Dwindling output from conventional plays elevated US natural gas prices from 2003-08, prompting independent operators such as Chesapeake Energy Corp (NYSE: CHK) to invest heavily in efforts to advance technologies and techniques that would make shale-gas production a commercially viable enterprise.

As I discussed in Asian LNG Demand and North American Exports, their success has transformed the US from a country that was expected to depend heavily on imports of liquefied natural gas (LNG) into the world’s top producer of the commodity. 

Superior economics and leasehold drilling have accelerated activity in many of the nation’s top shale plays despite depressed natural gas prices. Although the oversupply should abate a bit once producers’ leases are “held by production,” low natural gas prices and the sheer abundance of the country’s reserves have prompted producers to push for new demand outlets.

Fuel switching at power plants with the capability to burn either coal or natural gas has picked up over the past year thanks to low natural gas prices, while concerns about limits on carbon emissions are prompting many utilities to close coal-fired facilities or convert them to cleaner-burning natural gas.

The US Energy Information Administration forecasts that coal-burning facilities, which accounted for 18 percent of new capacity in 2009, will decline to 10 percent of new builds in 2013. Meanwhile, natural gas-fired plants are expected to account for 82 percent of new capacity in 2013, up from 42 percent in 2009.

Interest in fuel switching has also hit the US transportation sector, where concerns about the country’s dependence on foreign oil and carbon-dioxide emissions have picked up. Energy magnate T. Boone Pickens has played a key role in raising public awareness about America’s massive natural gas reserves and the benefits of natural gas vehicles (NGV), sinking $58 million into an elaborate advertising campaign.

The National Gas Vehicle Coalition (NGVC) estimates that 110,000 NGVs are on the road in the US and about 1,000 fueling stations, roughly half of which are open to the public.

To date, limited fueling options have restricted interest in NGVs to trucks, buses and other vehicles that run predictable routes.

According to the American Public Transit Association, transit buses accounted for 66 percent of vehicular natural gas use in 2009, while 26 percent of new bus orders that year were for NGVs. About 18 percent of the nation’s buses run on natural gas. Not surprisingly, NGVs are also big in the waste management industry, which the NGVC says accounts for 11 percent of vehicular natural gas use.

Other industries are making the switch as well. Last year telecom giant AT&T (NYSE: T) announced that it would spend up to $350 million over five years to purchase more than 8,000 vans that it will convert to run on compressed natural gas. Such investments not only reduce fuel costs and lower greenhouse gas emissions by 20 to 30 percent, but also make for a good public relations story.

On the consumer side, Honda’s natural gas-powered version of the Civic is available in only four states, though individuals can also convert existing gasoline-powered cars to natural gas using a number of different kits that are available.

But widespread adoption of NGVs in all classes won’t occur until sufficient fueling infrastructure is in place. In other countries, strong government incentives for switching to NGVs have accelerated this transition.

Much has been made of President Obama’s Remarks on America’s Energy Security, a speech delivered at Georgetown University on March 30, 2011, that highlighted natural gas as a crucial component of the nation’s energy independence. This excerpt demonstrates why shares of natural gas producers and names related to natural gas-fueled vehicles have soared:

[T]he potential for natural gas is enormous. And this is an area where there’s actually been some broad bipartisan agreement. Last year, more than 150 members of Congress from both sides of the aisle produced legislation providing incentives to use clean-burning natural gas in our vehicles instead of oil. And that’s a big deal. Getting 150 members of Congress to agree on anything is a big deal. And they were even joined by T. Boone Pickens, a businessman who made his fortune on oil, but who is out there making the simple point that we can’t simply drill our way out of our energy problems.

So I ask members of Congress and all the interested parties involved to keep at it, pass a bill that helps us achieve the goal of extracting natural gas in a safe, environmentally sound way.

Evidently, legislators on both sides of the aisle were listening. The following week ushered in a rare show of bipartisanship, with Reps. John Sullivan (R-OK), Dan Boren (D-OK), John Larson (D-CT) and Kevin Brady (R-TX) submitting the New Alternative Transportation to Give Americans Solutions Act (NAT GAS Act) to Congress.

The bill includes terms that would create or extend tax credits for using natural gas as a transportation fuel, manufacturing and purchasing NGVs and building out refueling infrastructure.

Last year a similar bill failed to gain enough support for a vote in the House of Representatives, despite the backing of 146 co-sponsors and extensive lobbying from the energy industry. This year’s version likewise enjoys bipartisan support and has a better chance of making it to the floor for a vote. Whereas last year’s bill covered a 17-year period, this year’s legislation includes proposals with a five-year scope.

That being said, the bill could fall by the wayside, overshadowed by ongoing posturing over cutting the federal budget. At least one trade group that represents manufacturers has opposed the bill, noting that the current abundance of low-priced natural gas has given the industry an enormous competitive advantage over foreign competitors.

Meanwhile, the Environmental Protection Agency announced a final rule easing the conversion of cars and trucks to run on compressed natural gas.

NGVs were also in the news in Pennsylvania, home to the Marcellus Shale. Working with natural gas producers Chesapeake Energy, EQT Corp (NYSE: EQT) and Range Resources Corp (NYSE: RRC), the Marcellus Shale Coalition unveiled a Natural Gas Vehicles Roadmap and called for the creation of the Pennsylvania Clean Transportation Corridor, a system of natural gas fueling stations on highways connecting the commonwealth’s major population centers.

Many of these proposals found their way into Marcellus Works, a bundle of seven bills proposed by Pennsylvania House Republicans that would increase the role of natural gas in mass transit, encourage public and private entities to purchase NGVs for their fleets and promote the construction of a network of NGV fueling stations within the state.

In response to these developments, shares of natural gas producers and companies involved in the NGV industry rallied. For example, shares of Westport Innovations (NasdaqGS: WPRT), which builds natural gas-powered engines and has partnerships with Cummins (NYSE: CMI), have appreciated 13.6 percent since President Obama’s speech and even hit a new 52-week high.

That being said, the amount of infrastructure investment needed to support widespread adoption of NGVs in the US is a significant challenge that will take some time to resolve. Investors seeking to profit from this trend should wait for valuations to pull back and consider companies with leverage to robust growth in foreign markets, particularly in Asian emerging markets.

Around the Portfolios

Earnings season is in full swing. Here’s a listed of expected announcement dates for The Energy Strategist’s Portfolio holdings.

Wildcatters Portfolio

Baker Hughes (NYSE: BHI)–04/27/2011
BG Group (LSE: BG)–05/10/2011
Cameron International (NYSE: CAM)–04/28/2011
Dresser-Rand Group (NYSE: DRC)–04/29/2011
Eagle Rock Energy Partners LP (NSDQ: EROC)–05/05/2011
Linn Energy LLC (NSDQ: LINE)–04/29/2011
Occidental Petroleum Corp (NYSE: OXY)–04/28/2011
Petrobras (NYSE: PBR A)–05/13/2011
Range Resources Corp (NYSE: RRC)–04/26/2011
Suncor Energy (NYSE: SU)–05/04/2011
Sunoco Logistics Partners LP (NYSE: SXL)–04/27/2011
World Fuel Services Corp (NYSE: INT)–05/05/2011

Proven Reserves Portfolio

Chevron (NYSE: CVX)–04/29/2011
Eni (NYSE: E)–04/27/2011
Enterprise Products Partners LP (NYSE: EPD)–04/26/2011
ExxonMobil (NYSE: XOM)–04/28/2011
Natural Resource Partners LP (NYSE: NRP)–05/04/2011
NuStar Energy LP (NYSE: NS)–04/27/2011
Penn-Virginia Resource Partners LP (NYSE: PVR)–05/05/2011
Teekay LNG Partners LP (NYSE: TGP)–05/13/2011

Gushers Portfolio