CHINA: SMOG VS GAS

Powering vehicles with natural gas, a cleaner alternative to diesel fuel and gasoline, is catching on faster in China than in any other nation as President Xi Jinping seeks to reduce smog.

About 3.8 million cars, trucks and buses in China, the world's biggest energy consumer and emitter of greenhouse gases, will be filling up with compressed or liquefied natural gas by 2020, according to Bloomberg New Energy Finance. That's almost double the current number, making Asia's largest economy the fastest-growing market.

The emergence of natural gas as a motor fuel emitting 32 percent less than diesel is buttressed by China's network of almost 4,900 refueling stations and a $400 billion gas import deal with Russia. The fuel is also about 30 percent cheaper than its diesel equivalent as LNG trades at a three-year-low in Asia. Chinese Premier Li Keqiang has promised to ban dirtier vehicles as smog in the capital, Beijing, increasingly exceeds World Health Organization limits and forces residents to don masks outdoors.

"Natural gas vehicles have significant growth potential in China because they're more economical than conventional models and because the government is committed to fighting pollution," Ricky Wang, an analyst at ICIS-C1 Energy, a Shanghai-based commodity consultant, said by phone on July 1. "Gas demand from the transport sector is booming."

India, Pakistan and Iran are among other fast-growing markets for natural gas-powered vehicles, said Tony Regan, founder of Tri-Zen International Inc., a Singapore-based consultant with clients including Royal Dutch Shell Plc and OAO Lukoil. The U.S., enjoying a rising supply of low-cost natural gas because of the boom in hydraulic fracturing, or fracking, was one of the first to use LNG as a truck fuel.

Heeding Demands

In China, leaders are starting to heed demands for cleaner air in the nation, which the World Bank estimates has 16 of the planet's 20 most-polluted cities.

Exposure to PM2.5 pollution, the small particles that pose the greatest risk to human health, contributed to an estimated 8,572 premature deaths in Beijing, Shanghai, Guangzhou and Xi'an in 2012 and more than $1 billion of economic losses, according to a study by Greenpeace and Peking University's School of Public Health.

China is now the largest and fastest-growing market for LNG used in trucking, Regan said. By 2015, 220,000 heavy trucks and 40,000 buses in China are expected to run on LNG, he said in an e-mail July 2.

LNG Alternative

"While natural gas has been used as a fuel for vehicles since the 1930s, this was mainly for cars and taxis," Regan said. "CNG was the first way to use gas as a motor fuel, but there is growing awareness of how much cheaper LNG is than diesel and how suitable that is to fuel trucks, trains and buses."

Even so, China's ability to switch drivers to natural gas will be constrained. The country is far behind the U.S. in using fracking to expand domestic production of gas. In the U.S., the technology has unlocked natural gas trapped in formations like the Marcellus shale. China's electricity makers also are competing for gas to replace coal, meaning the nation will face a long-term shortage, according to Charlie Cao, a Beijing-based analyst at New Energy Finance.

"The lack of fueling infrastructure has been the single largest constraint to the natural gas vehicle market," Cao said. "Drivers have to compete for already limited gas supplies, especially in the peak heating season, when the tight gas flows are prioritized for residential use."

China will have 200 million vehicles running on all types of fuel by 2020, according to the China Association of Automobile Manufacturers. That means natural gas will fuel only about 2 percent of the total even as the use of gas surges.

Compressed Gas

Compressed natural gas, or CNG, currently dominates China's market and accounts for 97 percent of vehicles running on natural gas, Cao said. LNG has a smaller share in transport because of higher costs for liquefaction and a shortage of infrastructure for deliveries.

Still, transportation is forecast to surpass manufacturing as China's biggest downstream consumer of LNG by 2016, Gordon Kwan, the regional head of oil and gas research at Nomura Holdings Inc. (8604) in Hong Kong, said in an e-mail last month.

China's LNG-powered fleet will more than double to 180,000 vehicles and use 5.3 million metric tons for a 40 percent share of LNG consumption by 2016, Kwan said.

"Natural gas vehicles are more economically attractive and technically mature than other new-energy vehicles," Cao said. "Electric or hybrid vehicles, for example, still requires government subsidies to compete with the gasoline and diesel-fueled passenger vehicles. Building the gas fueling stations is also less capital-intensive than the charging networks."

Filling Stations

While China is struggling to keep up with demand, it had 51 percent more natural gas refueling stations at the end of 2013 than the year before, ICIS-C1's Wang said. She expects about 6,000 natural gas pumps at the end of 2014, up 24 percent from last year.

China National Offshore Oil Corp., the nation's biggest operator of LNG receiving terminals, plans to triple its filling stations supplying the fuel to 400 this year. China will have more than 12,000 such stations by 2020, with Cnooc taking 20 percent of market share, it said on April 2.

Shaanxi Automobile Group, western China's largest truck maker, and Dongfeng Yangste Motor Co., the region's biggest bus manufacturer, are among those producing natural gas vehicles that are outwardly indistinguishable from conventional models.

Gas Deal

China signed a 30-year deal in May to import natural gas from Russia through a new pipeline. The agreement with OAO Gazprom, Russia's pipeline-gas monopoly, is forecast to provide 38 billion cubic meters of gas annually, according to Alexey Miller, Gazprom's chief executive officer. China is set to increase imports via Turkmenistan as well.

LNG costs 30 percent less than China III-standard diesel as of May this year, according to ICIS-C1 Energy.

LNG in northeast Asia dropped in the week ended June 30 to $11.25 per million British thermal units, the lowest price since March 2011, New York-based Energy Intelligence Group said on its World Gas Intelligence website. Prices for August delivery may decline next week as more spot cargoes are offered, according to three traders surveyed by Bloomberg.

Switching from diesel to natural gas for trucks and buses can pay for itself after 12 to 15 months and it saves 686,000 yuan over a lifetime of 10 years, Cao said.

"The growth of gas in the transportation sector is expected to be significantly faster for the foreseeable future," said Thomas Chhoa, Shell's Singapore-based general manager for Global LNG to transport. "Natural gas for mobility is widely available, cleaner burning than other conventional transportation fuels, cost competitive and technically ready," he said in a webcast hosted by the company in April.

bloomberg.com