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Natural Gas Vehicles See Steady Growth
While everyone is watching to see how low oil prices will affect U.S. shale drillers, natural gas production continues to rise. Each month, the U.S. posts new production highs (see chart), and 2014 is shaping up to be a record year for natural gas drillers. With production ratcheting upwards, the U.S. has been able to achieve record levels of storage injections, building back inventories after last winter walloped the east coast and depleted supplies.
The abundance of natural gas is allowing utilities to increasingly burn the fuel in power plants for electricity – a well-known trend that continues to accelerate.
But another sector also stands to benefit – the transportation sector. In particular, natural gas is likely to become a serious option for transportation fuels, particularly as an alternative to diesel in long haul trucking or in shorter fleet operations. It can either come in the form of compressed natural gas (CNG) or liquefied natural gas (LNG).
There are several advantages that natural gas has over traditional diesel or gasoline powered vehicles. First, natural gas can be a lot cheaper on an energy equivalent basis, generally a little more than $2 per gallon. There was certainly a much bigger disparity in prices earlier this year when gasoline prices cost more than $4 per gallon, but there is still a financial gain to be had (see chart below from U.S. Department of Energy). Moreover, crude oil prices won’t stay this low forever, so natural gas should compete favorably on price over the long-term.
Second, natural gas prices, while historically volatile, have become a bit more predictable since the shale gas revolution took hold. Natural gas prices are expected to remain relatively stable for years to come, while oil prices are gyrating all over the place.
And for fleet managers – long haul trucking companies, municipal bus fleets, postal delivery – natural gas vehicles can act as a hedge against oil. With some of their vehicles using natural gas and others diesel, companies can diversify their risk.
But we have been hearing about the coming natural gas vehicle tidal wave for years, and it has yet to really take off. Why the slow start? There are some obstacles. First, natural gas vehicles cost more upfront. A new diesel long haul truck can cost $150,000, but for a CNG truck the price tag can be as high as $200,000. The CNG trucks end up paying for themselves, but the payback period averages four years. That is a problem when some fleets turn over their vehicles in four years or less.
Second, sometimes truck companies merely pass on the cost of fuel to their customers. That gives them less of an incentive to invest in more efficient natural gas trucks.
But one of the biggest problems is the dearth of infrastructure. There are only around 1,400 refueling stations, both public and private, for CNG vehicles. That pales in comparison to over 121,000 traditional gas stations across the United States. Companies are less likely to buy natural gas vehicles without adequate refueling infrastructure, and developers are not going to build more refueling stations unless they are sure there is a market – a classic chicken and egg problem.
Nevertheless, the market continues to grow briskly, if slower than the industry had originally hoped. For 2014, an estimated 11,000 long haul natural gas trucks will be sold, a 27% jump from a year earlier.
Ryder Systems Inc. (NYSE: R), a major commercial fleet supplier, is one of the stocks to watch. It announced on November 12 that it forged a strategic alliance with Mansfield Clean Energy Partners, a joint venture between Mansfield Energy Corp. and Clean Energy Fuels Corporation (NYSE: CLNE), a builder of CNG refueling stations. The alliance will offer potential buyers the option of natural gas vehicle leasing from Ryder and fuel supply management from Mansfield.
The market trends look good. The average age of US Fleet Class 8 trucks was 6.5 years, just a bit below the record high of 6.7 years in 2011. By way of comparison, in the late 1990s, the average age of the commercial fleet across the country was just 5.3 years. This suggests that corporate fleets are aging and ready for major turnover – an enormous growth opportunity for companies like Ryder. Fleet replacement in 2013 sparked the fastest growth in heavy-duty truck manufacturing since 2006, up 21%. A further 17% expansion is expected this year. By 2015, the average age is expected to come down to just 6 years.
Ryder won its first natural gas vehicle order in Canada in October, with Canadian trucking company C.A.T. leasing 100 CNG vehicles. That is almost one-third if C.A.T.’s fleet.
Ryder also offers lease options for its fleets, and it argues that due to the complexity of tighter environmental and safety regulations, it will become more commonplace for shippers to outsource their trucking operations to companies like Ryder. Ryder has seen its earnings per share rise each of the last five years. Its share price is up nearly 50% year to date.
Westport Innovations Inc. (TSE: WPT) and Cummins Inc. (NYSE: CMI) are two other market leaders in the space. The two formed a joint venture, Cummins Westport, that makes 6 and 12-litre natural gas engines. These are smaller versions used in daily operations, such as municipal waste or bus fleets, rather than long haul trucking. They scrapped a 15-liter engine due to weak market conditions, but they are still bullish on the sector.
Westport in particular looks like an exciting company. It has 423 patents related to natural gas engines, the most in the market and more than even major car manufacturers like Ford (181) or Toyota (127) are holding. Westport’s sales are projected to grow 15% annually for the next few years. It has struggled a bit in 2014, but by the end of 2015, it expects adjusted EBITDA to turn positive.
Clean Air Power (LON: CAP), a small UK-based company (market cap: $5.27 million) is working on a dual fuel system that allows long haul trucks to run on a combination of diesel and natural gas. It is an after-market product, essentially an upgrade kit to a heavy-duty truck that does not change the diesel engine that is already in place. Importantly, the system would allow drivers the flexibility to switch between fuels. UPS (NYSE: UPS) piloted 10 of Clean Air Power’s dual-fuel trucks, and the 10 trucks have been integrated into UPS’ operations.
Clean Air Power’s share price has had a rough ride over the last year. The European market, on which the company focused, is not growing as quickly as anticipated. The company is in the midst of expanding into more lucrative markets like the U.S. and Asia, but it is still gearing up. Crucially, the company had a hiccup getting EPA certification, and its share price plummeted following the news in September. Yet, if the company can sort out the kinks, it offers a promising product.
In the short-term, the share prices of many natural gas vehicle makers will likely fluctuate with the price of oil. Although long haul trucking and natural gas vehicles still offer economic advantages over diesel even when crude oil prices are low, investors tend to pull away. But oil prices will not stay low forever – cutbacks in drilling will ensue and the subsequent contraction in supply will send prices upwards.
Additionally, tighter regulatory conditions on diesel engines are increasing costs for maintenance, which works in favor of natural gas vehicles.
Meanwhile, in China, growth is continuing at a much quicker pace. Although the phenomenon is more recent, China added more than 30,000 natural gas trucks to its roads last year. That trend is expected to accelerate as China leans more heavily on natural gas to clean up its air.
Over the long haul (pun intended), natural gas vehicles, while growing from a small base, are expected to capture an increasingly large slice of the transportation market.
Source : oilprice.com
Russia's Weakened Hand Pays Off For Beijing In Major Gas Deal
Gazprom's CEO Alexei Miller announced on a Russian news show last weekend that Russia and China were "one digit" away from finalizing the agreement. "There is just one question - it's ... a starting, base price in the price formula which, it's remarkable, has already been fully agreed upon with our Chinese partners," he said on May 17. "It's a very little more - to put in only one digit, and a 30-year contract to supply 38 bcm of gas from East Siberia to China will be signed," said Miller.
38 billion cubic meters (bcm) of natural gas is equivalent to one-quarter of China's current gas consumption. The contract begins in 2018 and runs through 2048.
To get the gas into China, Russia plans on building a $23 billion pipeline that will span the length of Russia, just north of the Chinese border. It will connect with China at four points – one near where the borders of China, Kazakhstan, Mongolia and Russia meet, and three more connections much further east, including one at Vladivostok.
The negotiations have taken so long mostly because neither side wanted to give in on price. China was looking for similar or better pricing than what Russia gives to Europe, which would be between $10 and $11 per thousand cubic foot (mcf). For years, Russia held out for a higher price, but the crisis in Ukraine has weakened Russia's hand. Gazprom gets about 80 percent of its revenue from selling gas to Europe, and with Russia's relationship with its western neighbors deteriorating quickly, Russia needs other markets. That has it looking east.
China has gained even greater leverage over the years from working with Turkmenistan on natural gas supplies. China already receives about half of its natural gas imports from Turkmenistan – 20 bcm – and the two sides agreed last year to triple the volume to 65 bcm by 2020.
So while Russia was waiting for China to cave, the Middle Kingdom was finding alternative suppliers.
Moreover, not only is Russia feeling exposed by its dependence on a European market that could shrink in the coming years, but it is also in a race against the clock to meet rising Asian gas demand. That's because a lot of liquefied natural gas capacity is set to come online in over the next three to five years; both Australia and the U.S. have ambitious plans to send LNG to Japan, South Korea and China. Russia is in a much better position geographically to meet that demand, but it would need to accelerate building pipeline capacity and liquefaction terminals before Australian and American companies beat them to the punch.
All this is to say that China has capitalized on Russia's vulnerability, and before the last "i" is eventually dotted on the gas contract, Beijing might have what it wants.
If that happens, it would be a major concession by Russia. As Steve LeVine notes over at Quartz, the $10-$11/mcf price Russia may agree to would be below the $12/mcf that Gazprom needs to merely break even.
For the deal to go through, China might have to pay a large amount upfront instead of over 30 years. Investors continue to pull billions of dollars out of the Russian economy in the response to the crisis in Ukraine, so Moscow could use Beijing's money.
Russian President Vladimir Putin said he doesn't think the European community can do without the natural gas it gets from energy monopoly Gazprom. With a Russian economy starting to decline, however, it may be Gazprom that's too strongly interconnected to the European market to break free. The narrative over European energy security reaches at least back to 2006 when Gazprom first cut gas supplies through Ukraine. The fallout from the latest disruption in 2009 put opposition darling and former Prime Minister Yulia Tymoshenko in prison, but now the tables have turned for a Ukraine tilting more strongly toward the European Union. Last week, Putin warned European leaders that gas supplies through Ukraine may be cut if Kiev didn't settle its $2.2 billion gas debt to Gazprom. With European allies mulling the best way to break Russia's grip on the region's energy sector, Putin said there are few alternatives to Russian natural gas. "Can they stop buying Russian gas?" he asked in a question-and-answer session this week. "In my opinion it is impossible." Russia sends about 15 percent of its natural gas supplies bound for the European community through the Soviet-era transit network in Ukraine. The European energy market has options in Caspian gas waiting in the wings, and potentially liquefied natural gas deliveries, though those alternatives provide little short-term relief. U.S. State Department spokeswoman Marie Harf warned Putin against using energy as a geopolitical tool in a crisis that's re-opened old Cold War wounds. "We've said very clearly that Russia should not use this as a weapon and that, actually, Russia has a lot to lose if they try to do so," she said. Before the situation erupted into one of the most severe Eastern European crises since the 1990s, the Kremlin had expected 2.5 percent growth in gross domestic product. Now, Economic Development Minister Alexei Ulyukayev said GDP growth should be "near zero" and the Ukrainian row may be to blame. Trade in oil and natural gas nets Russia about 70 percent of the estimated $515 billion in export revenue and accounts for more than half its federal budget. Though Gazprom has sought entry to a growing Asian economy, most of its natural gas heads to the European market, meaning Putin's Russia may be as strongly linked to the EU as the EU is linked to the Kremlin. Russian First Deputy Prime Minister Igor Shuvalov said the economic situation in the country in part depends on how the Ukrainian crisis plays out. The World Bank, he said, expects 1 percent economic growth for Russia this year. The view from the Kremlin, however, is much more pessimistic. With both Russia and the European community interconnected by natural gas, the relationship may remain intact despite the rhetoric from both sides of the lowering Iron Curtain. Source: http://oilprice.com/Geopolitics/Europe/Putin-is-Losing-Eastern-European-Energy-Gamble.html By. Daniel J. Graeber of Oilprice.com
Ukraine : The Most Profitable Gas in the World
There is only one certainty in Ukraine: The energy sector must and will be transformed, and how long this takes will depend on who ends up in the driver's seat and how serious they are about becoming a part of Europe and reducing dependence on Russia. But by then, investors will have missed the boat.
The driving factor for any energy investor in Ukraine is the pricing environment. There is nowhere else in Europe—or some would even argue in the world—where you are going to get significant access to resources and potential resources for the price. Gas is selling at $13.66/Mcf, while it costs $4-$5 to produce and operate. That means producers are netting anywhere between $8 and $9/Mcf.
Whether it likes it or not, kicking and screaming, Ukraine will have to transform its energy sector, if it hopes to see promised IMF money. Kiev will have to start selling off assets and making the industry much more transparent. Greater transparency coupled with an already-favorable gas price environment, will make Ukraine one of the best places to be over the next 5-7 years.
While everyone is now closely watching the campaigns unfold in the run-up to 25 May presidential elections, in the end who wins the presidency—and even the energy ministry—will determine not if, but how fast the country moves to transform its energy sector.
The crucial next step is a psychological one: Ukraine's new leaders must come to the realization that their energy assets, particularly the pipeline system, are not strategic assets, rather they are valuable commercial assets. Privatizing these assets could raise $50 billion.
Right now, the pipeline system is nothing but a conduit for Russian gas into Europe. It could be much more. The pipeline system, and the state-run company that manages it, should be turned into a transparent public company in London, for instance. The sale of 50% of the company could generate sizable profits—half of which could be used to pay down debt to Russia, while the other half could be invested in modernization, turning a potentially valuable assets into a commercially realistic one.
Without the right people in place in the new government, we could perhaps lose a year in getting the necessary reforms in place. And continued talk about the “strategic” nature of these assets could cause investors to lose faith in Ukraine's seriousness about reducing its dependence on Russia. Eventually, it will happen, and what elections will tell us simply is how long it will take.
There are a lot of resources to be developed in Ukraine, and there are also quite a few companies who have assets they cannot development, primarily due to lack of funding or marginal management teams. These companies will now be seeking to transact with larger players.
Historically, the most significant red flag for new investors in Ukraine has been working with the government. It's too early to determine whether that will change. Bureaucracy generally kills deals more than anything, and foreign companies coming in will never be able to understand how the bureaucracy works. The smart investor will employ capital through a Ukrainian private entity to maximize investment dollars. Western management teams, without help from local partners, won't be able to operate in this venue even if they are top-notch managers.
The smart investor will also realize that there is no better time to invest in Ukraine's energy sector. Once it is transformed, the best opportunities will have been seized.
By Robert Bensh of Oilprice.com