Natural Gas for HHP Applications USA – An Overview

Across the US marine, mining and rail industries, a number of players are either currently investing or are planning to invest in natural gas as a high-horsepower (HHP) energy source.

However, the penetration of natural gas in these industries remains a fraction of its potential size, in 2013 accounting for only 3.8% of the HHP transportation sector’s energy consumption. A range of factors has limited market size, including the high capital expenditure associated with switching to natural gas; limited LNG supply and infrastructure, and safety, training and operational issues to name but a few.

Here, in the first of a series of three articles on the use of natural gas in HHP industries, we take an overview of the market to find out the drivers behind the nascent growth currently being seen and the obstacles blocking its progress in transportation and other industries.

Both on- and off-road transportation comprises the largest potential for natural gas fuelling in North America in the period to 2040. This is followed closely by the mining, drilling and fracking industries, where 99% of the fuelling potential remains unrealized.

Transportation is expected to be the fastest growing sector, experiencing a 2.9% cumulative annual growth rate (CAGR) in natural gas as a fuel over the next 20 years, according to the International Energy Agency (IEA). Despite its rate of growth, the transportation industry will remain the smallest sector by consumption to 2035.

In all HHP sectors, diesel consumption is high, openings for lower-powered alternative fuels such as electricity are negligible and natural gas is an appropriate substitute. Based on consumption and the price differentials between diesel and natural gas alone, the opportunity for natural gas as a fuel for high horse power applications is very large, considering 99% of the drilling and fracking industry alone is untapped.
The HHP sector includes both pioneers already adopting LNG, such as BC Ferries, Shell and Apache, and those still in the testing phase, such as Union Pacific, CSX and BNSF. This pioneering of LNG adoption and testing is expected to continue in 2014-15, and adoption rates are set to accelerate from 2016 onwards.

Driving Growth
Of course, the principal factor driving the growth of natural gas use in HHP industries is price, or more specifically the cost differential between diesel and natural gas – and natural gas prices are expected to remain substantially cheaper than diesel for the foreseeable future.

Consistently low prices compared to diesel have allowed HHP industries to plan for a future with natural gas as part of the fuel mix. Nonetheless, as General Electric’s Ivan Bach told FC Gas Intelligence, it is important that end users lock in the fuel differential with gas producers to try and guarantee that price advantage.

For companies that have moved quickly and have already engaged in a natural gas fuelling strategy, operating expenditure (OPEX) savings based on considerably lower fuel prices (30-70% depending on the HHP sector) are proving the major growth driver. Despite potential for these prices to rise, the differential remains so great and supply so abundant that this is expected to have little impact.

Across all industries, given the high capital expenditure required, LNG adoption is heavily dependent upon the retirement schedule of existing diesel-fuelled equipment. Where the opportunity presents itself, however, a more towards natural gas is begging to be seen, albeit in fits and starts.

In the marine sector, adoption is expected to accelerate after the North American Emissions Control Area comes into force on January 1, 2015. A lot of research and pilot programs are therefore taking place to assess the best way forward for complying with the new regime, and for a number of players natural gas seems to be the way forward.

The number of LNG fuelled vessels in the US is expected to rise from 37 in 2013 to 160 in operation or under construction by 2021, according to by predictions by Kostas Dimitropoulos of Princeton Sovereign Maritime LLC. LNG adoption will remain piecemeal and gradual during this period, however, and will be dependent upon the purpose, route and size of the ships along with infrastructure availability.

Mining, meanwhile, lags behind marine in terms of uptake, despite having very high end-user potential. Similarly to natural gas vehicle adoption, mining and extraction activities are able to profit from the vertical integration of natural supply and use. Although the potential is clear, adoption is dependent on geography, incentives, logistics and regulation, energy procurement policy, economic case and operational implications.

In the oil & gas industry, great synergies have been found in using the natural gas being extracted to power the drilling rigs and for hydraulic fracturing. E&P have been shifting power generation gradually from diesel to natural gas for almost a decade, while Encana first tested a natural gas powered drilling rig in 2005. The proportion of natural gas-powered drilling rigs is small in comparison to the 1,700 rigs active, although as Douglas E. Kuntz, President and CEO of Pennsylvania General Energy Company notes, “As the technology evolves, you’ll see more companies across the country doing more natural gas fuelling of this equipment.”

Finally, in the rail industry, LNG technology is widely seen as having a hugely significant potential – for Oscar Munoz, Chief Operating Officer at CSX Corp, it could even be one of the most significant developments in railroading since the transition from steam to diesel in the 1950s. A number of railroads are testing LNG engines alongside GE and Caterpillar, although railroads have recently considered biodiesel, propane and hydrogen as well as natural gas.

Expectations are that LNG adoption will occur gradually and accelerate over time, similar to the shift from steam to diesel. GE and Caterpillar, the world’s largest locomotive manufacturers, are presently working with Class 1 railroads, but the first natural gas locomotives and tender cars will not be commercially available until 2016 at the earliest.

For some industries, such as marine and rail, the level of infrastructure investment required to switch to natural gas as a fuel is huge, and long timeframes are required to recoup the investment needed. The economic case for the switch is clearly there, however. How quickly this will happen will depend on the influence of government policy, the subject of the next article in this series.