$5 Billion Lost from Natural Gas Bets

Amaranth Advisors is a hedge fund that keeps making front page news. It is trying to explain to investors how it lost $5 billion in one week betting that natural gas prices would rise. Gas prices fell. $5 billion is gone. Amaranth Advisors is a hedge fund with a trader who forgot to hedge.

The bet could have gone the other way. One good hurricane to disrupt supplies would have spiked prices upward, as would an early cold weather snap to fire up millions of heaters. The bad bet is understandable. In the long term, natural gas prices are likely to return to prices at the start of this year, double what they are now.

Natural gas is likely to become the number one source of energy globally, surpassing current number one – oil. Natural gas is the fuel of choice for modern electric power plants, being cleaner than coal.

Natural gas helps achieve energy independence because it is not refined from oil. Over 90% of the natural gas used in the USA is from North America. Natural gas burns cleaner than gasoline, ethanol and biodiesel. Natural gas is popular with cities and other fleets with low-emission programs. The next time you take a taxi at an airport, it may be running on natural gas. These vehicles get priority at airports.

Natural gas is about 90% methane; the molecule is CH4. The molecule is four hydrogen atoms and one carbon. Natural gas is primarily hydrogen. In fact, most early adapters of hydrogen vehicles are natural gas fleet owners. Most vehicles use compressed natural gas (CNG). Heavy trucks that need more fuel for long distance may use liquid natural gas (LNG). It is expensive to keep natural gas so cold that it stays in liquid form, so CNG is the most popular approach.

There are about five million natural gas vehicles in operation globally. There are about 150,000 natural gas vehicles in the USA. These vehicles consume 238 million gasoline gallon equivalents. That amount has doubled in only five years. CNG vehicles are popular in fleets that carry lots of people: buses, shuttles and taxis.

Natural gas prices have not been increasing at the speed of gasoline and diesel prices. The fuel price advantage is causing some to switch to CNG. Diesel vehicles are getting more expensive with tough 2007 emission standards. Some diesel makers state that EPA 2010 emissions are impossible. These statements are scaring some to switch to CNG. The federal government offers tax credits up to $40,000 for large natural gas vehicles, creating an added incentive.

Some governments are going beyond incentives and mandating the use of CNG. Seoul, Korea, plans to allow only buses that run on CNG, beginning in 2010. The measure is intended to reduce pollution. Currently, 2,798 of Seoul’s 7,766 registered city buses are CNG buses, and the rest are diesel-powered vehicles.

Since 1993, LAWA has been buying vehicles which reduce smog-forming emissions and which reduce greenhouse gases. LAWA now has 490 alternate-fuel vehicles at the four airports which it operates – LAX, Ontario International, Palmdale and Van Nuys. At LAWA, I met with Dave Waldner, Alternative Fuels Fleet Manager, who has been reducing emissions for over 13 years. He explained that early success started with compressed natural gas (CNG) in vehicles in 1993. Then liquid natural gas (LNG) was used in transit buses. LNG provided for longer-range than CNG. With oil prices increasing over 50% annually, CNG has proved to lower fuel cost. LAWA has secured very favorable long-term contracts, paying a little over $3.00 per thousand cubic feet of natural gas. CNG is also available to the many independent fleet operators and individuals using airports. LAWA encourages independent operators to use clean vehicles that use CNG and hydrogen. Clean Energy operates public CNG stations at LAX and Ontario.

Taxi fleets were early adopters of CNG. They received the strong revenue incentive of getting first priority in passenger pick-ups. They also receive a tax credit of $6,000 per CNG vehicle. There were 156,000 taxis operating in the United States in 2004, less than 2% of these vehicles were natural gas vehicles. The growth opportunity is substantial.

It has not been easy for many other early adopters of CNG vehicles. Individual automobile owners painfully experienced different fueling stations using incompatible pressures and nozzles. Fleet managers spent millions building new facilities to meet fire and safety standards. Heavy CNG vehicles often lack the acceleration and range of their diesel counterparts. Storage makes the vehicles weigh more. In hot weather fills can be slow. Fleet managers have faced hundreds of angry riders, when their natural gas was not delivered as scheduled. Natural gas prices fluctuate dramatically, making long range budgeting difficult.

Several of these problems have been resolved. There are now nozzle and pressure standards. There are more CNG stations and they are easy to find on maps and the Internet. Storage tanks are lighter, reducing the extra vehicle weight and improving performance.

Natural gas is not a panacea. To deal with our climate crisis and free us from depending on oil, many see the answer in a portfolio of energy sources rather than one “silver bullet.” The portfolio would include cellulosic ethanol, hydrogen, EV, PHEV, and natural gas.

John Addison publishes the Clean Fleet Report. His firm OPTIMARK Inc. conducts fleet outreach, market intelligence, and cleantech market development. He can be reached at http://www.cah2report.com/. John is the author of the upcoming book Save Gas, Save the Planet.

1 reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!