Shippers getting on board with natural gas

By 2015, consumer products giant Procter & Gamble Co. (P&G) will use for-hire trucks running on compressed natural gas (CNG) over as much as 20 percent of its nationwide network, which currently stands at about 8,000 lanes. Earlier this year, P&G awarded contracts to 11 carriers to move the company’s products on natural gas across 25 states.

Home improvement powerhouse Lowe’s Companies Inc. plans to transition its dedicated fleet serving all of its regional distribution centers to natural gas from diesel by the end of 2017.

Industrial titan Owens Corning Corp., which has been one of the leaders in natural gas conversion for transport, forecasts using the energy source to run half its network miles by 2020.

Food behemoth General Mills Inc. plans to reduce its diesel fuel use by 35 percent over the next five years. General Mills is in the midst of a pilot program with trucker Dart Transit to use CNG-powered trucks on 63 of the shipper’s 7,500 U.S. lanes. Doug Watne, General Mills’ director of North American transportation, declined comment on how much diesel the company consumes annually other than to say, “too much.”

The four companies are at the vanguard of one of those rare transformative moments in transportation. Given that energy accounts for between 25 and 45 percent of a shipper’s overall product distribution costs, the growing abundance of low-cost, cleaner-burning natural gas is poised to change the transport calculus in a way not seen since deregulation in the early 1980s.

Shippers are taking serious looks at where natural gas works, where it does not, and how to forge relationships with their carriers to create the oft-sought yet elusive scenario: a win-win. Out of these efforts will come models driven by “new levels of collaboration between multiple shippers and multiple carriers,” predicts Patti M. Murdock, president of Clean Logistics Consulting, which is based in Cincinnati. Murdock created and ran P&G’s natural gas transportation strategy before retiring last January.

Because the natural gas fueling infrastructure, unlike diesel, is not well established, shippers have a unique opportunity to determine how their route systems will evolve, according to Douglas Mueller, president of Breakthrough Fuel, a Green Bay, Wis.-based transport energy advisory firm. As natural gas use becomes mainstream, “the shipper can become the anchor of a whole new infrastructure,” Mueller says.

NO EASY FEAT
But it will be easier said than done, experts said. Despite well-publicized efforts by energy baron T. Boone Pickens to eventually convert the nation’s entire truck fleet to natural gas, few expect that to happen. The future of a shipper’s energy world will likely resemble a composite of diesel and natural gas, with some biofuels thrown in. For those accustomed to working only with diesel, the addition of other sources will introduce a new level of complexity into the equation, experts say. There will be many lanes that, given their shipment characteristics, will still be best supported by diesel use.

A heavy-duty natural gas truck costs about $55,000 more than a comparable diesel vehicle due to the significant expense of the fuel tanks. Natural gas vehicles take longer to fill up than diesel trucks. In addition, the heavy tanks aboard a CNG-powered vehicle result in a reduction in payload of between 600 and 3,000 pounds; shippers of high-cube, lighter-weighted goods will be less affected by this issue than will shippers moving heavier consignments, according to Murdock.

CNG has become by far the dominant natural gas newbuild, with about 96 percent of new order market share, according to truck manufacturers. CNG, which is used by truckers for short distances of up to 300 miles, is cheaper and easier to manage than liquefied natural gas, or LNG, which must be transported to refueling locations. CNG needs pipelines to act as the delivery mechanism; CNG advocates said there is no shortage of nationwide pipeline capacity.

Though many fleets are testing the viability of natural gas vehicles, there remains considerable reluctance to take the plunge. Truckers already confronting compressed margins due to higher operating expenses and stubbornly subpar freight demand are concerned that tank and engine technology is not sufficiently proven to justify the costs. They also worry about whether the expensive equipment will retain its value.

It all boils down to the time required for a return on the investment, said Donald Broughton, transport analyst and chief market strategist for Avondale Partners, an investment firm. “If it pays for itself in 18 months, [fleets] will buy without testing,” he said. “If it doesn’t, they will continue to test, and test, and test.”

Shippers relying on natural gas fleets will need to be “surgical,” in Murdock’s words, about how they segment their freight and lanes. Dedicated moves, where a shipper commits to a specific number of round-trip miles in return for committed capacity, will have to reach specific mileage thresholds for carriers to justify deploying a natural gas vehicle. Private fleets, which operate round-trips on closed-loop routes, may have an easier time of it than companies like P&G, which will use a for-hire network operating over irregular, one-way routes and could have difficulty coping with a still-underdeveloped refueling infrastructure.

For its part, P&G is using the same “key performance indicators” (KPIs) to measure the performance of its natural gas operators as it does with its diesel-powered partners, according to Nancy Getter, who today heads the company’s natural gas program. Getter spoke at the Council of Supply Chain Management Professionals’ annual meeting in October but was unavailable to elaborate on P&G’s strategy.

Fuel-usage decisions will be based on the level of volume density and miles driven, the type of truck move (whether it be for-hire, private fleet, or dedicated), and how a shipper-carrier contract is constructed to align a shipper’s objectives with a carrier’s need to achieve a suitable return on its equipment investment. Most experts say longer-term contracts will become the norm as carriers demand incentives, in the form of committed traffic flows, to justify the investment; another option is for a shipper to pay a higher base rate to offset a carrier’s equipment costs, while agreeing to share in the fuel surcharge savings. No one projects a scenario where shippers subsidize a carrier’s equipment purchases.

LOOK BEFORE YOU LEAP
Experts caution shippers not to jump blindly into the natural gas pool with the belief that it is the panacea for all their energy-related challenges. Mueller of Breakthrough Fuel said shippers need a good dose of education on all aspects of natural gas transport and should begin with a pilot in order to gain real-world experience. Mueller says he’s seen projects start with little forethought and no transparency between the parties over cost structure, with predictably bad results.

Above all, it takes a commitment to natural gas from both sides, even if it means the chance of parting ways with core carriers not willing to make the leap. “You have to align with partners that have the passion for it and a long-term plan,” said Getter of P&G. Watne of General Mills added that “you don’t want to force carriers” to migrate to natural gas services if it is not something they want to do.

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