Compliments of Doomberg but I give further credit to the late great Boone Pickens:
That which can’t go on forever usually doesn’t, and valuable hydrocarbons won’t trade for substantial discounts to their molecular peers indefinitely. Heat is heat, after all, and market forces will grind away at this staggering arbitrage until it is closed. Throughout North America, a quiet revolution is underway. Machines are being modified, processes reconfigured, and infrastructure developed to switch from expensive oil-based products to dirt-cheap gas. Let’s head to the shale patch and highlight a few interesting examples.
We begin with Liberty Energy, an innovative oil field services provider that operates in all the major shale basins in North America. In perusing its most recent annual report, we learn that the fast-growing company delivered $4.7 billion in revenue in 2023, up 15% over the prior year and twice what it achieved in 2021. One driver of this growth has been the company’s strategic moves to take advantage of the natural gas supply glut (emphasis added throughout):
“In early 2023, the Company launched Liberty Power Innovations LLC (‘LPI’), an integrated alternative fuel and power solutions provider for remote applications. LPI provides CNG [compressed natural gas] supply, field gas processing and treating, and well site fueling and logistics. LPI was formed with the initial focus on supporting Liberty’s transition towards our next generation digiFleets℠ and dual fuel fleets, as CNG fueling services are limited in the market, yet critical to maintaining highly efficient well site operations. Currently, LPI is primarily focused on supporting an industry transition to natural gas fueled technologies, serving as a key enabler of the next step of cost and emissions reductions in the oilfield.”
During a recent investor presentation delivered at Piper Sandler’s Annual Energy Conference, Liberty Energy’s CEO Chris Wright highlighted the company’s efforts to profit from the historic price disparities observed in the markets. Wright committed to convert most of the company’s fleet to natural gas by year-end and noted the company’s significant investments “to serve a wide array of power needs: microgrids, power plants, data centers, grid enhancement, mining, emergency and disaster relief.” Liberty Energy also recently acquired Siren Energy & Logistics, a company that provides integrated natural gas compression and CNG delivery services in the Permian Basin.
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The shift toward CNG-based fueling options looks set to get a significant boost this year when leading engine maker Cummins brings to market several new engines that are either fuel-flexible or engineered to run exclusively on natural gas. We listened with interest during the company’s most recent earnings call as CEO Jennifer Rumsey highlighted these investments early in her prepared remarks. This is from a transcript provided by Bloomberg:
“Most notably for our core business in 2023, we committed to investing more than $1 billion across our U.S. engine manufacturing network to support the industry's first fuel agnostic engine platforms, as well as unveiled the X10 fuel agnostic series launching in North America in 2026.
Additionally, we initiated several collaborations with our natural gas X15 engine, which will launch in North America this year and further enables our customers to achieve their decarbonization goals. This is the industry's first natural gas engine designed specifically for heavy-duty and on-highway truck applications, offering customers the opportunity to realize reductions in nitrous oxides and greenhouse gas without compromising performance. We are continuing to see strong interest from both OEMs and end users ahead of the launch later this year.”
Energy Innovation
Re: Energy Innovation
Further more names to explore and a familiar name...
Apart from new engine designs, there is also the growing prospect of using natural gas as a feedstock to manufacture gasoline and diesel directly, something that would provide a drop-in outlet for the current supply glut. In an article we wrote in January titled “Putting a Ceiling on the Equilibrium Price of Oil,” we highlighted that chemists and engineers are more than capable of converting natural gas into products typically derived from oil, thereby broadening the very definition of oil itself. Barely a month after we published that report, a rather interesting press release crossed the wire:
“Verde Clean Fuels, Inc. (NASDAQ: VGAS) (“Verde” or the “Company”) and Cottonmouth Ventures LLC, a subsidiary of Diamondback Energy (NASDAQ: FANG) (“Diamondback”), today announced that the parties have executed a Joint Development Agreement (“JDA”) for the proposed development, construction, and operation of a facility to produce commodity-grade gasoline utilizing associated natural gas feedstock supplied from Diamondback’s operations in the Permian Basin…
The expectation for the project is to produce approximately 3,000 barrels per day of fully-refined gasoline utilizing Verde’s patented STG+® process. By consuming natural gas in the pipeline-constrained Permian Basin as feedstock, the proposed project could demonstrate the ability to mitigate the flaring of up to 34 million cubic feet of natural gas per day, while also producing a high-value, salable product.”
Compared to traditional refineries, 3,000 barrels per day is an insignificant amount, and this project is akin to a large pilot plant. However, should the price disparities in the market persist we would expect many more announcements of this type. Verde itself has positioned the project “as a template for additional natural gas-to-gasoline projects throughout the Permian Basin and other pipeline-constrained basins in the US, as well as address flared or stranded natural gas opportunities internationally.”
In the long run, every hydrocarbon will be oil, and all will trade for roughly the same price. Things that do the same thing don’t sell for different prices indefinitely, and hydrocarbons will be no exception. Either by changing the engines or manipulating the molecules or a combination of both, arbitrage will prevail. The projects profiled here are but a small sample from the dozens we could have highlighted, and the economy will emerge from this historic period more efficient and flexible.
Apart from new engine designs, there is also the growing prospect of using natural gas as a feedstock to manufacture gasoline and diesel directly, something that would provide a drop-in outlet for the current supply glut. In an article we wrote in January titled “Putting a Ceiling on the Equilibrium Price of Oil,” we highlighted that chemists and engineers are more than capable of converting natural gas into products typically derived from oil, thereby broadening the very definition of oil itself. Barely a month after we published that report, a rather interesting press release crossed the wire:
“Verde Clean Fuels, Inc. (NASDAQ: VGAS) (“Verde” or the “Company”) and Cottonmouth Ventures LLC, a subsidiary of Diamondback Energy (NASDAQ: FANG) (“Diamondback”), today announced that the parties have executed a Joint Development Agreement (“JDA”) for the proposed development, construction, and operation of a facility to produce commodity-grade gasoline utilizing associated natural gas feedstock supplied from Diamondback’s operations in the Permian Basin…
The expectation for the project is to produce approximately 3,000 barrels per day of fully-refined gasoline utilizing Verde’s patented STG+® process. By consuming natural gas in the pipeline-constrained Permian Basin as feedstock, the proposed project could demonstrate the ability to mitigate the flaring of up to 34 million cubic feet of natural gas per day, while also producing a high-value, salable product.”
Compared to traditional refineries, 3,000 barrels per day is an insignificant amount, and this project is akin to a large pilot plant. However, should the price disparities in the market persist we would expect many more announcements of this type. Verde itself has positioned the project “as a template for additional natural gas-to-gasoline projects throughout the Permian Basin and other pipeline-constrained basins in the US, as well as address flared or stranded natural gas opportunities internationally.”
In the long run, every hydrocarbon will be oil, and all will trade for roughly the same price. Things that do the same thing don’t sell for different prices indefinitely, and hydrocarbons will be no exception. Either by changing the engines or manipulating the molecules or a combination of both, arbitrage will prevail. The projects profiled here are but a small sample from the dozens we could have highlighted, and the economy will emerge from this historic period more efficient and flexible.