State Weighs Natural-Gas Push

By CASSANDRA SWEET
August 13, 2008; Page B3B

The notion of spending taxpayers' money to help fill U.S. roads with natural-gas-fueled vehicles faces a major test when voters in California, the nation's largest auto market, go to the polls in November.

Natural-gas providers are spending millions of dollars on advertising to persuade Californians to pass a ballot initiative allowing the state government to invest in the now-tiny market for natural-gas-fueled cars and trucks. The push comes as gas producers, emboldened by a windfall in domestic production, press federal lawmakers to help expand the market for gas as a means for reducing dependence on foreign oil and cutting greenhouse-gas emissions.

If the California ballot initiative passes, as many as a million vehicles fueled by compressed natural gas, or CNG, could ultimately end up on the state's roads. If the proposal -- called Proposition 10 -- fails, backers will face a tougher task selling authorities on the wisdom of investing in infrastructure for natural-gas-fueled vehicles instead of spending on biofuels or electric cars and trucks.

"Natural gas is on the menu of possible fuels for the future," said Jim Boyd, a member of the California Energy Commission. "Its carbon footprint isn't as good as totally noncarbon fuels. But as we transition to alternative fuels, there could be a pathway to a future that includes natural gas for a while."

No opposition has been organized against the proposal, which would authorize the state to sell $5 billion in bonds to fund rebates of $2,000 to $50,000 to people who purchase natural-gas-powered cars and trucks. Some of the money would be earmarked for research, development and production of renewable-energy technology and education. The plan would cost the state $9.8 billion over 30 years.

Scientists and policy makers say that filling the tank with natural gas instead of gasoline or diesel could serve as a stopgap to cut greenhouse gases and dependence on foreign oil but that it isn't ideal for the long term and shouldn't be heavily subsidized.

"Using natural gas has some small advantages," said Daniel Sperling, director of the Institute of Transportation Studies at the University of California at Davis and a member of the California Air Resources Board. "If someone can make a business out of it, that's great. The public benefits are rather small, so I don't think...our government should put much effort into promoting it."

Familiar Faces

Back Proposition

Among the most prominent backers of the Proposition 10 is Texas billionaire oilman T.<TH>Boone Pickens, who is founder and chairman of CNG provider Clean Energy Fuels Corp. Mr. Pickens and Chesapeake Energy Corp. Chief Executive Aubrey McClendon have contributed a total of $3.7 million to support Proposition 10.

Messrs. Pickens and McClendon testified before Congress in the past two weeks, pressing lawmakers for a bigger role for natural gas in the nation's fuel supply amid booming production from the Barnett Shale in Texas and the Haynesville Shale in Louisiana and East Texas.

The executives had already gotten the attention of Rep. Rahm Emanuel (D., Ill.), who introduced a bill that would provide tax credits for the purchase of natural-gas vehicles and home-refueling systems, as well as to encourage gas stations to install natural-gas pumps.

Although CNG has been around for more than 20 years, it is a small market. About 0.1% of the 23 trillion cubic feet of natural gas the U.S. consumed last year was used to fuel vehicles, according to the U.S. Energy Information Administration. Honda Motor Co. manufactures the only natural-gas-fueled car available in the U.S., the Civic GX, while several companies sell conversion kits, costing about $3,700 to $5,500, to modify gasoline engines to run on CNG.

One thing natural gas has going for it politically is that it is a lot cheaper than gasoline. Retail CNG prices in California are about $2.50 to $3 a gallon. The average price of retail gasoline in California is about $4.20 a gallon.

CNG proponents also point to the benefits that switching to a natural-gas-heavy vehicle fleet can bring in shoring up the nation's energy security. Big U.S. natural-gas discoveries and forecasts for larger reserves have emerged just as oil and gasoline prices have skyrocketed, forcing energy issues onto the front pages and into the speeches of the presidential candidates.

A report released last week by the Chesapeake-backed industry group American Clean Skies Foundation and Navigant Consulting Inc. estimated that U.S. natural-gas reserves could be as large as 2,247 trillion cubic feet, or nearly 100 times the current U.S. annual demand.

"If we started moving to natural-gas vehicles in large numbers, even if we didn't go to renewables, we'd have plenty of natural gas," said Rich Kolodziej, president of Natural Gas Vehicles for America, a Washington trade association.

The industry's goal is to replace 20% of the diesel used in the U.S. -- about 10 billion gallons, or 1.3 billion cubic feet -- with natural gas by 2025, Mr. Kolodziej said.

Long-Term Benefits

Remain Unclear

Mr. Pickens, Chesapeake and other backers are keen to see Proposition 10 pass because they otherwise would have to compete against other alternative-fuel providers for about $840 million California plans to hand out for development and deployment of alternative fuels under a law called AB 118.

While natural gas is more environmentally friendly than gasoline and diesel, its advantages have diminished since the 1980s, when engines were less efficient and petroleum fuels were dirtier, said the University of California's Mr. Sperling.

Automobile-pollution controls have improved since then, and California requires car and truck engines to become more efficient in the near term, making natural gas less competitive as a cleaner-burning fuel.

A study by the California Energy Commission found that using natural gas instead of gasoline reduced global-warming pollution 20% to 30%. Swapping natural gas with diesel in heavy-duty trucks cut greenhouse-gas emissions 10% to 20%, according to the study, which examined the "life cycle" of the fuels, from wellhead to gas processor to delivery point to combustion.

Natural gas used to be viewed as a good alternative to diesel in heavy-duty trucks, but this has changed as new truck engines have become much more efficient, and as refiners have produced cleaner-burning diesels, said Patricia Monahan, deputy director for clean vehicles at the Union of Concerned Scientists in San Francisco.

"The jury is out as to which is cleaner," Ms. Monahan said, referring to natural gas compared with diesel. She added that natural gas is best used to replace coal for power generation and that alternative vehicles running on solar-generated electricity, renewable diesel or fuel cells would be superior to those fueled by natural gas.

"You have to do a big calculation about what's the best use for the fuel," Ms. Monahan said. "Ultimately we'd like to see zero-emission vehicles on the road -- fuel-cell vehicles or electric vehicles powered by renewable energy."

Write to Cassandra Sweet at cassandra.sweet@dowjones.com