Given the low natural gas prices, investors are wondering if this is a good time to convert their cars and trucks to use natural gas as fuel. The short answer is no.
When analyzing gas prices, the only comparison that matters is comparing wholesale prices against wholesale prices and retail prices against retail prices. If fleet owners are considering converting to natural gas, the only price that matters is retail. Wholesale prices provide limited market fundamentals and price direction.
Let's look at those fundamentals. Wholesale natural gas prices are at trading at historical lows. Spot prices are trading at approximately $2.60 per million British thermal units (mmBtu). Future prices (NYMEX:NG) are in contango, the nearby sits near spot and the 12-month price floats up a dollar to approximately $3.60 per mmBtu.
In contrast, wholesale gasoline futures (NYMEX: RB) is not in contango. The nearby is approximately $2.90 per gallon, and future prices are erratic, but in 12 months will fall to approximately $2.50 per gallon.
The wholesale markets are providing analysts with important signals, the most important of which is that natural gas prices are not correlated with gasoline prices. Worse, these fuels' forward prices are diverging.
These signals create a problem for fleet managers. Wholesale markets are failing to provide any signal that will assure bankers that future prices will absolutely favor one fuel over the other. Of course, it seems obvious that natural gas should always be cheaper than gasoline. Unfortunately, bankers need hard numbers to make investment decisions.
It is expensive to convert vehicles to run on natural gas. Not only does the engine have to be converted, but the vehicle's fueling system, the fuel tank and the onboard fuel management system all must be all converted to use compressed natural gas (CNG).
Transportation CNG is pressurized up to 3600 pounds per square inch (psi). It is stored in the vehicle's tank at that same pressure and later is depressurized to 70 psi to 120 psi at the engine. In contrast, the Natural Gas Supply Association describes typical utility distribution systems that require as little as 3 psi.
The fleet manager has another problem. At the retail level, the numbers fail to provide a compelling argument for most owners to convert. Let's dig deeper.
Retail prices for both gasoline and natural gas vary geographically. For a national perspective of gasoline prices, check Gas Buddy's map.
For CNG, look at Chesapeake Energy's (CHK) price maps. Notice CNG stations use dollars per Gasoline Gallon Equivalent ($/GGE). This makes price comparisons with gasoline much easier.
For simplicity, use $3.50 per gallon for gasoline and $2.00 for CNG, for a price difference of $1.50 a gallon. Is the $1.50 difference worth the conversion investment?
It appears not. We have to first assume expired government incentives will not be reinstated for natural gas vehicle (NGV) owners. Also, we assume the capital cost of an NGV is only $5,000 over a standard gasoline-fueled vehicle; the net cost to replace an existing engine is the same amount. We also assume the NGV gets 20 miles per gallon, and assume the gasoline-fueled vehicle achieves the same mileage.
At current fuel prices, the $5,000 investment requires NGV owners to consume 3,333 GGE, or drive 66,666 miles to break even. If an owner drives 15,000 miles per year, it would take more than four years to break even.
The results are similar for diesel. Since diesel contains approximately 16% more energy and costs approximately 15% more for the equivalent of regular gasoline, the results are expected to be similar.
Also, to carry the same amount of fuel, CNG fuel tanks must be much larger than ordinary tanks. The reason is twofold. First, CNG's energy density is much lower than diesel or gasoline, so CNG tanks must be larger to carry the equivalent fuel. Second, unlike ordinary gas tanks, CNG tanks must carry their fuel under high pressures.
These challenges illustrate why managers are not eager to convert their fleets. Further, companies like Clean Energy Fuels (CLNE), Westport Innovations (WPRT) and Cummins (CMI) need government incentives to make a conversion worthwhile. Without incentives, the numbers just don't work.