IEA forecast sees gas ‘gaining traction in transportation’

Comments: 0

Natural gas is on its way to becoming a significant fuel in transportation by road, rail and sea. That is one of the key projections in the latest Medium-Term Gas Market Report published last month by the International Energy Agency (IEA). What does the agency believe that will mean for the gas industry over the five-year period that the report covers?

It has long been the conventional wisdom that while natural gas has very effectively displaced oil in many energy applications – notably electricity generation – it was never going to make much of a dent in oil’s dominance of the transportation sector. Even today, says the IEA in its Medium-Term Gas Market Report (MTGMR), “gas in transport is still a niche market”. However, it continues, “the energy industry hopes to see a real breakthrough in the coming decade”.

Launching the report in St. Petersburg last month, the IEA’s Executive Director Maria van der Hoeven made clear that the agency is less bullish about global gas demand growth than it was last year. The MTGMR projects that while gas will continue to increase its share of the global energy mix, demand will grow by 2.4%/year between now and 2018 – a significantly lower rate than the 2.7%/year the agency forecast in last year’s report. The reasons for the downward revision are “persistent demand weakness in Europe as well as difficulties in upstream production growth in the Middle East and Africa”.

However, said van der Hoeven: “Even though we have revised our growth estimates downwards, the ‘Golden Age’ of gas remains in full swing. Gas is already a major fuel in power generation, but the next five years will also see it emerging as a significant transportation fuel, driven by abundant supplies as well as concerns about oil dependency and air pollution. Once the infrastructure barriers are tackled, natural gas has significant potential for clean-energy use in heavy-duty transport where electrification is not possible.”

Driving factors: The agency believes that “three relatively distinct developments” will play key roles in accelerating gas demand growth in land and maritime transport:

“In the United States,” says the MTGMR, “the primary motives include the spread between oil (or gasoline/diesel) and gas prices, decreasing dependency on oil, and especially fuelling heavy-duty trucks with LNG, with the rail sector sometimes mentioned.

“In Europe, where the mood is very pessimistic due to recent demand developments and the gloomy gas demand outlook, companies are trying to develop an alternative market for natural gas, with a dual interest in road and maritime transport. At the political level, the EC is interested in reducing oil dependency and also improving air quality.

“In China, the primary concern is local air quality – the images of Beijing inhabitants suffocating due to heavy pollution have become a regular feature, but reducing oil dependency is also important. The main focus is currently on road transport, but some initiatives have recently also been taken on maritime transport.”

Graph showing the trend in acceleration of natural gas vehicles since 2000

EVOLUTION OF THE NUMBER OF NATURAL GAS VEHICLES – The number of natural gas vehicles has been on an accelerating trend since 2000, but most of the growth has taken place in a small number of countries, notably Pakistan, Iran, Argentina, Brazil and India. China, a relative latecomer, is set to grow very rapidly over the coming decade. (Source: IEA)

While the use of gas in transportation is still a very small proportion of total demand, the growth rate over the past decade and a half has been impressive. The chart above, from the IEA report, shows how the number of natural gas vehicles grew between 2000 and 2011. The consequences for gas demand are shown in the chart below, which, as well as showing the historic trend, projects further accelerating growth up to 2018.

Graph showing projected growth as predicted by IEA

EVOLUTION OF GAS DEMAND IN THE TRANSPORT SECTOR – The IEA projects a continuing acceleration of world demand for gas in transport, with China – where concerns about local air quality are mounting – accounting for much of the growth (Source: IEA)

According to the IEA, the number of NGVs grew from 1.3 million in 2000 to 16.2 million in mid-2012 – an annual average growth rate of 23%. Between 2000 and 2010, gas demand in the sector grew tenfold to reach 34 Bcm.

Stepping on the gas: What is particularly interesting is the acceleration in demand growth that the IEA projects over the coming five years and beyond: “Consumption in the transport sector (road and maritime) is set to reach 98 Bcm/year, or 2.5% of global gas demand by 2018.

"The 50 Bcm/year consumption growth over 2012-18 will be around 50% higher than what was observed over 2006-12 (33 Bcm). China is set to contribute to more than half of this additional demand, following the trend already observed over the past few years. Other Asian countries as well as the OECD region will add 8 Bcm each (with 7 Bcm from the United States). This could then set the stage for more growth during the post-2020 period as technology matures and more stations are available.”

The IEA notes that the International Association of NGVs (IANGV) estimates that the number of NGVs could grow to 65 million by 2020 – but sees this as optimistic. It implies an additional 50 million NGVs in eight years, an annual growth rate of 19%. Because most of the growth in NGV numbers has been in light-duty vehicles (LDVs) – such as passenger cars and light commercial vehicles – that would mean convincing “a great many” people to buy a car fuelled by compressed natural gas (CNG) or to convert an existing vehicle.

Moreover, three of the four countries with the highest number of NGVs – Pakistan, Iran and Argentina – are facing gas shortages, meaning that “a further rapid increase in the number of NGVs is likely to be difficult to achieve over the medium term”.

Chicken-and-egg problem: However, NGV numbers are not the only determinant of gas demand growth in transport. Though still relatively few in number, medium-duty vehicles (MDVs), such as vans, and heavy-duty vehicles (HDVs), such as buses and trucks, consume a lot more fuel than LDVs, particularly in the case of trucks. As the IEA points out, with a strategy concentrated on buses and trucks, growth in NGV numbers would be less impressive but could still lead to rapid growth in gas demand.

Such a strategy would help to address the “chicken-and-egg” problem that limits large-scale take-up of gas in transport: NGVs need re-fuelling infrastructure to be useful, but investment in such infrastructure is only economic if vehicle numbers are high enough to justify it.

“This challenge,” says the MTGMR, “would be easier to address with trucks or buses confined to determined areas or driving along specific highways, usually operated in fleets with dedicated places to refuel.”

The rise of LNG: Most of the NGVs in operation today carry compressed natural gas (CNG) in heavy cylinders, usually rated for a pressure of around 200 bar. One of several drawbacks of CNG is that it has a low energy density (energy per unit volume). This is not too much of a problem for LDVs, especially those that are bi-fuel and can switch to gasoline or diesel when the gas has run out. But it is an issue with trucks. A partial solution is the use of tanks that can hold higher pressures of up to 700 bar, but an even better option – in density terms – is to use LNG.

As the IEA says: “LNG comes as a handy solution due to its higher energy density, even though it remains 38% below that of diesel, but LNG is a fuel usually used for medium- to high-duty vehicles, not for passenger cars, as they can drive an acceptable distance on it.

“Even though they are more costly than CNG and have a higher weight, LNG trucks have a wider range: 400 miles or more compared with 150-300 miles for CNG vehicles. Additionally, HDVs are often driven over long distances, between 70,000 and 100,000 miles per year, which would require too much space or drivers making too-frequent stops for the distances considered.

“Finally, there are fewer HDV fleet operators and LNG retailers, so that it is easier for them to co-operate; many examples of such co-operation can be already found across the world. The much larger number of CNG users and retailers makes co-operation more difficult, except in the case of operators with large fleets of cars, such as taxis and buses.”

In the maritime sector very few ships currently use gas as a fuel, because CNG is not practical for the volumes of fuel required, but interest in using LNG as a bunker fuel is growing rapidly. This is partly because LNG is often significantly cheaper than fuel oil and partly because environmental regulations on emissions of sulphur dioxide and particulates are getting tighter over time.

Inside Emission Control Areas (ECAs), permitted fuel sulphur content will go down from 1% m/m (meaning by weight) currently to 0.1% after the start of 2015. Alternatively ship operators can install equipment to clean up emissions to equivalent levels.  ECAs exist in the North Sea, the Baltic Sea, North America and the US Caribbean Sea area.  Outside these ECAs there is a proposal for limits to go from 3.5% currently to 0.5% from the start of 2020, subject to a review in 2018.

For ECA compliance ship owners will have three options: switch to low-sulphur fuel; install exhaust scrubbers; or use LNG, which meets all the tighter requirements.

US push for LNG in transport: Unsurprisingly, one of the regions where interest is using gas in transport is running high is the US where the shale gas revolution has led to an abundance of cheap gas. This has made gas a much cheaper fuel than oil and there is also the political advantage of greater gas use reducing dependence on imported oil. There are also, of course, environmental benefits.

Commenting on the prospects for NGV growth in the US, the IEA says: “The framework seems to be right not only because of political backing at the federal and state levels, but also due to the price disparity between oil products and natural gas, as well as the increasing involvement of critical parts of the industry – gas producers, retailers and users.

“LNG trucks are attracting more interest because of the large savings they can provide. The premium to buy a natural gas-powered truck is currently estimated at $70,000, but could be significantly reduced when more trucks are built. With future premiums estimated at $20,000-30,000 more than the diesel equivalent, the investments can be recovered in only a few years in the current price environment.”

There are a number of initiatives under way that would help to solve the chicken-and-egg problem in North America. As the IEA notes: “The keys to solving the chicken-and-egg problem are the availability of refuelling infrastructure and co-operation among different parts of this value chain – LNG providers, refuelling station developers and truck operators/owners. The first signs show that this co-operation is making inroads in the United States. LNG providers would need to develop liquefaction capacity and the transport of LNG to the refuelling stations. Some signs show that there is growing interest from several gas producers, notably Shell, Chesapeake and Apache.”

Breath of fresh air: Another market with a high potential for rapid growth of gas demand for transport is China – where concerns over air pollution have been mounting and where vehicle numbers are growing so quickly that China now has the world’s second-largest car market behind the United States, with a total of 100 million vehicles.

For now, most of China’s NGVs – 1.5 million as of mid-2012 – run on CNG but interest in LNG vehicles is rising. According to the IEA, gas consumption for transport was 12 Bcm in 2012 and this is expected to grow more than three-fold to reach 39 Bcm by 2018. As elsewhere, tightening regulations on the sulphur content of fuels will work in favour of NGVs.

A new demand source for Europe? With the exception of Italy, the use of gas for transport in Europe is very low. Gas consumption for road transport was just 1.4 Bcm in 2011. But with the gas demand outlook for Europe looking gloomy, the gas industry is looking for growth markets and has turned its attention to the potential of transport.

“Interestingly,” says the MTGMR, “the gas industry is now getting support from the EC on the transport side, while this was not particularly the case in the power generation sector. The EC wants to establish a minimum number of LNG refuelling stations for maritime and road transport by 2020 and has proposed national binding targets in both areas.

“Related to LNG, the proposal consists of LNG refuelling stations for ships in all 139 maritime and inland ports by 2025. The strategy for road transport is part of a wider strategy to have more alternative vehicles, such as electric or hydrogen cars, with the aim of reducing emissions and improving air quality.”

Policy matters: Just how quickly gas will be taken up in transport will depend on many inter-related factors: the availability of gas supply; the various links of infrastructure needed for the gas supply chain, especially the refuelling infrastructure; the availability of NGV vehicles and retrofitting services; and, not least, policies and price incentives to support this development in the early stages.

The overall impression that the IEA report gives is that in several key regions of the world, all these elements are coming together encouragingly. What will be interesting to see over the coming decade is how big the impact of gas in transport will be on demand for oil. Gas may not yet have arrived as a mainstream transportation fuel, but looks to be on its way to that destination.

(Photo courtesy of Shell)