With plentiful supplies and high production driving natural gas prices to their lowest levels in a decade, interest in its potential — and how it might be played on Wall Street — is strong and growing stronger. Accordingly, there’s been an increasing level of chatter about the likely future role of natural gas in a wide range of applications that touch a number of high-profile industries.
I believe there are definite long-term opportunities here, and a number of short-term possibilities as well. I’ve posted several positive articles on the topic in recent weeks, including one on energy companies shifting toward its use in oil and gas operations, one on its rapid adoption by some transportation industry stalwarts, and one on Caterpillar Inc. (NYSE:CAT)’s emergence as a leader in product development.
The top dogs
Companies that will benefit the most from what is obviously a trend include Royal Dutch Shell , which produced more natural gas than oil last year for the first time in the company’s history; Westport Innovations Inc. (NASDAQ:WPRT) , widely considered the most advanced gas-injection engine designer in the field and a partner with many of the other top players; Clean Energy Fuels Corp. (NASDAQ:CLNE), already the transportation industry’s largest provider of natural gas and currently in the process of building a “natural gas highway” across North America; PACCAR Inc (NASDAQ:PCAR) , which holds the lead in the natural gas heavy-duty truck market with 40% share and six new models being introduced in 2013; and CAT, which is developing off-highway mining trucks, giant haul trucks, railroad locomotive engines, oil rigs, power-generation equipment, marine engines and other gas-powered products.
But not everyone thinks the movement from petroleum to natural gas will take place quickly — or whether a transformation as big as the one envisioned by some proponents will really ever happen at all. “It’s hysteria,” said the spokesman for a petroleum advocacy group.
With that in mind, let’s take a look at the key arguments these skeptics raise.
Four contrarian points
The upfront cost of the new technology is high. Most estimate that heavy-duty trucks powered by Liquefied Natural Gas, or LNG, cost $80,000 more than diesel trucks. Even at today’s natural gas prices, that could mean a 4-year payback — in an industry that prefers payback in 12 to 18 months. Gas engines for oil rigs run about 50% higher those powered by diesel, and conversions can run nearly $1 million per rig. These economics also raise eyebrows.
Natural gas prices are not likely to remain as low as they are now. Many suspect the current 30%-40% cost advantage of natural gas over diesel — its prime advantage — may only be temporary. Declines in availability or increases in production costs (see the next point) could dramatically shrink that spread. Some also believe that a boom in demand will actually cause prices to rise as companies in the loop find ways to boost their profits.
Production methods are controversial, and it’s difficult to transport the product to many of its best potential end users. To a lot of people outside the industry, fracking has become a dirty word. As a result, substantial state and federal restrictions that could impede natural gas production are distinct possibilities. But even after it is produced, there is no infrastructure at present that can be employed to easily transport the gas to the oil fields and filling stations where it would be used.