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The Fuel of the Future

A century ago, there was no such thing as a gas station. Early Model T owners had to buy gasoline from the drug store until oil companies adapted and built fuelling stations.

Now, 100 years later, we’re seeing a similar situation develop with natural gas.

The shale boom has brought an almost limitless abundance of natural gas to the United States. It’s unfathomably cheap and significantly cleaner than oil. For those reasons, it’s destined to replace gasoline as our main transportation fuel.

In fact, in 10 to 20 years’ time, any company not running all or most of its truck fleets on liquefied natural gas (LNG) or compressed natural gas (CNG) will be left in the dust by its competitors.

That theory is evidenced by the fact that companies with large vehicle fleets are already making the switch.

Changing Lanes

Waste Management (WM), the Houston-based disposal company, is committed to running 80% of its new trucks on CNG, providing a fuel savings of about 25%. Waste Pro USA, operating out of Florida, has almost 100 CNG trucks in operation and plans to add more. And garbage truck maker, Heil Environmental, sees about 35% to 40% of its production going to CNG vehicles, and the number is growing by about 10% each year.

The president of Environmental Solutions Group, which owns Heil, says CNG trucks will account for more than half of his company’s production in no more than three years.

Delivery giants FedEx (FDX) and UPS (UPS) are using more and more gas in their fleets, as well.

And that’s just a small taste of the global shift that’s occurring.

The European Union already has about a million CNG passenger vehicles on the road. And there’s legislation on the table that would put fuel stations at least every 150 kilometers by 2020.

Even in emerging markets, natural gas vehicles are becoming commonplace.

I recall when I was in Mumbai 15 years ago, the tuk tuks were spewing so much pollution that I could hardly tell whether it was dusk or dawn because the air was so thick with smog. But on my last visit there a couple of years ago, all of the tuk tuks were running on CNG, and the change was palpable.

Still, the United States continues to lag behind other countries in the adoption of natural gas for transportation especially when it comes to passenger cars.

There are two reasons for this: high costs and a lack of infrastructure.

Natural gas vehicles provide significant cost savings over gasoline and diesel, with some motorists spending just $0.99 a gallon. However, they cost more to produce, especially on a grand scale.

Take a big semi truck, for example. It costs $25,000 more to produce a large natural gas-powered truck than to build a conventional diesel powered rig. And worse, there is no nationwide network of filling stations that would allow the trucks to make long haul deliveries.

So no matter how efficient, the infrastructure just isn’t available, and that will take a significant amount of investment.

Indeed, the cost to build infrastructure for gas powered vehicles and bring enough LNG on stream to satisfy future demand is more than $1 trillion. That’s no small amount of chump change.

The good news, though, is that the commitment is finally coming on line. Companies like Royal Dutch Shell (RDS.A, RDS.B) are building more facilities to produce LNG, and companies like Clean Energy Fuels (CLNE) are building filling stations.

So we’re moving in the right direction, albeit slowly.

Speed Bumps

Ultimately, there are three things that need to happen before CNG and LNG stations become ubiquitous.

First, much deeper pockets than CLNE will have to enter the market. So far, the company has built fewer than 100 filling stations, and that’s just not going to cut it.

Second, the capacity to convert natural gas to LNG has to increase substantially. That, too, is happening gradually.

Shell, which last year produced more natural gas than oil for the first time in history, is ramping up production of LNG in the United States and investing in new plants. And GE Oil and Gas is selling two production facilities to CLNE for $200 million.

Finally, the cycle for the replacement of fleets has to occur. Old semis can stay on the road for a long time, and transport companies aren’t going to replace them when they’ve already invested so much in the original fleet.

Bottom line: The stars are aligning for natural gas for use in the transportation sector. The end for diesel powered trucks and locomotives is near, but it’s going take a few more decades before natural gas replaces oil as America’s fuel of choice.

That will give us plenty of time to seek out the investments that will provide the best return during this transition.

And “the chase” continues,

Karim Rahemtulla