Question

Many businesses in recent years have shifted their energy needs from traditional oil/gasoline to traditionally cheaper, cleaner, and more plentiful natural gas. AT&T, for example, recently replaced 8,000 of its regular service vans with natural-gas-powered vehicles. It believes the shift to natural gas service vans will save it the cost of about 49 million gallons of regular gasoline of the next decade. But what are some of the negatives of this cost control measure? Does the fact that less than 1,500 of the U.S. 162,000 vehicle service stations currently sell natural gas have any implications on AT&T's strategic moves in this regard? What about the fact that oil/gasoline prices have fallen a decent amount recently?

Answer 1

In order to determine the answers to the questions specified above, it's important to understand the idea and the reasoning for using Natural Gas as an environment-friendlier alternative to regular oil/gasoline. Most of us are aware that the use of Natural Gas can help ease out the pressure we are exerting on depleting fossil fuels however there is more to it than meets the eye. Let's try and explain what are the components, advantages, and disadvantages of the consumption and production of Natural Gas and why it could end up being our future.

Like coal and oil, Natural Gas is a fossil fuel formed from decayed organic material which is transformed by high temperatures and pressures, over millions of years, into methane gas bubbles. Conventional sources to obtain natural gas are found in underground gas/oil field, however, extraction from unconventional sources prove challenging as the gas is locked inside the sediment:

• coalbed methane (trapped in the coalbed),
• tight gas (trapped in sandstone),
• gas hydrates (trapped in ice) and
• shale gas (trapped in shale).

Now that we have established the composition of natural gas, let's outline the many qualities that make it an efficient, relatively clean-burning, and economical energy source.

1. Abundance/availability: the U.S. Energy Information Administration estimates there are at least 6,800 trillion cubic feet (TCF) of proved natural gas reserves. The current consumption of the world is still at a hefty 120 TCF a year, which provides for another 56 years of reserves.  
2. Presence of Infrastructure: the process of extracting natural gas is very similar to that of harnessing other fossil fuels which makes it a lucrative opportunity with less investment in developing new infrastructure.
3. Relatively cleaner fossil fuel: as compared to coal, natural gas emits almost half the amount of CO2 when it's burned. It serves as a 'bridge' fuel supporting a growing renewable energy economy.
4. Relatively cheap: to sum up the cost-effectiveness of using natural gas has to do with the more than an abundant supply of the same being stored in various shale corporations across the US which are estimated to serve the customer for almost 100 years based on the demand in 2013. Hence there is a comparatively lesser chance of external factors affecting the cost of supply for natural gas across all States.

All of the aforementioned advantages make it a lucrative opportunity for businesses to transition towards using Natural Gas. The example stated in the question regarding AT&T adapting to such changes and developments showcases the business opportunity there is to achieve with the use of natural gas. However, there are certain red flags when it comes to the usage of the cleaner source of energy - natural gas.

When making changes in the business adaptations, it's advisable to look into the following main options to ensure the returns on the investment are significantly higher than the present time statistics:

• Sustainability of Resource
• Cost-effectiveness
• Future of the industry

Each of the above factors outlined is not combated with the use of Natural Gas as outlined below:

• Natural Gas is a fossil fuel - and hence, a non-reusable resource. This means that the production and consumption of Natural Gas come with an expiry date. In order to keep up with the recent surge in demand from the commercial and industrial sectors, the reserves are only sufficient for the next 50 or so years.
• In the case of sustained demand, the projected increase in the cost of consumption of natural gas is only 4% between 2015 and 2030. However, with increased demand, the increase in cost could lead up to as high as 10%.
• Especially in the transportation industry, the future of Natural Gas serves only as a buffer until the next possible sustainable energy resource is made widely available.

Considering the data points and the scenario outlined above, the answer to individual questions is as follows:

1. The negatives of the cost controlling measure/strategy for AT&T is mostly environmental and could be summarized as follows:
   • Natural Gas is mainly methane which is a much stronger greenhouse gas, up to 20 times more potent than CO2.
   • Fracking (the process of extraction of Natural Gas) has many environmental concerns and negative impacts.
   • Aging infrastructure of storage and transportation of Natural Gas can create potential health hazards leading to newer investments which increase the purchasing cost of the said gas.
2. The present number of vehicle fueling stations for natural gas is on the lower end however it doesn't pose a threat for businesses to start migrating towards the usage of the same as with the increase in demand, the supply could be made available across most of the primary fueling stations as:
   • it doesn't require new infrastructure,
   • transportation cost is comparatively lower than that of oil/gasoline,
   • the abundance of stored Natural Gas present within the United States has the potential to supply natural gas to virtually all the States.
3. The overall decrease in the prices of oil/gasoline is not a contributing factor to avoid the usage of natural gas. Referencing from the data provided by Energy Efficiency & Renewable Energy for January 2020, the price of Natural Gas is $2.18/GGE versus the cost of Gasoline which is $2.59/gallon, clearly outlines that both sources of energy are somewhat equally priced which takes us to the advantages of using Natural Gas over oil/gasoline as mentioned above.

To summarize, the business strategy from AT&T to adapt to using Natural Gas is backed by enough data and advantages to provide a strong case for the same. However, it should not be looked at like a permanent shift or way of the future as it is not yet the best alternative source of energy but surely should be considered as the "buffer".