Dwindling output from conventional plays elevated US natural gas prices from 2003-08, prompting independent operators such as Chesapeake Energy Corp (NYSE: CHK) to invest heavily in efforts to advance technologies and techniques that would make shale-gas production a commercially viable enterprise.
As I discussed in Cheniere Energy and LNG Exports, their success has transformed the US from a country that was expected to depend heavily on imports of liquefied natural gas (LNG) into the world’s top producer of the commodity.
Superior economics and leasehold drilling have accelerated activity in many of the nation’s top shale plays despite depressed natural gas prices. Although the oversupply should abate a bit once producers’ leases are “held by production,” low natural gas prices and the sheer abundance of the country’s reserves have prompted producers to push for new demand outlets.
Fuel switching at power plants with the capability to burn either coal or natural gas has picked up over the past year thanks to low natural gas prices, while concerns about limits on carbon emissions are prompting many utilities to close coal-fired facilities or convert them to cleaner-burning natural gas.
The US Energy Information Administration forecasts that coal-burning facilities, which accounted for 18 percent of new capacity in 2009, will decline to 10 percent of new builds in 2013. Meanwhile, natural gas-fired plants are expected to account for 82 percent of new capacity in 2013, up from 42 percent in 2009.
Interest in fuel switching has also hit the US transportation sector, where concerns about the country’s dependence on foreign oil and carbon-dioxide emissions have picked up. Energy magnate T. Boone Pickens has played a key role in raising public awareness about America’s massive natural gas reserves and the benefits of natural gas vehicles (NGV), sinking $58 million into an elaborate advertising campaign.
The National Gas Vehicle Coalition (NGVC) estimates that 110,000 NGVs are on the road in the US and about 1,000 fueling stations, roughly half of which are open to the public.
To date, limited fueling options have restricted interest in NGVs to trucks, buses and other vehicles that run predictable routes.
According to the American Public Transit Association, transit buses accounted for 66 percent of vehicular natural gas use in 2009, while 26 percent of new bus orders that year were for NGVs. About 18 percent of the nation’s buses run on natural gas. Not surprisingly, NGVs are also big in the waste management industry, which the NGVC says accounts for 11 percent of vehicular natural gas use.
Other industries are making the switch as well. Last year telecom giant AT&T (NYSE: T) announced that it would spend up to $350 million over five years to purchase more than 8,000 vans that it will convert to run on compressed natural gas. Such investments not only reduce fuel costs and lower greenhouse gas emissions by 20 to 30 percent, but also make for a good public relations story.
On the consumer side, Honda’s natural gas-powered version of the Civic is available in only four states, though individuals can also convert existing gasoline-powered cars to natural gas using a number of different kits that are available.
But widespread adoption of NGVs in all classes won’t occur until sufficient fueling infrastructure is in place. In other countries, strong government incentives for switching to NGVs have accelerated this transition.
Earlier this summer, Senate Majority Leader Harry Reid (D-NV) introduced legislation that included almost $3.8 billion in subsidies for NGVs, including federal rebates of $10,000 for natural-gas powered cars and up to $64,000 for heavy trucks. The proposal would also establish a Natural Gas Vehicle and Infrastructure Development Program whereby the Dept of Energy would disburse grants to support infrastructure construction and domestic manufacturing of NGVs and components.
Reid has acknowledged that an energy bill is unlikely to pass this year, though a version that includes support for nuclear power might achieve bipartisan support in 2011.
Meanwhile, developments at the state level are encouraging.
In May, Oklahoma’s governor signed the Oklahoma Energy Security Act, which set the goal of having at least one NGV fueling station every 100 miles along its interstate highway system by 2015. To move toward this goal, the law includes a 75 percent tax credit for NGV fueling stations.
Republicans in Pennsylvania’s House of Representatives are working on similar legislation that calls for transitioning the state’s fleet of 16,000 vehicles to natural gas and includes grants for local governments to upgrade their vehicles. The proposal would also build natural gas filling stations at half of the existing gas stations on the Pennsylvania Turnpike.
That being said, the amount of infrastructure investment needed to support widespread adoption of NGVs in the US is a significant challenge. Investors seeking to profit from this trend should consider companies with leverage to robust growth in foreign markets, particularly in Asian emerging markets.
According to the International Association for Natural Gas Vehicles, Asia is home to half of the world’s top 10 nations in terms of NGV adoption. Pakistan leads the way, with 2.3 million NGVs on the road, though the technology is becoming increasingly popular in China, India and Thailand. In fact, the Asia-Pacific Natural Gas Vehicle Association expects NGV use to increase 10 to 15 percent in 2010. Progress in emerging economies is easier than in the US because these countries often lack the legacy infrastructure, allowing NGVs to compete on equal footing.
Although India already boasts the world’s fifth-largest deployment of NGVs, many analysts believe that the market offers the best growth potential, thanks to a 7,500-mile, 15-state LNG pipeline that’s due for completion in 2012.
Investors seeking to profit from economic expansion in emerging markets and growing investment in NGVs should consider Cummins (NYSE: CMI), a leading manufacturer of hybrid and natural gas engines for trucks and buses. The firm should continue to benefit from stricter emissions regulations, and management has worked hard to build its market share in India and other emerging economies.
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