COMPRESSED NATURAL GAS AS A TRANSPORTATION FUEL: A THREAT TO REFINERS?

Transcription

1 Annual Meeting March 22-24, 2009 Marriott Rivercenter Hotel San Antonio, TX COMPRESSED NATURAL GAS AS A TRANSPORTATION FUEL: A THREAT TO REFINERS? Presented By: David Freyman Senior Consultant Baker & O Brien, Inc. Dallas, TX Rick Thomas Senior Consultant Baker & O Brien, Inc Houston, TX National Petrochemical & Refiners Association 1667 K Street, NW Suite 700 Washington, DC voice fax

2 This paper has been reproduced for the author or authors as a courtesy by the National Petrochemical & Refiners Association. Publication of this paper does not signify that the contents necessarily reflect the opinions of the NPRA, its officers, directors, members, or staff. Requests for authorization to quote or use the contents should be addressed directly to the author(s)

3 Compressed Natural Gas as a Transportation Fuel: A Threat to Refiners? Gasoline produced from the refining of crude oil has dominated the United States (U.S.) automobile and light truck fuel market for decades. Historically, inroads by other fuels, such as electricity, liquefied petroleum gas (LPG), and natural gas have been small and short in duration. Recent events have changed how traditional sources of transportation fuel are viewed. Despite some false starts in the past, compressed natural gas (CNG) is once again emerging as a potential solution to a number of problems facing the U.S. The potential benefits of CNG as a transportation fuel include: Availability U.S. proven reserves of natural gas are increasing, and the country is less dependent on natural gas imports (16%) than on crude oil and petroleum imports (73%). The Environment - The hydrogen-to-carbon ratio in CNG is higher than the ratio for either gasoline or diesel fuel, resulting in lower carbon dioxide (CO 2 ) emissions from an automobile tailpipe. In addition, public policy debate regarding alternative fuels is likely to increase with the new Administration. Economics - CNG could potentially be more economic than liquid fuels given the British thermal unit (Btu) discount that is typically seen for natural gas versus (vs.) gasoline and diesel, and potential changes in public policies and subsidies. So, an old idea has been resurrected: Can CNG be a viable fuel for U.S. light transportation needs? Natural Gas Availability The U.S. imports almost three-fourths of its crude oil and petroleum products demand. In contrast to petroleum, the U.S. imports relatively little natural gas from outside North America to meet its needs. Natural gas imports comprise about 16% of the total and 83% of imported gas comes from Canada and Mexico. Figure 1 highlights the contrast between U.S. petroleum and natural gas import dependency. Page 1

4 FIGURE 1 U.S. DEPENDENCE ON IMPORTS 2008 Natural Gas Supply U.S. Natural Gas Supply Imports Imports U.S. Petroleum Supply U.S. U.S. Imports Domestic Natural Gas Supply U.S. natural gas availability may present the most significant challenge for expanding the use of natural gas as a transportation fuel, as the U.S. is a net importer of natural gas. Without offsets, such as those presented in the Pickens Plan, shifting more natural gas into the transportation sector would increase natural gas imports. While much of the natural gas imports are from Canada, there is substantial worldwide competition for natural gas. The Canadian oil sands will require a growing volume of natural gas for thermal (in situ) production. U.S. natural gas demand for electrical generation may grow if development of nuclear and coal electrical generation options is limited. Finally, Asia, with its large developing economy, may need more LNG to meet its needs, which would impact the world supply. Historical Balances The U.S. natural gas supply and demand balance for 2008 is depicted in Figure 2. Of the total natural gas supply, domestic production accounts for 84%. Page 2

5 Supply FIGURE U.S. NATURAL GAS BALANCE Disposition Unconventional (41%) Conventional Onshore (21%) 24.2 trillion CF per year Industrial (28%) Electricity (27%)? 0.3%* -0.6% Conventional Offshore (12%) Residential (20%) -0.2% Associated Dissolved (8%) Alaska, other? Pipeline Imports Canada (14%) LNG Imports SOURCE: EIA Expected positive growth Expected negative growth Commercial (13%) Captive Use (8%) Exports to Canada Exports to Mexico *EIA AEO 2009 average annual growth % U.S. total natural gas supply was 24.2 trillion cubic feet in The majority of this consumption occurred in the industrial and electric power generation sectors. The transportation fuels sector demand has been inconsequential. Figures 3 and 4 present the 2009 EIA Annual Energy Outlook (AEO) forecast for natural gas supply and demand. The 2009 AEO forecast shows a 0.8% annual increase in production from 2007 to 2020, while pipeline and LNG imports are forecast to decline 5.3% annually during this same period. As seen in Figure 4, total natural gas demand is forecast to increase 0.1% annually from 2007 to While the transportation sector accounted for less than 0.1% of the total natural gas demand in 2007, this sector is forecast to have the highest growth rate over the 2007 to 2020 period. Even at an 8.5% annual forecast growth rate, the transportation sector will still account for less than 1% of the total natural gas demand in the U.S. by Residential, commercial, industrial, and power generation will still account for the vast demand of natural gas in 2020, as it does today. However, natural gas usage for power generation is forecast to decline in the near term ( ) by 0.6% per year. Page 3

6 FIGURE AEO NATURAL GAS SUPPLY FORECAST Trillions of Cubic Feet LNG Imports Pipeline Imports Production SOURCE: EIA 2009 AEO FIGURE AEO NATURAL GAS DEMAND FORECAST Trillions of Cubic Feet Lease and Plant Fuel Pipeline Fuel Transportation Electric Power Industrial Commercial Residential SOURCE: EIA 2009 AEO Page 4

7 Natural Gas Reserves Based on the EIA 2006 Annual Reserves Report published in November 2007, the total U.S. proved natural gas reserves are estimated at 211 trillion cubic feet. Proved reserves are the estimated quantities which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. However, proved reserves may not tell the full story. Unconventional Production and Emerging Opportunities As depicted in Figure 5, unconventional production has increased from 1998 through 2008, while conventional natural gas production has declined. In 2008, the unconventional production comprised 46% of the total dry natural gas production. FIGURE 5 U.S. DRY NATURAL GAS PRODUCTION Trillion Cubic Feet per Year Unconventional Conventional SOURCE: EIA The major components that make up the unconventional natural gas production include tight sand, coal bed methane, and shale. Figure 6 provides the breakdown of these sources in comparison to the total unconventional production. While tight sands and coal bed methane production has increased approximately 5% annually over this period, production from shale has increased at a much faster rate (13% annually). Natural gas production from shale now represents approximately 12% of the total unconventional production. Page 5

8 FIGURE 6 UNCONVENTIONAL PRODUCTION SOURCES Trillion Cubic Feet per Year Shale Coal Bed Methane Tight Sands SOURCE: EIA A recent study prepared by Navigant Consulting, Inc. (NCI) 1 suggests that the EIA natural gas reserves forecast is significantly understated. The results of this study indicate that the reserves associated with shale gas have been understated, because their emergence has been too rapid for the underlying models to capture it accurately. There are at least 21 shale basins located in over 20 states in the U.S. The major producing areas include Antrim, Barnett, Devonian, Fayetteville, Haynesville, and Woodford. The Potential Gas Committee 2 (PGC) reported an estimated 1,530 trillion cubic feet of U.S. natural gas reserve potential, inclusive of an estimated 204 trillion cubic feet of proved reserves for The NCI study estimated for shale gas a reserve of 274 trillion cubic feet, which is approximately 143 trillion cubic feet higher than the shale gas reserves contained in the PGC estimate. Adjusting for this difference and for the higher proved reserves (211 trillion cubic feet from the EIA report for 2007), gives a total reserve estimate of 1,680 trillion cubic feet. This represents a supply of 87 years at 2007 production levels. If the maximum reported shale gas assessment that NCI obtained from its producer survey is used (842 trillion cubic feet), the 1 Navigant Consulting, Inc., North American Natural Gas Supply Assessment, July 4, 2008, Richard G. Smead and Gordon B. Pickering. Page 6

9 estimated total U.S. reserves becomes 2,247 trillion cubic feet, which represents a 117-year supply at 2007 production levels. Figure 7 presents a graphical summary of these results. FIGURE 7 U.S. TOTAL GAS SUPPLY ESTIMATES 2,500 2,000 Trillion Cubic Feet 1,500 1,000 1,326 1,469 2,036 Unproved Technically Recoverable Resource Proved Reserves PGC 2006 Mean Assessment Total Gas with Updated Shale and Proved Reserves Total Gas Using Maximum Reported Shale Assessment SOURCE: NCI, EIA While there may be significant unproved natural gas reserves potentially available in the future, without the economic incentive via higher natural gas prices, little development in this area may occur. Therefore, dependence upon natural gas imports will continue until there is an economic driver to substantially develop the unproved reserves. Forecast Supply and Demand Balances The supply/demand fundamentals for transportation fuels are generally projected to weaken considerably during the next four years even without any impact from CNG. Flat to slightly negative demand growth, combined with increased product supply from expansion projects, 2 Potential Gas Committee is part of the Potential Gas Agency at the Colorado School of Mines; supported by the American Gas Association, Gas Technology Institute, and industry; Darrell L. Pierce, President/General Chairman. Page 7

10 capacity creep, and ethanol, is expected to result in surplus available capacity in the U.S. refining system (Figure 8). FIGURE 8 SUPPLY-DEMAND FORECAST Light Product Supply-Demand Outlook: U.S. Gasoline, Diesel, Jet Fuel Implied Net Exports in 2012 with Constant Utilization Net Imports MMB/D Demand MMB/D 13.9 MMB/D Ref Util = 85% 0.3 Creep 0.7 Expansion Projects Ethanol 15.1 MMB/D Ref Util = 78% at 0.4 MMB/D Net Imports Demand MMB/D 0.8 Net MMB/D Exports 2012 Implied Capacity Rationalization = 1.2 MMB/D with 0.4 MMB/D Net Imports Supply 2008 Supply 2012 SOURCE: EIA AEO 2009 Alternative fuels other than ethanol are expected to grow, but from a very small base. For instance, the 2009 AEO shows CNG usage growing in the transportation sector, but forecasts it to remain a miniscule portion of the supply picture. Environmental Issues Transportation vehicles are estimated to account for 60% of carbon monoxide (CO) pollution, 29% of hydrocarbon emissions, and 31% of nitrogen oxide (NO x ) emissions in the U.S. 3 Concern for public health and quality of life over the past 25 years has led to increasing controls on mobile and stationary source emissions. NGVs fueled by CNG can provide environmental benefits over conventional liquid fuels on several levels. 3 NaturalGas.org (Natural Gas Supply Association). Page 8

11 Natural gas vehicles are much cleaner burning than traditionally-fueled vehicles due to the chemical composition of natural gas. Compared to gasoline, properly-designed and maintained NGVs can offer the following environmental benefits 4 : Ozone: Reduced tailpipe emissions of ozone precursors (NO x and non-methane hydrocarbons [NMHC]) and lower reactivity of emissions. On a gram-per-mile (g/mile) basis, average reductions in NO x of 66% and 85% for NMHC emissions are possible. CO: At least 50% reduction under normal driving conditions. Global Climate Change: A recent study done on behalf of the California Energy Commission 5 concludes that CNG vehicles produce up to 29% less greenhouse gas emissions than comparable gasoline vehicles. Compared to diesel, properly designed and maintained NGVs can offer the following environmental benefits: Ozone: Reductions in tailpipe emission of ozone precursor NO x by 50% or more. Particulate Matter (PM): Reductions on the order of 50-75%. Global Climate Change: A recent study done on behalf of the California Energy Commission 6 concludes that CNG vehicles produce up to 22% less greenhouse gas emissions than comparable diesel vehicles. A summary of the potential reduction in CO 2 emissions for several fuels vs. gasoline is presented in Figure 9. Relative to gasoline, CNG can provide an overall reduction in CO 2 emissions vs. gasoline of 21%. 4 U.S. Department of Energy Energy Efficiency and Renewable Energy, Alternative Fuels and Advanced Vehicle Data Center. 5 Full Fuel Cycle Assessment: Well-To-Wheels Energy Inputs, Emissions, And Water Impacts; June 2007, TIAX LLC, Jennifer Pont, CEC F. 6 Ibid. Page 9

12 FIGURE 9 GREENHOUSE GAS EMISSIONS: IMPROVEMENT VS. GASOLINE 35% 30% 25% 20% 15% 10% 5% 0% Clean Diesel Gasoline Hybrid Diesel Hybrid CNG E85 SOURCE: Well-to-Wheels Analysis of Advanced Fuel/Vehicle Systems A North American Study of Energy Use, Greenhouse Gas Emissions, and Criteria Pollutant Emissions; May 2005 Public Policy Various plans have recently been proposed to reduce dependency on foreign oil and to reduce the environmental footprint associated with our transportation fuels. Pickens Plan: The Pickens Plan proposes to invest $1 trillion in wind energy to displace natural gas from electrical production which would meet 20% of the nation s electricity needs. By substituting wind and solar power for electrical generation, natural gas would then be freed up for use in the transportation sector. The Pickens Plan targets to reduce crude oil imports by 3.5MMB/D (or by approximately 38%). The White House: With the recent change in administration, new policies for energy and the environment are being led by President Obama. During his presidential campaign, he set a target to reduce U.S. crude oil consumption within 10 years by 3MMB/D 7. As a member of Congress, Rahm Emanuel, the new White House Chief of Staff, introduced a bill that stated, Not later than 2018, 10% of new vehicles sold in the U.S. should be natural gas vehicles. This bill mandated the use of NGVs, but also provided additional tax incentives to encourage vehicle adoption. The bill expired during the last congressional session. Natural Gas Producers: Natural gas producers, such as Chesapeake Energy, have begun pushing for new markets for natural gas production. Aubrey K. McClendon, Chairman and CEO of Chesapeake, made the following statements with regard to natural gas. Natural gas can and should be the driving force for how this Congress can take bold action to free our country from the death grip of high prices for imported oil, 7 New Energy for America, Organizing for America, barackobama.com Page 10

13 thereby improving our economy, enhancing national security, and helping the environment. To convert 10% of American cars to CNG would take less than 8 years and would only require an increase in U.S. natural gas consumption of 1% per year. Vehicle Modifications Substantial refueling infrastructure modifications and certain vehicle requirements are required before the U.S. can consume significantly higher quantities of CNG for transportation fuel. A vehicle s conventional internal combustion engine must be designed and installed properly to safely and efficiently utilize CNG for its fuel. Engines from several manufacturers that are already installed in vehicles can be modified to burn CNG. Alternatively, a very limited number of original equipment manufacturers (OEMs) worldwide, such as Honda, manufacture new vehicles that operate on CNG. Fuel Storage: Most NGVs operate using CNG to minimize storage volume requirements. CNG is stored on vehicles in high-pressure (3,000-3,600 pounds per square inch) tube-shaped cylinders that are attached to the rear, top, or undercarriage of the vehicle. While using the liquid form of natural gas (liquefied natural gas [LNG]) is possible, the reduced storage capacity gained from using LNG is offset by the heavier weight requirements associated with the use of double-wall, vacuum-insulated pressure vessels. Therefore, LNG fuel systems typically are only used with heavy-duty vehicles. Fueling Receptacle: Unlike gasoline and diesel fuel storage that can essentially be open, CNG and LNG storage systems must be designed to prevent the release of fuel. CNG refueling nozzles lock onto the vehicle receptacles and form a leak-free seal, similar to the coupling on an air compressor nozzle. Engine Modifications: NGVs require modifications to the fueling system and the engine. The fueling system requires a gaseous fuel-injection system, and sensors and computers adjust the fuel-air mixture to ensure efficient combustion. A natural gas engine also includes forged aluminum, high-compression pistons, hardened nickeltungsten exhaust valve seats, and a methane-specific catalytic converter. Chassis Modifications: Some modifications in the suspension of an NGV may be required to create space for the fuel-storage containers. NGVs also remove the spare tire and jack, which allows for a flat floor plan. Page 11

14 Economics In terms of fuel efficiency, CNG is 6% more efficient than gasoline on a Btu/mile basis. Figure 10 presents a comparison of fuel efficiency for various transportation fuels vs. gasoline. Compared with hybrids, which use stored electrical power in conjunction with gasoline, CNG vehicles have lower fuel efficiency. However, this analysis can be somewhat misleading, since there is no technical barrier to developing a CNG hybrid vehicle. FIGURE 10 FUEL EFFICIENCY RELATIVE TO GASOLINE 40% 30% % Improvement vs. Gasoline 20% 10% 0% -10% -20% Clean Diesel Gasoline Hybrid Diesel Hybrid CNG E85-30% -40% SOURCE: Well-to-Wheels Analysis of Advanced Fuel/Vehicle Systems A North American Study of Energy Use, Greenhouse Gas Emissions, and Criteria Pollutant Emissions; May 2005 On a Btu basis, natural gas is less expensive than gasoline or diesel, because it competes directly with other low-cost fuel sources, such as coal and residual fuel oil. Figure 11 presents the historical pricing for gasoline, diesel, and CNG on a dollar-per-million Btu ($/MMBtu) basis. During the period 1998 through 2008, the CNG price advantage vs. gasoline averaged $8.36/MMBtu. The minimum spread or lowest advantage of $3.76/MMBtu occurred in 1998, while the maximum spread or highest advantage of $16.50/MMBtu occurred in Page 12

15 FIGURE 11 NATURAL GAS Btu COST ADVANTAGE VS. GASOLINE/DIESEL $/MMBtu Maximum spread noted = $16.5/MMBtu 10 Unleaded Regular 5 0 SOURCE: EIA Minimum spread noted = $3.76/MMBtu On Highway Diesel U.S. Natural Gas Vehicle Fuel Price NGV life-cycle costs can be lower than conventional gasoline and diesel vehicles with fuel savings typically offsetting higher vehicle costs as long as federal tax credits are in place. There is currently a federal tax credit of $4,000 for NGVs, such as the Honda Civic GX. Federal credits range from $2,500 to $32,000 depending on gross vehicle weight rating. Of course, the life-cycle cost advantage for individuals will improve with higher tax credits, and the energy policy debate present today will help shape the future economics of NGVs. Historical Natural Gas Pricing vs. Crude Oil The conventional wisdom concerning the price linkage between natural gas and crude oil is that natural gas trades at a discount to crude oil on a Btu basis. So, while the theoretical Btu ratio between crude oil and natural gas is approximately six, recent price history suggests a ratio that is significantly larger. From 2002 to 2008, the yearly average price of crude oil increased from approximately $31 per barrel (Bbl.) to just under $100/Bbl., an increase of 222%. However, during this same time period, the price of natural gas increased only 165%, demonstrating a further disconnect between crude oil and natural gas price. Figure 12 presents a comparison of historical crude oil and natural gas pricing. Of particular note is the steep Page 13

16 increase in crude oil prices that occurred over the last several years compared with the natural gas price increase. FIGURE 12 COMPARISON OF CRUDE OIL AND NATURAL GAS PRICES 120 $/Bbl. or Barrel Fuel Oil Equivalent (BFOE) Cushing, OK WTI Spot Price FOB Henry Hub Spot Natural Gas Price SOURCES: EIA, Natural Gas Weekly Operating Cost Comparison Using historical pricing from 1999 through 2008 for gasoline and CNG, and typical mile per gallon (mpg) estimates for the two fuels, the average operating cost incentive for using CNG vs. gasoline was estimated to be 3.1 cents ( ) per mile. This operating cost comparison only includes the fuel component and does not consider any differences in annual maintenance costs, such as oil changes. Table 1 presents a summary of the assumptions used to generate the operating fuel cost comparison. Page 14

17 TABLE 1 OPERATING COST ASSUMPTIONS Honda Civic Gasoline Engine Honda Civic CNG Engine Highway Fuel Economy, mpg City Fuel Economy, mpg Combined Fuel Economy, mpg Miles Driven per Year 15, Average Gasoline vs. CNG 8.84 Pricing Spread, $/MMBtu Based on the assumed fuel economies in Table 1, the fuel cost for the gasoline engine is 9.9 per mile vs. 6.8 per mile for the CNG engine. Over one year (15,000 miles) this represents a fuel cost savings of over $450. If the minimum gasoline/cng price spread is used over the same ten-year period, the operating cost incentive for using CNG is reduced to only 1.2 per mile ($174/year). Likewise, if the maximum gasoline/cng price spread is used for the same ten-year period, the operating cost incentive for using CNG is increased to 6.1 per mile ($885/year). From October 2008 to the 1 st Quarter 2009, there has been a marked decline in the cost advantage of CNG compared with gasoline. Figure 13 presents a summary of this decline FIGURE 13 OPERATING COST COMPARISON RECENT HISTORY /mile Operating Cost Advantage Operating Cost Advantage CNG Gasoline Diesel October st Qtr Fuel Economy Guide 2009, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, fueleconomy.gov Page 15

18 Potential for Economic Substitution of Natural Gas To illustrate the potential economics for purchasing a CNG vehicle, we compared a CNGpowered Honda Civic (GX model) with a typical gasoline-powered Honda Civic. The following assumptions were used in this economic evaluation: Difference in manufacturer s suggested retail price (MSRP) between the two vehicles of $7,000 Each vehicle driven 15,000 miles per year 9 Historical average price differential of 97 per gallon between CNG and regular unleaded price ($8.80/MMBtu) Equal resale percentage for both vehicles 10 years of ownership $4,000 federal tax credit for the CNG vehicle These assumptions result in a net present value (NPV) at a 10% discount rate of $1,220 for purchasing the CNG vehicle vs. the traditional gasoline-powered vehicle. A sensitivity analysis indicates that the pricing spread between CNG and gasoline has a substantial impact on the NPV for the purchase of a CNG-powered vehicle. Also, without a government tax incentive, CNG is not economical, given historical $/Btu spreads and the incremental costs of CNG vehicles. This sensitivity analysis is presented in Figure Fuel Economy Guide 2009, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, fueleconomy.gov Page 16

19 FIGURE 14 HONDA CIVIC ILLUSTRATION SENSITIVITY ANALYSIS RUL/CNG Price Spread Min Max. Tax Credit 3 Minus $1,000 Plus $1,000 Miles Driven per Year 2 Minus 5,000 miles Plus 5,000 miles Resale Value 1 Minus 5% Plus 5% Base Case $7,000 MSRP differential 15,000 miles per year CNG - Regular Unleaded = 97 /gallon Equal resale percentage 10 year ownership life $4,000 CNG tax credit -1, ,000 1,500 2,000 2,500 3,000 3,500 4,000 Net Present Value, $ Using this same example and applying January 2009 pricing for regular unleaded gasoline and CNG results in a negative NPV (-$320). In this market environment, it does not make economic sense to purchase an NGV, even with the government tax incentive. Historical Refined Product Supply and Demand Balances U.S. refinery utilization in 2008 averaged 85% and was the lowest in 10 years, reflecting the reduced demand for gasoline as a result of the economic recession which began in Page 17

20 FIGURE 15 REFINERY UTILIZATION Year History of U.S. Refinery Utilization ( ) year average Refinery Utilization (%) year range 2008 SOURCE: EIA 75 Primarily hurricane effects, but higher utilization was available and not needed at end Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec As demand declined in 2008, petroleum product exports increased and imports declined, as shown in Figure 16. Finished gasoline imports fell by 29% from 2007 to 2008, while finished distillate imports declined by 38%. In contrast, finished product exports increased by almost 37% when compared to Page 18

21 16,000 FIGURE 16 U.S. LIGHT OIL PRODUCT SUPPLY Gasoline, Diesel, Jet 14,000 12,000 Total Supplied 10,000 MB/D 8,000 6,000 4,000 Imports Net Production Exports 2,000 - (2,000) SOURCE: EIA AEO 2009 The largest contributor to alternative fuel supply is forecast to be ethanol. Mandated ethanol fuel use is expected to continue to grow, and its impact will continue to be felt by the refining industry. Figure 17 presents the potential erosion of the petroleum gasoline supply based upon the 2009 AEO forecast. FIGURE 17 Total Gasoline Demand, MB/D Gasoline Equivalent 9,400 9,200 9,000 8,800 8,600 8,400 8,200 8,000 7,800 7,600 7,400 MTBE FORECAST ETHANOL AND CNG IMPACTS Forecast Ethanol Gasoline from Petroleum SOURCE: EIA AEO 2009 CNG, LPG, Other Page 19

22 NGV Description There are over 5 million natural gas vehicles (NGVs) on the road worldwide. Leading countries are not necessarily those one might expect and include Argentina with over 1.5 million NGVs (20% of all Argentine vehicles), Brazil and Pakistan, each with over 1 million NGVs, followed by China, India, Iran, and Germany. In the U.S., the primary NGV strategy has been to pursue the high-fuel use, urban fleet market, e.g., transit and school buses, trash trucks, urban delivery vehicles, port and airport vehicles, and taxis. While these vehicles make up a small percentage of the total vehicles on the road, they use a disproportionately large amount of petroleum. According to the U.S. Energy Information Administration (EIA), the U.S. has only about 130,000 NGVs on the road. However, those vehicles consumed about 13,000 barrels per day (B/D) in 2006, an average of over 1,500 gallons (gasoline equivalents) per vehicle per year. The average personal car in the U.S. uses only about 600 gallons of fuel per year. Natural gas vehicles operate on the same basic principles as other internal combustion enginepowered vehicles and natural gas can power all the same vehicles currently powered by gasoline and diesel fuel. However, since CNG is a gas rather than a liquid at standard pressure and temperature, some modifications are required to enable an NGV to operate properly. As of the 2009 car model year, Honda is the only manufacturer of a CNG passenger vehicle for the U.S. market. Honda manufactures a CNG-based Civic model which sells in the U.S. for approximately $7,000 more than its comparable gasoline-powered Civic. The option also exists to convert a gasoline-powered vehicle to run on CNG. The cost to convert can range from about $12,500 to $22,500 depending on the vehicle, engine, and size of CNG tanks needed, with the greatest expense being for the CNG tanks Can You Convert to Natural Gas?, Bill Siuru, Green Car Journal, Greencar.com, July 21, 2008 Page 20

23 Distribution Infrastructure More problematic than the conversion or manufacture of an NGV is the need for infrastructure to distribute and dispense CNG to the motoring public. Compared to the plethora of gasoline and diesel filling stations there are very few places where the public can refill CNG vehicles. In addition, most existing CNG fueling stations are owned by truck or other fleet operators and are not necessarily located proximate to consumer high-traffic areas. Clearly, a substantial infrastructure investment will be required for a widespread conversion of vehicles to CNG. In order to build out a CNG infrastructure, a sufficient number of NGVs need to be in use to provide an economic incentive for expansion. However, the NGV purchases and conversions are limited by the number of CNG distribution stations. This results in somewhat of a chicken and the egg situation. Potential catalysts to build out a CNG infrastructure could come from government stimulus for both the infrastructure and vehicles. In addition, groundswell support, such as the Pickens Plan, could provide the grassroots public support needed to push for government stimulus. As of January 2009, there were only 775 CNG fueling stations in the U.S., compared to over 160,000 gasoline/diesel fueling stations. Of these 775 CNG fueling stations, only about half are open to the public. An alternative to CNG stations is a home fueling system that does not have a storage system and has a much smaller (and less expensive) compressor. It typically costs $4,000 installed and refuels vehicles overnight at a rate of about 0.5 to 1.0 gallons per hour. Of course, the slow fueling rate of home systems is not an attractive feature if a quick refuel is desired. Despite the challenges of building a CNG distribution infrastructure, the existing natural gas pipeline and distribution system is well established and accesses many of the major metropolitan areas of the U.S. Conclusions While there has been some success with CNG in the transportation sector, most usage has been restricted to fleet use and heavy duty vehicles. The outlook for CNG substitution in light duty vehicles still is dependent upon the three factors outlined at the beginning of this paper: Availability The increase in U.S. proven reserves of natural gas could significantly impact the availability of natural gas for transportation needs. Page 21

24 The Environment - Lower automobile CO 2 emissions result from natural gas versus conventional fuels. Public policy debate regarding alternative fuels is sure to increase with the new Administration. Economics Continuation of the Btu discount associated with natural gas vs. gasoline and diesel could drive conversion. Refiners would be wise to continue monitoring these factors along with other potential competitive threats to their businesses. Page 22