Liquefied natural gas (LNG) carries the potential to displace diesel as cheaper and cleaner fuel for trucks and buses. With IFC’s help, China is leading the transportation sector into the Age of Gas.
China’s rapid economic rise has come at a cost: pollution. As the world’s largest emitter of carbon dioxide — as well as air pollutants such as sulfur dioxide and nitrogen oxide — China has made transitioning to renewables and natural gas a key priority in achieving a more sustainable economy.
With challenge comes opportunity, and China has shown some leadership in moving toward a low-carbon future, becoming the world’s top renewables producer and clean energy investor. When it comes to the transportation sector, which accounts for more than 40 percent of China’s oil consumption, the country is also pioneering the development of a natural gas-powered trucking and busing system.
With cost and technology considerations putting renewable energy-powered transportation out of reach in the near term, natural gas represents a significant improvement over diesel fuel — emitting 30 percent less greenhouse gas and 95 percent less PM2.5 pollution, the small particles considered the greatest risk to health. It’s also cheaper, saving Chinese drivers between 30 percent and 40 percent on fuel.
“We see natural gas as an important transitional fuel away from oil-based fossil fuels, because natural gas is both cleaner and cheaper,” says Michael Lin Sheng, who leads the Asia oil and gas team for International Finance Corporation (IFC), a member of the World Bank Group that works with the private sector to support global development. “However, one of the challenges of expanding access to natural gas as a transport fuel has historically been the need for associated infrastructure, including pipeline networks.”
One solution that China, Europe, the U.S. and other countries are turning their attention to is liquefied natural gas (LNG), a liquid form of natural gas that is more cost efficient to transport over long distances through cryogenic vessels or road tankers to markets where pipelines do not exist. With increased fungibility and the independence from pipelines, natural gas (in the form of LNG) has become a viable, cleaner and competitive transport fuel to replace diesel, particularly in the heavy-duty trucking and long-haul busing sector.
Yet developing an LNG-based transport fuel marketcarries its own challenges, especially in building a network of fueling stations to ensure the supply of LNG, when most of the trucks and buses on the road are powered by diesel or gasoline engines.
It’s a classic “chicken and egg” dilemma — the transport industry doesn’t want to convert to LNG without a secure and accessible supply, while the energy sector is hesitant to invest in infrastructure like fueling stations without clear demand, says Sheng.
That’s where the IFC comes in, providing financing and expertise to ease some of the first-mover risk of developing China’s LNG transport system. In 2013, the development institution provided a $150 million in financing to ENN Energy Holdings Limited., a leading gas distributor in China, to help develop an LNG fueling network to provide LNG as a transport fuel to replace diesel along China’s major highways.
“IFC is here to support private sector companies to try to break the chicken-and-egg cycle,” says Sheng. “Our investment was meant to encourage private-sector players, like ENN, to take the first mover advantage in the LNG refueling sector, which we hope would eventually stimulate a broad conversion (from diesel) to natural gas. This will bring huge social and environment benefit to China.”
Through the investment, IFC is also demonstrating to the rest of the world the potential of bringing the transportation sector into the Age of Gas, to capitalize on the benefits of cleaner and less expensive fuel options. Global gas demand, which currently amounts to about 70 percent of the oil market, could grow to match or even surpass the market share of oil and coal as the world’s primary source of energy by 2025.
The global market for natural gas vehicles is small but growing, expanding at an annual rate of 15 percent since 2008 to reach about 16 million — about 1 percent of the world’s automotive fleet — though only a million of those are buses and heavy-duty vehicles, which are more likely to be fueled by LNG. Cars and light-duty trucks are typically powered by compressed natural gas (CNG), a less dense fuel better suited for light vehicles in urban settings.
From an environmental perspective, the world’s natural gas vehicles are already displacing about 1.5 million barrels a day of oil that would have been used for gasoline or diesel, according to Morgan Stanley. That number could double — or even grow by another 5.6 million barrels a day, equivalent to China’s oil imports — by 2021, depending on whether there’s sufficient infrastructure and capital in place to achieve economies of scale.
That’s what IFC is seeking to achieve in China, a country that has emerged as leader in utilizing LNG as a transport fuel — with more than 100,000 LNG powered vehicles on the road in 2014. “China started late, but is catching up very quickly and passing the rest of the world in making LNG available as a transport fuel,” says Sheng.
The number of LNG fueling stations are also expanding rapidly. At the end of 2012, China already had more than 700 stations, while the U.S. and Europe had less than 50 each. By the end of this year, China’s LNG fueling network is expected to expand to 3,500 stations, from less than 2,000 in 2014, while LNG usage as transport fuel is forecast to grow by 30 to 40 percent a year over the next five years,” says Sheng. “Globally, there’s nowhere that’s comparable to what’s happening in China.”
Indeed, ENN Energy is taking the first-mover advantage to expand internationally, building LNG fueling stations in the U.S. and Europe. Sheng expects that to enable a broad adoption of LNG as a major transport fuel, government support and regulations would be key.
Europe is moving aggressively to support the development of its own LNG transport infrastructure, recently adopting a set of rules that would build a core network by 2025 with fueling stations every 400 kilometers. “Alternative fuels are key to improving the security of energy supply, reducing the impact of transport on the environment and boosting EU competitiveness,” Siim Kallas, the EU transport commissioner, said in announcing the rules. “With these new rules, the EU provides long-awaited legal certainty for companies to start investing, and the possibility for economies of scale.”
The U.S. has been slower to adapt, despite enjoying the benefits of a shale gas boom. With an initial investment of $100 million, a profitable LNG fueling network could be launched along California’s high-volume I-5 trucking corridor to help kickstart infrastructure development, according to a recent study by the Institute of Transportation Studies at the University of California Davis and Rice University.
“The U.S. is probably the most ideal place to use gas to replace diesel, because gas is so cheap,” says Sheng. He expects the transition to LNG as transport fuel will pick up elsewhere around the world as policy makers start to recognize the environmental benefits.
“The age of natural gas is coming,” he says, “and more and more people are becoming aware of that.”
(Top image: Courtesy of David McNew/Getty Images)