of being easier to store sufficient quantities onboard a vehicle in liquid form. Natgas is supercritical (i.e. gas and not liquid at any pressure) at earthly temperatures, thus it must be stored at extremely high pressures on the vehicle - much added expense and weight. The filling station is similarly more complicated, and potentially hazardous. The problem with Propane, is supply. It is only a small fraction of crude oil and natural gas pruduction. If vast numbers of cars started using propane, then supply would tighten and price would go up to parity with gasoline (mogas) in short order - this is similar to what we saw years ago with diesel. It has a higher btu content than mogas, and had a price advantage - that has changed and diesel is no longer cheaper. There is NO WAY going to propane would "virtually doubles the supply base." As I have posted elsewhere on this subject, the laws of thermodynamics stand as serious constraints in this area - not absolute bars to implementation, but inconvenient realities that make multi-fueling supply side issues very problematic. The "solution" won't be some modern day philosopher's stone - but rather a mix of technologies, the fundamentals of which are well understood today, and continued dependance on crude oil for a major portion of world energy supply for some time to come.
    Reply
  •  
    Aug 26 09:01 AM
    What to do about the lost taxes? If we sell CNG at $1/gal equivalent, and currently state, local, and federal taxes on gasoline are about $1.60, where will all the money come from to replace the lost taxes?

    Just a thought.

    I agree with the concept, but am just thinking ahead to the next problem. Replacing the lost taxes will have to be addressed at some point.
    Reply
  •  
    Aug 26 10:00 AM
    Baron & Poggi,

    You raise interesting questions about taxes.

    UT and OK don't tax CNG as a transport fuel. They also provide generous tax credits to residents who title such vehicles there to encourage its use.

    The federal tax on gasoline is 18 cents a gallon. State and local gas taxes vary widely, from a low of 26 cents in Alaska to a high of 75 in California. Municipalities rarely tax gasoline.

    Reply
  •  
    Aug 26 10:16 AM
    The cost of CNG at refueling stations is largely unregulated, as well. Prices vary dramatically due to its present scarcity, from less than $1 in UT and OK to $3 in CA (where gas is still about $4).

    CA has a ballot initiative this year to spend $5 billion to support CNG usage as a transportation fuel. If, as expected, it's adopted, it will be interesting to see how they spend this seed money.
    Reply
  •  
    Aug 26 10:24 AM
    Over time, we can expect the cost of CNG to be determined by its proximity to its source. In states with large NG production facilities (eg. TX, LA, UT, OK) there will be more use and greater competition.

    Other places probably won't use it at all, but will benefit from lower gas prices due to NG's increasing substitution for gasoline elsewhere in the U.S.
    Reply
  •  
    Aug 26 10:32 AM
    Remember, even if CNG is eventually priced on a par with gasoline, every gallon we consume is an AMERICAN fuel, and a gallon of oil we don't have to import from OPEC!
    Reply
  •  
    Aug 26 10:32 AM
    From a supply point of view, it makes no sense to contemplate powering vehicles with natural gas. North American gas production isn't what it used to be, and there is little chance of vastly expanding it. Importing liquified NG from overseas would be very expensive, and there are few facilities for handling it anyway. We should not create a situation in which we're forced to choose between powering our cars and heating our homes.
    Reply
  •  
    Aug 26 10:36 AM
    In the UK LNG (we call it LPG) has been available for many years, but not on original vehicles, so there is a cost of conversion around £2,000 - say US$4,000. They are also, all dual fuel, as they need to start on petrol. Any saving in running costs is lost by the inability to sell the used vehicle - second hand values are seriously low - if a buyer can be found... and you lose the boot space for the gas tank.

    A recent June 2008 article here - tinyurl.com/57me9l - provides a background on using UK luxury 2nd hand models to convert and then presumably run into the ground.

    Depending on the model you may also find problems with insurance cover.
    Reply
  •  
    Aug 26 10:37 AM
    Ooooops! Boot = Trunk
    Reply
  •  
    Aug 26 10:50 AM
    ziz - you make the same mistake I comment on above - LNG = Liquified Natural Gas, LPG = Liquified Petroleum Gas. Two different things. LNG requires cryogenic temperatures to stay liquid - very expensive and not viable on board a vehicle for transport - hence CNG - Compressed Natural Gas. The phase equilabrium of different hydrocarbon fractions vary considerably from one compound to another with major technical considerations related to the facilities needed to distribute and dispense fuel to a typical personal transport vehicle.
    Reply
  •  
    Aug 26 11:39 AM
    Two graphs:
    tonto.eia.doe.gov/dnav...
    tonto.eia.doe.gov/dnav...

    Look from 1999 onward - what does that tell you?
    Reply
  •  
    Aug 26 11:48 AM
    Thank you, PaulK, but regardless of the tax amounts, the point is still the same. The tax will have to be replaced, in some fashion, it seems to me. Our roads are not being maintained, with the present tax structure, and this will only make that situation worse.
    Reply
  •  
    Aug 26 11:58 AM
    redbaron is correct - any differential highway tax treatment will operate as a subsidy which cannot persist for long without distorting the true economic equation. Tax preferences that act as a catalyst to get over a barrier to entry or make things happen faster are fine - when they are integral to feasibility, they are goverment wealth transfer programs that distort the natural rent seeking behavior of capital investors.
    Reply
  •  
    Aug 26 12:05 PM
    Dave,

    One thing about NG is the U.S. has ALOT of it. A 118 year supply at current rates of usage according to the EIA. And our reserves have DOUBLED during the past 10 years alone. And there's no tellling how much more well find when we open up the OCS to exploration.

    But your point is well taken. That's why Boone Pickens is building vast wind farms, to take the NG we now use off the electric grid. This isn't a permanent answer to high oil prices, but at least when other affordable alternatives are eventually developed, we'll still be solvent.
    Reply
  •  
    Aug 26 12:06 PM
    Dual fuel vehicles are nothing new in Argentina, where many privately owned vehicles run on gasoline or CNG.

    The fly in the ointment with the rosy price savings forecasts if we redevelop the dual fuel vehicle is that Big Oil will jack up the price of CNG to about what gasoline is, or maybe even above it. See diesel fuel prices over the last 20 years if you don't believe it. Big Oil is never going to miss a trick.
    Reply
  •  
    Aug 26 12:12 PM
    The tax structure is hardly the point. We can tax this fuel the same as gasoline, okay?

    The point is to STOP sending $700 billion overseas each year to import oil. If we continue this folly, the dollar won't be worth the paper its written on and we'll be broke.
    Reply
  •  
    Aug 26 12:16 PM
    Mangum,

    The only flaw in that is our "Big Oil" companies control NEITHER the price of oil or natural gas.
    Reply
  •  
    Aug 26 12:18 PM
    And they don't control the price of diesel fuel, which is derived from refining oil, either.
    Reply
  •  
    Aug 26 12:34 PM
    For a fraction of the cost of Bush's dumb war the US can pay for a NG ppl from Mackensie Delta in Canada's Northwest Territories to Alberta, where existing working ppls can distribute this plentiful, now stranded, resource.
    Reply
  •  
    Aug 26 12:42 PM
    paulk8756 - The thing is, it's easy to make optimistic assumptions about the future supply of NG, and the EIA has a history of doing just that with both NG and oil. Do actual production figures support the idea that US reserves have doubled in the last decade? No, they don't. Gas production has been more or less flat during that period. Also, the price signals contradict it. NG prices have been rising for years... it hasn't been as dramatic as the rise in oil prices, but the trend is unmistakable. In short, the observable facts do not support the claim that we have vast supplies.
    Reply
  •  
    Aug 26 12:51 PM
    HAPPYCAJUN AND OTHERS--

    you all need an update on the world of nat gas in transport. suggest several webste visits--

    WESTPORT.COM
    CUMMINSWESTPORT.COM
    NGVAMERICA.ORG
    SITES FOR CLNE[NAS], CHNG[OTC] SYSF

    much more going on in world[including USA] of nat gas than your comments indicate.
    Reply
  •  
    Aug 26 01:01 PM
    Yeah, guys. Read an SA post dated Aug. 11 entitled, "Study: U.S. Has 118 Year Supply of Natural Gas," and then tell me what you think about our domestic NG reserves. And they're DOMESTIC, that's the point!
    Reply
  •  
    Aug 26 01:04 PM
    (Or maybe you guys work for GM, and are promoting the Volt... ha, ha! Well, bring it on. The more the merrier!)
    Reply
  •  
    Aug 26 01:15 PM
    <i>...then tell me what you think about our domestic NG reserves</I>

    What I think is that a study comissioned by a NG industry front group should be taken with a big grain of salt.
    Reply
  •  
    Aug 26 01:18 PM
    And none of our "conventional&quo... and "uncoventional&qu... (Barnett, Marcellus, Haynesville, et al) NG reserves include a substance known as gas hydrates, which contain 160X (wow!) the density of NG. According to the DOE, these gas beds lying of the coasts of Alaska and (of all places) S.Carolina, contain more energy than all of OPEC's oil reserves combined!
    Reply
  •  
    Aug 26 01:23 PM
    As to taxes, natural gas at the pump pays the same federal excise tax as gasoline (18.3 cents per GGE). State tax policies differ.

    As to supply, where do I begin? In 1990 the Potential Gas Agency (the experts) estimated that, in the US, we had 1100 trillion cubic feet (Tcf) of gas resources (i.e., gas that could be produced economically at that time). We produce a little over 19 Tcf per year in the US. From 1990 to 2006, we produced and consumed about 300 Tcf. In 2007, the Potential Gas Agency estimated that we had 1500 Tcf in gas resources. Technology and economics had changed. Last month, a study by Navigant Consulting concluded the real number is closer to 2200 Tcf, primarily because we now know how to produce gas from gas shale economically. This would be 118 years of supply at current US production levels.
    There also is the issue of methane hydrates. This is methane trapped in ice structures found off of every continent. It is estimated by the USGS that there is twice as much energy trapped in methane hydrates than in all the oil, coal and natural gas combined. The problem is that we don’t yet know how to mine it. But, keep in mind, we didn’t know now to mine gas from shale 15 years ago, and now it’s half our resource base.
    Oh … and then there is biomethane. Methane is produced when organic matter decomposes without oxygen. DOE estimates that we could produce 1.25 Tcf PER YEAR easily from just landfill gas, sewage and animal waste alone. This is enough to fuel 10 million average cars. Importantly, in Europe, they have concluded that producing biomethane from cellulosic matter (crop waste and energy crops like switchgrass) is far more productive and less expensive than producing cellulosic ethanol. Cellulosic biomethane could provide a virtually inexhaustible supply of renewable methane.
    Anyone that uses the “we’re running out of gas” argument against moving to NGVs is either misinformed or has another agenda.

    As to price, unlike with oil, the US is not tied to world natural gas prices. Except for one small exception, there is no way to export natural gas from North America. As a result, while the world price is about $13 per MMBtu, the average US price is now below $8. (That’s $1 per GGE at the wellhead.) We have several LNG terminals in the US to import liquefied natural gas. Unfortunately for them, they can’t compete with the low US prices, and, therefore, are only operating at about 20% capacity – and that’s need just to keep the terminals from shutting down.
    Reply
  •  
    Aug 26 01:23 PM
    Dave,

    The study was performed by the American Clean Skies Foundation, a CA based environmental organization. HARDLY a NG industry front group in any event.

    But if you have a better answer to our energy predicament, I'm listening with open ears for sure.
    Reply
  •  
    Aug 26 01:24 PM
    fran - read my posts - BURNING NG is rather old tech - in fact technology is not particularly an issue wrt NG as a serious fuel. Supply and distribution is the issue, and hence economics. Pure and simple.

    PaulK - I've never worked for GM or any automobile co. Have worked in the upstream & midstream oil & gas industry (the folks who produce, process and distribute natural gas and gas products), including hitches in operations and in strategic planning, domestically and internationally. Indeed, I once had need to keep a large number of small internal combustion engines running on natural gas in stationary service - and that was over 25 years ago. I'm an engineer who has moved on to the practice of law - principally commercial litigation. I'm used to hearing "theories" and puff pieces on what might be - but hard facts - business plans backed by credible data - that sort of thing impresses me. I have not yet seen anything of the sort.

    AGAIN - my position is that all this 'silver bullet' crap is wishful thinking. Energy is going to be an ongoing issue for years. Use heavy taxes or subsidies? That will create perverse incentives - wish I was wrong - I've always liked fairy tales, but find them useful for entertainment only. PaulK - still waiting to see your CV posted to bolster your cred as an "alpha" author.
    Reply
  •  
    Aug 26 01:39 PM
    "Rko,"

    Thank you for the NG supply tutorial.

    Are you familiar with any efforts to produce gas hydrates?
    Reply
  •  
    Aug 26 01:43 PM
    Cajun,

    If it's a "plan" you desire, read the Pickens Plan.

    And I don't believe in subsidies, either. Indeed, if it weren't for the 81-cent per gallon subsidy for corn ethanol, it wouldn't even exist.
    Reply
  •  
    Aug 26 02:02 PM
    Cajun,

    As for my "cred," as you put it, let's just say I'm unaffiliated and pro-American. When I say something inaccurate, I'll welcome your critique.

    Times do move on, my friend. From the time when you worked in the industry and I bought gasoline for 24.9. But that doesn't mean "old solutions" or "new technologies" are best. What's best is what WORKS. Or, as Boone would say, "The LOW COST solution wins every time."

    And I'm not promoting our switching to NGV's (in part) as any sort of "silver bullet," either. I simply don't like the idea of America becoming a second rate country, which is where we're headed if we don't get this energy mess sorted out. So anything that helps if FIRST RATE with me.

    Reply
  •  
    Aug 26 02:03 PM
    Mr. Pickens, unsurprisingly, stands to make a great deal of money from his natural gas holdings if the Pickens energy plan works out the way he proposes. I don't begrudge him the right to profit from his investments, and I do appreciate that he's raising public awareness of these issues. But he's hardly impartial.
    Reply
  •  
    Aug 26 02:11 PM
    Cajun,

    I think we're on the same page, actually. But, if not, that's alright, too.

    I do take issue with our government picking the winners and losers in the energy business, though. They have a PERFECT RECORD so far. They are 0-FOR as many times as they've stuck their beaks in!
    (Much the same as the rest of their track record in interfering with our economy.)
    Reply
  •  
    Aug 26 02:15 PM
    As far as infrastructure for fueling up your CNG vehicle....
    myphill.com

    fill'er up at home!!!!!!!!!!!
    Reply
  •  
    Aug 26 02:17 PM
    Dave,

    Interesting you said that. Pickens is the majority owner of CLNE. And, according to Cramer, guess who another major investor is? None other than Nancy Pelosi (who shares about as much in common with the Texan as I do the man in the moon). I could have fell off my chair!
    Reply
  •  
    Aug 26 02:24 PM
    PaulK - I think we are generally on the same page - I'm probably a little less optimistic about particular outcomes - but I think we agree on the "balance of trade" regarding payment for a huge portion of such an important economic building block (we are closely alligned on the definition of the problem - our views of the solution are not that far apart either, just more a matter of degree and timing). I am in ABSOLUTE agreement regarding the Gov. picking winners & losers - they have to play a role at the "policy" level - not so much concerned with how we get to the solutions - but in determining what we support internationally and domestically (faciliting a climate receptive to drilling, pipeline construction, R&D in diverse areas of energy use for transport (addressing some of the problems with storing wind and solar for example at the "blue water" research level). I'm real suspicious of measures like our current grain-for-ethanol incentives - those things get so political so fast they lose sight of real, beneficial goals and instead have hidden agenda that serve the politician more than the public.
    Reply
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