It’s more than about natural gas or the environment. It’s about our country, says Scott Zaremba.
“Being through the Gulf War, the oil embargo, you start seeing we need another source of transport energy,” he says. “That’s where I got into ethanol, biodiesel, propane, and [compressed natural gas] now is the latest one to come down the pipe.
“None of them is the answer to everything, but they’re all going to have their specific segment that they can pick up and take care of.” One man by himself will not make America energy-independent. But Zaremba, president of Lawrence, Kan.- based Zarco 66, proudly considers himself an “alternative-fuels guy,” with his nine sites selling E85 and biodiesel.
Of course, patriotism alone is a compelling proposition, but rarely do nationalistic sentiments sustain what is a long-term challenge. This is why proponents of natural gas as a transportation fuel readily highlight its advantages as they push for renewing and expanding federal tax incentives designed to give the industry a head start.
For one, consider that the U.S. ranks fifth worldwide in the size of proven natural-gas reserves. According to the Energy Information Administration, the U.S. imports more than 60% of its petroleum, yet generates 85% of its natural gas.
On the clean-air front, swapping an older, conventional vehicle with a new natural-gas vehicle (NGV) can slash carbon-monoxide emissions up to 90%, nitrogen oxide up to 95% and carbon dioxide 20% to 30%, according to Natural Gas Vehicles for America (NGVAmerica), a Washington, D.C.-based natural-gas trade association.
Then there is the profit potential. As of press time, the average nationwide price for a gallon of gasoline was $3.68 (and dropping). The average for a gasoline gallon equivalent (GGE) of compressed natural gas (CNG)? $2.07.
It’s this triple benefit that is compelling Zarco 66 to install CNG at four sites. But there are obvious drawbacks. For starters, the start-up costs are high—roughly $600,000 to $650,000 per 1,000-GGE site before tax credits for infrastructure and equipment. Regardless, Zaremba believes in the blue flame.
“The infrastructure costs are high, and being able to handle getting [NGVs] into the mainstream is another issue,” he concedes. “It’s going to take a long time before we’re able to turn over the motorvehicle population to another type of product. But we have to start somewhere.”
Surveying the Fleet
NGVs can run exclusively on CNG or liquid natural gas (LNG), or be “bi-fuel,” operating on natural gas and gasoline. According to NGVAmerica, there are about 112,000 NGVs in the United States—out of roughly 245 million vehicles total—with most dedicated to fleets. CNG typically powers light, medium and some heavy-duty NGVs, while LNG is reserved for class A trucks requiring greater range.
Richard Kolodziej, president of NGVAmerica, says garbage trucks are seeing some of the fastest growth in the NGV industry, and about 40% on order are natural-gas models. “Return home” vehicles—anything from taxis and beer trucks to diaper-service vans—are another growing segment.
Consumer vehicles are limited in number, but they include the CNG-powered Honda Civic GX and light-duty trucks. Conversion kits are also available, which enable a conventional vehicle to be retrofi tted for natural gas at roughly $15,000.
As with any business, economics drive the growth of the NGV market. “In the private sector, especially business, people will say they care about oil dependence, greenhouse gases, urban pollution, but it’s money,” says Kolodziej. “If I can pay for it and it’s cheaper, I will go for it; if it’s not, I won’t.”
NGVs, depending on the model, typically have a three-year ROI, says Kolodziej. There is roughly a $6,000 price difference between a conventional Honda Civic sedan and the CNG-powered model. A class A truck powered by LNG, meanwhile, may have a $70,000 premium.
“But remember, those guys are using 25,000 gallons of fuel a year, and if they’re saving $2 per gallon, you can recover that $70,000 investment in two years,” he says. Of course, this fi gure can vary as the price of crude rises and falls.
Growth of NGVs is highly regional, says Kolodziej. California, New York and Texas are top in natural-gas use for transportation, while California, New York and Utah have the highest consumer use. Oklahoma—home to natural-gas giant Chesapeake Energy—is quickly rising. And the Southeast—the Carolinas, Georgia and Florida—are warming up. “You’ve had public policy in those states saying we want to encourage this, either through tax incentives or access to HOV lanes,” he says. “It goes back to economics.”
Gaining a Foothold
According to the Clean Vehicle Foundation, there are about 1,100 natural-gas fueling sites in the United States, and only one-half are open to the public. It is this bare-bones infrastructure that will dampen faster growth of the consumer market, according to clean-technology firm Pike Research. In a 2011 study, the research group forecast that the number of refueling sites would grow to 1,972 fueling stations by 2016, or 90 NGVs per station.
A typical fast-fill CNG fueling site involves an inlet gas dryer hooked up to the local natural-gas line. The gas then feeds into a compressor, which compresses the gas to 3,600 to 4,000 pounds per square inch (psi). This leads into aboveground storage tanks, which are connected to the dispenser. The latter looks like a typical gasoline dispenser, complete with a payment processor, but it has a different nozzle. The cost of an installation depends ultimately on the throughput, which determines the size of compressor and amount of storage tanks required.
The key is to install CNG so that it can be upgraded easily as business grows, says Zaremba. “There’s no way you can create an ROI on something that will fuel 100 vehicles a day,” he says, “because the cost is prohibitive for the equipment. I can’t put a quick-fi ll system in today with only 10 vehicles in the area. The big thing is finding items that are scaleable, where you can start with X and move to Y and then Z as that distribution line builds and consumer demand builds.”
This chicken-and-egg proposition afflicts each alternative fuel as it struggles to displace petroleum: how to grow infrastructure to meet demand, when demand is dampened because of a lack of infrastructure.
“We have to build enough infrastructure so there are enough places to fuel to make it economically viable to buy vehicles that will run on it,” says Zaremba. “CNG is a huge infrastructure cost to be able to fuel it, and a huge cost on the vehicle to be able to burn it. It’s balancing those all the time and trying to find a niche you can fill with it.”
For the natural-gas transportation fuel industry, growing that infrastructure has required a change in approach.
“When the NGV industry first started, utilities primarily were getting into the fueling-station business,” says Kolodziej. “They used the ‘If we build it, they will come’ strategy. That was a loser at that time—because they didn’t come.” This was because the NGV fleet was so small.
Instead, the industry today is adopting a “shopping mall” approach to growing infrastructure. That is, find one or two anchor tenants to provide a guaranteed income stream and then grow from that base.
“Talk to fleets in the area and offer a very good, low fixed-price contract for three to four years,” he says, “in exchange for what’s a take-and-pay contract, where they guarantee they will pay you so much for fuel. That way, you as a station owner have enough throughput guaranteed to open a station.” The goal: organically growing the station infrastructure.
Love’s Travel Stops & Country Stores, Oklahoma City, took this approach when it opened a CNG site in February at its Kingfisher, Okla., truckstop in a partnership with Chesapeake Energy. The site, which Love’s both owns and operates, has Chesapeake’s CNG truck fleet as its anchor tenant. The natural-gas supplier has converted nearly 70 trucks in its fleet to CNG.
“It’s a good site from the standpoint that it’s on a well-traveled highway, but the key piece of it was that Chesapeake has an office right there and operations in that area,” says Jenny Love Meyer, Lovee’s director of communications. “We knew there was some demand that was already there.”
Meyer couldn’t say how the rest of the CNG customer base breaks out, but other fleets in the area such as AT&T and UPS that are converting trucks to CNG may be using the site.
While Love’s initially had no idea what type of sales to expect from CNG, “It’s enough volume to where we look at it as a good opportunity,” Meyer says. In fact, at press time, the company announced an expansion of its CNG business to 10 additional sites.
The CNG fueling dispenser is located on a concrete pad next to the truckstop’s parking lot and situated next to a naturalgas pipeline. Other equipment includes aboveground storage tanks, a compressor and the dispenser itself. Love’s took advantage of state and federal tax credits to help offset the installation costs.
Kolodziej says NGVAmerica is in discussions with some large c-store chains that see natural gas as a “significant opportunity.” “Putting in gas or diesel is not capital-intensive—it’s far less capital-intensive than natural gas—but the margin is tiny,” he says. “With natural gas, it’s a bigger capital investment but the margins are significant.” Natural gas is priced at roughly 50 cents per gasoline gallon equivalent at the wellhead; add $1 or $1.10 for transportation costs, and the price hits only $1.60 per GGE. Compared to gasoline, says Kolodziej, “there’s a lot of room between $1.60 and $3.50.”
Another Way
For retailers who don’t want to get their hands dirty with natural gas, turnkey offers exist. Questar Corp., a natural-gas utility and producer based in Salt Lake City, will install a CNG fueling station— including a compressor, storage and dispensing—on a retailer’s pad, and pay 7 cents per GGE in rent for use of the property. Questar keeps the rest of the CNG sales as its profit.
“We’ve made it really easy,” says Gordon Larsen, head of Questar’s natural gas for vehicles program. “[Retailers’] real money is Cokes and doughnuts. We’ve tried to pick the best places, and that way we don’t have to buy property, either—it saves us a lot of money on our stations since we’re utilizing theirs.” A typical income may run $2,000 to $4,000 per month, “which is really good rent for the amount of property we take,” he says.
The fueling equipment fits in about a 20-foot-by-70-foot footprint on the site. There also needs to be enough space so a range of NGVs—from a Honda Civic GX to a garbage truck—can use the site. Questar now has 34 public CNG sites, with most in Utah, but it plans to expand into Wyoming. The state has 13,000 to 14,000 NGVs, Larsen says, and the second-largest natural-gas fueling infrastructure in the country.
Unlike the bulk of natural-gas sales, which are consumed by fleets, 80% to 90% of sales at Questar’s CNG sites come from individual consumers—a fact that Larsen credits to the price differential and the existence of an established infrastructure.
One of Utah’s advantages, compared to other states, is its population concentration. “There are 2 million people and the majority live between Logan and Provo, and along I-15,” Larsen says. “So we can go in a straight line; we don’t have to scatter all over the whole state to get the majority of the people.”
Taxing Issues
Just like ethanol, natural gas has approached the road’s end for current federal tax incentives designed to give the industry a head start.
Since 2006, buyers of NGVs or conversions have enjoyed an income tax credit, while fuel suppliers received an income tax credit toward the cost of natural gas refueling equipment—today at $50,000 or 50% of the cost. Suppliers also have benefited from a tax credit of 50 cents per GGE of CNG or liquid gallon of LNG. Both are set to expire Dec. 31, 2011. A bill sitting in the House of Representatives— H.R. 1380, or the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act—would:
Extend the NGV and refueling equipment credits by five years. Increase credit for refueling equipment to 50% of the cost, or $100,000.
Extend the excise tax credit for CNG and LNG sales by five years.
John Eichberger, vice president of government relations for NACS, has recently described the bill’s prospects as “dim,” and as of press time, it was still referred to committee. But natural-gas industry players are more optimistic about the long term. “
The prospects are dim this year because of the makeup of congress,” says Kolodziej, who believes that after the 2012 congressional election cycle, more reasonable minds may prevail. “After the primaries, everyone is running toward the center to look better for the general voting population.”
Either way, he recommends retailers interested in CNG proceed as normal. “This tax credit, if it goes through, will be retroactive from the day of the bill’s introduction—so there’s no reason not to do it,” he says. “If it happens, you get the credit. If it doesn’t happen, you made a decision based on economics.”
“I’m not chasing the tax credits because it’s a long-term investment,” says Zaremba. “If the tax credit goes away and it doesn’t make it viable, well, then we’ll have to look at it again.”
Natural Gas by the Numbers
1,100 Number of natural-gas fueling sites in the United States; one-half are open to the public
112,000 Number of NGVs in the United States
$1.61 Price advantage per gasoline gallon equivalent of CNG to gasoline, as of July 2011
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