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Arctic Leaf

Clean Energy Fuels sees daylight ahead

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Wall Street was abuzz last week as Clean Energy Fuels, the leading supplier of natural gas for use in delivery and heavy-duty trucks, jumped 11 percent in one day after a long slump in which investors were questioning its business model.

“We’re at the very beginning of a major shift to natural gas for trucking – a shift that could take a decade before the growth slows – and Clean Energy Fuels is the leader in the market,” added Jason Hall of Motley Fool, who had been skeptical of the company in the past but is now turning enthusiastic.

“Natural gas vehicles are here to stay,” added James E. Brumley on SmallCap Network, in one of the many enthusiastic endorsements the company received last week. “So Clean Energy Fuels is very much a right-time, right-place idea. It’s not just that the company is the biggest and the best at what it does. There’s a market of scale for what it has to offer.”

It hasn’t been easy. The company, the brainchild of legendary oilman T. Boone Pickens, seemed poised for growth last year but suddenly hit a sudden downdraft in January. Skepticism grew over whether compressed natural gas (CNG) or liquid natural gas (LNG) would be the best substitute for diesel in heavy-duty trucks. The debate is really inconsequential since the two are interchangeable – LNG for large-scale storage and transport with some use in the biggest rigs and CNG for fueling smaller commercial vehicles. Nevertheless, the controversy drove down CEF’s stock price 25 percent since the first of the year.

“Much of the conversation in the investor community over the past six months has been dominated by the false idea that CNG and LNG were competing fuels,” wrote Hall in a recent evaluation. “But while we’ve been arguing, Clean Energy Fuels has been opening stations for trucks across the country. And the company is a leader in both.”

Once again, it seems to have been a case of investors becoming absorbed in short-term focus while ignoring the long-term prospects of the company. True, Clean Energy Fuels has not yet delivered a profit but its progress in building infrastructure to enable us to use significant portions of our natural gas resources as a substitute for diesel fuel has been significant. Here’s what the company has accomplished so far:

  • Clean Energy Fuels has delivered 800 million gallons of CNG and LNG to light and heavy-duty trucks.
  • The company has built approximately 500 fueling stations across the country.
  • It has installed over 1,500 compressors for delivering CNG to vehicles worldwide.
  • It has two LNG production plants.
  • It has 60 LNG tankers making 5,000 deliveries every year.
  • It has two renewable natural gas plants producing bio-methane.
  • It has 39 major airport fueling stations.
  • It now fuels over 35,000 trucks, large and small, with CNG each day.

As you can see, this is no fly-by-night operation. Whether the company is profitable or not right now, Pickens is obviously in it for the long haul.

Clean Energy Fuels’ long-term goal is a “CNG superhighway” that will offer fueling stations to long-haul trucks along all the major interstates that crisscross the country. But its major success to date has been in servicing fleet vehicles for delivery companies and municipalities.

  • CEF currently services 230 trucks a day for UPS with big plans for expansion.
  • CEF has contracts with Owens-Corning, Lowe’s, Proctor & Gamble and other commercial establishments’ fleet owners for their delivery vehicles.
  • Garden City Sanitation of San Jose has converted 23 refuse trucks to natural gas using CEF’s services.
  • CEF will be fueling Kroger’s new 40-unit fleet of LNG trucks later this year.

Analysts believe that refuse and delivery fleets, especially those that are garaged overnight and can be refueled at a central CNG station, will become one of the company’s major markets.

CEO Andrew Littlefield just announced a loss in revenues for the first quarter of 2014 but said this was because of the expiration of the federal volumetric excise tax credit (VETC), which had provided $26 million in 2013. Overall, the trend is definitely upward:

  • LNG fuel deliveries increased 22 percent to 16.7 million gasoline gallon equivalents.
  • CNG deliveries increased 16 percent.
  • When the VETC is excluded, overall revenues were up 43 percent. 
  • Sales of Redeem, the company’s renewable bio-methane product, increased 45 percent.

Sean Turner, COO for Gladstein, Neandross & Assoc., a leading consulting firm for the development of alternative fuels, notes that the NGV market in the United States is actually larger than in countries such as Argentina and Pakistan, which have been at it for a longer time. “While North America might lag behind in the adoption curve of other countries, natural gas usage per vehicle is actually near the top worldwide,” he said. “This is because other countries have tended to employ NGVs for passenger cars, whereas the U.S is now concentrating on medium-sized and heavy-duty trucks.” And as T. Boone Pickens likes to point out, natural gas will be unrivaled in this marketplace since electric vehicles cannot produce the torque needed to power those long-haul vehicles.

Whether all this makes Clean Energy Fuels a hot stock again is something Wall Street will have to decide. But in terms of moving America toward greater reliance on homegrown natural gas, the news is all favorable.

Arctic Leaf

Rin Tin Tin, RINs and the price of ethanol

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Is the son or daughter of Rin Tin Tin alive and well? For a while I thought he or she was, while catching up on my reading over the weekend. I kept reading articles about RINs (Renewable Identification Numbers), their possible impact on the ethanol market and relatively high ethanol prices, despite the apparent weakening of the ethanol market. There seemed to be RINs and more RINs on every page I turned! Because I hadn’t slept for two nights, I couldn’t really focus on the contents of the articles, but only on the dog Rin Tin Tin and his offspring. How many of you have done that? Come on, be honest. Don’t make me feel bad!

I felt guilty after it became obvious that my focus on Rin Tin Tin resulted from a tired brain and eyes. I am back to the complex world of RINs today. (I had a bit of sleep).

Okay, you ask, “What the hell are RINs?” They are sort of a pass at reflecting company fulfillment of government mandates concerning biofuels. For this article, think ethanol! They are issued at the point of ethanol production or the purchase of the fuel by companies. They are approved by the EPA. They reflect a credit that verifies that the required amount of ethanol has actually been blended into gasoline. Succinctly, the Renewable Fuel Legislation, now the law of the land, mandates that a Renewable Identification Number (RIN) must be attached to every produced or imported gallon of renewable fuel in the U.S. One more thing, RINs are separated from the batch of renewable fuel when it is blended with gasoline. This fact indicates compliance with the law and Renewable Volume Obligations (RVOs). Credits, at this juncture, can be used for trading purposes.

In 2012, before the EPA’s Nov. 2013 proposal to change RIN quotas and lower requirements for ethanol, the price of RINs was very volatile. Initially, they ranged around 1 to 10 cents a gallon. By spring of 2013, however, they were around $1.

Why the price increase and what does it bode for the price of ethanol in the future? Initially, the RINs were thought of as a way to encourage refiners to produce renewable fuels, like ethanol, and to “pay” for credits if they don’t “play” by  meeting fuel targets.

Part of the volatility and increase in costs of RINs, probably, has to do with speculation by banks and other financial institutions. Thomas D. O’Malley, chairman of PBF Energy, indicated in a recent New York Times article that financial institutions “helped transform an environmental program into a profit machine…These things were designed to monitor the inclusion of ethanol in the gasoline pool…They weren’t designed to become a speculative item. For the life of me, I can’t see the justification for it.” Interviews with members of the financial community, conducted by the New York Times, seem to suggest agreement with O’Malley.

According to the Times, speculation in RINs “could have consequences for consumers. In the end, energy analysts say, the outcome will be felt at the gas pumps — as the higher cost of the ethanol credits get tacked onto the price of a gallon of gasoline.” The Times reports that the “credits, which cost 7 cents each in January [2013], peaked at $1.43 in July, and [were] trading for 60 cents” in September. Jordan Godwin in the Barrel Blog indicated that like RINs in 2013, ethanol prices in 2014 are downright wacky. “In a matter of less than two months, ethanol prices went from six-month lows to eight-year highs.” Godwin and others blame delayed returning train cars during the winter and constraints on supply and production. I would add speculation by Wall Street and uncertainty as to the impact and longevity of EPA’s new regulations concerning the reduced mandates for ethanol and other biofuels. It’s a dilemma for proponents of alternative fuels. Less speculation regarding trading, sustained predictable production and refinement of the distribution system, (along with avoidance by some retailers and blenders to price ethanol well over costs) would facilitate more competition with gasoline at the pump. More predictable competition and larger sales at the pump of E15 and E85 would generate more private-sector fixes to the ethanol supply chain as well as likely stabilize prices and, over time, lower them. In light of ethanol’s benefits to the nation, wise folks might be asked to find policies and stimulate market behavior that permit the American people to have it both ways.

Arctic Leaf

Matching ethics and policy: Free markets, subsidies and fuel

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There is probably a reason that ethicists rarely sit at the public policy table with respect to transportation fuel. Let’s think about it for a few minutes in the context of a diverse group of econo-ethicists. Let’s match the ethics of presently monopolistic gasoline markets, the huge oil subsidies granted to oil companies and, yes (for environmental folks), the gift of HOV lanes and tax subsidies for those with the “right” cars, with:

  • John Rawls’ ethical guideline that we should respond to the least among us as we would want to be responded to ourselves,
  • Jeremy Bentham’s ground rule that we should seek the greatest good for the greatest number),
  • Karl Hayek’s admonition that the least government is, generally, the best government,
  • Michael Douglas’ statement in “Wall Street” that “greed is good.”

Currently, oil company policy and behavior with respect to gas stations they own, franchise or influence is very restrictive. Even when they allow alternative fuels to be sold in gas stations, companies play the role of Cinderella’s ugly stepmother. Alternative fuel pumps, often, are placed apart from the gas pumps, sometimes out of sight. If they were human, the alternative fuel pumps, legitimately, would have a discrimination case, need psychiatrists and would probably cry a lot because of loneliness. Lacking choices, consumers must pay an extra tariff for gasoline. Prices for gas reflecting little or no competition are arbitrarily high.

Congress supports the oil monopoly at the pump. It has failed to allow methanol as a transportation fuel and has not passed open fuels legislation.

Certainly, an ethical judgment of the current fuel market and those who establish its limited boundaries should be easy to make. You would get an “A” from both Rawls and Bentham as well as from Hayek if you said, “It is rough on the poor who pay upwards of 15-17% of their income for gasoline and it forces extra costs for all of us at the pump.” Finally, it illustrates Hayek’s warning that too much government restrictions limit freedom. Gosh, who ever thought I would agree with Hayek, even in a limited way? Perhaps, however, Mike Douglas wins this one. Greed has been good for the oil companies.

Douglas also wins big on tax subsidies to oil companies. Yet, despite diverse ethical principles, everyone scores well on the granting of tax subsidies to the oil industry. Both liberal and conservative groups, as well as the Congressional Research Service (CRS) agree that many of the tax subsidies are not needed to secure production and distribution. Why, then, does the industry benefit from such beneficence? History granted them favored status; politics and money give them influence at budget-making time.

I was in favor of (and probably deep down still tilt toward) HOV lanes. But, I do have some real doubts about tax subsidies, particularly subsidies not tied to income.

I am worried about the ethics of both. Most of the benefits of HOV lanes and tax subsidies to secure buyers of cars that use them go to relatively affluent income folks. Both are paid for by general taxpayers, including income-deprived tax payers.

Further, most low and moderate-income households face severe budget constraints if they try to buy new so called clean vehicles that are now allowed in the HOV lanes and secure tax benefits. No preference is granted to other alternative fuels like ethanol, and the federal government does not readily allow the relatively inexpensive conversion of existing cars to alternative fuels — methanol, ethanol. States generally do not permit the small number of converted cars in HOV lanes. Lastly, in terms of debits, HOV lanes do increase congestion, when they are not utilized to the fullest, increasing driving costs for every one of us who are not so lucky to own the “right” vehicles.

So HOV lanes and tax subsidies for favored cars do raise ethical questions. They don’t treat the least among us fairly, they are not good yet for the greatest number of us, and they reflect government behavior that reflects a bit of shooting from the hip before tough analysis concerning efficiency, and effectiveness. Let me see, Rawls, Bentham and Hayek would at least be sensitive to the involved ethical issues.

Alright, are you happy, indifferent or sad that ethicists are not at the policy table? Let me know.