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The Shell-Westport Deal – Demers Interview Underlines the Risk For Clean Energy Fuels

Following last week’s deal between Westport Innovations (WPRT), provider of natural gas engine technology, and Shell (RDS-A) on a co-marketing agreement for natural gas solutions for the trucking industry in North America, Westport CEO David Demers gave an interview on CNBC’s Mad Money.

You can read more about the original co-marketing deal here. The bottom line is that this commitment from a major oil company will no doubt spur the use of natural gas in the transportation sector. However, it may well represent simply too much competition for the smaller Clean Energy Fuels (CLNE). Again, see more detail here.

Following the announcement, Westport CEO Demers’ interview on CNBC only served to underline each of these two main conclusions, as the quotes below make clear. You can view the full interview, including all quotes given below, here.

What is most striking in terms of Demers’ comments, is his repeated suggestion that customers have been waiting for the entry of an oil major to assure them that long-term availability of natural gas fueling would be there:

“The question we get from everybody, whether they’re in trucking or rail or mining, is well is this sustainable. Can we really see the fuel that we need, in the scale that we need, in the price we need for decades into the future to justify a move of this whole economy into a new fuel”.

The implication that the good work previously being done by Clean Energy Fuels alone had not been enough is fairly clear:

“And I think that people have been waiting for a move from one of the majors and this move from Shell is clearly the starting gun for a whole new energy era”.

Demers put forward a good case that Shell has the presence to make the shift towards natural gas in the trucking sector start to happen:

“Shell has clearly got a lot of ability to help make this transition easy for fleets. They have the billing systems, the credit card, the networks, the experience, the technical expertise, its going to give people a lot of comfort that this is not a big scary, risky move to go into this new fuel”.

Shell is of course starting out by offering natural gas from 2012 in selected Shell Flying J truck stops in Alberta Canada. Initially the LNG will be supplied by third parties. However, by 2013 Shell expects to be producing LNG at the company’s Jumping Pond gas processing facility. Moreover, the agreement with Westport is for North America as a whole and if Shell’s move in Alberta is successful they will no doubt roll out LNG availability in trucking corridors across the States.

This will also spur the natural gas transportation market as a whole. However, this level of competition will no doubt limit the growth of a much smaller company such as Clean Energy Fuels, which simply does not have the capital to compete in terms of infrastructure roll-out.

As I argued in my previous article on the issue, T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end Shell may well just represent too much competition for a relatively small pioneering outfit.

On the other hand, the news is unequivocally good for Westport. At present, I have no positions in my clean energy portfolio due to a negative view of the risk in the overall stock market (more detail here). However, from a long-term perspective Westport looks set to grow its business very strongly. Further weakness in the overall market in the period ahead may very well provide a good entry point in this stock.

Disclosure: I have no positions in the stocks discussed.