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Price contrast

Interesting complexities at work in conversion from diesel to LNG for long-haul trucks, but price of fuel remains significant factor

Art Gelber says it's elementary.

“Natural gas is to diesel as the iPad is to the walkman,” he said. “Say goodbye, good riddance, to the cassette tape and say hello to MP3.

“It's not a future based on scarcity. It's not a future based on peak oil. It's a future based on abundance, and it's very exciting. As Walt Disney said, ‘I always look at the optimistic side of life, but I'm realistic enough to know it's a complex matter.’”

In “Natural Gas to Oil Price Forecasts,” Gelber, president of Gelber & Associates, said the single greatest incentive for liquiefied-natural-gas (LNG)-fueled transportation in North America is the price discount natural gas offers relative to oil. Gas currently trades at approximately one-sixth the price of West Texas Intermediate and one-seventh the price of Brent.

“Why in the world would anybody want to go to the trouble and expense to switch long-haul trucks from diesel to LNG (liquefied natural gas) or short-route trucks from gasoline to CNG (compressed natural gas)?” he said during the presentation made earlier this year during World LNG Fuels 2012, which was hosted by Zeus Intelligence. “Diesel is readily available and easy to handle, while LNG is pretty unavailable to us, at least in the US, and relatively difficult to handle.

“The answer is simple. But it's as simple as it is ephemeral. It's price. The price of natural gas is, give or take, $2.50 while crude oil is $100 — and that is a huge, huge spread. You could drive a truck through that spread.”

He said the crude-to-NG (natural gas) price differential (or delta) will continue.

“There is now no speculative bubble in energy as there was in 2008,” he said. “A single truck can provide $30,000 to $50,000 in annual savings to pay off the cost in two to three years, maybe less. But truckers I talk to will ask about the resale market. The fuel saving is there. There are a lot of interesting complexities in play that drive a fascinating conversion from diesel to LNG for longhaul trucks.

“Over the past two years, there's been a lot going on with earnings of major international companies. Prices generally for NG and oil have been diametrically opposed. It could be negatively correlated. The reasons: shale gas technology leading to a flood of domestic supply; a generally slumping economy; exporting of US industrial capacity to China based on high energy costs here; and cheap labor. But I can tell you that for my customers, it was the high price of natural gas that sent them overseas.

“We also have a history of manipulative pricing signals by speculators and cartels, leading at times to a failure to allocate capital to the right energy projects. A facilitating problem at this very moment is too much LNG import capacity and not enough domestic liquefaction capacity. We also have growing global oil demand and devaluation of the US dollar, and a series of never-ending political events like the Persian Gulf.

“In the next 18 months, this is our best estimate: The low price of natural gas will continue, the current level of crude pricing will stay high or go even higher. If you like the spreads today, stick around, because they're going to get even wider.”

Market risks at work

He said there are some market risks:

  • Government limits on hydraulic fracturing, including various chemical mixtures, water usage and disposal, and cross-state pollution regulations.

    “In his State of the Union address, President (Barack Obama) mentioned natural gas. That was a shocker. We haven't heard much about natural gas since the Bush Administration went away. It's a fantastic change, but it brings to bear some of the biggest risk, which is that they are watching. Some of it could be good, some of it bad. I think the government is the single biggest risk.”

  • Allocation of government subsidy and incentives.

  • Resale market for LNG-fueled trucks. “Truckers are worried about that. It's their biggest investment.”

  • Global LNG pricing signals. “Until we get the infrastructure built up, the backbone of LNG continues to be imported LNG. Pricing is a risk.”

  • Mobilization of capital to domestic liquefaction and distribution assets. “Producers are flaring gas in the shale areas while waiting for the infrastructure to match production. We need a mobilization of capital to grab that gas, gather it, bring it to central stations, liquefy it, and bring it to highway stations.”

Gelber said there is plenty of natural gas but not enough LNG, and to make this industry commercial for trucking, it needs 25,000 to 100,000 BTU facilities, and dispersal of storage facilities to go with it.

His keys:

  • There is a spectacular pricing advantage to domestically produced LNG over diesel fuel.

  • The advantage for imported LNG over diesel is much lower.

  • Large volumes of LNG are potentially available from import facilities.

  • LNG supply from domestic sources is currently extremely limited.

  • Gelber's 18-month Price Forecast shows the spreads remaining advantageous to domestic LNG.

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