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Propane battles natural gas for share of U.S. transport market

By Edward McAllister

NEW YORK (Reuters) - Last November, Nicholas Jackson, the transport chief responsible for Cleveland's school buses, found himself in the middle of a battle for business in the niche world of alternative fuels.

Tasked with replacing an aging fleet of diesel-powered buses and saving money, he had to choose the best fuel option for his fleet: either compressed natural gas (CNG), a cheap and clean option that powers fleets of buses and garbage trucks in cities from New York to Los Angeles; or propane, a less-used but simpler fuel that's been gaining in popularity.

He chose propane, and this month the city's Municipal School District finished taking delivery of 49 new propane-fuel buses. The new buses will save the school district about $95,000 a year in fuel costs, based on prices that are about 35 percent lower per gallon, easily offsetting the slightly better mileage diesel gets.

"There was some thought about natural gas," Jackson said, but the cost of building a CNG fueling station, which can top $1 million, and refitting his maintenance facilities with venting in case of a gas leak, proved too expensive. "We wanted to move down the propane route because it was easier to refuel and it was cheaper. Propane is the best alternative fuel to use right now."

Traditionally used to heat homes and fire up barbecues, propane used to be viewed as unlikely to contend with CNG for widespread vehicle use due to its relatively higher cost and the difficulties in transporting the fuel across country. Propane costs $2.43 a gallon on average at private refueling stations, compared to $1.80 for CNG and $3.74 for diesel, according to U.S. government data.

That's starting to change as the fracking energy boom spurs a surge in the production of liquid petroleum gas, including propane, and driving down prices. Propane is a by-product of oil and natural-gas drilling.

CNG and propane are increasingly going head to head for the same customers, including the 500,000-vehicle school bus market, the largest form of mass transit in the United States. Propane engine makers are winning over customers and one of the largest manufacturers, Roush Clean Tech of Livonia, Michigan, expects to sell about 6,500 engines this year, compared with about 4,000 in 2013.

"If you go into a meeting and say you can save 30 percent on your fuel bill, then people will listen," said Todd Mouw, a vice president of sales and marketing at Roush Clean Tech.

By offering free vehicle trials and factory tours, and connecting potential customers with a network of existing users, companies including Roush Clean Tech and bus maker Blue Bird are working on a grass-roots campaign to boost sales.

"Support for propane has been smaller, but propane is growing faster," said Phil Horlock, chief executive of Fort Valley, Georgia-based Blue Bird, which made the buses for the Cleveland schools. "The natural gas folks are threatened by that."

Among the companies threatened are Clean Energy Fuels, a natural gas fuel station provider backed by oil billionaire T. Boone Pickens, as well as CNG-powered truck makers such as Westport Innovations Inc, Cummins Inc and Navistar International Corp.

GARBAGE TRUCKS

To be sure, different alternative fuels typically target different vehicle types -- natural gas tends to dominate in heavier vehicles such as garbage trucks, and can be better for long-haul journeys because it's cheaper per gallon.

CNG has established itself as the alternative fuel of choice for many large fleets. For example, UPS and AT&T are moving their fleets over to natural gas with bulk purchases of new trucks. Waste Management, one of the largest residential recyclers in the United States with a fleet of 32,000 vehicles, is in the process of transferring its trucks over to natural gas and last year opened its 50th refueling station in Jackson, Mississippi.

New York City has a fleet of 2,000 CNG and hybrid powered buses, while Los Angeles began making the switch to CNG in 1995 and now has 2,200 CNG buses, the largest fleet of its kind in the country.

But the two fuels are increasingly overlapping. With most companies now well aware of the price advantage of switching away from diesel or gasoline, the marketing pitch is now more of a battle between alternative fuels.

Executives at Clean Energy Fuels in Newport Beach, California, which owns more than 500 fuelling stations that dispense CNG and liquefied natural gas (LNG), play down the competitive threat from propane -- while acknowledging its advances in markets such as buses.

In what sales vice president Peter Grace describes as "hand to hand combat," a team of more than 20 marketing employees are out on the streets, touting natural gas to whomever will listen.

EXPLOSION RISK

"Sure, we have to go out there and hustle customers," Grace said in an interview. He shows off a one-page sheet listing reasons why CNG is superior, including being cheaper, cleaner and less likely to explode. CNG is lighter than air and when it leaks dissipates in the air, unless it's inside; while propane is heavier than air and a leak results in the gas pooling on the floor or on the ground.

"Why would you want to use a fuel that is not as safe as CNG?" Grace said.

CNG's weak spot, propane proponents say, is the cost of building the stations necessary to dispense it - about $1 million. Propane refueling stations cost between $350,000 and $500,000, Jackson said. School buses running on propane also cost less - about $90,000 each, compared with about $150,000 for a CNG-powered bus.

Customers have also been swayed by the low-key style with which propane bus and engine makers have approached them, Mouw at Roush Clean Tech said.

"We do less chest pounding in the marketplace, but we put people in touch with other users and find that to be more effective," he said.

In Fort Lauderdale, Florida, Broward County Public Schools recently bought 98 propane-powered buses. It's about to buy 138 more, Mouw said.

As Broward considered the switch, Roush organized a trip to another school district that already ran its buses on propane. There they spoke with mechanics and the transport director to assess the advantages of propane.

"Propane was by far the most economical way to go," said Pat Snell, who runs fleet services for Broward. "I appreciated not having a hard sell. They gave me the numbers and let me make my own decision."

(Reporting By Edward McAllister, editing by Jonathan Leff and John Pickering)

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