With natural gas prices hovering around four dollars per million British thermal units, many have been wondering if it makes sense to use natural gas as a transportation fuel. Indeed, I was curious myself.
When Exxon Mobil Corporation (XOM) held its analyst meeting 11 March 2010, Rex Tillerson, Chairman and Chief Executive Officer, responded to a question about using natural gas as a transportation fuel.1
Well, we think gas as transportation fuel has a lot of limitations. There have been a number of studies done. We have done our own. I could also refer you to the EIA's recent study just done in 2009 that they published, and we would concur with their conclusions, and that's that natural gas as a transportation fuel will probably never be particularly attractive. But it's due to basic physics.
The density of the fuel that you can put on board the vehicle is a limitation. It is a gas. It is not a liquid. So when it competes with whether it's conventional gasoline, diesel or biofuels, liquid biofuels, density is a problem. To get more comparable energy on board means you've got to either pump it up to higher pressures or you've got to put bigger storage tanks.
So it has some limitations with respect to the range of the vehicle operation. It has some limitations with refueling, not just the fact that there's an absence of refueling stations, but a refueling modification to it at conventional retail site is about $1 million. If you're a mom and pop dealer, that's next to impossible to do without a lot of help.
Then, when you pull up to that station to refuel, it takes a little longer than when you're putting on board liquid fuel. The question of using it in tractor trailer, cross-country transportation, I just, for all the reasons I just described, that one, I can't make the math work on why anybody would do that.
Now having said that, there are -- and CNG vehicles have been around a long time. They've been around in fleet service for 30, 40 years. I mean, the technology itself, there's nothing new about it, and there's not much you can do to the basic physics and thermodynamics to improve it.
But where you have fleet operations, municipal buses, taxi cabs, a company, that have large fleets of service vehicles, utilities where the vehicles all come back to one central location every night, you can afford the cost of installing a refueling system where you can refuel these vehicles simultaneously overnight. You can get enough fuel on board that they basically can make their daily rounds and come back. That could make sense for someone.
The cost of converting a vehicle is not insignificant. So you've got an upfront capital cost. So for all of those reasons, we just do not see natural gas as a viable transportation fuel. We don't think the consumer is going to particularly be pleased with what they have to do.
From an economic standpoint, there's really not the kind of gain that people think there is. From an emission standpoint, the kind of best case, you do get about a 15%, best case, 20% reduction in CO2 emissions, well-to-wheels on a CNG vehicle versus a conventional internal combustion gasoline engine.
An internal combustion gasoline engine has got a lot of room to get better, and it's going to get better. It is getting better. So that's going to always compete against this other alternative as well.
With kind assistance from the folks at U.S. Energy Information Administration (EIA), I was able to locate Natural Gas and Crude Oil Prices in AEO2009, which I believe is the EIA study Tillerson referred to earlier.
Substitution of Natural Gas for Petroleum Consumption
In a relatively high oil price environment, as in the AEO2009 reference and high oil price cases, consumers can reduce oil consumption through energy conservation and by switching to other forms of energy, such as natural gas, coal, renewables, and electricity. Natural gas is not necessarily the least expensive or quickest option to implement (in comparison with reducing transportation vehicle-miles traveled, for example).
In the residential, commercial, and electric power sectors, petroleum consumption is relatively small, accounting for only 6.5 percent of total U.S. petroleum consumption in 2007. Gradually converting all the petroleum consumption in those sectors to other fuels would have only a modest impact on natural gas consumption and prices.
In the industrial sector, the most feasible opportunity for substituting natural gas for petroleum is in heat and power uses, which amount to about 0.61 quadrillion Btu per year [70]; however, most petroleum consumption in the industrial sector (such as diesel and gasoline consumption by off-road vehicles in agricultural and construction activities; petroleum coke; refinery still gas, which is both produced and consumed in refineries; and road asphalt) is not well suited for conversion to natural gas. Also, there is considerable uncertainty about the extent to which petroleum feedstocks for chemical manufacturing could be replaced with natural gas before 2030. At a minimum, considerable downstream investment in chemical manufacturing processes would be required in order to convert to natural gas feedstock.
The greatest potential for large-scale substitution of natural gas for petroleum is in the transportation sector--especially, in local fleet vehicles refueled at a central facility, such as local buses, which consumed 0.18 quadrillion Btu in 2006 [71]. Wider use of natural gas as a fuel for transportation fleets also has been advocated; however, the idea faces significant hurdles given the relatively low energy density of natural gas; the cost, size, and weight of onboard storage systems; and the challenge of establishing a refueling infrastructure. In addition, any significant increase in natural gas use could raise natural gas prices sufficiently to reduce the ratio of natural gas prices to oil prices.
The Honda Civic GX and Civic LX-S vehicles provide a uniform basis for comparing the attributes of a natural-gas-fueled LDV (the GX) and a gasoline-fueled LDV (the LX-S) that use the same design platform (Table 13). The Honda GX is about 34 percent more expensive, carries 39 percent less fuel (resulting in a much shorter refueling range of about 200 to 220 miles), and provides 50 percent less cargo space, 19 percent less horsepower, and 15 percent less torque. Although natural gas has a high octane rating of 130, the GX horsepower and torque are reduced by the rate at which natural gas can be injected into the piston cylinders because of its lower energy density.
Although the higher cost and other disadvantages of natural gas vehicles could be offset at least partially by their lower fuel costs, the lack of an extensive natural gas refueling infrastructure will remain a difficult hurdle to overcome. Consumers are unlikely to purchase natural gas vehicles if there is considerable uncertainty as to whether they can be refueled when and where they need to be. Similarly, service station owners are unlikely to install natural gas refueling equipment if the number of natural gas vehicles on the road is insufficient to pay for the infrastructure costs.
In 2008, there were only 778 service stations in the United States with natural gas refueling capability out of a total of more than 120,000 service stations [72]. Public refueling capability for natural gas, ethanol, methanol, and electric vehicles has fluctuated considerably over time, as the different vehicle options have gained and lost favor with the public. Even after the more than 15 years that these alternative fuel options have existed, fewer than 1 percent of the Nation's public service stations currently offer refueling capability for any alternative fuel.
Without an extensive public refueling network, the potential for market penetration by natural gas vehicles will be limited, and until a substantial number have been purchased, an extensive public refueling network is unlikely to develop. Market penetration by natural gas vehicles is also limited by the many alternatives that consumers have for reducing vehicle petroleum consumption, including buying smaller vehicles, reducing vehicle-miles traveled, and buying hybrid electric or, potentially, all-electric vehicles. In addition, price volatility in crude oil and natural gas markets obscures the long-term financial viability of natural gas vehicles. Consequently, AEO2009 assumes that widespread adoption of natural gas vehicles in the United States is unlikely under current laws and policies.
One item that neither Tillerson nor EIA mentioned is that natural gas and propane vehicles cannot be parked in enclosed areas such as underground parkades. If there were a small leak of natural gas or propane, it could create an explosive situation when the gas contacts an ignition source, such as a spark or cigarette.
Along with many others, at first I thought natural gas might be an ideal gasoline substitute. But after listening to Tillerson's comments and reading the EIA's work, I am now a skeptic. I found this information interesting, and I hope you did too.
Disclosure: I am long XOM stock and long XOM puts and short XOM puts for a net long or bullish position.
1 I used Morningstar Document Research, formerly called 10KWizard, to obtain Exxon Mobil's analyst day information. You can also retrieve this information directly from Exxon Mobil's Exxon Mobil investor's site. If, when you search for the document, it is no longer present on Exxon Mobil's site, you can still find it at SEC.gov using XOM as the search term. Once you find the list of corporate filings, then search for an 8-K listing on 2010-03-17.
On Sunday, 21 February 2010, I photographed River Cafe in Prince's Park in downtown Calgary. For those interested, you can view this location using Google Maps. Now that it is April, I need to take some pictures without all the snow. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.
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