Dallas Going Green With Natural Gas

It was just reported that the Dallas Area Rapid Transit DART board (no pun intended) voted to solicit bids from firms able to supply nearly 600 new natural gas-powered buses. They cited falling natural gas prices as the reason they no longer think diesel buses are the best buy. The cost was estimated at $100 million, but they claim the fuel savings will offset the expense. Dallas Mayor Tom Leppert said that choosing natural gas over diesel would help brand Dallas as an environmentally friendly, forward-looking city.

Commentary – The US market for Natural gas-powered vehicles (NGV’s) is expected to remain dominated by fleet sales to government and commercial customers. The fuel is cheaper than gasoline/diesel and has substantially lower CO2 emissions and other pollutants. The current price for compressed natural gas (CNG) in the Dallas area is $1.95/gallon. In Oklahoma City the average price is $1.11 per gallon.

 

 

What’s Happening With Ethanol?

According to the Energy Information Administration (EIA) approximately 5 billion gallons of ethanol was produced in the U.S. in the first 6 months of 2009. The US also imported 79 million gallons of ethanol during this same period. Based on the first 6 months of production it is estimated that 10.5 billion gallons will be consumed in 2009. The imported volumes from Brazil and the Caribbean for 2009 are estimated to be 157 million gallons.

Current ethanol production capacity stands at 13 billion gallons. The idle production is a result of the financial crisis when some ethanol plants went into bankruptcy. The capacity is being put back into service as they come out of bankruptcy. Ethanol producers were squeezed by escalating corn prices and overcapacity as the industry overbuilt. In late 2008, most producers were at breakeven levels or worse as ethanol prices fell significantly in tandem with crude oil.

Commentary – The ethanol industry was created by the U.S. government by subsidizing it. They protected it from imports by putting tariffs on ethanol from Brazil and other countries. To create demand the government then mandated its use as an additive in gasoline and this triggered the rapid growth of the ethanol industry. In 2008, ethanol has displaced only 3% of our oil usage. The Obama Administration is pushing a big expansion in ethanol, including a mandate to increase the share of the corn-based fuel required in gasoline to 15% from 10%. Apparently no one in the Administration has read a pair of new studies, one from its own EPA, that expose ethanol as a bad deal for consumers with little environmental benefit. A second study — by the Environmental Protection Agency’s Office of Transportation and Air Quality — explains that the reduction in CO2 emissions from burning ethanol are minimal and maybe negative. The government has put a maximum on the amount of ethanol that can be produced from corn at 15 billion gallons. All ethanol is made by the fermentation of corn. To meet the new mandated volumes of 36 billion gallons by 2022 without exceeding the 15 billion gallons of corn-based ethanol, the ethanol industry will be challenged to commercialize cellulosic ethanol technology.

Are Gasoline Prices Going Higher?

The EIA says gasoline retailers and wholesalers account for about 13% of the total cost of gasoline. Refiners get another 7% and taxes eat up 16%. The remaining 64% is crude oil. Based on a price of $2.55 per gallon the breakdown is as follows: Crude oil – $1.63, Taxes – 41 cents, Refining - 18 cents and Distribution/Marketing – 33 cents.

From January 2003 to October 2009, oil prices have increased 125% while gasoline prices have risen 75% (Based on data from the Energy Information Administration). For the most part, the price increases for both crude oil and gasoline track reasonably well. But during the period September 2007 to October 2008 they started deviating with crude oil price increases accelerating faster than gasoline prices.  It appears that in the past 3 months crude oil prices and gasoline prices are starting to deviate again.

Commentary – I believe the explanation for the deviation in price increases was a result of decreased demand. Consumers cut back on their gasoline usage and the refiners and retail outlets responded by not increasing prices despite the fact that crude oil prices were still rising. This has been proven out by lower refiner profit margins. It appears that the deviation is starting again. Strictly based on the chart above it appears that we are either going to see crude prices decline or gasoline prices are going higher. Refining margins are already low, so this time I believe gasoline prices will go higher. If crude oil price increases continue, we may see $4.00 gasoline again.

Big Investments Needed in Natural Gas Infrastructure

According to a new study by the Interstate Natural Gas Association of America (INGAA) projected growth in North American natural gas supplies and market growth in the U.S. and Canada will require billions of dollars of additional investment in pipeline, storage and other midstream infrastructure through 2030. The study analyzed future natural gas infrastructure requirements under different market scenarios and came up with a range of investment from $133 to$210 billion over the next 20 years.These investments would be required to bring increased domestic natural gas production from unconventional shale basins and tight sands to the pipeline network.

By 2030, the U.S. and Canada will need approximately 29,000 to 62,000 miles of additional natural gas pipelines, 370 to 600 billion cubic feet (Bcf) of additional storage capacity, 6.6 to 11.6 million horsepower of new gas transmission pipeline compression, 20 to 38 Bcf per day of new natural gas processing capacity and 3.5 Bcf per day of new LNG import terminal capacity in order to meet market requirements. About three-fourths of the market growth occurs in the power sector. The growth rate of natural gas consumption in the electric generation sector is the predominant determinant of the growth rate of the entire natural gas market.  Electric load growth, timing and development of renewable generation technologies, clean coal with carbon capture and sequestration, and expansion of nuclear generation are areas of uncertainty.

Commentary - The study seems to rely heavily on the growth rate of natural gas use in electrical generation. I am assuming that this is due to the belief that natural gas fired power plants will replace coal-fired power plants in the future. They might want to check with the coal industry lobbies before they put to much faith in their study. If the study is accurate in its assumptions, these investments would create many new jobs within the natural gas industry and create many new opportunities for midstream pipeline companies