Oversupplied producers see room to grow with LNG-powered vehicles

HOUSTON -- The use of liquefied natural gas as a vehicle fuel is expanding arguably faster than many in the industry anticipated.

Compressed natural gas (CNG) and liquefied natural gas (LNG) have powered vehicles for many years, but those fuels have always served a very niche market. However, the glut of domestic gas reserves created by the recent explosion in production has led producers to see the vehicle market as one attractive new demand center for their surplus gas.

Most observers expected this market to develop slowly. A year ago, there were few examples of the rise of LNG as vehicle fuel aside from the "Texas Triangle" LNG fueling station corridor for trucks, a Shell LNG project for trucking in western Canada, and some major corporate fleet conversions.

But that's changing quickly, driven largely by the efforts of many in the oil and gas industry committed to making it work and by the increasing realization of trucking companies and fleet operators that converting to gas makes economic sense and eventually pays for itself, so long as diesel prices stay high.

"I think it's a pretty sustainable proposition," said Chris Goncalves, director of natural gas and LNG research at Berkeley Research Group (BRG). "It's the smallest source of incremental demand in North America, but it is a meaningful source."


The market for LNG for vehicles and transportation won't be nearly as big as the one for overseas power generators, the target market of some 20 proposed LNG export projects along the coastal United States. And gas drillers are expected to continue to face rising demand from domestic power companies looking to transition away from coal-fired generation.

But investments completed and planned by LNG vehicle fuel boosters make it clear that the industry is taking very seriously the notion of LNG as a mainstream vehicle fuel.

Last week, Houston hosted the 17th International Conference & Exhibition on Liquefied Natural Gas, and LNG for transportation was one of the biggest topics of conversation there. The most optimistic supporters envisioned LNG inevitably replacing diesel as the fuel of choice for heavy trucking, construction equipment, marine vessels and locomotives. But even cautious observers like Goncalves admit that the growth in demand for LNG as a vehicle fuel is potentially very strong.

Some big corporate names seemed convinced, too.

Big names line up projects

On the first day of the LNG conference, oil and gas giant Shell and TravelCenters of America announced a plan to roll out a nationwide network of LNG fueling stations at TravelCenters' retail locations. Up to 100 filling stations will be built, the companies said, with investments focused first on the United States' busiest trucking corridors.

Shell was already building three regional LNG truck corridors of its own before last week's announcement. Those projects center on the route between Calgary and Edmonton, Alberta, the Canadian-U.S. Great Lakes region and the U.S. Gulf of Mexico coastline.

Anders Ekvall, vice president LNG in the Americas at Shell, said his company sees itself in direct competition with other LNG-for-trucks supply companies such as Clean Energy Fuels, a firm that has been at the forefront of this emerging business in the United States.

Jim Harger of Clean Energy Fuels demonstrated just how quickly things have been happening within his company during the past year. Clean Energy Fuels' business is primarily CNG, but its LNG business is expanding rapidly and could overtake the CNG side if the pace continues, he said.

Harger noted that last year, his firm built about 70 LNG fueling stations for trucks across the United States, "more than all the prior years combined." Clean Energy Fuels has plans for 80 more stations this year.

The investment is justified, he said, due to signs that trucking companies are showing strong interest in pursuing LNG as an option, either through converting existing vehicles to run on LNG or purchasing brand new LNG-powered big rigs. Truck manufacturers Peterbilt Motors Co., Kenworth, Volvo, Mack Trucks Inc. and Freightliner Trucks all have LNG as options for the trucks they build, Harger noted.

New CNG-for-vehicles projects are also continuing to roll out, he added. For companies managing larger fleets, CNG may make more economic sense on short runs between two or just a few destinations, such as shipping company trucks running from the airport to distribution centers. Clean Energy Fuels is designing its LNG filling stations to be able to add CNG capabilities, too, equipping them to do so only if the company sees a market for CNG near that station.

Clean Energy Fuels foresees the number of LNG and CNG-powered trucks on U.S. roadways expanding by an almost exponential rate. By the end of this year, that company believes about 3,650 trucks in the United States will be burning gas, mostly as LNG. Clean Energy thinks that figure will grow to almost 10,700 at the end of 2014; 30,850 in 2015; 65,300 in 2016; and nearly 140,400 by the close of 2017 -- a fortyfold increase in four years.

It still represents a small fraction of the more than 2.6 million diesel-powered heavy trucks on U.S. roads -- about 5 percent by 2017 -- but it is a rapidly growing proportion of the nation's trucking fleet.

Eyes on new markets

Independent analysts are starting to predict a similar growth trend.

Bob Nimocks, president of Zeus Development Corp., figures that "those numbers are as good as they get." And he sees growing markets beyond just the mail and freight haulers.

More than 12 hours was spent on the topic of LNG in transportation on the sides of last week's industry conference. During one of these presentations, Nimocks suggested that LNG suppliers should expand their marketing efforts to include rock quarry and aggregate pit owners. Since their products fetch relatively low prices, the cost of fuel used in earth moving and hauling represents a large percentage of expenses for these companies.

Nimocks counted 11,700 quarries and aggregate pits in the United States, and estimated that if all of them were to switch to LNG, they would consume around 60 million gallons per day, roughly the equivalent of two large LNG liquefaction and export projects.

But in the longer term, many industry experts believe the real potential lies in marine applications. Powering ships on LNG is already a well-established technology, used for roughly 40 years on the very vessels used to transport liquefied methane.

"Probably within 30 to 40 years, a dramatic change will occur," said John Hatley, Americas vice president for ship power at Wartsila, a Finnish manufacturer of ship engines and other heavy equipment.

For land transportation, potential LNG consumption volumes range from a few thousand gasoline-equivalent gallons per year for a personal car to up to 150,000 gallons per year for one large railroad locomotive, he pointed out. For ships, however, the consumption ranges from a million gallons or more a year for a harbor tugboat to around 28 million gallons per year for a large freighter.

How regulations can help, or hurt

Emissions rules could be the key to seeing shipping companies quickly embrace LNG. Hatley noted the gradually stiffening rules regulating emissions from ships in U.S., Canadian and European waters and the longer-term possibility of international emissions controls set by the International Maritime Organization.

Historically regulation, and not market demand, has led to the declining fortune of one vehicle fuel source in favor of another, he said, providing as an example New York City's imposition of a ban on steam engine trains in the 1920s because of the pollution from coal-fired trains. As other cities and governments followed suit, steam engine trains were swiftly replaced completely with the diesel-powered trains that dominate today.

But Frederick Adamchak, LNG adviser at the consultancy Poten & Partners Inc., said LNG producers could have a tougher time persuading ocean shipping companies to abandon diesel. For starters, he said, that industry is facing relatively difficult financial times, and few companies are eager to invest, especially if they can't be confident that their ships will be able to find LNG bunkering services at the ports they stop at.

"Someone has to take the initiative," Adamchak said. "For LNG to move ahead [in marine use], it needs coordinated efforts."

LNG use for shipping is spreading in Europe, experts said, especially in the North and Baltic seas. Worries over emissions and European government initiatives are believed to be the driving force in those efforts.

But there are even nascent signs of interest in the United States. For instance, Shell's Great Lakes and Gulf of Mexico coast projects call for LNG use in inland shipping and for offshore drilling support vessels.

Hatley pointed to two promising developments last year. North America's first passenger ferry powered by LNG entered into service in Quebec. And last December, cargo ship company TOTE announced the order of an LNG-fueled container vessel it plans to use to run shipments to Puerto Rico. Hatley said he believes it will be the world's first LNG-powered container ship.

Goncalves at BRG believes that by 2025, as these markets mature, some 1 billion to 2 billion cubic feet of natural gas could be consumed for transportation per day.

Dan Thomas, a top executive at Chart Industries, said LNG applications, including for transportation, are "the fastest-growing part of our business." He sees the momentum toward using LNG for trucking beginning to really pick up steam within a year, for marine vessels with one to three years, and between three to five years for trains.

LNG can even be used in aviation, though almost nothing exists on that front.

The Russian airplane manufacturer Tupolev introduced the world's first LNG-fueled commercial aircraft, a TU 155, just prior to the fall of the Soviet Union. Tupolev proved the concept with successful test flights, but the project was mothballed after communism collapsed in Russia.

Boeing is doing preliminary research on LNG for aviation. The company proposed a LNG airplane design concept to NASA last year as part of its Subsonic Ultra-Green Aircraft Research project, or SUGAR. An LNG plane could be one means for airliners to meet tighter fuel efficiency and emission standards beyond 2030, Boeing says.

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