Power shift? Proponents again push for natural gas-powered vehicles

Editor’s note: This is an abridged version of a story to be featured in the next issue — to hit the streets next week — of TBQ, a quarterly magazine about business and politics in Arkansas that is published by Little Rock-based journalist Roby Brock.

story by Michael Tilley

There were high hopes in 1982 at Arkansas Oklahoma Gas Corp. about the future of using compressed natural gas to fuel vehicles.

The Fort Smith-based natural gas utility, which has about 46,000 customers in Arkansas and 14,000 in Oklahoma, invested $70,000 to install a 10-vehicle compressed natural gas (CNG) fuel station in 1982, and by 1986 had installed CNG conversions on 70 of its 120-vehicle fleet. By the end of 1986, the company was using about 400 MCF (one thousand cubic feet) of CNG in the vehicles — an amount equivalent to 3,200 gallons of gasoline. The CNG use would peak at about 500 MCF in the late 1990s.

But there were problems. The vehicles were limited in how far they could travel, the CNG tanks were heavy and the vehicles experienced an approximate 15% power loss when using CNG, according to a detailed May 2009 memo from AOG President Michael Callan (see the complete memo at the end of this story).

What’s more, the major vehicle manufacturers weren’t advancing the technology and no reliable CNG conversion kits were available for the GM and Ford trucks used by AOG. Adding insult to injury, new Environmental Protection Agency rules requiring all CNG conversion kits be certified by the EPA “severely impeded AOG’s ability to convert vehicles to CNG in the late 1990’s,” noted Callan’s memo.

NOT DISCOURAGED
By 2005, AOG’s use of CNG fell to about 200 MCF. Today, AOG operates 24 vehicles with CNG capabilities, but only 10 of those are capable of using CNG and the company’s use of CNG for vehicles is down to about 40 MCF — the equivalent of 320 gallons of gasoline.

Callan and AOG are not discouraged, however. The low price and abundant supply of natural gas, along with renewed acceptance and improving CNG technology might finally reward AOG’s more than 17-year belief in using CNG in vehicles.

“AOG is stepping up its efforts to increase CNG capability and CNG usage on its fleet. A conversion kit is now available for 6.0 liter GM engines at a cost (installed) of approximately $8,000 per vehicle,” Callan noted in his memo. “AOG has initiated a program to train AOG employees to perform the conversions which should reduce the conversion cost by approximately $3,000 per vehicle.”

AOG also was the first natural gas utility in Arkansas — and one of the few in the country — to seek and gain approval to sell CNG to the public for the purpose of fueling gas-powered vehicles. The Arkansas Public Service Commission not only approved the request, but praised AOG for the move.

CNG POTENTIAL
Richard Kolodziej states in no uncertain terms that the problems Callan and AOG faced in the 1980s and 1990s “are in the past.” He says CNG equipment is “now in the third generation of technology and systems are good,” and even the domestic auto makers are getting serious about CNG.

Kolodziej, an avid proponent of using natural gas to fuel vehicles, is the president of Washington D.C.-based NGVAmerica (Natural Gas Vehicles for America). He rattled off the four key benefits of using CNG to fuel vehicles as if he had done so a million times before. The benefits are, according to Kolodziej, reduced dependence on foreign oil, reduction of urban pollution, reduction of greenhouse emissions and CNG vehicles are cheaper to own and operate.

To his point of reducing oil use, an MIT energy report says U.S. cars and light trucks consume about 44% of all the petroleum used nationwide, and 10% of that used worldwide.

It’s on the last point of cheaper to own and operate on which Kolodziej adds the caveat that the true market “is not for the mom and pop.” The real savings, he contends, comes from outfitting large fleets, like trash trucks, airport fleet vehicles, package delivery fleets and transit buses.

The potential market for CNG vehicles is beyond huge.

A report from Oklahoma Natural Gas indicates there are approximately 140,000 natural gas vehicles in the U.S., a statistical drop in the ocean compared to the more than 254.4 million total U.S. registered vehicles in 2007. (ONG also reports there are more than 8 million NGVs worldwide.)

According to the U.S. Bureau of Transit Statistics for 2007, there are 254.4 million registered passenger vehicles in the U.S. Out of these 254 million vehicles, 135.93 million were classified as autos, while 101.46 million were classified as SUVs and pick-up trucks. Yet another 6.8 million were classified as vehicles with 2 axles and 6 tires and 2.22 million were classified as “Truck, combination.” The bureau also reported 834,436 buses on the road in 2007.

TRUCKING TECHNOLOGY
If there is a frustration expressed by the optimistic Kolodziej, it’s with the American public and their short memories with respect to high gas prices.

“As soon as the pain went away, they started focusing on other things, like what’s coming up on American Idol,” Kolodziej noted with some contempt.

However, large and small fleet managers and business owners around the country aren’t likely to forget $4-plus gasoline and diesel.

“But the fleets, they were saying, ‘Look, we almost went out of business with those (prices).’ It was almost catastrophic for them. Therefore, the fleets have continued their interest in this market … they continue to call and a number of them are starting to convert their fleets,” Kolodziej explained.

Kolodziej also is confident new technology will allow CNG use by trucking companies, and he cites Westport Innovations as leading the research into CNG-fueled engines powerful enough to replace the class 8 diesel engines now used by trucking companies. Kenworth and Peterbilt are analyzing the engines for possible use, Kolodziej said. Daimler Trucks announced June 11 it would use the Cummins Westport engine (a collaboration between Westport and Cummins, a leading manufacturing of diesel engines) in its Freightliner Trucks division. Cummins Westport officials said in the June 11 statement that by the end of 2010, Freightliner Trucks expect to use the CNG-fueled engines in more than 90% of its North American truck applications.

The rolling average is that CNG is $1 a gallon less expensive than gasoline, a little more than $1 a gallon less expensive than diesel. So, for a company with 1,000 trucks burning about 10 million gallons of diesel a year, the savings are about $10 million. If the math points to such huge savings, why aren’t more fleets and trucking companies using CNG? Upfront costs to buy CNG vehicles, retrain maintenance crews and install CNG fueling stations often prevent wholesale conversions, Kolodziej explained.

For example, that 1,000-truck company could face costs of $30,000 or more per vehicle to go with CNG — and that’s after factoring in federal tax credits designed to encourage CNG adoption.

Kolodziej argues that the upfront costs are more often than not recovered through lower fuel and maintenance costs, and he says there is mounting evidence that U.S. fleet managers — public and private — are beginning to understand the long-term value of CNG.

Indeed there are numerous examples. What follows is just a sampling.

UPS announced Nov. 13, 2007, it had ordered 167 CNG delivery trucks for its North American operation. The company had about 800 CNG vehicles prior to the new order.

On March 11, AT&T announced a $350 million deal to buy 8,000 CNG vehicles over the next 5 years. The CNG push is part of a broader $565 million AT&T plan to have 15,000 alternative-fuel vehicles by 2015. The company said it would work with natural gas utilities to build up to 40 CNG fueling stations in its operating regions. The company has about 88,000 vehicles.

Clean Energy Fuels Corp. on June 30 announced the opening of the world’s largest natural gas truck fueling station on a 2.9-acre site near the large Ports of Long Beach and Los Angeles. Clean Energy operates 184 CNG/LNG (liquified natural gas) stations in the U.S. and Canada.

The Lower Merion School District in Ardmore, Pa., now operates 73 CNG school buses, including 62 of the large Blue Bird 72-passenger buses.

Tulsa Public Schools began a bus conversion program in 1990 with 24 schools buses using CNG. Today, the district operate 82 CNG vehicles that use more than 200,000 gasoline-gallon equivalents annually — an annual savings based on current fuel prices of more than $200,000.

COST CONCERNS
Not all school districts see the practical, financial value of using CNG buses. Not yet, anyway.

“We have a few maintenance vehicles on CNG, but that (bus conversion) is cost prohibitive and impractical right now,” said Jeff Tomlin, supervisor of transportation for the Fort Smith Public Schools.

Tomlin said the smaller CNG-powered buses cost about $175,000, compared to a diesel-powered bus that costs $90,000. However, Tomlin said more school districts around the country are converting or investigating converting to CNG. The districts with CNG buses “tell me the (CNG) buses have very little maintenance costs and they run forever,” Tomlin said.

Within the next decade Tomlin thinks the cost advantage will support CNG use.

“We’re waiting for the technology to catch up so it will lower the price,” Tomlin said. “Eventually the cost benefit will lean to CNG because the cost of the diesel engines will keep going up, and the cost of the CNG will keep coming down.”

Callan said there is “no reason” why Fort Smith transit buses and other city vehicles aren’t using CNG.

SEEKING ‘SYMBIOSIS’
The problems are costs, as noted earlier, and infrastructure.

“The lack of CNG fueling stations and the unavailability of CNG vehicles creates a conundrum. The investment necessary for both is substantial, and one cannot effectively develop without the other,” Callan noted in his memo. “Simultaneous development of this ‘symbiosis’ is critical to expanding the use of CNG as an alternative to petroleum-based automobile fuels. The federal government’s role in creating this symbiotic relationship is of paramount importance.”

As of late July, the U.S. Department of Energy reported just three private CNG stations in Arkansas, 50 in Oklahoma, and 781 in the U.S. (The info did not separate by public or private fueling stations).

A 200 mile radius from Little Rock finds only one public access CNG facility — the ONG Muskogee Service Center in Muskogee, Okla. There are about 30 public fueling sites in eastern Oklahoma, with at least one-third of those owned by ONG (Oklahoma Natural Gas). AOG’s fueling station is available to the public, but requires an appointment and fueling is handled by AOG personnel.

The infrastructure problem could find some measure of the “symbiosis” Callan with the NAT GAS Act filed July 8 by U.S. Sens. Orrin Hatch, R-Utah, Robert Menendez, D-N.J., Harry Reid, D-Nev. The companion bill in the U.S. House of Representatives was filed April 1 by U.S. Rep. Dan Boren, D-Okla., and has 75 sponsors including U.S. Reps. John Boozman, R-Ark., Mike Ross, D-Ark., and Vic Snyder, D-Ark. (As of Aug. 5, the Senate and House bills were parked in committee.)

The New Alternative Transportation to Give Americans Solutions (NAT GAS) Act is designed, according to a collective statement from the senators, to make it easier to buy natural gas vehicles, refuel them, and convert existing cars to use natural gas. The bill would extend and expand tax credits — up to 80% of the incremental price to buy a CNG vehicle — and encourage through tax credits the construction of more natural gas fueling stations. For light-duty vehicles, the tax credit cap increases from $5,000 to $12,500. The bill also proposes to increase the refueling property tax credit from $50,000 to $100,000 per station.

BIG SUPPLIES
One factor not expected to be a problem in the push to convert millions of vehicles to use CNG is the supply of the prime commodity — natural gas.

The Potential Gas Committee — a Golden, Colo., nonprofit considered the ultimate source for natural gas info — reported June 18 a total U.S. resource base of 1,836 trillion cubic feet (Tcf) of natural gas. The figure, the highest in the committee’s 44-year history increases the natural gas reserve base by 39% and is a result of the reevaluation of new U.S. shale plays, including the Fayetteville Shale Play in Arkansas.

More importantly, the committee’s findings combined with U.S. Department of Energy figures suggests the U.S. has a total available future supply of 2,074 Tcf, up 542 Tcf over the previous report. Also, the 2,074 Tcf of U.S. natural gas is the equivalent of nearly 350 billion barrels of oil, or about the same as Saudi Arabia’s oil reserves. What’s more, the DOE estimates the reserves give the U.S. a more than 100-year supply of natural gas.

“I used to worry about the long-term sufficiency of gas supplies, which would obviously be an impediment to championing the use of CNG as a vehicle fuel. I don’t harbor that worry anymore,” Callan noted in an e-mail interview. “The development of ‘non-traditional’ natural gas supply sources, such as the shale plays which have proliferated around the nation, have me convinced we are well situated for the future.”

Callan is not concerned that increased use of natural gas will drive prices higher and diminish the economic benefit of using CNG vehicles. The average wellhead price for natural gas in April was $3.43 per thousand cubic feet (Mcf) — a low not seen since October 2002. The price was approaching $11 (Mcf) in the summer of 2008, which was a price driving much of the frenetic activity in the Fayetteville Shale Play.

“I seem to be convinced more and more every day, that with the natural gas supplies we have, the industry will withstand additional usage for natural gas vehicles,” said Callan, who cited the recent Potential Gas Committee report as the source of his optimism.

STILL HOPEFUL
Callan and the folks at AOG, who have plenty of reasons that date back to 1982 to be cynical about the future of CNG use, aren’t. He professed to growing more confident that the past year of renewed acceptance of CNG is not “a false start.” And while he admits that the American public has a short memory when it comes to energy issues, he says the “constant unrest” in the Middle East serves as a “constant reminder” of the $4 a gallon gas seen in the summer of 2008.

“And you have this (Obama) administration at the national level dedicated to this issue,” Callan said. “I really think that maybe we are beyond false starts this time.”

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Below is the complete memo AOG President Michael Callan provided to The City Wire.

M E M O R A N D U M
FROM:    Michael J. Callan
DATE:        May 28, 2009
RE:        Compressed Natural Gas Vehicles

Arkansas Oklahoma Gas Corporation (“AOG”) is a small natural gas local distribution company (“LDC”) operating in five counties in Western Arkansas and four counties in Eastern Oklahoma.  AOG serves approximately 60,000 customers, with approximately 46,000 of those customers located in Arkansas and 14,000 in Oklahoma.  The majority of AOG’s customers are located within a 40-mile radius of Fort Smith, Arkansas, and include a significant number of industrial customers located predominantly in Fort Smith proper.

Beginning in 1982, AOG, in an effort to take full advantage of abundant supplies of locally produced natural gas, initiated a program to convert a number of its fleet vehicles to operate on compressed natural gas (“CNG”). During 1982 and 1983, AOG installed, at a cost of approximately $70,000, a ten-vehicle capacity Slow-fill CNG fueling station and a Fast-fill fueling station at its Operating Headquarters in Fort Smith, Arkansas. Concurrent with this installation, AOG began converting vehicles to CNG, and by 1986 had equipped approximately 70 vehicles of its 120-vehicle fleet with CNG capabilities. All the vehicles were bi-fuel (operating on both CNG and gasoline); however, performance was very poor due to the carbureted engines and heavy steel CNG fuel tanks. By the end of 1986, AOG was using approximately 400 MCF (MCF = one thousand cubic feet) per month or 3,200 gasoline-gallon equivalent (“GGE”).  AOG continued its CNG program through the late 1980’s. By the early 1990’s, manufacturers had improved performance of the vehicles through the use of fuel injection; however, the after-market CNG conversion kits used during this period had not improved and vehicles continued to experience an approximate 15% power loss when operating on CNG.

Responding to an elevated demand for alternative fuels, General Motors (“GM”) developed and marketed a dedicated natural gas vehicle in the early 1990’s which utilized lighter weight composite CNG tanks. Overall, the performance of these vehicles was equal to comparable vehicles operating on gasoline, but the range was limited to approximately 200 miles due to limited fuel capacity. Subsequently, GM recalled all of these vehicles because of fuel tank failures; however, in the late 1990’s, Ford marketed dedicated CNG trucks with performance capabilities and range limitations similar to those of the GM vehicles.

New Environmental Protection Agency (“EPA”) regulations and the requirement that all CNG conversion kits be certified by the EPA severely impeded AOG’s ability to convert vehicles to CNG in the late 1990’s. [See endnote.]  AOG’s CNG usage during this period was at a peak of 500 MCF per month but beginning to decline due to the inability to effectively convert vehicles to CNG and the lack of factory converted CNG vehicles.

During the 2000 to 2004 time period, there were no reliable certified CNG conversion kits available for use by AOG; therefore, AOG was relegated to relying on 3/4 ton bi-fuel pick-up trucks manufactured by both Ford and GM. These vehicles performed almost as well on CNG as they did on gasoline, but had severe maintenance issues with their fuel lock-off valves which neither Ford nor GM ever resolved. By the end of the 2004 model year, Ford and GM discontinued their CNG programs. As a result, AOG’s CNG usage declined to approximately 200 MCF per month by 2005.

During the 2005 to 2009 time period, AOG began replacing older CNG units with gasoline- and diesel-powered vehicles due to the lack of factory converted CNG vehicles or certified kits for the vehicles AOG had in service. AOG currently has 24 vehicles with CNG equipment; however, due to limited parts availability, only ten of these vehicles are currently capable of running on CNG. AOG’s current CNG usage is approximately 40 MCF per month.

AOG is stepping up its efforts to increase CNG capability and CNG usage on its fleet.  A conversion kit is now available for 6.0 liter GM engines at a cost (installed) of approximately $8,000 per vehicle. AOG has initiated a program to train AOG employees to perform the conversions which should reduce the conversion cost by approximately $3,000.00 per vehicle. One drawback to the new conversion kits is they are typically not EPA-certified until mid-model year. Therefore, in order to convert a new unit purchased at the beginning of the model year, it is necessary to bring the vehicle out of service, a time consuming process which results in lost productivity.

AOG continues to maintain and improve its CNG fueling capabilities by upgrading its existing compressor station and exploring all avenues for CNG conversions. The cost-saving potential is indisputable. Currently, natural gas prices are approximately $4 per MCF. Gasoline prices, as of May 26, 2009, are approximately $2.25 per gallon. A $4 versus $18 per energy equivalent (8 gallons of gasoline equals one MCF of natural gas) obviously represents a significant energy savings.

AOG recently received approval from the Arkansas Public Service Commission (“APSC”) to market CNG to the general public and is the only natural gas utility in the state of Arkansas with this capability. However, due to the lack of CNG vehicles manufactured by the automobile companies and the limited and high cost of CNG conversion kits, AOG’s CNG sales have been limited to mass transit vehicles being driven along the Interstate 40 corridor from manufacturing locations to purchasers.

The lack of CNG fueling stations and the unavailability of CNG vehicles creates a conundrum. The investment necessary for both is substantial, and one cannot effectively develop without the other. Simultaneous development of this “symbiosis” is critical to expanding the use of CNG as an alternative to petroleum-based automobile fuels. The federal government’s role in creating this symbiotic relationship is of paramount importance. There must be sufficient financial incentives in order for a CNG industry to develop. Providing these incentives is certainly justifiable in light of the desire to pursue independence from foreign fuel sources and develop environmentally friendly transportation fuel alternatives.

Endnote: EPA CNG kit certification requirements enhanced quality but also hindered CNG usage as an alternative fuel.  The cost of EPA certifications (approximately $200,000.00 per engine family) eliminated many poorly designed CNG kits but caused the cost of the kits to rise dramatically.  Also, these certifications were required for every year model and if, for example, a company certified for the 2008 model year, the certification was only good during that model year.  In 2009, if the Company wanted to maintain a kit for the 2008 model year, re-certification for the 2008 model year was required.