October 23, 2015
transportation report | Motor Freight

It won't be long...

It won't be long...

Bloodied but unbowed, players in the CNG space patiently wait out a downcycle in oil prices.

By Mark B. Solomon

In September 2012, DC Velocity spent a day with Saddle Creek Logistics Services, an asset-based third-party logistics service provider (3PL) that had made one of the biggest commitments of any for-hire trucker to compressed natural gas (CNG) trucks. At the time, diesel fuel prices hovered around $4 a gallon, well above CNG prices. Michael J. DelBovo, president of the Lakeland, Fla.-based company's transport division, predicted that level would be the long-term price floor for diesel.

Three years later, the floor has given way. As of Nov. 30, the average national price of a gallon of on-highway diesel stood at $2.42, according to weekly data published by the Department of Energy's Energy Information Administration (EIA). On the Gulf Coast, which generally reports the lowest diesel prices of the nine regions tracked by EIA, the average price stood at $2.25 a gallon. Through mid-year, the drop in diesel lagged behind the sharp declines in the prices of the two types of oil traded on world markets: West Texas Intermediate (WTI) and Brent North Sea crude. In recent months, however, diesel has caught up—or down—in a big way.

In an interview a couple months back, DelBovo said he anticipated the oil-price volatility but underestimated the duration of its decline. He's not alone; a near-universal misread of the longevity of the downward move led to the coinage of the term "lower for longer."

Faced with a sudden and dramatic change in the macro environment, DelBovo tweaked the company's operating model. He eliminated a "fast fill" approach to fueling its 200 natural gas trucks in favor of a "time fill" method, under which gas is slowly dispensed from on-site compressors into the trucks. The "time fill" method fills an engine more completely because the gas has time to adjust to its surroundings inside the tank. The company then established filling "zones," where trucks were time-filled in rotation rather than all at once. This optimized tractor utilization by keeping more of the rigs on the road while others were being refueled, according to the company. Through these steps, Saddle Creek Transportation boosted its CNG utilization by about 10 percent, DelBovo said.

The company will take delivery of 50 new tractors by year's end. But they will run on a mix of 70 percent CNG and 30 percent diesel, and will cost less than tractors that run exclusively on CNG. At least 20 of the tractors will be financed in part through incentives from states like Florida, Georgia, and Texas to encourage investment in natural gas vehicles, DelBovo said. "We are taking advantage of every incentive out there to buy new trucks," he said.

Even with the steep drop in oil prices, the gap at the pump between diesel and CNG persists, thanks to natural gas's own price plunge. As of Dec. 2, natural gas was priced at $2.17 per million British thermal units (BTUs), down nearly $1.71 per million BTUs from the same time in 2014. The natural-gas price downdraft has kept a tight lid on CNG pump prices. Current prices at public fueling stations nationwide, and at company-owned stations in Lakeland and Fort Worth, Texas, range between $2.00 and $2.10 a gallon, according to Saddle Creek Transportation's estimates. They are lower at its own locations.

DelBovo said he remains confident in the unit's strategy. "This project is going to be successful even at the current prices for diesel and CNG," he said in the recent interview. Still, the initial projections of a four-year time frame for the gap between diesel and natural gas prices to overcome the upfront expense of CNG-powered vehicles have been pushed out to six years, he said.

SLAM-DUNK NO LONGER

The conversion from diesel fuel to natural gas, which seemed a no-brainer earlier in the decade, now requires some thought. A CNG-powered vehicle still costs tens of thousands of dollars more than a comparable new diesel truck, although economies of scale in production have helped cut the differential to $47,000 today from $85,000 to $95,000 per truck in 2007, according to Peter Grace, senior vice president for Clean Energy Fuels Corp., a Newport Beach, Calif.-based company that builds and manages infrastructure for CNG and liquefied natural gas (LNG) fueling.

Private fleets, dedicated contract carriers, and for-hire carriers that have committed to large-scale investments plan to see them through, confident that an eventual return to higher oil prices will bear out the wisdom of their strategy. By contrast, firms on the fence two or three years ago are either still straddling or have pulled back. "They are taking a wait-and-see approach," said Patti M. Murdock, a former transport executive at Cincinnati-based Procter and Gamble Co. and head of Clean Logistics Consulting, which advises companies on alternative energy solutions for transportation and logistics services.

Bill Renz, general manager of U.S. Gain, an Appleton, Wis.-based provider of CNG fueling and infrastructure services, said the drop in oil prices has put many fleet conversion plans on hold. But those already running on CNG continue to grow their fleets, Renz added. "In general, we've seen a shift from smaller fleets moving to CNG to much larger corporations making the move, so our overall growth hasn't slowed down," Renz said in an e-mail.

Those who are pressing forward are couching their investment in terms of environmental, rather than economic, benefits. Belgian brewing giant Anheuser-Busch InBev said in August it was replacing its St. Louis tractor fleet of 97 diesel-powered rigs with CNG-powered rigs. Last year, the company switched out its entire Houston-based fleet of 66 diesel tractors for CNG. (Approximately 30 percent of Anheuser over-the-road tractors now run on natural gas.) In its statement announcing the changes in St. Louis, Anheuser emphasized the value of reducing greenhouse-gas emissions. There was no mention of cost savings.

Shippers that aggressively pushed their carrier partners to convert to natural gas when oil prices were higher have since backed off. Spending on the refueling infrastructure has slowed so far this year, though a huge project backlog from 2014 ensured that work would continue in earnest well into 2015. As a result, the one component long seen as the biggest impediment to the growth of the CNG heavy-duty truck market is in better shape now than it has ever been, Murdock said.

Sales of big CNG rigs during 2015 have been roughly on par with 2014 levels, but that's considered a victory of sorts considering how the sharp decline in oil prices could have deflated CNG's value proposition. Cummins Inc., one of the manufacturers of the 12-liter CNG engines used by heavy-duty fleets, will sell 3,000 to 3,500 engine units this year, about the same as last year, according to William Zobel, vice president, market development and strategy, for Trillium CNG, a Salt Lake City-based fueling-services and filling-station-design company. "The market is still maintaining momentum" despite unfavorable macro trends, Zobel said in a phone interview.

Those involved in the CNG space remain optimistic, believing natural gas's historical price stability (it has traded in a tight range for more than a decade, except for late 2005 after hurricanes Katrina and Rita shut down Gulf Coast supply lines, and mid-2008, when all energy prices spiked), its environmental benefits, and its abundant domestic production will remain appealing factors. Private fleets and dedicated carriers remain committed to CNG, they contend. "The feedback we're getting is that they're all in," said Grace of Clean Energy.

Then there is the price of oil itself: Most in the CNG field are biding their time, confident that oil and fuel prices will eventually rise, and, if there is a supply shock due to unrest anywhere in the oil-producing world, that the increase will be violent. Over the last eight years, which include the sharp fall in the past 16 months, diesel prices have averaged $3.44 a gallon, according to Grace.

Still, the best guess is that, barring unexpected events, oil prices will stay around current levels—or perhaps go lower—for the next year or two. That has led DelBovo of Saddle Creek Transportation to engage in unconventional thinking. "I'm probably the only person in America hoping for oil prices to rise," he mused.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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