Aleem Khan

Gaso­line and diesel are still the dom­i­nant fu­els for trans­port, but this could change as nat­ur­al gas is in­creas­ing­ly be­com­ing com­pet­i­tive, Mor­gan Stan­ley said in an April 16 blue pa­per ob­tained by the Busi­ness Guardian.

Ex­plo­ration suc­cess and tech­no­log­i­cal in­no­va­tion have boost­ed glob­al gas re­sources to around 240 years of cur­rent con­sump­tion, nat­ur­al gas is priced at a 45 to 75 per cent dis­count to oil in the Unit­ed States and Eu­rope, and nat­ur­al gas ve­hi­cle (NGV) tech­nol­o­gy ex­ists and is tried and test­ed, Mor­gan Stan­ley said.

"With in­put from our glob­al oils, au­tos and com­mod­i­ty teams, this blue pa­per ex­plores the po­ten­tial for nat­ur­al gas to gain share from oil in the last but most en­trenched 'oil bas­tion,' the trans­port mar­ket," the blue pa­per said.

The con­trib­u­tors were many from all around the world.

In many cas­es, the eco­nom­ics of switch­ing to nat­ur­al gas are com­pelling, par­tic­u­lar­ly for re­turn-to-base fleets such as couri­er trucks, bus­es, taxis, etc, as well as heavy du­ty trucks that do high an­nu­al mileage, the pa­per said.

The pay­back pe­ri­od on the ad­di­tion­al in­vest­ments in a Class 8 liq­ue­fied nat­ur­al gas (LNG) truck, for ex­am­ple, can be as short as two to three years.

In a hy­po­thet­i­cal sce­nario in which all Class 8 trucks in the US were fu­elled with LNG, an­nu­al sav­ings of US$40-$70 bil­lion could be re­alised, the re­searchers es­ti­mate.

NGV pen­e­tra­tion in emerg­ing mar­kets is cur­rent­ly around 3.6 per cent, the pa­per said. De­vel­oped mar­kets lag this con­sid­er­ably with just around 0.2 per cent pen­e­tra­tion. If the share in emerg­ing mar­kets were to im­prove to around five per cent (that is, in line with Brazil cur­rent­ly) and the share in de­vel­oped mar­kets were to in­crease to one to two per cent (in line with Swe­den, Italy), this could boost gas de­mand by eight-16 bil­lion cu­bic feet (bcf/d) per day (three to five per cent of cur­rent glob­al gas de­mand), but shave off 1.5-2.7 mil­lion bar­rels per day of gaso­line/diesel de­mand (three to six per cent of glob­al gaso­line/diesel de­mand), Mor­gan Stan­ley said.

If 30 per cent of US medi­um and heavy du­ty trucks were to switch to nat­ur­al gas, this could in­crease to 26 bcf/d (eight per cent of glob­al gas de­mand) and 4.5 mil­lion bar­rels per day (mb/d) (nine per cent of glob­al gaso­line/diesel de­mand), but this still re­quires a num­ber of ob­sta­cles to be over­come, Mor­gan Stan­ley said.

Se­lect­ed equip­ment man­u­fac­tur­ers could be well placed to ben­e­fit from broad­er NGV adop­tion, Mor­gan Stan­ley said. Al­so, high­er nat­ur­al gas prices would ben­e­fit ma­jor gas re­source hold­ers, in­clud­ing many E&P com­pa­nies in T&T, but al­so in the US, Eu­rope, and Asia-Pa­cif­ic.

"Nat­ur­al gas is now rel­a­tive­ly cheap and abun­dant and 'tried-and-test­ed' tech­nol­o­gy is mak­ing it more vi­able as a trans­port fu­el," Mor­gan Stan­ley said.

"Dis­cov­er­ies of new con­ven­tion­al gas fields alone have been suf­fi­cient in re­cent years to re­place near­ly all of the world's nat­ur­al gas con­sump­tion. In ad­di­tion, re­serve es­ti­mates for pre­vi­ous dis­cov­er­ies con­tin­ue to in­crease and the 'shale rev­o­lu­tion' has un­leashed sub­stan­tial un­con­ven­tion­al nat­ur­al gas re­sources.

The In­ter­na­tion­al En­er­gy Agency (IEA) es­ti­mates that tech­ni­cal­ly re­cov­er­able gas re­sources now stand at around 28,000 tril­lion cu­bic feet (tcf) glob­al­ly, which is equiv­a­lent to around 240 years of cur­rent con­sump­tion, sub­stan­tial­ly ahead of oil, the pa­per said.

In ad­di­tion, nat­ur­al gas is al­so much cheap­er than oil on an en­er­gy-equiv­a­lent ba­sis, par­tic­u­lar­ly in Eu­rope and the US. For ex­am­ple, Mor­gan Stan­ley said, the Hen­ry Hub nat­ur­al gas price of around US$4 per mil­lion British ther­mal units (mmb­tu) is at a around 75 per cent dis­count to the West Texas In­dex. Eu­ro­pean hub prices are some­what high­er, but around US$10 per mmb­tu is still at a around 45 per cent dis­count to Brent. On­ly spot LNG im­port prices in­to Asia at around US$16 per mmb­tu come close to oil prices.

Nat­ur­al gas mar­ket share

Nat­ur­al gas' low price and in­creased avail­abil­i­ty has al­ready made it more com­pet­i­tive in oth­er mar­kets. For ex­am­ple, gas has al­ready tak­en mar­ket share from coal in pow­er gen­er­a­tion in the US, the pa­per said. Yet, these ad­di­tion­al sources of de­mand have so far been in­suf­fi­cient to ab­sorb all ex­cess pro­duc­tion.

In the trans­porta­tion mar­ket, nat­ur­al gas has so far not played a mean­ing­ful role, Mor­gan Stan­ley said, but NGV tech­nol­o­gy has been avail­able since at least the 1930s and is al­ready rel­a­tive­ly ma­ture. In­creas­ing­ly, car man­u­fac­tur­ers are of­fer­ing ver­sions of ex­ist­ing mod­els that can run on com­pressed nat­ur­al gas (CNG).

In Eu­rope, this in­cludes Fi­at, Lan­cia, Mer­cedes, VW, Seat Sko­da, Au­di, Vol­vo and Saab. In the US, the of­fer­ing is more lim­it­ed, but Hon­da, Ford, Gen­er­al Mo­tors and Chrysler have var­i­ous CNG cars in their fleets, and af­ter-mar­ket con­ver­sion sys­tems are avail­able for a wide range of mod­els. In Chi­na and In­dia, there are more than 50 mod­els of CNG ve­hi­cles on of­fer and af­ter-mar­ket con­ver­sions are com­mon, Mor­gan Stan­ley said.

The same holds for trucks. Sev­er­al man­u­fac­tur­ers of­fer nat­ur­al gas fu­eled mod­els, in­clud­ing Vol­vo, Sca­nia, Daim­ler and Ive­co, and oth­ers can be con­vert­ed us­ing third-par­ty en­gines.

So far, NGV adop­tion has been dri­ven by emerg­ing mar­kets, in­clud­ing Chi­na and In­dia, the pa­per said. The glob­al NGV fleet cur­rent­ly stands at around 16 mil­lion units, in­clud­ing around 700,000 bus­es and around 360,000 medi­um and heavy du­ty trucks. The num­ber of NGVs world­wide has been grow­ing rel­a­tive­ly strong­ly at a com­pound an­nu­al rate of around 15 per cent since 2008. Still, the blue pa­per said, NGV share of the glob­al car fleet still on­ly stands at around 1.5 per cent.

So far, the glob­al NGV fleet has been con­cen­trat­ed in emerg­ing mar­kets, the pa­per said. Based on da­ta it re­ceived, Mor­gan Stan­ley es­ti­mates the pen­e­tra­tion of NGVs in emerg­ing coun­tries is around 3.5 per cent, more than dou­ble the glob­al av­er­age. This is off­set by pen­e­tra­tion in de­vel­oped mar­kets of mere­ly around 0.2 per cent.

NGV in emerg­ing mar­kets

Emerg­ing coun­tries have al­so been the main dri­vers of growth of the glob­al NGV fleet in ab­solute terms, the pa­per said. For ex­am­ple, Chi­na's NGV fleet has in­creased from around 0.4 mil­lion at the end of 2008 to around 1.2 mil­lion cur­rent­ly, a com­pound an­nu­al grout rate (CA­GR) of 37 per cent.

Sim­i­lar­ly, In­dia's fleet has in­creased 24 per an­num over this pe­ri­od from around 0.7 mil­lion to around 1.5 mil­lion units now. Oth­er coun­tries that have added sub­stan­tial­ly to their NGV fleet are Pak­istan (over 1.1 mil­lion units since late 2008), Ar­genti­na (over 0.4 mil­lion) and the Ukraine (more than 0.3 mil­lion).

In many of these coun­tries, there are strong gov­ern­ment in­cen­tives in place that stim­u­late adop­tion of NGVs. These are usu­al­ly in­tro­duced to re­duce im­port de­pen­dence on oil and/or re­duce pol­lu­tion (foe ex­am­ple, Mum­bai, Bei­jing), Mor­gan Stan­ley said. As a re­sult, gov­ern­ments in emerg­ing coun­tries have so far been more sup­port­ive of NGVs than their coun­ter­parts in de­vel­oped mar­kets.

How­ev­er, Mor­gan Stan­ley said, the eco­nom­ics ap­pear at­trac­tive in many de­vel­oped mar­kets too. Growth trends in Chi­na, In­dia, and Ar­genti­na for ex­am­ple, are well es­tab­lished and with cur­rent gov­ern­ment in­cen­tives in place, "we ex­pect those to con­tin­ue," Mor­gan Stan­ley said.

"It is note­wor­thy, how­ev­er, that many of the coun­tries with the largest and fastest grow­ing NGV fleets have nei­ther the largest gas re­serves nor the low­est gas prices. Nat­ur­al gas is par­tic­u­lar­ly cheap and abun­dant in the Unit­ed States, and al­so Eu­rope is, on the whole, bet­ter sup­plied than most coun­tries top­ping the NGV fleet chart. In prin­ci­ple, this cre­ates po­ten­tial for those de­vel­oped mar­kets to be­come a sec­ond source of NGV growth."

Eco­nom­ics plus up­com­ing reg­u­la­tion could al­so in­cen­tivise the use of nat­ur­al gas to fu­el ships, the pa­per said.

"LNG is al­so a fu­el op­tion for ships, and may be­come more at­trac­tive af­ter up­com­ing changes in reg­u­la­tion. The In­ter­na­tion­al Mar­itime Or­gan­i­sa­tion has de­clared that all ves­sels sail­ing in so-called Emis­sion Con­trol Ar­eas (ECAs) must re­duce the sul­phur lev­el in fu­el oil to 0.1 per cent or clean the ex­haust gas to the equiv­a­lent lev­el by 2015.

"A sim­i­lar re­duc­tion could be en­forced world­wide by 2020. In prac­tice, ship­ping ves­sels will have three op­tions:

1) use ma­rine gas oil;

2) in­stall a 'scrub­ber';

3) switch to LNG. In a re­cent joint study on con­tain­er ves­sels, Ger­man­ishe Lloyd and MAN cal­cu­lat­ed that LNG is like­ly to be the most eco­nom­i­cal­ly at­trac­tive op­tion in many cas­es.

Pay­back pe­ri­ods de­pend heav­i­ly on ves­sel size and time spent in ECAs, but were less than two years in many of their sce­nar­ios (rel­a­tive to the use of ma­rine gas oil)," the re­searchers said.

Trans­port gen­er­ates 13 per cent of glob­al green­house gas emis­sions, the blue pa­per said. On an en­er­gy-equiv­a­lent ba­sis, burn­ing nat­ur­al gas pro­duces al­most no sul­phur diox­ide and 30 per cent less car­bon diox­ide and 80 per cent less ni­tro­gen ox­ide than burn­ing oil. There­fore, us­ing nat­ur­al gas as a trans­port fu­el should sig­nif­i­cant­ly re­duce harm­ful pol­lu­tant emis­sions from the burn­ing of oil-based fu­els.

"But, there is a catch," Mor­gan Stan­ley said, "These fig­ures as­sume that dur­ing the ex­trac­tion and pro­duc­tion process of nat­ur­al gas, lit­tle or no methane leaks in­to the at­mos­phere. Nat­ur­al gas is around 90 per cent methane, and the US En­vi­ron­men­tal Pro­tec­tion Agency es­ti­mates leak­age rates at around 2.4 per cent from var­i­ous stages of the pro­duc­tion process. This mat­ters, be­cause one mol­e­cule of methane is able to trap over 20 times more heat than one mol­e­cule of car­bon diox­ide.

Methane leak­age

"Re­cent stud­ies sug­gest that methane leak­age rates above two to three per cent would prob­a­bly negate the en­vi­ron­men­tal ben­e­fit of burn­ing nat­ur­al gas as a fu­el. Cost-ef­fec­tive tech­nolo­gies that re­duce methane leak­age rates to be­low one per cent would, there­fore, be need­ed to en­sure the en­vi­ron­men­tal ben­e­fits of switch­ing to nat­ur­al gas."

Mor­gan Stan­ley said a "key ob­sta­cle is a lack of re­fu­el­ing in­fra­struc­ture" and get­ting the gas from the well head to re­fu­elling sites re­quires ma­jor in­fra­struc­ture in­vest­ment.

"We es­ti­mate that adding CNG ca­pa­bil­i­ty to an ex­ist­ing petrol sta­tion costs around US$0.4 mil­lion, whilst build­ing a CNG fu­elling sta­tion on a new site re­quires an in­vest­ment of around US$1.6 mil­lion. For LNG, the cost of re­fu­elling in­fra­struc­ture is even high­er, at US$1.4-2.2 mil­lion per sta­tion. LNG sta­tions al­so need to be lo­cat­ed with­in 150-300 miles of a small to mid-sized LNG liq­ue­fac­tion plant.

Build­ing the nec­es­sary in­fra­struc­ture will re­quire both time and in­vest­ment, Mor­gan Stan­ley said, but with suf­fi­cient vis­i­bil­i­ty on de­mand and sup­port­ive eco­nom­ics, these bar­ri­ers ap­pear sur­mount­able.