Natural Gas, Diesel, and the Future of Trucking

California’s Interstate 5 is one of the most important roads in America. The 1,400-mile stretch of highway connects the U.S.-Mexican border in the south to its northernmost terminus in Canada. I-5 is a massive, transcontinental highway. It serves as a vital artery that fuels local and regional economies along the Pacific Coast and Pacific Northwest. In addition to this critical role, a new report says I-5 may also be a new catalyst for alternatives that will enable us to transform our ground transportation system and reduce oil demand. Researchers at the University of California at Davis’ Institute of Transportation Studies looked at price disparities between diesel and natural gas fuels used in heavy trucking. The team, led by energy expert Amy Myers Jaffe, found that heavily used corridors like I-5 in California are best suited to handle a growing network of natural gas fueling stations. Natural gas has gained momentum as a way to displace oil from the transportation sector, and the researchers point to burgeoning worldwide markets like Iran, Pakistan, China, India, and Brazil as evidence for the viability of natural gas in fuel diversification, and ultimately, energy security. There are currently 17.7 million natural gas vehicles (NGVs) on the roads worldwide, yet only 250,000 are in the U.S. Using a spatial optimization model, the researchers determined the most profitable transportation routes for natural gas supplies to enter transportation markets. They found that concentrating natural gas fueling stations around major highways would grow investment in NGV fueling stations and encourage fleet diversification. This is important, because over 70 percent of U.S. freight tonnage is transported by trucks, the report says. Most of those goods move across the Interstate Highway system where some 2.5 million Class B heavy-duty vehicles (HDVs) carry 8.2 billion tons of goods each year. On some stretches of highway—like I-5 in California, Chicago to Milwaukee, or Dallas to Houston—there are few alternate transportation routes. This makes these stretches of highway—colored in red, below—ideal candidates for an NGV refueling infrastructure. Natural gas could displace large quantities of oil in the U.S. transportation sector. In the 1970s, when oil prices collapsed and trucking companies sought better margins, they traded gasoline-powered engines for diesel-powered ones. Investment bank Citigroup now estimates that a shift to liquefied natural gas (LNG) could displace 1.2 to 1.8 million barrels per day (mbd) of U.S. diesel demand by 2030 and 3.4 mbd globally. Additionally, domestic natural gas supply is increasingly abundant. In its 2014 Annual Energy Outlook, the Energy Information Administration (EIA) found that total natural gas production will increase 56 percent between 2012 and 2040 in its reference case. Much of that growth is thanks to shale gas production, which will increase from 9.7 trillion cubic feet (Tcf) in 2012 to 19.8 Tcf in 2040. Overall, the agency projects a 13 percent increase in shale gas’ share of total U.S. natural gas production, from 40 percent in 2012 to 53 percent by 2040. This could put downward pressure on natural gas prices. LNG is already being sold at a discount from diesel, equivalent to $12 to $16 per million British thermal units last year. Even given oil price declines, Jaffe and colleagues point out that the natural gas-oil differential on the medium term futures market (three-to-five years) is being sold for $9-10/mmBtu and $9.18/mmBtu in the long term. But natural gas encounters many of the same challenges that encumber other alternative fuels, namely the “chicken-egg problem,” according to the researchers. First, LNG-powered trucks currently cost more than diesel trucks, due to the higher price of component parts, like the ignition and onboard storage tank. The least expensive NGV is composed of a compressed natural gas (CNG) storage unit with a spark ignition engine. This may be more cost effective, the UC Davis research team finds, but it is also less fuel efficient. Second, natural gas-refueling infrastructure—in both liquefied and gaseous state—is nascent, especially in comparison to diesel, the incumbent fuel. The U.S. uses 41 billion gallons of diesel each year, and heavy trucks account for 62 percent of that consumption. Accordingly, there are 59,739 diesel fueling stations nationwide, and 2,542 truck stops where diesel fuel is readily available. This translates into 20 truck stops for every 400 miles of highway, the authors calculate. In comparison, the Alternative Fuels Data Center said there were 1,603 CNG or LNG refueling stations in the U.S. at the end of last year. To overcome these barriers to entry, the researchers found that the natural gas price discount would have to be large enough to cover the capital intensity of building-out new stations, as well as the operating costs associated with LNG. Under the UC Davis model, heavy truck fleets that travel 120,000 miles or more in a year—given prices at $4 per gallon of diesel, $2.45 of diesel gallon equivalent (dge) of LNG, and $2.34 per dge of CNG—could optimally lower costs for U.S. heavy truck operators. Over the coming decade, heavy truck attrition is projected to be high, the report says, opening a large, new market. More than three-quarters of the current fleet (76 percent) will be replaced by 2.7 million new vehicles through 2025. If public incentives are structured to entice freight operators to buy natural gas-powered trucks, NGVs could account for a larger proportion of fleet conversions in the HDV sector, they argue. California’s Interstate 5 may be a springboard for a nationwide natural gas network. At 0.1 percent market penetration, dynamic LNG station price differentials between natural gas dge and LNG at the most trafficked points on I-5 could give investors a 12 percent rate of return. The UC Davis researchers say that comprehensive LNG coverage for the entire State of California requires an up-front investment of $100 million to grow the number of LNG-fueled trucks—from 3,000 today to 6,000—and fund $10 million for LNG station construction. A similar model could be commercially viable in the Great Lakes region, they add. Diesel—as the fuel that has powered the internal combustion engines of heavy trucks for the past forty five years—is deeply entrenched and widely available. On a recent surge of U.S. natural gas production, which started with horizontal fracturing of shale wells late in the last decade, this UC Davis study finds that the area’s best-suited for a LNG or CNG refueling infrastructure are not those that are closest to domestic gas sources. Rather, they are built on existing infrastructure within the context of current commercial realities. As lawmakers promote greater domestic use of abundant natural gas resources, enhanced public-private partnerships may facilitate investment in this important infrastructure.