T. Boone Pickens didn't reach the top of the heap in the energy world by thinking small. His first major acquisition, in the late 1960s, was of a company 30 times the size of his own firm, Mesa Petroleum. Years later, Mesa would make takeover runs at such oil giants as Cities Service Co. and Phillips Petroleum, moves that cemented Pickens' reputation as a gutsy and shrewd wheeler-dealer.
Pickens, 84, is not about to change his stripes. Instead he has embarked on what might be the most ambitious initiative of a very ambitious career: converting the nation's heavy- duty truck fleet of 8 million vehicles from diesel fuel to natural gas.
Pickens will speak Oct. 2 on the second day of the Council of Supply Chain Management Professionals Annual Global Conference in Atlanta. DC Velocity and its sister publication CSCMP's Supply Chain Quarterly recently obtained an interview with Pickens. (The full Q&A with Pickens will appear in the September issue of DC Velocity and the Quarter 3 issue of the Quarterly.)
PICKENS' VISION
By Pickens' estimate, large, heavy-duty trucks burn the equivalent of 3 million barrels of oil each day. Given that
the U.S. imports about 4.4 million barrels a day from the Organization of Petroleum Exporting Countries (OPEC), switching
the nation's big rigs from oil-powered diesel to domestically produced natural gas would "knock out 70 percent of OPEC oil,"
he said.
Pickens believes that it's just a matter of time for the nation's truckers to switch to natural gas, an abundant, clean-burning, relatively inexpensive fuel source produced entirely in North America. He wouldn't fix a time frame on the conversion, but recalled that it took about six years for truck fleets to shift from gasoline to diesel fuel in the early to mid-1970s.
The Dallas-based energy baron knows better than anyone that pricing will drive decisions to convert fuel sources. As of Monday, natural gas prices stood at $2.76 per million British thermal units (BTUs), and the average gallon of diesel fuel sold at slightly less than $3.67, according to the Department of Energy's Energy Information Administration.
Natural gas supplies in the U.S. have remained plentiful due to a mild North American winter that depressed energy demand and an increase in domestic exploration and development that has triggered large new discoveries of gas inventories. However, prices have gradually moved up from a low of below $2 per million BTUs as producers cut back on development efforts because current market prices for natural gas don't justify the investment.
Meanwhile, diesel prices have fallen substantially as they have tracked the downturn in oil prices from $110 a barrel to about $79. As a result, the gap between natural gas and oil prices is narrower than it has been in months. Based on current prices, it would cost about $2.90 a diesel equivalent gallon for liquefied natural gas (LNG) and about 70 cents a gallon less for compressed natural gas (CNG), a heavier form of gas that is not well suited for longer-haul truck services because it weighs down equipment already laden with cargo, thus increasing a carrier's costs.
Pickens projected that, a year from now, natural gas prices will trade in the $3.50 to $4.00 per million BTU range. Prices will need to reach about $5 per million BTUs, and stay around there, to make it economically feasible for producers to resume full-bore production efforts, he said. Still, oil prices could easily begin trending higher again.
Additionally, argues Pickens, it would be unwise for the United States to continue to rely on unfriendly countries and politically unstable governments for its energy.
Citing a study from The Milken Institute that, between 1978 and 2010, the U.S. spent $7 trillion on Mideast oil, Pickens said a large portion of that tab went for military expenditures to protect key shipping lanes in the region. Pickens added that in the last 10 years, $1 trillion of U.S. wealth has been transferred to OPEC nations, and that if oil prices average $100 a barrel over the next 10 years, the nation will fork over an additional $2.2 trillion. "That is unsustainable," he said.
INFRASTRUCTURE CHALLENGE
In addition to price, another key challenge facing the switch to natural gas is building the national
infrastructure that would allow truckers who are hauling goods 400 miles to fill up either with LNG or
CNG. Clean Energy Fuels, a Seal Beach, Calif.-based provider of natural gas for transportation, plans to construct natural
gas fill-up lanes at as many as 150 facilities owned by Pilot/Flying J, the Knoxville, Tenn.-based truck stop giant, by the
end of 2013. Pickens sits on Clean Energy's board.
Earlier this month, Houston-based Shell Oil Co. and Westlake, Ohio-based TravelCenters of America LLC (TA) signed a tentative agreement to build and operate LNG fueling lanes for heavy-duty rigs at about 100 of TA's 238 nationwide fueling centers.
Pickens said government help isn't needed to establish the fueling infrastructure. The expected fuel savings from converting to natural gas should serve as an incentive for the private sector to do the job, he said. Instead, he strongly called on Washington to provide subsidies—in the form of tax credits—to offset the higher cost of buying a natural gas-powered vehicle, which requires a larger engine than is found in a diesel-powered truck.
The cost differential between diesel and gas-powered rigs will "be there for a while" because of the larger truck engines, Pickens said. Eventually, critical mass of demand for gas-powered engines will reduce that gap, he added. The issuance of tax credits would "hurry the process along," he said.
Some natural gas producers, frustrated with low selling prices in the U.S., are pushing to obtain permits from the U.S. government to export the commodity overseas, where prices are seven to nine times higher, depending on the country.
Unlike some others, Pickens doesn't support a ban or quota on natural gas exports as a means of keeping the cheap, abundant fuel in domestic hands. "I'm not big on that idea," he said. "I think what should be done is to increase the demand in the United States and to take advantage of it."
Pickens said he sympathizes with producers who are trying to tap into a lucrative global market for their products. "I understand it very well..." he said. "You have to give your producers a chance to get a getter price. And you have to develop demand in the U.S."
Pickens' push to power the nation's truck fleet with natural gas sprung from his now-famous 2008 "Pickens Plan," the centerpiece of which called for wind power to replace natural gas as a main energy source, with natural gas primarily becoming a transportation fuel. The program got significant coverage when oil prices spiked to record highs in mid-2008, but fell off the radar when prices collapsed during the 2008-09 recession.
Pickens said he has not given up on the concept. However, he noted that pricing for wind power is based on prices for natural gas, and in a period of low natural gas prices, wind power is an unattractive investment. "When you get below $6 [per million BTUs] you can't finance a wind deal," he said. "When natural gas gets above $6, you can use wind."
Gartner, Inc.