Will Low Diesel Prices Stall Natural Gas Trucking?

February 29, 2016 by John O'Dell

Natural gas, once hailed by supporters as the fuel that could free the trucking industry from the clutches of demon diesel, has hit a wall.

Turns out that at $2 a gallon, diesel isn’t so demonic after all, even with all the filtering that has to be done to make it meet regulatory standards for truck engine emissions.

The future of the natural gas market in an era of cheap diesel will be the headline topic Tuesday at the annual Green Truck Summit in Indianapolis, held in conjunction with the 2016 Work Truck Show presented by industry association NTEA.

Suppliers of compressed and liquid natural gas and natural gas engines say enthusiasm has cooled in the last year for the methane-based fuels among trucking companies and commercial and government fleet operators that haven’t already made the switch.

It costs, on average, $30,000 to $50,000 to equip a medium or heavy truck to use compressed natural gas (CNG) or liquefied natural gas (LNG). Fleet operators also will have to spend an additional six to seven figures to build natural gas refueling facilities to serve their vehicles.

Although fleet operators saw the economic benefits of switching to natural gas when diesel was $3-$4 a gallon back before the price slide started two years ago, doing so now at $2 a gallon is a tougher equation. Moreover, natural gas suffers from a fuel efficiency penalty when compared to diesel.  It delivers about 10 percent less range per gallon equivalent and that makes it even more difficult for some operations to contemplate making the switch now.

Still, the price wall that’s slowing the advance of natural gas isn’t so mammoth as to freeze the industry. More than 50 percent of all refuse trucks sold in the U.S. in 2015 were equipped with natural gas engines, as were more than a third of all transit buses.

That pace is expected to continue, but “having diesel go from $4 to $2 hasn’t helped,” said Jim Arthurs, executive vice president of natural gas engine developer Westport and chairman of Cummins Westport, a joint venture of Westport and diesel engine giant Cummins Inc.

Indeed, Cummins has put plans to develop a 15-liter CNG engine for heavy long-haul trucks on hold because of the slowing market, Arthurs said.

“The majority of the applications [for natural gas] right now are fixed-route, return-to-base operations,” he said.

Yet, even in the current price climate, “there are real pockets of strength,” said Adam Comora, president of White Plains, N.Y.-based TruStar Energy, a major CNG station developer and operator that built 40 stations last year, most for private and government fleet operators.

He cited municipal and local government fleets, transit operations and refuse companies as the strongest markets because government uses are often driven by environmental regulations and sustainability rules.

“Those who are already in with natural gas vehicles are staying in and continuing to transition their fleets. It’s those who were on the fence that are holding off,” said Steve Shearson, commercialization manager of natural gas station developer and operator Constellation CNG, an arm of utility company Constellation Energy.

The Baltimore-based company started in 2015 with seven Midwestern CNG stations and had planned to open 100 CNG filling stations around the country by 2019, “but we’ve backed off on that,” said Shearson, a panelist at the CNG seminar of the Green Truck Summit.

The slowdown isn’t likely to continue for years and years, said Steven Tam, vice president and commercial vehicles market specialist at ACT Research Co., a trucking industry data and analytics firm.

“There were about 18,000 to 20,000 natural gas trucks sold in the U.S. in 2015, and we don’t see much growth” for 2016, he told Trucks.com. “But fast-forward 10 years and we probably are looking at seven to ten times the volume.”

Although a lot of that will be driven by sales of light trucks and passenger vehicles, the presence of natural gas vehicles in the medium and heavy trucking segments will grow as well, said Tam, who also is speaking at the Indianapolis seminar Tuesday.

Escalating diesel prices are inevitable and will help make an economic case for natural gas for many fleets, said Arthurs of Cummins Westport. The drive for cleaner emissions also will promote natural gas sales, he said.

Meantime, the operators of fleets that have made the leap to natural gas are sticking with it. Some, like United Parcel Service, are expanding.

They are able to ride long-term supply contracts and a 50-cents-a-gallon federal incentive. That can make the fuel 50 to 75 cents a gallon less expensive than diesel.

Additionally, their trucks pile on so many miles per year that the fuel savings over several years can nullify the extra cost of acquiring trucks and tractors with CNG and LNG engines, said Mike Casteel, director of fleet procurement for UPS.

The parcel delivery giant, which counts almost 3,800 natural gas trucks in its delivery fleet of more than 103,000 trucks, is “committed to our sustainability efforts,” he said.

Natural gas vehicles are the only alternative-fuel trucks the company has “been able to deploy in significant numbers,” Casteel said. They perform as well as, or better than, diesel trucks, he said.

Although low-priced diesel has posed challenges, UPS still sees additional options for CNG trucks, he said, “and we plan to continue to deploy natural gas vehicles this year.”

In the longer run, said analyst Tam, “we will see some escalation in diesel prices that will help rebuild the economic case for natural gas, and there are also the clean emissions and ‘soft side’ reasons” of environmental responsibility and corporate image that will continue to drive acceptance of natural gas.

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