Interview with Erik Neandross (CEO of Gladstein, Neandross & Associates)

   CEO of Santa Monica, Calif.-based consultancy Gladstein, Neandross & Associates, Erik Neandross spoke recently with DC Velocity Senior Editor Mark B. Solomon about the benefits of natural gas conversion, the challenges, and what carriers, shippers, and private fleets need to do to make it all work.


Your company made its name working with for-hire carriers. In recent years, you've expanded into working with private fleets. Are there differences in how the two sides think about this issue?


   Both sides have the same goal, which is to create mutual benefits in terms of cost savings. However, carriers shoulder a great deal of risk because they must make alternative-fuel vehicles fit a variety of routes for different shippers. It is difficult to find the necessary fueling infrastructure on all routes. To address those issues, we work with multiple shippers to consolidate regions where natural gas transportation is desired to make it easier for carriers to provide services.


There are many shippers that can't justify private fleets but that would still benefit from the cost savings derived through natural gas conversion. Are they in a position to influence decisions by carriers to invest in natural gas-powered fleets?


   It's not a question of shippers being unable to afford the conversion; it's that they prefer not to manage the operation of a private fleet and would rather contract it out. The trick is to fine-tune a project so that the incremental investment necessary to acquire more expensive natural gas trucks and infrastructure is shared between the carrier and shipper. Our task is to make that financial equation work.


We've attended conferences and trade shows where liquefied natural gas (LNG) and compressed natural gas (CNG) vendors spent time debating which technology is superior and why. Does this confuse the issue for users?


   Yes. The debate creates a lot of confusion for both shippers and carriers, and for the market as a whole. You need to find the right combination of factors to determine whether LNG or CNG is a better fit. It ultimately can be boiled down to an economic analysis.

   Shippers have become savvy about the various technologies and have started to become agnostic on fuel choice. In some areas or applications, that choice might be LNG, but it is leaning toward CNG in a growing number of scenarios.


What do private fleets need to understand about the economics of conversion before exploring such a move? Are there metrics or benchmarks they need to meet before determining this is right for them?


   Regardless of which fuel you choose, NGVs (natural gas vehicles) have a significant capital cost compared with diesel-powered vehicles. The incremental cost needs to be paid back through lower fuel costs. Each fleet must look at how much fuel it burns per vehicle to determine if the savings will cover the incremental cost of the vehicles in an acceptable timeframe. Some heavy-duty fleets simply don't use enough fuel per vehicle to meet their own investment hurdle rates. They will have a difficult time making the switch.


What was the biggest challenge your company faced in convincing shippers to make the switch?


   Our biggest challenges have been convincing shippers that the payback is there and the long-term savings do exist, as well as convincing them that the infrastructure and technology are available to suit their needs. With the proliferation of blue-chip fleets entering the market, the convincing is getting easier.


What did you learn from the Frito-Lay project's development and implementation that could be useful for other fleets considering a similar move?


   What we learned from the Frito-Lay project is that large fleets can really help spur the development of the industry by "anchoring" large public fueling stations. These anchor tenant arrangements are good for the anchor fleets and help the fuel station builders develop projects they might not be able to build on their own on spec. This helps the other heavy-duty fleets in a given area that are also looking for low-cost and accessible fueling stations.


Until recently, it was diesel or nothing. Diesel will remain a key energy source even as natural gas use ramps up. Do fleets face more complexity in their decision-making with an alternate fuel source? If so, what is your best advice as to whether to go with diesel or natural gas?


   While natural gas fueling infrastructure is still a complicating wrinkle in the story, the difficulty in caring for advanced diesel after-treatment systems has made many fleets more willing to trade off the complexities between diesel and natural gas. Where the economics dominate in high fuel use fleets, it really begins to become a no-brainer for natural gas. Without high fuel usage, which will drive the return on incremental capital, today's NGV incremental costs—which we expect to decline as the industry grows—will keep some fleets with diesel.


Your company has its finger in the public policy pie. Do you believe there should be federal and/or state subsidies to encourage fleet investment and/or infrastructure buildouts?


   There is room for funding for high-volume fuel stations that provide support for a developing market. There is also room for some funding of high-volume fuel users because high initial capital costs are still prohibitive for fleets that might be cash constrained. With additional vehicles being built, the cost of all components tends to drop. This helps stimulate the larger industry. Once the public infrastructure is there, it will be easier for owner/operators to make the switch. However, we need to see a decrease in vehicle incremental costs before we'll see these smaller operators enter the market.


The cold weather this winter led to a significant drawdown of natural gas inventories and a corresponding rise in prices. People who may have grown accustomed to prices only declining saw that they could also rise. If market price patterns become more volatile, will that dull the industry's appetite for conversion?


   Recent price spikes for natural gas on the spot market are unlikely to have much effect on the cost of compressed natural gas for vehicles. The situation is isolated to the Northeast and Midwest due to pipeline congestion issues from winter cold spells. If these price increases were due to fundamental shortages of natural gas in the U.S., we'd see similar dramatic increases in other regions.

   As for CNG, most sourced gas comes from local utilities and often under a long-term contract. The bottom line is that this is a short-term price spike that won't significantly affect customers with long-term fuel price contracts or who purchase gas through local utilities.


What can shippers do—either in word or deed—to facilitate or expedite the conversion?


   Both parties must have an honest dialogue to determine where a project can be successfully implemented. It will also take attention and focus by both sides to figure out how to make a project work. Issues such as backhauls, appropriate fueling infrastructure, and contractual terms need to be thoroughly reviewed and addressed.


By Mark B. Solomon

The DC Velocity Q & A

March 24, 2014