Background

A natural gas vehicle (NGV) is an alternative fuel vehicle that utilizes compressed natural gas or, less frequently, liquefied natural gas (LNG) for propulsion. With oil imports surging and climate change continuing to advance, many policy-makers, industry leaders, and analysts claim greater NGV fleet penetration enhances U.S. energy security. The potential development of large amounts of shale gas has furthered the calls for natural gas to be more fully deployed as a "transitional" fuel until more sustainable sources can assume a larger role in America's energy mix. The hope is that renewable energy sources, by supplanting the gas that produces 21% of our electricity, will allow natural gas to be used as a substitute for petroleum-based products, such as gasoline and diesel.

From personal automobiles to heavy-duty 18-wheel trucks, NGV proponents argue the immediate advantages of expanded use are twofold. First, NGVs are powered by North American fuel, as over 80% of the natural gas consumed in the U.S. is domestically produced and imports come mostly from Canada. Second, the California Energy Commission reports NGVs emit 29% less greenhouse gases than gasoline-powered vehicles and 22% less than those using diesel. Hence, the opinion that greater NGV use improves U.S. energy security is spreading:

* "Natural gas is cheap, green and American-made and it is time we encouraged the use of natural gas vehicles here in America," Rahm Emanuel, White House Chief of Staff, Democrat
* "Converting [conventional vehicles] to compressed natural gas gives us an opportunity to promote energy security and support a clean-burning alternative," Jon Huntsman, Governor of Utah, Republican
* "NGVs can have an immediate and positive impact on the issues of air quality, U.S. energy security, and public health," Southern California Gas Company
* "I am continuing my call to implement a real national energy policy that will reduce our dependence on foreign oil through [greater use of] natural gas in our transportation system," T. Boone Pickens, legendary oil and gas executive

Unfortunately, any approach dead set on decreasing dependence on foreign oil today -- dangerously approaching 70% of total usage -- by any means necessary could undermine U.S. energy security in the years ahead. As opposed to maximizing energy security by merely utilizing a domestically produced resource, the use of natural gas to fuel America's automobile fleet could ultimately establish the same precarious dependencies that have made oil usage a national security concern. The new infrastructure required to relevantly incorporate a "transitional" fuel into our transportation sector would cost hundreds of billions of dollars and, in reality, commit us to a commodity whose long-term prospects are not much better than those of oil. This paper examines the three key issues that make the switchover to NGVs a demanding and risky endeavor: 1) Technical Issues 2) Production Issues and 3) Market Issues.

Technical Issues

There are several drawbacks to NGVs, most notably the lack of fueling infrastructure. According to Natural Gas Vehicles for America, only about a half of the 1,100 fueling stations nationwide are available to the public. With about 180,000 gasoline stations, the funding to make natural gas a pragmatic alternative would come at the expense of more lasting energy solutions. NGVs have less cargo space because the fuel is stored in cylinders in the trunk (extra storage tanks displace the vehicle's payload capacity). NGV service is difficult due to the specialized expertise involved, and many owners complain station compressors cannot maintain sufficient pressure to fill tanks completely. The lower energy content of natural gas decreases the vehicle's driving range and increases fueling stops. These deficiencies contribute to a lack of popularity, as only about 150,000 of the 10 million NGVs worldwide are in the convenience-obsessed U.S. Vehicles running on natural gas demand more fuel because their engines are less efficient. Dedicated natural gas engines need to be more commonly available. Currently, most NGV engines are gasoline retrofits where the compression ratio has been altered. Retrofitting used gasoline engines is a slow and expensive process that must be approved by the U.S. Environmental Protection Agency (EPA). Utah, a state depending on heavy tax incentives to boost NGV use, is asking the EPA to streamline the onerous and expensive certification process that continues to constrain broader deployment. The ongoing credit crisis has pushed the manufacture of NGV equipment, which is more expensive than that of conventional vehicles, into further decline. Low sales and the high costs of adding NGVs to a lineup give dealers even more of a disincentive to carry them.

By the end of last year, the lone automaker to sell NGVs in the U.S., Honda, had its vehicles exclusively available to consumers in New York and California. The "Phill" by Fuelmaker (a company owned by Honda) is the sole manufacturer of a natural gas refueling appliance for residential use, but it, too, is only available in certain states. These supply scarcity issues demonstrate an overall lack of competition within the industry that has made the costs associated with NGVs artificially high across-the-board.

Displacing even a portion of the 250 million petroleum-based vehicles on American roads is no small feat. The Hirsh Report, a 2005 peak oil mitigation study, indicates it takes 17 years to replace just a half of U.S. automobiles. Today's petroleum-based vehicles are of higher quality and have better fuel economy. NGV proponents tend to overlook the long lag time between replacing older vehicles with newer ones. It simply does not make sense for most consumers to get rid of their current automobile. Without heavy tax subsidies and incentives, which should be reserved for a more sustainable vehicle revolution (electric?), the push for extended NGV market share will only get more challenging.

Production Issues

According to the U.S. Energy Information Administration, domestic natural gas production in 2008 totaled 21.4 trillion cubic feet (Tcf). Unless this figure can be substantially elevated, enough NGV fleet penetration will overextend U.S. gas usage, as only 0.13% of the 23.2 Tcf consumed last year was as vehicle fuel. Climate change legislation forthcoming under the Obama administration and a Democratic Congress has our reliance on natural gas, for residential, commercial, industrial, and electric power use, expected to surge -- the familiar "dash to gas" slogan. For example, gas enthusiasts also promote it as a replacement for coal (a fuel that supplies a half of U.S. electricity).

The extraction of natural gas from tight, brittle shale formations is viewed as the industry's main chance to expand domestic production. In recent years, gas companies have applied a combination of advanced well drilling and completion technologies to shale gas formations to reverse what had generally been accepted as a permanent decline in U.S. production capacity. Shale gas development, however, which the industry boasts is the game-changer in U.S. (and North American) production, faces a rather hazy future.

The ongoing credit crisis and critically low prices are effectively grinding production in the four major U.S. shale plays -- Barnett, Marcellus, Fayetteville, and Haynesville -- to a sudden halt. Unlike petroleum, the majority of gas produced in the U.S. comes from independent exploration and production companies, not the super-majors. The financial crunch has pushed many of these smaller firms to the economic brink, as sunken prices have substantially reduced the recoverable reserve assets producers rely upon to secure loans. This is an enduring production problem because entry fees into the shale gas business regularly run into the hundreds of millions of dollars.

The horizontal drilling technique companies are banking on to expand production is about five times more expensive than traditional vertical well drilling. Ambitions are now sputtering, as companies are working to cut drilling expenditures. Baker Hughes reports the active U.S. directional/horizontal rig count is down about 50% from last year's peak. Vertical rigs are down over 60%. Because idle machines become less effective over time and often force workers to seek alternative employment opportunities, the slowdown could have longer lasting consequences than many industrial leaders care to admit. Indeed, John Richels, President of Devon Energy, says it could take an additional two years for companies just to reassemble rig crews once demand and prices rebound.

Further, horizontal wells are a major disturbance for surrounding citizens, particularly in densely populated areas. They often require up to 80 acres of land and five times the truck volume of a conventional well. The fracturing technology involved uses four million gallons of water and can swiftly erode local water conditions. Residents of Forth Worth, an area struggling to balance the interests of those parties impacted by the Barnett play, are lobbying Texas lawmakers to raise operating costs. Energy companies can offer thousands of dollars per acre for the lease bonus and very high royalty percentages, but many mineral owners remain uninformed. "Uncertainty often exists as a result of these high sums because many owners do not know the difference between leasing their mineral rights and selling them," says Bill Sinclair, of the National Association of Royalty Owners of Texas.

The long-term benefits of shale gas production to a community are of debate because the cumbersome wells have steep decline rates. A shortage of reliable data, detailing the amount of gas U.S. shales could ultimately yield, has left more questions than answers. If the disadvantages of shale gas development prove to outweigh its advantages, the major shale plays, along with the "newfound abundance" the industry touts, could fade as quickly as they appeared. With an NGV fleet then being forced to scramble for fuel, the prospects to buy from afield stand in direct contrast to U.S. energy security.

Market Issues

The functionality of NGV infrastructure requires reliable access to a fuel whose market has a very chancy future. Natural gas prices, which are continually being linked to the price of oil, are extremely volatile. From 2005 to 2008, for instance, the price of natural gas ranged from a low of $3.56 to a high of $12.17. The growing competition within various sectors of the global energy economy makes the procurement of gas a more difficult task today than in previous times. Long-term contracts and the inability to shift in and out of markets make the purchasing process more inflexible than that of oil. Natural gas is much less fungible and has historically been sold on the domestic and regional levels where pipelines cement the supplier-buyer relationship. The burgeoning LNG trade, however, is changing market dynamics by making distant transport a viable export option.

The U.S. is now set to join the new global gas market that will interconnect countries, continents, and prices in an oil-like fashion. In fact, many analysts project the extension of LNG infrastructure will merge the three distinct regional gas markets -- North American, Western European, and East Asian -- into a single global market within a decade. The rapid expansion of transportation infrastructure, such as tankers and hubs, is constantly making natural gas a global commodity riddled with the same market uncertainties that plague the oil business. The inevitability of this picture eventually coming fully into focus must serve as the impetus to reexamine the path NGVs could lead us down. It is a stark reminder of how a lack of foresight today can have dire consequences far into the future.

Russia, Iran, and Qatar own nearly 60% of the world's natural gas reserves and have discussed creating a "gas cartel" to possess more power over supplies and pricing. In increasingly tight energy markets, more "troika" influence is antithetical to U.S. energy security. Russia, known to use its vast energy resources as a political weapon, has simply not made the necessary upstream investments to increase production and remains an unpredictable supplier. Iran uses most of its gas for re-injection into petroleum fields for enhanced oil recovery operations and is controlled by an erratic dictator who has publicly stated Israel must be "wiped off the map." Qatar, although seen as more politically benign, has recently capped gas production and placed a moratorium on export projects in favor of domestic industries and conservation. Indeed, optimistic projections of LNG supply frequently ignore the dangerous nature of worldwide politics and every country's devotion to act in its own self-interest.

Unfortunately, the majority of reserves not yet committed to long-term contracts are located in the Middle East and Former Soviet Union. Outside investment possibilities in these areas are extremely limited. Indeed, resource nationalism and the rising clout inefficient state-owned companies have on energy production make a globalized natural gas market a U.S. national security concern. A single gas market would give geopolitics, regional and interregional alliances, national policies, and other precarious factors even more influence in determining our level of energy security. With BP confirming North America has just 4.5% of the world's proved natural gas reserves, foreign supplies cannot be expected to adequately materialize.

Conclusion

If NGVs achieve the level of fleet penetration many hope they do, we could be forced into an arising global gas market where capricious producers control the bulk of the reserves. Conventional North American production has peaked and unconventional reserves are promising but hardly assured. An overextension of natural gas is already likely because, due to inherent limitations and reduced credit options, renewable energy projects are struggling to get off the ground. Wind and solar energy appear unlikely to displace natural gas-based electricity generation anytime soon. Apt et al (2008, 2009) and others indicate the federal Renewable Portfolio Standard NGV advocates hope will change this is simply not practical and could actually create a public backlash against renewable energy policies.

Overestimates of U.S. gas supply have become somewhat habitual. Wishful thinking and political expediency, however, cannot change the reality that we not hold the reserves to justify significant NGV use -- demand is expected to grow in other sectors of our energy economy and around the world. Using precious government resources to erect an entire infrastructure to accommodate an uncertain "transitional" fuel that, in the best case, is only 29% more "green" than petroleum exemplifies precisely the type of short-term thinking that has perpetuated America's energy insecurity. NGVs should remain exactly where they are now: in a small niche market.

APPEND:

One of the misconceptions being thrown out there is ng is "clean." You see this on buses all over your town. NG is not clean. It is CLEANER, than gasoline - yes, by 29%. But the NG industry, which is pretty well organized, sees the writing on the wall and wants to promote their product as good for the environment as possible. Coal to liquids is a good option, although the environmental lobby will never let it happen, because gasoline engines do not need to be replaced (that is a main problem with NGVs).

What I am saying is that "adaption will take time and money" and the result is not worth it. For energy security we must see farther down the line, not 10 to 15 years out. The surplus gas now can evaporate as soon as it came about. Natural gas is a valuable fuel, of course, but it is only part of the energy mix - it cannot play all parts - as the industry likes to say it can. Look at the EIA projections in recent years about where our gas will come from, it changes every year! Conventional, to LNG, to Unconventional (shale). It is far too risky of a transitional fuel to do a switchover - that is why electric vehicles should take priority, as news story after news story tells about another $200 million going to NGVs. "Unproven" reserves are just that. Being "technically feasible" is a tricky subject. It is "technically feasible" to put all the residents of Pittsburgh on the moon, it does not mean we should do it. EOR, to me, offers a more realistic approach to fueling our fleet with gasoline, than switching over to natural gas.

The point is significant NGV use will put us on a path that we are now on with oil. We do not have the reserves. Of course we cannot forecast that far out - I am talking about something much more long-term. We know two things: other countries (Russia, SA, Qatar, Iran, Venezuela, etc) have the reserves and NG is becoming a global market. Under the cartel that Banks is talking about, we will be in a position then like we are now with oil. Shale gas, as Banks said, is what the industry is banking on, and it has its vast array of issues.

This is not about EIA projections, this about making choices now that will have long-term negative impacts. What road is an energy choice taken now going to put us on? That is really what I am talking about here. Electric cars are the obvious choice - NG is not that much better than gasoline - they are much more sustainable. That is where the precious resources should be going.

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