When Ryder Systems Inc.’s Southern California office bought a fleet of 200 natural gas-fueled trucks last May, it hoped to use them to win contracts with big companies interested in burnishing their green credentials.

And it soon signed deals with El Segundo grocery store chain Fresh & Easy Neighborhood Market Inc. and Framingham, Mass., office supply chain Staples Inc., companies that touted the benefits of using lower-carbon fuel for their L.A. deliveries.

Natural gas trucks cost from $50,000 to $100,000 more than diesel trucks, but Ryder wasn’t worried: It was able to get $19 million in state and federal grant funds to help pay for the trucks, which use compressed natural gas, or CNG, making them almost certainly a good deal.

But now with the average price of diesel fuel above $4.50 a gallon – between $1.50 and $1.70 more expensive than a so-called diesel gallon equivalent of natural gas – Ryder executives say the natural gas trucks are close to being competitive even without subsidies.

“There have always been companies on the leading edge, interested in natural gas as part of their sustainability initiatives,” said Scott Perry, vice president of supply management for Miami-based Ryder. “But now with the spread in diesel and natural gas prices … we’re not quite to the point where buying these natural gas vehicles without incentives is an absolute no-brainer, but we’re making progress.”

Thanks to government mandates, natural gas has been used for years in buses, trash trucks and government vehicles. And through subsidies offered by the clean air programs at the ports of Los Angeles and Long Beach, the number of natural gas trucks used in harbor trucking has nearly doubled in the past two years to 877, representing 9 percent of all harbor trucks.

Now, with new drilling techniques beefing up domestic supplies, natural gas prices have hit a 10-year low and the trucking industry is anticipating a future without subsidies. Until now, most truck buyers have received subsidies worth as much as $100,000 per truck, but many of those federal, state and local programs have either expired or are running out of money.

However, with both types of natural gas fuel – CNG and liquefied natural gas, or LNG – now selling for $3 or less per diesel gallon equivalent in Southern California, it’s not clear they are needed.

For a truck that would otherwise use 10,000 gallons of diesel annually, natural gas represents a savings of $15,000 or more. That’s spurring national carriers such as Ryder, Salt Lake City’s C.R. England Trucking and Omaha, Neb.’s Werner Enterprises to test out natural gas trucks in Southern California to see how estimated fuel savings really add up. They also are curious to see if the trucks can work on long hauls, given the relative scarcity of fueling stations.

“We want to make sure there’s an infrastructure there to support us and make sure it makes sense. We’re moving very slowly,” said Tracy Brown, director of dedicated operations for C.R. England.

Doing the math

To take advantage of today’s low natural gas prices, trucking companies must invest in trucks that without subsidies sell for much more than comparable diesel models.

Bob Fry, fleet sales manager at the Montebello office of truck dealership Inland Kenworth, said a 475 horsepower natural gas engine from Vancouver, British Columbia’s Westport Innovations Inc. costs about $100,000 more than a similarly sized diesel. A 320 horsepower natural gas engine from Westport joint venture Cummins Westport Inc. costs about $30,000 more than a diesel, but it doesn’t come with fuel tanks or a fuel system. That system can cost $15,000 for LNG and $20,000 for CNG.

CNG is more widely available than LNG, with about 75 CNG stations in the L.A. area and just 16 for LNG. But LNG is a better choice for long-distance trucking because it is a denser fuel and can be carried in smaller tanks. The decision for carriers, then, is whether the savings on fuel is worth the extra up-front investment without subsidies.

“That’s really the question of the day: Is this going to be able to be self-sustaining or will it only have traction with grant funding?” said Mark Drinkwater, chief executive of startup Riverside trucking firm Glacier Transportation LLC., which plans to run an all natural gas fleet. “I think there will come a time when this will be self-sustaining.”

Glacier this year signed a deal with Cincinnati’s Sunny Delight Beverages Co. to haul its juice drinks from a plant in Anaheim to distribution centers across Southern California. Like most companies operating natural gas trucks, Glacier received subsidies, specifically a $30,000-per-truck discount through a Department of Energy grant.

With those grants, Fry, who sold the trucks to Glacier, said the trucks were still about $20,000 more expensive than comparable diesel models.

But Drinkwater said he would have bought the trucks even without the subsidies because the fuel savings would pay back the price difference in five years or so. He has a deal with Seal Beach natural gas provider Clean Energy Fuels Corp. to buy CNG below retail and now pays about $2.50 per diesel gallon equivalent, a discount of about $2 compared with diesel.

Driving about 40,000 miles per year and getting 4.3 miles per diesel gallon equivalent, each truck will use about 9,300 diesel gallon equivalents of CNG each year. If the spread between diesel and Glacier’s CNG stays at just $1.50, that’s a yearly savings of nearly $14,000.

“We believe it’s economically viable. The money you save over that (five-year) period will be pretty much a break-even point,” Drinkwater said.

Fueling growth

While Drinkwater sees a payout without subsidies even in local short-haul trucking, Ryder officials aren’t so sure. The company’s $19 million grant that subsidized its local fleet of 200 trucks works out to $95,000 per vehicle. It’s a substantial figure, though some money was used to build fueling infrastructure.

Perry, the Ryder vice president, said it took the subsidies to ensure the local fleet would pay off. Because the trucks are used on short routes and use little fuel compared with long-haul trucks, the fuel savings add up more slowly.

“We’re more limited to the L.A. basin and low-mileage operations,” he said. “And that’s still hard to do without incentives.”

However, he and others believe LNG trucks are a good bet on long-haul routes, where trucks rack up 100,000 or more miles per year and would use 20,000 or more diesel gallon equivalents of natural gas. That could mean fuel savings of $30,000 or more annually given today’s prices.

But LNG stations are few and far between: After leaving the L.A. basin, there are LNG stations in Barstow and Redlands, but only one public station each in Arizona, Nevada and Utah, according to the Department of Energy.

Still, a few companies are trying longer hauls with LNG trucks. For six months, C.R. England has been using five LNG trucks on runs between Ontario and Las Vegas, but the company had to work with Clean Energy to build a fueling stations in Las Vegas so its trucks could make the nearly 500-mile round trip.

“You have to consider the availability of fuel. Right now, from a regional perspective, natural gas makes sense. But from the long-haul (national) perspective, we’re nowhere near being ready to test something like that,” said C.R. England’s Brown, who declined to disclose the purchase price or price difference for the trucks.

So natural gas suppliers see opportunity in long-haul trucking. The area’s two regional suppliers, Clean Energy and Applied Natural Gas Fuels Inc. in Westlake Village, have plans to open more LNG stations along major trucking routes nationwide.

“We’re starting to see LNG in long-haul operations, and that’s where the industry wants to be,” said Scott Johns, vice president of sales for Applied Natural Gas, which has its own stations and wholesales to other fueling operations such as Speedy Fuel Inc. in Long Beach, where LNG trucks from the port often fill up.

“Companies are going to start seeing more infrastructure in more locations. When those come into play, obviously it’s going to help out,” he said.

The company has already set up fueling stations near Palm Springs and the Salton Sea in the Coachella Valley for medium-haul truckers bringing products into Los Angeles, and it now plans to build stations in Arizona and Utah.

Clean Energy, a company part owned by Texas oilman T. Boone Pickens, has similar plans, though on a more massive scale. With the help of a $150 million investment from Oklahoma City natural gas giant Chesapeake Energy Corp., the company this year plans to open 70 LNG stations linking Los Angeles, Houston, Chicago, Atlanta and other cities. It plans to open 80 more stations next year.

Holding back

Still, many companies say they don’t plan to buy more natural gas trucks without subsidies. Atlanta-based United Parcel Service Inc. last year bought 48 natural gas trucks with the help of a $4 million federal stimulus grant – a subsidy worth more than $83,000 per truck. But with federal money running out, a UPS executive told the Wall Street Journal that the company wouldn’t purchase unsubsidized trucks.

That could be posturing as companies push for further federal help. But Mark Hanson, an equity analyst for oil and gas at Morningstar Investment Services in Chicago, said companies might be legitimately concerned that despite today’s low natural gas price, increases could be on the way.

Chemical and fertilizer manufacturers use huge amounts of natural gas, and utility companies are switching from coal and oil for power generation. Add in the possibility of U.S. natural gas being sold abroad – several companies are seeking federal approval to build export facilities – and Hanson said the market can heat up fast.

“Very quickly the marketplace reverses and you go from oversupply to conditions that become tight pretty quick,” he said. “If it’s going to take you longer than six to 12 months to pay back the capital expense (of a natural gas truck), how certain are you that the price is going to stay low?”