Navigant Research Blog

Low Price Drives Natural Gas Truck Market

Dave Hurst — May 10, 2013

Low prices for abundant natural gas, along with smoother regulations and volatile gasoline and diesel prices, are driving operators of fleets to increase their consideration of both compressed natural gas (CNG) and liquid natural gas (LNG) as a fuel.  Additionally, the impending launch of the Cummins Westport ISX12 G engine is generating real excitement in the natural gas truck market.  This 400 hp engine slots between Cummins Westport’s ISL 8.9L and Westport’s 15L engines.  The result is a vehicle market that is expected to grow at a rate of 14% this year in North America (compared to a global rate of about half a percent).

The two forms of natural gas vehicle fuels are both growing, but although CNG systems are more compact and cheaper to install on trucks, LNG systems give longer vehicle range.  The result, as The New York Times reports, is that the long distance trucking industry is increasingly looking toward LNG as an option to replace diesel.

But that’s only half the story.  The number of LNG stations is set to grow significantly in the next couple of years.  Navigant Research forecasts that about 200 new LNG stations will be open in the United States by 2015, with more in the works.  This expansion is critical to sustain sales growth in the vehicle market.  At the moment, in answering the chicken-and-egg question of whether vehicles or refueling stations have to come first, the answer is clearly that vehicles are ahead of the stations.

Rising Demand, Rising Prices

At the same time, there are new concerns about the price of natural gas.  The Henry Hub gulf coast spot price is $3.81/million BTUs, its highest point since September 2011, and well above the low of $1.95 seen last April.  Demand for natural gas is on the rise for electricity production as well as vehicles, but supply continues to outstrip demand.  At the moment, natural gas cannot be exported to countries without free trade agreements with the United States, but that may change.  President Obama’s new Department of Energy nominee, Ernest Moniz has stated that he supports LNG exports to non-free trade agreement countries, which could have a greater impact on demand.  Charles Ebinger of the Brookings Institute, however, testified that the price of electricity would not be significantly affected by wider LNG exports.

Does that mean the price of CNG and LNG as a vehicle fuel will also be relatively unaffected?  This question is challenging to answer, because prices for CNG and LNG will not going be influenced in the same ways.  In looking at CNG, Navigant Research estimates that about 17% of the gasoline gallon equivalent (GGE) price at the nozzle is related to the price of natural gas (about $0.35 to $0.40).  The remaining 83% of the price is determined by the cost to compress and cool the gas, profit margins, taxes, and so on.  So, even if the price of natural gas does eventually hit the $8/MBTUs that Forbes contributor Richard Finger expects, CNG will see a about a $1.40 GGE increase but will likely still be priced below gas and diesel.  According to America’s Natural Gas Alliance, the natural gas price component of LNG, on the other hand, consists of about 45% the diesel gallon equivalent (DGE), so an increase in the cost of natural gas has a bigger impact on the LNG price.

The result is the price of natural gas has to remain low in order to help grow the LNG truck market.  The incremental costs for an LNG truck can run between 60% and 80% more than a diesel truck.  The result is that the combination of government vehicle purchase incentives and the fuel incentive ($0.50 per GGE) become even more critical to keeping the payback on the LNG trucks attractive as the price of natural gas climbs.

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