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Analysis: Thrifty truckers wary of pricey natural gas vehicles

A LNG fuel pump nozzle at a Blu LNG filling station in Salt Lake City, Utah, March 13, 2013. REUTERS/Jim Urquhart
A LNG fuel pump nozzle at a Blu LNG filling station in Salt Lake City, Utah, March 13, 2013. REUTERS/Jim Urquhart

By Nichola Groom

LOS ANGELES (Reuters) - Truckers considering natural gas as an alternative to high-priced diesel say the cost of vehicles that run on the cheap and cleaner-burning fuel is still too high for them to see a timely payback on their investment.

A push to run more of the nation's truck fleet on cleaner, domestically produced natural gas is rapidly gaining momentum.

Suppliers like T. Boone Pickens' Clean Energy Fuels, Royal Dutch Shell and China's private ENN Group are scrambling to build natural gas fueling stations along U.S. highways, while Cummins-Westport Inc will begin later this year selling a 12-liter natural gas engine able to power the biggest trucks on the road.

Truck companies too, are enthusiastic - up to a point.

The trucks that will sport the new engine, made by a joint venture of Cummins Inc and Westport Innovations Inc, will have expensive tanks for storing compressed or liquefied natural gas. With the industry still reeling from an economic slump that pushed margins below 5 percent, truckers have little ability to make big bets on new equipment.

Customers like household products giant Procter & Gamble and building materials maker Owens Corning, however, are increasingly demanding that their products be hauled on cleaner trucks using cheaper fuel.

Natural gas trucks' greenhouse gas emissions are about 20 percent lower than those of diesel trucks. But truck companies must fork over an extra $40,000 to $80,000 per natural gas truck - a big markup considering a heavy-duty diesel truck starts at about $100,000.

President Barack Obama wants to begin a federal incentive program that would help pay for the new trucks, but budget woes make that unlikely.

Big natural gas-producing states such as Pennsylvania, West Virginia and Texas, as well as environmentally conscious California, offer programs to get heavy-duty, natural gas trucks up and rolling. But none foots the bill entirely, and in an era of fiscal tightening, truckers fear the subsidies may not last.

Replacing diesel with natural gas can save truckers about $1.50 per gallon, and experts say a truck that runs at least 80,000 miles a year could see a payback in two years. But factor in the cost of modifying maintenance facilities and the still unknown value for second-hand natural gas trucks and the math isn't so clear cut.

"We can't make the economics work," said Randy Mullett, a vice president at Con-way Inc, one of the country's largest trucking companies. "The upfront cost is too high."

Con-way is testing two compressed natural gas trucks in the Chicago area and plans to add three or four liquefied natural gas (LNG) trucks in Texas, where state incentives will help offset the added costs. But Mullett said fueling big rigs with natural gas is "not the slam dunk that it's presented to be."

MOVING BEYOND TRASH

Heavy-duty trucks are big fuel consumers, running more than 130 billion miles a year in the United States and averaging about 6.5 miles per gallon, according to the American Trucking Associations. With about 200,000 such trucks sold each year, and turnover of fleet vehicles about every five years, the opportunity to reduce diesel fuel consumption and tailpipe emissions by switching to natural gas is huge.

New techniques unlocking vast reserves of natural gas from shale have produced a boom in U.S. supplies and driven prices down sharply, increasing the transportation industry's interest in using natural gas as its primary fuel.

Earlier this month, BNSF Railway Co said it would run some locomotives on liquefied natural gas to save fuel costs, and Lockheed Martin said it was developing new fuel tanks for ships, trains and trucks powered with LNG.

Heavy-duty truck maker Kenworth, a unit of Paccar Inc, has a "very large backlog" of orders for natural gas vehicles, according to national sales manager Andy Douglas. Cummins-Westport, meanwhile, has been growing about 30 percent a year, and the addition of the 12-liter engine should give it "a pretty good growth spurt for the next few years," said Jim Arthurs, the joint venture's president.

The waste industry has already made a big push into natural gas, with about half of the garbage trucks sold in the United States last year running on it. Natural gas works well for garbage trucks because they are able to refuel overnight at dedicated stations at their home bases. Trucking companies say they could lose precious time and fuel going out of their way to find a natural gas fueling station near their routes.

Clean Energy, ENN and Shell have committed to building a network of natural gas stations along U.S. highways, but they need to know that there will be a sufficient number of trucks using those stations to justify their investment.

Waste Management Inc began converting its fleet to compressed natural gas (CNG) about three years ago. It is adding 700 to 1,000 natural gas trucks each year, saving roughly $30,000 a year per truck on fuel and maintenance, according to spokeswoman Jennifer Andrews.

The company has "not seen the costs of natural gas trucks come down at all," Andrews said, but added that it had received significant revenue from government grant programs.

STATE INCENTIVES HELP

Some trucking companies said incentives are the only way they can add natural gas trucks to their fleet.

C.R. England, a family-owned truck company based in Salt Lake City, Utah, has been running five LNG trucks between Ontario, California and Las Vegas since late 2011 but has yet to make back the close to $80,000 premium it spent per vehicle.

The company is hoping it will win a grant from Pennsylvania to help it add five CNG trucks to serve Hershey Co. The state is awarding grants of up to $25,000 per vehicle to cover up to half of the added cost of a natural gas truck.

C.R. England would probably not seek to buy any more natural gas trucks without such an incentive, said Allen Nielsen, director of fuel for the company.

Even United Parcel Service Inc, which has 93 LNG-fueled big rigs, said it has taken advantage of state incentives to buy most of them. Though the lack of a fueling infrastructure is a key impediment to adoption of natural gas trucks, the director of UPS' global energy group, Mike Whitlatch, said "the cost of the vehicle is probably the largest challenge."

CUSTOMERS PUSHING HARD

Truckers can't rely on their customers for help, either.

"We're trying to push pretty hard," said Sean Turner, purchasing group manager at Procter & Gamble Co, which is running 22 CNG trucks at a Pennsylvania factory that makes Pampers diapers and Bounty paper towels. The company's truck partner, which it would not name, made the investment, Turner said.

Owens-Corning is talking to nearly all its trucking partners about switching to natural gas, according to Dave Uncapher, sourcing and operations leader for the Toledo, Ohio company. Some who balked at the proposal have lost "a piece" of the building material maker's business, he said.

Not only do customers want to see more predictable, and hopefully lower, fuel costs, many also have internal goals to reduce the carbon and tailpipe emissions of their supply chains.

Dillon Transport Inc, a privately held company based in Burr Ridge, Illinois, agreed to Owens Corning's request, adding 25 LNG trucks in Texas about a year ago.

To help offset the additional costs, Dillon is aiming to run its natural gas trucks 300,000 miles a year. The average for big trucks is about 68,000 miles a year, according to federal data. But the company's marketing director, Phil Crofts, said the question of recovering the extra cost of a natural gas truck is murky, because there is no market for used LNG trucks and the conversion of maintenance facilities adds to the costs.

The natural gas trucks are more about distinguishing itself in the market, Crofts said. The deal with Owens Corning has helped Dillon land a contract with fertilizer producer Mosaic Co to run 50 CNG trucks at the Port of Tampa. That, plus the Owens Corning business, has helped boost volumes 35 percent.

"This business is not like the cell phone business or the iPad business where there are great new markets going out there," Crofts said. "For us to grow we've got to be taking somebody else's business."

(Reporting by Nichola Groom; Editing by Patricia Kranz and Leslie Gevirtz)

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