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Thoughts About Energy Generally, and Natural Gas Specifically

Sigma Investment Counselors

July 5, 2012

Natural gas is currently trading at approximately $2.50-3.00/mmBTU (million British Thermal Units) and oil is approximately $80/BBL (barrel). It takes approximately 5.8 mmBTU of natural gas ($15-17) to provide the same amount of heat as one barrel of oil ($80). Both are fossil fuels, although natural gas is generally viewed as relatively less hazardous to the environment. Oil on the other hand, is much easier to transport and is a much more concentrated heat source. Natural gas has significant advantages for use in stationary applications where supplies can be delivered via pipeline but, up to now, has proven difficult to adapt to vehicular applications. Clearly, if you are heating your home, you would be much better off connected to a natural gas utility than relying on heating oil. The same holds true for fueling an electric generating station or almost any stationary facility.

There are two major transportation related problems that tend to reduce the usefulness of natural gas, despite the apparent price advantage. Oil can be economically transported by water or land (pipeline or vehicle), while natural gas is difficult and expensive to transport other than via pipeline. Oil, in the form of motor fuels, is highly concentrated, compared to natural gas, with a typical auto or light truck gasoline tank capacity of about 20-30 gallons and a range measured in hundreds of miles. A similar driving range, using natural gas, would require approximately 3,000 cubic feet. To put that into context, my office is approximately 100 cubic feet.

In order to use natural gas in vehicles or to transport natural gas over long distances, where pipelines do not exist, it must be concentrated. The two methods currently in use are compressed natural gas (CNG) and liquefied natural gas (LNG).

CNG is made by compressing natural gas to less than 1% of the volume it occupies at standard atmospheric pressure. It is stored and distributed in hard containers at a pressure of 2900-3600 pounds per square inch (psi), usually in cylindrical or spherical shapes. To put that into context, pressures in most automobile tires approximate 30 psi. CNG can be used in traditional gasoline internal engines that have been converted for bi-fuel use. The cost of conversion and the availability of refueling stations tend to restrict adoption to larger vehicles that can be refueled at a central location. Transit and school buses, local delivery fleets, trains and ferryboats have proven to be suitable applications. Passenger car use is likely to be limited pending solutions to the problems of power train conversion costs, heavier and larger fuel tanks and refueling requirements.

LNG is natural gas that has been converted to liquid form which requires the removal of certain components and then condensed into a liquid at atmospheric pressure by cooling it to approximately minus 162C(-26oF). LNG takes up about 1j6ooth the volume of natural gas in the gaseous state. LNG is stored and transported in cryogenic tanks. Currently, LNG is principally used for transporting natural gas to markets, where it is regasified and distributed as pipeline natural gas.

The long-term outlook for natural gas appears to be promising. While CNG use in passenger cars remains problematical, the number of vehicles in the world that use CNG has been growing steadily and is likely to continue to attract fleet use as operators become more confident regarding price and supply.

LNG has good long-term potential in export markets. Sempra Energy has estimated that it would cost gas exporters between $8 and $9 per million BTUs ($2-3 for the gas and $6 to liquefy and transport) to get LNG to Japan today. If LNG is currently selling for $16/mmBTUs in Japan, the opportunity is obvious. Natural gas is attractive (cleaner and cheaper) as a substitute for coal and oil in stationary facilities, should become gradually more viable in heavy duty transportation applications as infrastructure is developed and makes considerable economic sense as an export.

Walter Kirchberger, CFA

Sigma Investment Counselors is an independent fee-only financial advisor offering comprehensive wealth management services with a “Thoughtful Investing” approach for more than 35 years, Our team of highly knowledgeable and experienced investment professionals takes the time to understand each client’s specific investment goals to develop a customized financial plan.

www.sigmainvestments.com

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