April 14, 2012

Navistar, Clean Energy deal: Devil is in details

Success of oil-to-natural gas programs for truckers depends on "unknowables."

By Mark B. Solomon

If you're a trucker or private fleet manager looking for a predictably priced alternative source of fuel, truck maker Navistar International Corp. and natural gas advocate Clean Energy Fuels Corp. think they have a deal for you.

Ironically, how good that deal turns out to be will depend on doing one's best to predict the unpredictable.

In early February, Lisle, Ill.-based Navistar and Seal Beach, Calif.-based Clean Energy, cofounded by energy baron T. Boone Pickens, unveiled a joint program to provide incentives to truck owners, renters, and lessors to purchase new and more expensive vehicles powered by liquefied natural gas (LNG) or compressed natural gas (CNG), both of which are considered cheaper and more environmentally friendly than traditional diesel fuel.

Under the program, a user would agree to purchase a gas-powered vehicle manufactured by Navistar and then commit for five years to buying 1,000 gallons of natural gas per month. In return, Clean Energy would offer the user a $500 monthly rebate, which, over the five-year span, would offset the estimated $28,000 per-unit differential between buying a gas-powered truck and purchasing a new diesel-powered vehicle.

In addition, the user would pay for its natural gas fill-ups at a price 60 cents a gallon below the prevailing price of diesel fuel as calculated each week by the Department of Energy's Energy Information Administration (EIA). As of April 9, the national average price for a gallon of diesel fuel stood at $4.148, according to EIA data. Thus, a customer would pay $3.55 a gallon for the first 1,000 gallons consumed during the month.

Users who need to buy in quantities that exceed the 1,000-gallon threshold in any given month would be charged Clean Energy's "retail" rate, which currently stands a shade below $2.90 a gallon, the company said.

Big savings potential
Based on estimates that a typical solo long-haul driver logs 12,000 miles a month, the program could deliver monthly savings of $1,200 per month between the rebate and the savings at fill-up, according to the companies. LNG-powered vehicles can run about 400 miles on a full tank. Vehicles powered by heavier CNG wouldn't get the same range with a full trailerload. Such vehicles are better suited to shorter trips within urban areas where they return to the same depot each day.

For fleet owners and operators uninterested in participating in the program, the alternative would be to pay for the gas-powered vehicles out of pocket and fill up at the pump at prevailing prices for either LNG or CNG. Based on the stunningly wide differential between natural gas and crude oil prices, that option, at least for now, sounds like the better bang for the buck.

Natural gas futures contracts are today trading at $1.98 per million British thermal units (BTUs). Futures prices have fallen about 50 percent in the past 12 months due to a mild North American winter that depressed energy demand and an increase in domestic exploration and development that has led to an abundance of gas inventories. More than 80 percent of natural gas consumed in the United States is domestically produced. The balance is imported from Canada.

By contrast, West Texas Intermediate (WTI) oil futures prices, which are more influenced by global demand and by geopolitical factors, have hovered in the $103-a-barrel range for several months. Brent crude (a sweet, light crude oil), considered the world's benchmark, is trading at a 20 percent premium to WTI.

The current differential of "52 times" between market prices for natural gas and WTI oil is unprecedented; the ratio is historically between six and 12, according to Clean Energy. Many analysts believe the combination of factors that have already affected natural gas supply and demand could cause futures prices to fall even further in 2012 and beyond.

The market price for natural gas translates into a pump price of $2.50 a gallon for LNG and $2.25 for CNG.

Market uncertainties
James N. Harger, Clean Energy's chief marketing officer, said the company is marketing the service to companies skeptical that such a wide price gap between oil and natural gas will persist in the years ahead. From 1990 through 2012, natural gas futures prices averaged $4.01 per million BTU, reaching an all-time high of $15.35 in December 2005 in the wake of hurricanes Katrina and Rita that shut off natural gas supply flows along the Gulf Coast, and hitting a record low of $1.05 in January 1992.

Each $1 per million BTU increase in natural gas prices would equal a 14- to 15-cent per-gallon price hike at the pump, according to Clean Energy's estimates. Thus, a spike to levels midway between the historical high and low price ranges could significantly narrow the gap between oil and natural gas, and make the Navistar-Clean Energy initiative more attractive, Harger said.

Perhaps mindful of all the market uncertainties, Clean Energy said it would allow customers to opt out of the agreement at any time without penalties, Harger said.

Navistar spokesman Stephen C. Schrier said the company will in late summer unveil a gas-powered line of vehicles in the mid-sized category. It plans to roll out gas-powered trucks in the heavy-duty, or "Class 8," category sometime in 2013, he said.

The natural gas highway
The initiative is the latest effort by Pickens, who turns 84 next month, to wean the nation off of imported oil and to use more natural gas. Several years ago, Pickens proposed a plan to invest $1 trillion in wind farms that would eventually replace natural gas as a primary energy source. Natural gas supplies would then be freed up to power trucks and other heavy-duty equipment. The proposal has made little headway due to the logistical challenges in locating wind turbines in congested urban areas.

Clean Energy operates hundreds of natural gas fueling stations nationwide and has a strong presence among intra-city transit agencies and waste-hauling companies, both of which have vehicles that operate in local service and depart from and return to the same locations each day.

The company is building what it calls "America's Natural Gas Highway," a national network of truck refueling stations. Harger said the company expects to have 70 stations operational by year-end and another 80 built by the end of 2013. A high-density gas-refueling infrastructure is considered the key to a successful transition by truck fleets from petroleum to natural gas consumption.

At this point, no companies have signed up for the joint program. Jerry Moyes, CEO of Phoenix-based Swift Transportation Co., the nation's largest truckload carrier by sales, attended the Feb. 1 program launch event at Navistar's Lisle headquarters in Lisle. According to published reports, Moyes said Swift is testing 16 natural gas-powered trucks, and said the success of the program depends on the density of the refueling infrastructure.

More articles by Mark B. Solomon

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