On a Blue Streak
CNG sparks interest as retailers look to grow sales and save money.
Imagine a fuel that has a margin five to six times greater than that of gasoline or diesel, changes price at most once a month, and is in demand among the nation’s heaviest consumers of fuel.
The potential of natural gas as a transportation fuel seems as great in 2013 as it has ever been, thanks to record low prices, a clean-burning reputation and the huge appeal of a plentiful domestic fuel source in a country eager to become less reliant on imports.
For retailers getting into the business, compressed natural gas (CNG) and, to a lesser extent, liquid natural gas (LNG) are keys to differentiation on a forecourt that has been otherwise commoditized [CSP—Dec. ’11, p. 145]. It has also enabled them to the capture the business and loyalty of local fleets and municipalities whose natural-gas-powered light-, medium- and heavy-duty trucks currently make up the bulk of the customer base.
Retailer OnCue Express, Stillwater, Okla., could be considered a CNG veteran, having entered the business back in 1995. This past fall, it sold its 3 millionth gasoline gallon equivalent (GGE) of CNG through 13 of its 38 locations in Oklahoma, and it has 10 more CNG sites in the hopper for 2013.
“I love the fact that it is a clean-burning fuel,” says CEO Jim Griffith. And then there is “the typical stuff about a lower dependence on foreign oil.”
Griffith freely admits that, after 17 years, CNG remains a small part of his overall fuel business; 10,000 GGEs per month “means you’re doing pretty good.” And he has not measured CNG sales’ effect on inside sales, although he assumes there is one because OnCue now has more dedicated customers. But he can testify firsthand that there is a definite price advantage.
Consider OnCue’s own fleet of eight CNG-powered pickups, which helps the company save $125 per truck per week in fuel costs. “You can add that up and see that is a huge, huge savings over the year,” he says. There is a per-gallon discount of $1.30 to $1.75 for CNG vs. gasoline and diesel, according to NGVAmerica, a Washington, D.C.-based natural-gas trade association.
“It takes a little while to ramp up when you start,” Griffith admits. But demand continues to grow from local public and private fleets that have converted to CNG, he says, fueled by generous incentives from the state of Oklahoma. “It’s always nice when you have something you really like and believe in and you can make a little money at it. It’s the best of all worlds.”
The CNG fueling infrastructure has caught fire right near the sources, in states such as OnCue Express’ Oklahoma. It is a major producer of natural gas, ranking fourth in the nation behind Texas, Louisiana and Wyoming. Fellow Oklahoma chain Love’s Travel Stops & Country Stores opened its first CNG fueling location in 2011 for light-duty vehicles, and in October 2012 it debuted a fast-fill site for heavy-duty trucks.
Norman Herrera, director of market development for Chesapeake Energy Corp., Oklahoma City, which partnered with OnCue and Love’s on their installations, says natural-gas producers often provide the catalyst for infrastructure development, using their own fleets as an anchor tenant. Chesapeake is the second-largest natural-gas driller, with operations in 14 states.
“The first adopters will probably be in markets with oil and natural-gas exploration where many companies like Chesapeake are converting our fleets to operate on natural gas,” he says, citing states such as Colorado, Louisiana, Texas, Oklahoma, Ohio, West Virginia and Pennsylvania. “We’re really counting on the c-store business to support it through a convenient and accessible infrastructure.”
In its attempts to jumpstart the development—with a goal of 16,000 stations to support the current and future NGV fleet—Chesapeake has targeted fuel retailers of scale, visiting with the top 15 largest chains in its markets to keep them updated on any new developments or opportunities in the CNG arena.
Herrera says education and highlighting the price advantage of natural gas over petroleum is the key to winning over more retailers to CNG’s potential as a transportation fuel, which is further stymied by the steep $700,000-and-up capital cost of installing a CNG offer.
“If you can start using the fuel for something that touches everyone, in their pocketbook and vehicles they drive home, that is probably the most compelling piece,” he says. “For those with questions about our industry, the price point is a great conversation starter and a compelling one that will cause conversions of private fleets, and hopefully lead to those opposed to it to look a second time.”
In Texas, which ranks first in the nation for natural-gas production, another large retailer is dipping its toes into the CNG pool. In mid-2011, Stripes LLC, Corpus Christi, Texas, the retail subsidiary of Susser Holdings Corp., began examining the CNG opportunity, attracted by the buzz and growth potential of the alternative fuel. At the same time, it was wary about entering a new, relatively unproven business.
“We’re willing to take risks, but we also are pretty proud of the record we have of using our capital wisely,” says Craig Scotton, senior director of fuel services for Stripes, which has more than 1,100 sites in Texas, Oklahoma and New Mexico. “We don’t want to take unnecessary risks. So our biggest question was: Can we get a return?”
Around that same time, the company was approached by Apache Corp., a Houston-based producer of natural gas. Apache had originally planned to purchase property next to Stripes’ Midland, Texas, location, which was adjacent to one of Apache’s fleets of bi-fuel (running on gasoline and CNG) vehicles, and install its own CNG station. But after considering the size of the Stripes location—about 8 acres—it had another idea, according to Scotton: “Why don’t we ask Stripes if we can build on their land, rather than go through with the acquisition of new property?”
After ironing out the details, the companies struck a deal. Stripes leases the property to Apache, which funded and built the CNG fueling station. This includes leasing the easement from the underground piping and space on Stripes’ fuel islands for the dispensers. Apache plans to open the station to the public soon, partly to help make the site profitable and also because it received state grants that require public access. It will handle any transactions through its own POS, independent from Stripes.
The location would serve 70 vehicles immediately, with plans to attract an additional 45 vehicles from local fleets. A second Stripes location near one of Apache’s regional offices in Midland will host a CNG fueling site to service employees as they convert to NGVs. Apache would also solicit additional fleet accounts for both facilities to make them profitable.
While Stripes has not committed to additional locations, it is in talks with a few other potential partners, says Scotton. In the end, the company hopes to see an increase in business from the new offer.
“We’re looking at the amount of store traffic and a committed, dedicated customer that has nowhere else to go, and what that can mean to us on the inside sales,” he says, “more so than anything we make on the lease agreement.”
A Positive Trend
While most development of the CNG infrastructure is happening in states producing natural gas, especially where government incentives exist to encourage growth of the market, it also can blossom where retailers simply see an incredible business opportunity.
Take La Crosse, Wis.-based Kwik Trip Inc. “Our goal is to be on every major corridor in every sizable market within our three-state area,” says Chad Hollett, director of transportation and distribution for the 400-store chain, which today has 10 locations in Wisconsin and Minnesota that sell CNG and one that markets LNG.
Kwik Trip started with a bang last year when it hosted its first Natural Gas Summit and Tradeshow, attracting about 1,500 attendees from OEM vehicle and infrastructure manufacturers, natural-gas providers and local fleets. It also opened its first alternative-fuels station, which sells not only CNG but also LNG, E85 and biodiesel.
As Hollett explained at the time, the motivation was driven by natural gas’ price advantage, as well as the belief that Kwik Trip, by throwing its considerable weight behind CNG, could jumpstart the development of the fueling infrastructure in its Midwest markets.
Several months later, Kwik Trip is exceeding its sales growth and volume targets, with an average volume of 1,000 GGEs per weekday.
“As we’ve opened every new station from that point forward, we tried to do as good a job as we can to let the public know we’re coming,” says Hollett. “We are seeing a lot of fleets making the transition, and they’re ready for it when the station opens.”
At the La Crosse site, Kwik Trip’s own NGV fleet represents “a good portion” of the CNG volume, says Hollett. By the end of its fiscal year, Kwik Trip had planned to have more than 40 of its 150 large vehicles, and more than 50 light-duty vehicles, converted to CNG. Beyond its own fleet, Kwik Trip’s No. 1 customer is a regional freight hauler, with the rest including municipal vehicles such as garbage trucks. Most of the customers are retail, without a supply contract.
While he could not cite a specific effect on inside sales—Hollett says Kwik Trip should have a better idea in about a year—he cites a “positive trend.” One of the first sites opened in Milwaukee saw a 15% jump in in-store sales.
“It’s all new business, which is increasing customer count,” says Hollett. In some cases, Kwik Trip has been able to pick up a fleet’s diesel business after winning its CNG sales. “You can bring new business to a retail site like ours, which is tough to do in today’s climate, and natural gas is giving us the opportunity to do just that.”