Whatever happened to the promise of natural gas as a surface fuel? Where did it go? What seems to have curtailed it, cut it back, or made it seem irrelevant? There are four factors.
First, the gasoline engines got cleaner. One of the key drawing points of natural gas engines came from documented proof that the engines burned cleaner than diesel. At the same time that Westport Innovations (WPRT) was working with Cummins (CMI) to develop the next generation engine for natural gas, however, Cummins was creating a cleaner diesel engine. The environmental advantage is still there, but has diminished. You can tell that from the horrendous numbers out of Westport last week. Cummins is clearly supporting diesel.
Second, the price of gasoline had to go higher to make natural gas prevalent. But the glut of oil and the Saudi price cuts have make this fuel less economic. That's another reason why I believe the Saudis are discounting oil and not trying to keep the price up. We will not develop our alternative natural gas surface fuel industry with gasoline at $3 per gallon. It needs to be closer to $5 per gallon to make the payback work.
Third, natural gas hasn't gone down in price, and it is stubbornly hanging in there. That's odd, because we are still flaring more than we use. The conversion to natural gas from other fuels has slowed, as pretty much all of the switching we can expect has occurred. There are still some oil-fueled buildings in the northeast, but those will convert with pending pipelines. The price of natural gas should be much lower than it is. The price stays high perhaps in hopes that we will be exporting it extensively, given the permits granted. However, I think the Cheniere Energy (LNG) development, with its huge expense and multi-year permitting process, makes it highly unlikely that more than a handful of these plants will ever be built. Companies that want to use natural gas worry that maybe it won't be available. That's what happened in Australia.
Four, the payback for these natural gas engines just isn't there. You can't have decreasing gasoline price, when these natural gas engines are so expensive that the payback takes multiple years. Moreover, we don't have the infrastructure in place to support the trucks that could use natural gas, except at the local depot level. That's why Chart Industries (GTLS), which had high hopes, got cut in half. The future's just not as bright as we had expected, either in the U.S. or in China. Remember, natural gas is underpowered, and you have to fill up more often. Truck drivers hate that.
All of the above factors have combined to frustrate the use of a natural resource that is much more abundant in the U.S. than oil is. Without subsidies, or at least a directive from the federal government to implement natural gas adoption in government entities, I suspect that lower gasoline prices will put a stop to further development of natural gas technology. The move toward light-weighting trucks with aluminum just makes the case worse.
It's too bad. We know the Marcellus Shale and the Utica Shale are far bigger than we had thought. We are in a once-in-a-lifetime position to be domestically energy-independent by harnessing natural gas as a surface fuel. But with gasoline coming down, this scenario is no longer as likely as it had been three to four years ago. We have to, as a country, hope that the chemical companies keep building to take advantage of it. Right now, we have the worst of all possible worlds. We have too much of a resource that we are not using, and we have no plans to use it on a grand scale in the foreseeable future.