Natural gas eyes oil’s last fortress
Cheap shale gas has meant a surge in interest
Westport Innovations Inc. had been trying to convince manufacturers for years to give its natural gas engines a chance. Its luck finally changed last summer when it signed a deal with Caterpillar Inc.
“It took one of the major original equipment manufacturers to capitulate, and ever since we have seen every OeM [original equipment manufacturer] manufacturer at our doorstep,” said darren Seed, vice-president at Westport.
The Vancouver-based company, which is in danger of burning through its cash within four quarters according to JPMorgan Co., has secured agreements with General Motors Co., Volvo AB and two other undisclosed manufacturers as the company and natural gas vehicles get a second look from the long-haul trucking industry.
The abundance of cheap shale gas has seen a surge of interest in natural gas vehicles (NGVs) in North America, and has also excited market observers such as Citigroup and the International energy Agency.
“Gas penetration in the transport sector is a potential ‘game changer’ but is likely to occur in stages,” the IeA said in its latest medium-term report.
Citibank expects global demand for natural gas in transportation to more than double to 10.2 billion cubic feet per day by 2020 from 4.3 bcf/d today — and double again by 2030, displacing nearly 3.4 million barrels of oil per day.
A federal government roadmap estimates that if one out of every 10 new medium- and heavy-duty vehicles sold in Canada over the next 10 years were natural gas-powered, carbon emissions could be reduced by an estimated 1.99 megatonnes annually by 2020 —or 0.2% of current GHG emissions.
“We actually have even more urgency to try to move natural gas into transportation, because we need new markets for this resource,” said Alicia Milner, president of the Canadian Natural Gas Vehicle Alliance.
“We are exporting less natural gas to the u.S. and per customer demand is going down too, as equipment gets more efficient and renewables come into the market.”
This is significant for oil as transportation is its last fortress. While demand for oil in power generation and residential sectors has receded slowly over the years, the industry has been counting on the world’s continued romance with gasoline-fuelled cars.
even as Big Oil views the resurgence of electric car makers such as Tesla Motors Inc. with some concern, a new challenger has emerged from within the fossil fuels industry.
Projections of lower longterm natural gas prices, and efforts to curb carbon emissions in the trucking industry are making liquefied natural gas (LNG) and compressed natural gas (CNG) promising transport fuel choices.
“2013 looks to be the year when natural gas trucks start to become mainstream,” said robert Brown, analyst at Lake Street Capital Markets LLC, which has a buy rating for the TSX-listed Westport. “This has already happened in the refuse truck market with natural gas engines reaching 50% penetration of new trucks in 2012. We believe the regional truck market is next.”
But Canadians have been down this road before. As far back as 1995, the country boasted 36,400 natural gas vehicles compared with the paltry 14,000 NGVs in 2011.
But as oil prices crashed to around uS$10 per barrel in the late 1990s, diesel and gasolinepowered fuels won that round on efficiency and costs. A focus on passenger vehicles instead of the long-haul trucks also contributed to NGVs’ undoing, as there was no infrastructure to support mass market.
But Westport and its partner Cummins Inc.’s new engine has many sitting up and taking notice.
“Introduced just over one month ago, with great anticipation by many in the trucking community, the Cummins Westport ISX 12G engine will be the first natural gas product to be used in heavy-duty applications, with the performance differential in horsepower and
We know the future fuel mix is going to be much more diverse
torque only 5% and 12%, respectively, less than its diesel counterpart,” said Citibank in its report.
The engine is already sold out for the year.
“you really could argue that natural gas-powered longhaul trucking just got started 12 weeks ago,” Mr. Seed noted. “you have competition between the OeMs, which is helping bring prices down.”
JP Morgan, which remains unimpressed with the company, says while the 12-litre engine could outperform expectations, a key barrier to adoption of long-haul LNG trucks in North America is the lack of fueling infrastructure, which could result in the company revenues being lower than expected.
With LNG export plants being proposed across North America and natural gas company CeOs under pressure to take steps to improve prices, the trucking industry remains “cautious”, says david Bradley, CeO of the Canadian Trucking Alliance.
“It is going to be a slow burn,” Mr. Bradley said, noting that perhaps 10 of its 4,500 member companies are experimenting with NGVs.
“I don’t think anybody should feel that it [natural gas] has the potential to displace diesel fuel. It is just not in the cards at this point.”
The gasoline infrastructure has been in place for a hundred years and it will be important to see where natural gas prices go in the future, said Bill Simpkins, an official at the Canadian Fuels Association, which represents major gasoline retailers such as Suncor energy Corp., Husky energy Inc. and Shell Canada Ltd.
“you are also looking at certain amount of tax replacement for the government, and there will be an interest in taxing that product,” Mr. Simpkins noted.
But some heavy hitters are entering the fray. In March, Shell Canada Ltd. opened its first LNG fuelling station in Calgary as part of a three-station grid covering the edmonton-Calgary corridor.
The company is also opening small liquefaction units in Sarnia, Ont., and Louisiana, which will form the basis of two new LNG transport corridor in the Great Lakes and Gulf Coast regions.
In April, Shell and TravelCenters of America LLC agreed to build at least two LNG fuelling lanes and a storage facility at up to 100 existing TA and Petro Stopping Centers in the u.S.
Canadian companies such as Montreal-based robert Trucking will reportedly have fuel savings of $10,000 per year for each of its 180 LNGpower tractors. Vedder Transport in British Columbia will make similar gains for its 50 LNG tractors. Cenovus energy Inc. and encana Corp. are also using CNG trucks on some of their sites in Alberta.
Another area in which natural gas could steal oil’s market share is marine transportation.
“Because of regulations that are coming, ships won’t be able to burn bunker fuels within 200 miles of the east or west coast or the Great Lakes,” Ms. Milner said. “So this will open up some space for natural gas to compete.”
Westport’s Mr. Seed notes marine could be a billion-dollar opportunity for his company.
“There are gains to be made there,” said david Williams, a spokesperson for Shell, which counts Interlake Steamship Co. as its first marine customer on the Gulf Coast, and operates LNG-powered barges in europe.
While the trucking sector can comply with all the regulations through the existing conventional diesel fuel, a new set of regulations is coming in 2018, says CTA’s Mr. Bradley.
u. S . president Barack Obama’s recent drive to cut carbon emissions could put further regulatory heat on the trucking industry.
As Mr. Obama made his big speech on climate change this week, the White House released a policy document, which pledged to partner with industry “to develop post-2018 fuel economy standards for heavy-duty vehicles to further reduce fuel consumption through the application of advanced cost-effective technologies.”
The industry can see the changes coming.
“We know the future fuel mix is going to be much more diverse than it is today,” Mr. Simpkins said.