Energy Prospectus

You are going to hear a lot more about Natural Gas Vehicles (NGVs) in the near future.

NGVs will take time to make even a small impact on NG demand. Those of you that get an NGV early may get the biggest bang for your buck as the price differential to gasoline will the largest over the next few years. IMO the best news is that if we were cutoff from Middle East oil we could move to NGVs very quickly. This is not rocket science and NGVs have been around for a long time. - dan

From today's Raymond James "Energy Stat of the Week";

"This is our third annual Stat on natural gas vehicles (NGVs), and it is in many ways the most exciting one. If there had been any doubt that NGVs are "for real" in the U.S. market, they should have been dispelled over the past year. News about leading "old economy" companies - General Motors, Chrysler, Navistar, Hertz, General Electric, and more - jumping on the NGV bandwagon has visibly picked up pace, particularly year-to-date, as natural gas prices plummeted to the sub-$3/Mcf range. For energy investors, there are three key points to underscore. First, as we detailed in our Stat from April 9, the impact of natural gas fuels on declining U.S. oil demand is negligible for the time being but will become more material over time. Second, the flip side is that natural gas fuels - compressed natural gas (CNG) and liquefied natural gas (LNG) - are an incremental source of domestic gas consumption, but again, if you're looking for reasons to get bullish on gas prices anytime soon, this isn't it. Third, the rapid expansion of the NGV market, both domestically and overseas, creates opportunities for companies with direct leverage to this growth curve."

The U.S. has somewhere between 120,000 and 150,000 NGVs on the road (less than 0.1% of total U.S. vehicles, and under 1% of the world’s NGVs), mostly owned by fleets. These vehicles consume ~0.1 Bcf/d of gas. To get to 1 Bcf/d would mean a roughly ten-fold increase in the number of U.S. NGVs. Is that realistic? Sure, just not anytime soon. In fact, gas-rich countries like Brazil and Iran are already in the millions, and even gas importer Italy exceeds 700,000. As we noted in last year’s Stat (June 13, 2011), Armenia (population: 3 million) has almost as many NGVs as the U.S. The bottom line is that U.S. CNG/LNG sales are still marginal in the context of overall fuel consumption, but by definition there are gains in market share. Against the backdrop of steadily shrinking U.S. oil demand since 2005, Clean Energy’s sales growth has averaged 18% per year.

Lots of upside for companies getting in early.

How do CNG economics compare to gasoline?

At the outset, let us be crystal-clear that the main issue impeding widespread adoption of NGVs is not fuel economics. On the contrary: as shown in the chart below, it’s materially cheaper to produce a gallon of CNG than a gallon of gasoline. This is intuitive given the extremely wide spread between the price of oil and natural gas (currently 40:1). Since one Mcf of gas yields eight gallons of CNG, a $2.50/Mcf gas price (our 2012 forecast) implies a feedstock cost of only $0.31/gal. By comparison, $103/Bbl oil (with a barrel equating to about 42 gallons of refined product) equates to a feedstock cost of $2.45/gal – eight times higher than CNG. Of course, higher processing costs of CNG (approximately $1.00/gal, vs. $0.20/gal for conventional petroleum refining) offset some of that price differential. Adjusting the costs appropriately, CNG still comes out ahead with an all-in, “leaving the refinery” cost of $1.31/gal, vs. gasoline at $2.65/gal – a savings of 50%. (As a side note: The cost comparison is not exact because a barrel of crude oil produces a mix of various refined products – gasoline, diesel, residual fuel, etc. – not all of which compete directly with CNG. In addition, government incentives, taxes, distribution costs, and profit margins are not taken into account here.)

Ford, GM and Chrysler will all be selling CNG fueled pickups this fall.

Check out: http://www.neogas.us/locations/usa.html