Natural Gas (CNG / LNG) Business Overview
Many in the trucking industry are becoming more bullish long-term on Natural Gas (NG) use in their operations. We are too - but realistic on how the adoption process will proceed. The Compressed Natural Gas (CNG) versus Liquified Natural Gas (LNG) debate within different operations is ongoing. Decisions and approaches follow the normal business assessment process based on the local natural gas dynamics, vehicle availability and cost – along with a look at history and reality.
NG will gain a lot of traction over the next 5-years as availability and price of NG engine / equipment, CNG versus LNG gas dynamics and terminal / public fueling gets more mainstream. The outside factor is if the diesel-NG retail price differential stays notable. At ~$100 crude, we should have a diesel floor of ~$3.20 per gallon (with taxes). Because of low ultra sulfur diesel demand around the globe, we see US retail diesel at an $0.80 / gal premium or ~$4/gal. This is in comparison to NG prices at up to half of that on a Diesel Gallon Equivalent (DGE) basis.
If we look at NG prices of a little over $3/MMBTU, it converts to a floor diesel gallon equivalent pricing of ~$2.00 / DGE CNG and $2.50 / DGE LNG (both with taxes). Markup to retail varies by location, thus making the ROI vary by different geographic areas. Where there is competition, the prices and differentials get quite interesting – and the truckers’ ROI pretty good.
The LNG vehicle cost is driven by the tank cost of ~$25K today – then plus the engine / truck technology, other parts and installation. If we look at “spark-plug” technology, the engine price is less than the diesel-pilot / dual-fuel (using diesel in place of spark plug) approaches. There is also different (less expensive) exhaust aftertreatment needed with spark-plug technology, but with a slightly higher maintenance cost versus diesel.
Spark-plug fired diesels have been around for decades, but are slightly less efficient than diesel-pilot fired engines. Specialty “diesel” markets such as municipalities and utilities – and green grocers have driven the NG market since the early ‘90’s. Many are probably familiar with seeing Natural Gas powered buses in many cities. Other “clean-dirty” cities had picked up on that since, as has the refuse industry.
We all are also aware of all the municipality-type and utility operations doing NG in gasoline-powered smaller vehicles, but a driving issue today is the cleaner NG fuel. From a vehicle technology standpoint, the onboard electronics and higher pressure fuel injection systems have been the game-changers that allow for the improved performance and sales we see today.
Next, we all need to get midstream to downstream infrastructure in place. Liquefaction plants for LNG are needed but they are expensive (tens of millions of $$) each depending on capacity to put in and operate. There are some who have put estimates that we need 4-5 / State along the pipelines to make the CNG / LNG distribution models work. Then we must get NG to retail, which will be done by tank trailers (another opportunity).
Of course, we need to have terminal fuel / retail locations (est $1MM per station). User natural gas v. diesel price is key to get to a fuel cost per mile differential. This is in part the hesitation on the truck buying side – as well as what will happen with incentives.
Many people are running surveys on adoption of NG equipment. The results are consistent with NG infrastructure (user gas availability / price) and vehicle price as #1-#2. The largest limiting factor where gas is available – is the vehicle up-charge / residual. One difficulty in getting trucks into service is getting the upcharge of up to ~$80K financed (without grants / incentives) with today’s retail gas prices (ROI). This ties into the financing (leasing) sector where we see most activity in vehicle adoption is through leasing companies. Leasing companies with their own fueling (or independent fueling locations) offer the best financial option for adoption today (look at largest adopting CNG truck market). The exceptions again are municipalities, utilities and refuse where financing and gas availability are different animals.
Local / regional transport – including bus – is where NG opportunities exist today due to CNG fuel availability /price and truck pricing. Interestingly, the thing that drove trucking to diesel from gasoline were 1.) the low (almost) give-away price of diesel fuel versus gasoline and 2.) Diesel engine technology / performance. Diesel fuel was first made available at trucking terminals (back before deregulation) and union truckers ran between (and out of) those terminals. With deregulation and the growth of trucking, the Truck Stop models complemented terminal fueling – addressing the over-the-road / away-from-home segment.
Comparing that to NG, we see some of the same modeling with the leasing companies approach, as the majority of their customers are forward-thinking big box-types. Regional operations where trucks return / fuel at terminal will follow – then it will be about traffic-lanes where there is available fuel / competitive pricing.
The trucking industry is interested in LNG (and CNG), but it’s a full supply-chain gas pricing / markup issue – and a fleet ROI (Return on Investment) / business CPM (Cost Per Mile) issue. In the meantime, for longer-haul, most commercial adoption is going on where there is competitively-priced fueling available and with relays.
As we model the adoption criteria from a high level, here are the discussion points:
Assessing freight (or operations) planning model
—Changing trucking operational marketplace
—Trucking operations (LTL, TL, dedicated, private, leasing, bus, etc.) being local, regional and then relays for longer-haul trucking
—Addressing terminal & on-road fuel usage
—The clean emissions opportunity
Other CNG / LNG retail use markets
—Rail (long-haul / regional)
—Mining (large trucks)
—Bus and Transport Refrigeration Units
Truck / Engine Space
—Technology (Diesel-pilot v. spark & tank cost issues)
—OEM dealer potential
Fuel production / distribution model (pricing transparency)
—Feedgas pricing NG (HH floor plus transport)
—Liquefaction cost plus
—Truck transport to retail / trailers (leasing & storage)
—Retail margins (floor plus)
—Floor price versus diesel
Retail / terminal fuel
—Retail Public fuel
—Major O&G involvement
—Independent Truck Stops
—Long-term contract (financing & fuel)
—Rich parent (green) private fleets
—Truck Leasing (Ryder, Penske, Paccar, etc)
—Secondary market financiers (Master Lease)
—Truck residual pricing issues
—LNG trailer leasing market
Natural Gas ROI Proposition
—Financing / ROI modeling
—Shared equipment capex / fuel cost offset
We are assisting in planning with each step of the equipment decision process and full fuel supply-chain. On the fleet side, we start with the freight operations / traffic lane then move toward available technologies and cost. On the fuel supply side, we start with fuel type availability followed by cost with the supply-chain checklist.
Key to success is realizing the ROI and profitability opportunity in adoption. We assist shippers to funders of the operations and everyone else information and real-life / realistic numbers as to the risks and rewards with the various approaches.
To summarize, this is a great opportunity for our nation, businesses and individuals involved. Please let us know how we may assist in your planning. Contact Us