Where Einstein Meets Edison

Emerging Trends in Natural Gas – Finding New Sources of Demand

Emerging Trends in Natural Gas – Finding New Sources of Demand

Apr 6, 2012

The recent advent of shale gas has disrupted the U.S. energy market, causing entrepreneurs to jump on what many consider a once-in-a-generation opportunity.  Money has begun chasing natural gas deals including professional investors such as Venture Capital and Private Equity firms all the way down to the retail investor.  Some of hottest stocks this year have been companies that are capitalizing on cheap natural gas [1].  One of the companies on the forefront of natural gas development is Clean Energy Fuels (NASD: CLNE), a company interviewed for this article, whose stock has been a recent favorite among investors.   Other firms benefiting from this investor interest and interviewed for this article are Applied Natural Gas Fuels (ANGF), run by MIT Sloan alumni, and Carib Energy, a startup focusing on the export market.


Clean Energy Fuels

Clean Energy is the largest alternative transportation fuel provider in the U.S. with 285 compressed natural gas (CNG) and liquefied natural gas (LNG) stations delivering 123MM (million) gasoline gallon equivalents (GGE) in 2010, which serviced over 25,000 natural gas vehicles (NGV).  LNG is natural gas that is cooled to -260ºF, condensing the gas to 1/600th of the original volume in a liquid form [2]. CNG is partially compressed natural gas that is still in gaseous form – compressed to a density 40% of LNG.  Whereas CNG is used in passenger and light vehicles [3], heavy-duty vehicles such as tractor trailers need to be able to travel longer distances on a single fill.  LNG is condensed further than CNG allowing trailers to carry more fuel in the same volume.

Earlier this year Clean Energy released its plan to build “America’s Natural Gas Highway” [4] by partnering with Pilot Flying J, an operator of truck stops.  Clean Energy is investing $150MM to build 150 LNG refueling stations among the busiest truck routes. They expect to open 70 stations in 33 states by the end of this year.  As of the end of 2011, Clean Energy operates, maintains, or supplies 51 LNG refueling stations [5].

The firm sees two main market drivers for the conversion of vehicles to natural gas.  The first driver is the increasing availability of reliable natural gas engines.  A few years ago, Cummins Westport released an 8.9L natural gas engine.  The adoption rate increased rapidly, from 3% in the first year to 8% and 15%, respectively in the following two years [6]. Currently, 40% of all new purchases of this 8.9L engine gas are installed to run on natural gas.  This engine has been particularly attractive for refuse haulers.  Two well-known haulers, Waste Management and Republic Services, are actively converting their trucks with 90% and 60% of new engine purchases respectively being made for natural gas use.  This accelerating adoption rate has led several engine manufacturers to commit to building 12-13L natural gas engines [7], an ideal size for longer-range tractor trailers, which will be available for purchase by early next year.

The second driver involves fuel price differentials. The oil to natural gas spread is currently over 40x compared to a ten-year average of 13.0x.  The large spread comes from rising oil prices and a drop in natural gas prices due to shale assets coming online combined with a warm weather, which has curbed demand.  The result is that LNG and CNG pump prices are well below their respective substitutes of gasoline and diesel.  As of February 2012, the average cost of diesel in Los Angeles was $4.25 compared to the LNG diesel gallon equivalent (DGE) of $2.80.  Similarly, gasoline was $3.90 compared to the CNG gas gallon equivalent (GGE) of $2.25 [8].  As long as the price of the substitute, natural gas, remains low enough to earn an acceptable payback period on the costs of natural gas conversions, demand will continue to rise.  With natural gas at all-time lows, many predict an inevitable increase from current price levels, but future gas prices depend on many factors and are notoriously difficult to predict. However, the potential for large price variations and concerns related to hydraulic fracking as a sustainable source of supply could prove to be roadblocks for converting vehicles to natural gas.

Applied Natural Gas Fuels (ANGF)

ANGF’s business model is similar to Clean Energy Fuels but on a smaller level.  Cem Hacioglu, an MIT Sloan alumnus, is the CEO and Frank Martelli, also an MIT Sloan alumnus, is the VP of Operations.  ANGF’s LNG supply comes from a liquefaction plant in Arizona that is capable of producing up to 35MM gallons of LNG annually.  The firm owns 34 cryogenic trailers that deliver the LNG to end users and two company-operated CNG and LNG refueling stations.

LNG demand is currently outstripping supply and ANGF has plans to double its plant capacity.  Similar to Clean Energy, ANGF’s customers have been California municipalities and refuse haulers.  Industrial companies have shown an increasing appetite for LNG domestically.  In particular, mining and drilling companies are seen as potential high growth sources of demand for ANGF. Outside the U.S., ANGF has also been trucking LNG into Mexico.

Building the infrastructure necessary to produce LNG requires a large investment and is a multi-year effort.  Whereas Clean Energy has tapped the public markets, ANGF is one of several smaller competitors receiving backing by private investors eager to make a play on the natural gas boom.


Carib Energy

While ANGF and Clean Energy fill the need for LNG supply domestically, Greg Buffington has been looking to the Caribbean. Greg’s firm, Carib Energy, is one of the few companies to receive a DOE permit to export LNG.  Caribbean countries rely on imported oil and gas with the majority of utilities generating electricity through diesel generators.  This is an expensive method of producing energy.  The result is that the cost of electricity can range from $0.28 to $0.50 kWh (kilowatt hour), compared to an average $0.12 kWh in the U.S [9]. Greg recognized that shale gas disrupted traditional pricing relationships between diesel and natural gas enough to make exporting LNG to Caribbean utilities economical.  Carib Energy plans to begin exporting later this year with the vision of making electricity more affordable for its Caribbean customers.

To date, most liquefaction plants are owned by utilities for use in peak shaving plants, “peakers,” supplying energy to the grid in periods of high demand.  It is not uncommon for utilities to have excess LNG in their peakers, but the conservative nature of these organizations usually prevents them from selling to eager buyers.

Looking Ahead

Gas supply is the critical factor in most of these entrepreneurial ventures.  Firms are rushing to build liquefaction capacity both for export and domestic use.  Equipment orders have been backlogged, extending the timeline necessary to bring a plant online.  One creative solution to this is a deal by Pivotal LNG, a subsidiary of AGL Resources, which recently decided to enter the wholesale LNG market by signing a 100,000 gallons per day (GPD) five-year contract to supply LNG to refueling stations owned by Encana Corporation [10].  To fulfill this contract Pivotal secured a purchase agreement for a 60,000 GPD from Trussville Utilities.  The remaining 40,000 GPD balance likely to come from a peak-shaving plant belonging to the Chattanooga Gas– owned by AGL.

Commodity cycles have been known to be a particularly cyclical asset class.  Today’s surplus could easily turn into tomorrow’s deficit.  For niche players like the companies profiled in this article, a reliable source of LNG with predictable price range to base their business model on are both keys to their success.  Neither is easy to guarantee, but in the near term they look promising.



[1] http://www.investmentnews.com/article/20120323/FREE/120329955

[2] http://www.ferc.gov/industries/lng.asp

[3] http://www.ngvc.org/about_ngv/index.html

[4] http://www.cleanenergyfuels.com/

[5] CLNE 10k 2011

[6] CLNE excutive

[7] http://cleanvehicles.org

[8] CLNE 2010 10k

[9] Carib Energy Executive

[10] http://www.ogj.com/articles/2012/02/encana-opens-shreveport-lng-fleet-station.html