Facing soaring gasoline prices in 2011 and more than 100 miles of daily driving for his job as a traveling nurse, Daniel Piekarek confronted an uneasy choice: find cheaper gas or start updating his résumé. So, a few years before many of the world’s biggest companies would follow suit, Piekarek crossed his fingers and turned his life over to natural gas. On EBay (EBAY) he bought a used Honda Civic GX, the only commercially available natural gas vehicle in the U.S. at the time. “My costs went from $30 a day to $5 a day,” says Piekarek, who lives in Michigan and pays as low as the equivalent of $1.50 a gallon to fill up. “It’s been a real moneymaker.”
The shale revolution, which in recent years turned fracking into a household word and the U.S. into the world’s second-largest natural gas producer, is only half a revolution. It increased supply enough to meet current U.S. consumption for 100 years. To truly upend the global energy balance, the U.S. must also revolutionize demand. And the only way to do that is to get natural gas into what has always been the greatest prize: light trucks, 18-wheelers, government and delivery fleets, and, of course, private cars.
More than 1,000 natural gas fueling stations already dot the U.S., with about half open to the public and the rest serving fleets. There are about 120,000 natural gas-powered vehicles on U.S. roads today and more than 15.2 million worldwide, according to Natural Gas Vehicles for America, an industry-funded trade group. By 2019 the number of natural gas consumer vehicles worldwide will rise to 25 million, says Navigant Consulting. “This is early days, but we’re on the brink of one of those tectonic shifts that occur every 100 years in the energy game,” says Kirt Montague, chief executive officer of Plum Energy, which develops fueling networks for trains, ships, and drilling rigs powered by natural gas. “For years, I felt like we were the only ones drinking the Kool-Aid. Now that’s no longer the case.”
Not so long ago, only T. Boone Pickens and a handful of outliers were talking about the natural gas motor-fuel revolution. Now hundreds of investors and entrepreneurs like Montague are tackling engine retrofits and distribution issues, industrial conglomerates General Electric (GE) and 3M (MMM) are getting into the hardware arena, and energy giants such as Royal Dutch Shell (RDSA) and Sasol (SSL) are betting tens of billions of dollars on the change. Chrysler, Ford (F), and General Motors (GM) have begun to offer dual-fuel pickups in their lineups. “It’s going to reduce our dependency on foreign oil; it will clean up the environment and take trucks off the highway,” says Matt Rose, CEO of BNSF Railway, which is testing natural gas-powered trains. Owned by Warren Buffett, BNSF is the nation’s biggest nongovernment consumer of diesel fuel. “We’re willing to go down this path understanding up front that it’s filled with lots of challenges,” says Rose. “As in everything, things that are really important are really hard.”
Four years ago, Apache—among the largest of the independent oil and gas companies—started converting its fleet of trucks, building natural gas service stations, and helping employees run natural gas-powered cars and trucks of their own. Roger Plank, son of one of the Houston-based company’s co-founders, spent about $20,000 to retrofit his off-white Suburban with a pressurized compressed natural gas (CNG) tank and install equipment in his garage that lets him refill his Chevy with the same natural gas piped into his home. (Chesapeake Energy (CHK) is working with GE and Whirlpool (WHR) to develop an at-home CNG appliance that will cost just $500.) “It’s like printing money,” says Plank, showing off a glove compartment full of receipts and notes, one documenting a fill-up at home for the gasoline equivalent of 84¢ a gallon. “That’s turning back the hands of time about four decades.”
Plank, Apache’s president, admits it may be a decade before he recovers the cost of converting in fuel savings, but he sees a familiar arc: As retrofittings increase, technology improves, natural gas fueling stations spread, and automakers begin offering more natural gas cars, costs will come down. Apache has built 21 CNG stations from Tulsa to Midland and converted 453 company vehicles, a number the company expects to reach 851 by 2015.
Gas is currently distributed in three main forms, all building out at the same time, all with advantages and disadvantages. Plank is a missionary for compressed natural gas, which is squeezed down to 1 percent of its natural volume, much like the gas in those white tanks behind suburban homes. The two other forms are liquefied natural gas (LNG) and gas-to-liquids (GTL).
The option attracting the most investment is GTL. The technology essentially breaks down natural gas and converts it into a mixture of hydrogen and carbon monoxide before using chemical reactions to make diesel and jet fuel. No new cars, engines, or filling stations are required. Shell, which completed a $19 billion GTL plant in Qatar in 2011, is considering building another on the U.S. Gulf Coast. South Africa-based Sasol, trying to cash in on cheap U.S. shale gas, has announced plans for a facility in Louisiana that would begin operations in 2018 and cost as much as $14 billion.
The technology was developed in the 1920s and commercialized in Nazi Germany, which did not have local sources of oil. About 95 percent of the Luftwaffe’s aviation fuel during the Battle of Britain was produced using the Fischer-Tropsch process, named for the chemists who created it. They used coal, but the principles are the same. Smaller-scale GTL plants can produce diesel at a cost of about $1.50 a gallon (the average retail price for diesel in 2012 was $3.92). “The U.S. gas production curve is not going down, it’s going up,” says Sasol CEO David Constable. “We see this product really taking off in the next decade after these plants have been built.”
The plants are expensive, and compete with LNG and CNG. Globally, oil supplies two-thirds of all transportation fuels, yet that share has dropped as natural gas conversions have gained speed. In the first half of last year, the pace of fleet conversions to natural gas—from the likes of Waste Management (WM) and rental truck company Ryder System (R) to municipal buses in cities such as Houston—grew so fast that some analysts see the switch damping diesel demand and prices, says Vikas Dwivedi, global energy strategist for Macquarie Group (MQG:AU).
Liquefied natural gas, or LNG, is most suitable for use in ships, trains, and long-haul trucks. It’s made by chilling natural gas to -259F to turn it into a liquid that’s a dense source of energy, maintained at low temperatures in cryogenic fuel tanks. However, the special tanks on LNG-powered trucks can’t hold the fuel for long periods at that temperature. As LNG heats up, it reverts to a gaseous state that must either be burned by the engine or wasted. That’s why it’s most suited for 18-wheelers, which are constantly on the move and can keep tanks cool with a running engine.
Shell has emerged as one of the main boosters of LNG for transportation, investing $300 million to help build LNG filling stations at 100 locations across the U.S., and setting up networks for refueling trains and ships in Canada, throughout the Great Lakes, and on the Gulf Coast. Clean Energy Fuels (CLNE), formed with help from Chesapeake and Pickens, built 70 LNG fueling stations in 2012 as part of a plan to create “America’s Natural Gas Highway,” a group of stations linking major trucking corridors throughout the country.
“It’s happening,” says Gordon Pickering, co-head of the North American natural gas practice at Navigant. “When you combine that with what’s happening in fleets, the potential size of the market is very substantial.”
Commercial vehicles, which generally rack up two or more times the annual mileage of consumer cars, are going first. In the last year many companies, including GE, UPS (UPS), FedEx (FDX), AT&T (T), PepsiCo (PEP), and Waste Management, the biggest trash hauler in the U.S., have announced plans to begin or expand conversions of their fleets to natural gas. Cities such as Los Angeles, New York, Phoenix, Fort Worth, Dallas, and San Francisco all have CNG bus fleets. Large fleets of airport shuttles are converting as well.
According to the American Public Transit Association, nearly one-fifth of all transit buses were run by either CNG or LNG in 2011. Almost 40 percent of the nation’s trash trucks purchased in 2011 were natural gas-powered, the association said. Garret Alpers, founder and CEO of World CNG, a Seattle-based company that converts traditional gasoline cars into dual-fuel vehicles for as little as $8,000, estimates a taxi owner could recoup his expense in a year.
In 2008, as the recession eroded his business building race cars, Alpers ventured into natural gas conversions. By 2011 the company had revenue of $10 million; in 2012 it rose to about $14 million. He expects to do $30 million this year and as much as $60 million in 2015. “The transportation sector for natural gas has the opportunity to really pop in the next few years,” Alpers says.
There are arguments against natural gas. Some climate advocates, such as 350.org co-founder Bill McKibben, contend that environmental costs incurred in the drilling cycle—such as potential water contamination and possible methane leakage from drilling sites—make natural gas as dangerous as crude oil. But analyses of life-cycle emissions, known as well-to-wheel studies, sponsored by the U.S. Department of Energy show that emissions from natural gas vehicles are 6 percent to 11 percent lower than emissions from those powered by gasoline. According to a May 2012 report by the Center for Climate and Energy Solutions, a nonprofit based in Arlington, Va., LNG reduces life-cycle carbon emissions by 13 percent compared with gasoline and CNG lowers them by 29 percent in comparison.
DOE studies say vehicles powered by natural gas are no more prone to explosions than conventional gasoline or diesel vehicles. Their specially lined pressurized tanks tend to be more robust than thin, rubber-lined gasoline tanks and have been designed to withstand severe impact, extreme temperatures, and environmental exposure. (Tests conducted a decade ago by a CNG tankmaker involved strapping a quarter-stick of dynamite to a tank. The only damage was a 16th-inch dent.) If a tank does spring a leak, natural gas is lighter than air and dissipates into the atmosphere, greatly diminishing risks of fire or explosion. Spilled gasoline and diesel can pool, creating a lingering fire hazard and requiring cleanups amounting to a hazmat operation.
As the U.S. lets the market make many decisions, China is moving forward with stronger, centralized guidance. The country had 1.5 million natural gas vehicles on the road last year, 10 times as many as in the U.S., and an increase of 48 percent from the previous year, according to the research institute of China National Petroleum. In some Chinese cities, such as Beijing and Shanghai, buyers must enter a lottery to purchase a car running on traditional gasoline. Buying a natural gas-powered car, however, requires no permit, Xiansheng Sun, president of the CNPC institute in China, said at a March presentation in Houston.
In the U.S., President Obama has often sought to allow buyers of natural gas-powered cars to receive the same $7,500 tax credit that applies to plug-in hybrids and electric vehicles such as the Nissan Leaf. He signed legislation on Jan. 2 that extends a tax credit of 50¢ a gallon for natural gas used in vehicles. The law also provides a credit of as much as $30,000 per gas station for investment costs and as much as $1,000 for residential home-fueling units.
Irma Vargas, a real estate agent in Southern California, paid $1,500 for installation of an at-home refueler at the end of 2005 and qualified for a $1,500 federal tax credit that existed at the time. She and her business partner initially purchased only one natural gas-powered Honda Civic for use in their business but soon bought more to take advantage of Los Angeles’s offer of free parking at municipal meters and use of the carpool lane even if she is alone.
Vargas bought a new Civic last year with a sunroof, and she pays the equivalent of about $1 a gallon at home to refuel. While the potential environmental benefits of driving on natural gas are nice, she doesn’t mince words when it comes to the real reason she made the switch. “We’re a small company and you’ve got to look at the bottom line,” Vargas says of her real estate operation, which now owns six natural gas cars. “They drive like any other car, but at the pump, there’s not as much pain.”