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The nation’s slow roll toward cheap natural gas fuel for commercial fleets took another step Thursday as Shell said it’s gearing up to supply liquefied natural gas to 100 interstate highway fueling stations across the nation beginning in 2013.

Under the tentative terms of the agreement, Shell will construct more than 200 LNG lanes for fueling heavy-duty trucks at TravelCenters of America stations and Petro Stopping Centers across the country.

Locations for the LNG pumps will be selected based on the needs of cross-country commercial trucking customers, according to a statement from TravelCenters, a full-service truck stop chain with 165 locations nationwide.

TravelCenters also operates as Petro Stopping Centers.

Natural gas proponents have pushed for greater use of the fuel for transportation. Supporters say the fuel is a way to relieve the glut of domestically produced natural gas on the market. The oversupply has driven down the cost of natural gas fuels, compared to crude-based gasoline and diesel.

The scarcity of natural gas pumps and cars in the country has made the fuel impractical for most private motorists. But natural gas fuels are getting increasing attention from trucking companies and other businesses that operate large fleets.

Houston-based Waste Management said last month it is pushing to convert all of its 18,342 trucks nationwide from diesel to compressed natural gas.

The liquefied natural gas Shell is providing allows for greater range than compressed natural gas, making it more practical for long-haul trucks if drivers can count on a regular supply along their routes.

“Using natural gas for transport gives truck fleet operators a new, strong advantage because it’s abundant and affordable and a viable alternative to diesel,” Elen Phillips, vice president of Shell Fuels Sales & Marketing North America, said in a written statement.

TravelCenters said it plans to train repair technicians and to equip its truck service bays and emergency roadside repair vehicles to respond to the nation’s growing fleet of natural gas-powered trucks.

The agreement with TravelCenters is Shell’s latest move to expand LNG fuel sales across the continent for trucking, marine and rail industries. The company plans to begin supplying LNG to Flying J truck stops in Canada this year.

Shell and TravelCenters have entered an exclusive negotiating period to finalize the agreement.

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Everyone knows that oil production is declining. That it’s only a matter of time before Peak Oil forces us to find new forms of energy or battle over soil like Kevin Costner in “Waterworld.”

As usual, everyone is wrong.

Data recently released by the Energy Intelligence Group shows that production of global crude has now outpaced the demand. Take a look…

While it’s never wise to get too excited about a single data point, this chart isn’t just a blip on the radar. It reflects serious shifts in the supply and demand fundamentals that have changed energy markets over the last few years.

Energy markets may have more moving parts than any other market out there. It’s a wide-ranging mosaic, but when you put all the pieces together, the picture is clear: nearly every measure points to supply outpacing demand for years to come.

Understanding Peak Oil, Supply and Demand

This article is the first in a series of articles devoted to examining recent developments that have rocked the ever-changing energy markets and brought the Peak Oil concept into question.

The Peak Oil bogeyman was first raised by M. King Hubbert in 1956. Hubbert developed a logistic model (which resembles a bell curve) that successfully predicted that U.S. oil production would peak in 1970.

Hubbert’s model gained traction and has accurately predicted the peak levels of production in other countries since then.

But, as in any model, when time scales get long enough the prediction power breaks down as new information becomes a part of the equation.

Hubbert’s curve is based on properties of the natural world, which are based on geology. In that sense, it works. But let’s look at a past example to see where it may break down…

Hubbert’s model would have accurately predicted Peak Whale Oil. But the model wouldn’t have been able to account for technology shocks. Once the unforeseeable means for using petroleum entered the energy economy, the path for whale oil was forever altered.

Just as they did then, new developments have rendered Hubbert’s curve ineffective, or at least delayed it by decades.

Many energy optimists think that technology will bring new sources of energy through solar, wind, or biofuels. Some day they may. For now, the real advances remain in the petroleum industry. Huge discoveries and advanced extraction techniques have changed the economics of drilling for oil and other petroleum products.

You can see the effects of this expanded supply in today’s oil prices.

Of course, the global economy has slowed, providing a short-term decline in demand, as well. I’ll dig into that much deeper next week.

On a weekly basis, I’ll consider all the factors of energy markets in deep detail to determine where energy prices are heading.

I won’t only be reporting the latest news, arcane drilling reports, or updates on different oil projects. I’m going to provide a context to understand what to do with the latest headlines, and how to strategize no matter where energy prices go.

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Members of the Organization of the Petroleum Exporting Countries will hold their first meeting of the year on Thursday and, following steep declines in oil prices and ahead of European Union sanctions on Iran, they should have plenty to talk about.

“A month ago, it seemed like the quota meeting would be pretty boring, but maybe not now,” said Michael Lynch, president of Strategic Energy & Economic Research and a scheduled speaker at the upcoming OPEC conference.

“The recent drop in prices is causing some pain in countries, like Venezuela and Iran, and they will push for an earlier reduction in production quotas than the Saudis are likely to agree to,” he said.

The cartel’s members are gathering in Vienna for their official meeting on June 14. The election of a new secretary general to replace Abdalla el-Badri of Libya, which could provide a roadmap to the cartel’s next steps, will be closely watched. But more immediate concerns may get the most play.

“The main topic for discussion is no doubt the 15% decline in Brent crude prices in May that brought the benchmark below $100 for the first time in 240 days,” said Kirk McDonald, senior research analyst at St. Louis-based Argent Capital Management.

Brent crude on ICE Futures in London UK:LCON2 -2.06% closed below $100 a barrel on June 1 for the first time since early October. It finished at $99.93 Thursday, while OPEC’s basket price, a weighted average of oil prices from various oil-producing nations, was at $96.19 on June 5.

Futures prices for West Texas Intermediate crude CLN2 -2.97% traded on the New York Mercantile Exchange have also fallen 14% since the start of the year. They’ve lost 18% quarter to date to $84.82 a barrel Thursday.

When members of OPEC met on Dec. 14, the oil market appeared to have found a sense of balance, with Brent crude trading relatively stable above the $100-a-barrel level during the second half of 2011, despite OPEC’s failure to come to a production agreement at the meeting in June of that year. Read about the situation ahead of December summit.

In December, members decided to “maintain” the cartel’s total production level of 30 million barrels per day, though it wasn’t clear whether the group was actually maintaining output or legitimizing over-production. Read a Dec. 14 blog on OPEC.

OPEC output has been outpacing the target ceiling, partly because producers are anticipating a sizable decline in Iran oil exports once EU sanctions officially take hold on July 1.

A Platts survey of OPEC and oil industry officials and analysts showed that OPEC members’ output in April was 31.7 million barrels per day, up 320,000 barrels from a month earlier, with Saudi Arabia’s up 50,000 barrels from March to nearly 10 million barrels per day.

The Saudis increased output during the first half of 2012 in part to help replenish global inventories in advance of the pending EU embargo of Iranian crude, said Eric Gordon, equity research analyst at investment management firm Brown Advisory in Baltimore.

While the consortium is currently producing nearly 2 million barrels per day above the collective 30 million barrels per day target agreed to in December, “seasonal summer demand strength combined with uncertainty regarding Iranian crude exports in the very near future makes it difficult to predict a reduction in output among remaining OPEC producers,” he said.

Iran clouds view

Indeed, with so much uncertainty surrounding Iran, OPEC will have a cloudier picture of oil supply and demand and may decide to do nothing at all with its output level.

“With the EU sanctions against Iran due to come into effect in less than a month and a new round of nuclear talks set for Moscow on June 18 between Iran and world powers, we may see a return to the bullish geopolitical element that pushed [Brent] oil prices up to their highest level since 2008 earlier in the year,” said Dubai-based Kate Dourian, editor in chief, Middle East, at Platts.

CLN2 82.30, -2.52, -2.97%

Overall, “the potential disappearance of even more Iranian crude from markets will make it hard to assess what supply fundamentals will look like in the second half of the year since no one knows how much oil Iran will be able to sell beyond July 1,” she said.

So if OPEC members choose to take any sort of action at the meeting, all they can do is “to repeat the action they took in December, when they effectively formalized overproduction and set a ceiling of 30 million barrels per day for all 12 members … without establishing formal quotas,” she said.

A new round of U.S. financial sanctions on Iran will also come into effect on June 28.

Previous sanctions on Iran have made it difficult to do business with the country, according to the U.S. Energy Information Administration.

As a result, Iranian crude production will likely fall by about 500,000 barrels per day by the end of 2012 from the country’s output level of 3.55 million barrels per day at the end of 2011, reflecting “a lack of investment,” the EIA said in a recent monthly report.

If the investment issues worsen, “other OPEC members would simply dip into their spare oil capacity,” said Andrew Schrage, editor and founder of Money Crashers, a personal finance blog.

So “even with tumbling [oil] prices, few OPEC members have backed off production,” he said. “They actually improved production to offset concerns about Iran’s supply levels.”

Those concerns over Iran helped build what the oil market referred to as a “war premium,” as Iran ratcheted up threats to disrupt oil shipments through the Strait of Hormuz in the wake of the EU embargo, U.S. financial sanctions and ongoing dispute over Tehran’s nuclear program.

“While the market risk premium associated with Persian friction has arguably abated in recent weeks, the underlying supply risk remains,” said Michael Peterson, managing director of energy research at MLV & Co.

At the same time, “June marks the beginning of the summer driving season in the northern hemisphere as well as the start of peak demand for global oil,” he said. So “enacting supply constraints at this point along the seasonal demand curve could unintentionally drive prices well above OPEC’s comfort level.”

On the agenda

The global economy, an election and discussions over how to keep prices consistent will also be on OPEC’s meeting agenda.

OPEC ministers will discuss the global economic slowdown and its impact on crude demand, as well as vote for the cartel’s new Secretary General, Argent Capital’s McDonald said. “Currently, there is serious disagreement in OPEC about what constitutes a ‘balanced’ oil market and the Secretary General is the person who needs to get all of the members in line.”

El-Badri of Libya currently holds the position, but his term expires at the end of this year.

Iraq, Iran and Saudi Arabia, among others, have nominated candidates, according to news reports.

“Given the strained relations between Saudi Arabia and Iran, it is unlikely the Iranian candidate will win,” said James Williams, an energy economist at WTRG Economics.

And “the Saudis might object to the Iraqi candidate, Thamir Ghadhban. Ghadhban is a technocrat and would probably do well, but some could see him as a proxy for Iran because of Iran’s strong influence on the current [Iraqi] prime minister,” he said. “Ecuador’s Oil Minister Wilson Pastor could face the least opposition because he has not part in the ongoing Shiite/Sunni and Arab/Persian rivalries.”

Whoever wins the election may offer a hint on OPEC’s next move.

“The election of the Secretary General might provide insight [into] which viewpoint will dominate future meetings,” said Derek Gates, founder of index provider Sustainable Wealth Management in Calgary, Alberta, Canada.

“If the new Secretary General comes from Iran, then Iran would be able to set the agenda for the next OPEC meeting in December 2012,” he said. “Iran has indicated that they want to keep the production quota as is (in the hope of keeping prices high). This would support other struggling OPEC nations such as Venezuela.”

OPEC members, meanwhile, will also strive for consistency in oil prices at the conference next week.

“OPEC wants to see oil at $100 per barrel, which is a good number for all of them,” said Will McAndrew, chief executive officer of Xtreme Oil & Gas Inc. XTOG 0.00% . “If that doesn’t happen, things can get pretty contentious.”

Iran’s cost of production is “extremely high” at a little under $85 a barrel, he said, and while the global price of oil is above this level, Iran is “dangerously close to the brink.”

“If Saudi Arabia keeps increasing production and lowering the price of oil, Iran will boil and burn,” McAndrew said. Under that scenario, “you would see the Strait of Hormuz closed down and the price of oil jump up about $20 immediately, which would coincidentally bring the number to over $100.”

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The International Energy Agency (IEA) reports: Natural gas is well on its way to a bright future, according to a new report from the International Energy Agency (IEA) that projects China will more than double consumption over the next five years while lower prices from the unconventional gas revolution will continue to benefit the United States.

The report, Medium-Term Gas Market Report 2012, released today at the World Gas Conference 2012, says China will become the third-largest gas importer behind Europe and Asia Oceania, driving a 2.7% average annual growth in global gas demand through 2017 (up from the 2.4% annual growth rate predicted in last year’s report). During the period, North America will become a net LNG exporter, while Japanese imports will increase, although by how much will hinge on the country’s nuclear policies.

Medium-Term Gas Market Report 2012, part of a series of IEA medium-term market reports also featuring coal, oil and renewable energy, presents detailed forecasts for the next five years of sectoral demand by region plus supply and trade. An in-depth analysis addresses infrastructure investments in LNG and pipelines.

The release of Medium-Term Gas Market Report 2012 comes a week after the IEA issued a special report, Golden Rules for a Golden Age of Gas, which looks at the environmental impacts of unconventional gas production and how those impacts are being – and might be – addressed over the next 25 years.

“The Golden Age of Gas has dawned in North America , but its continued expansion worldwide depends on producing gas and bringing it to the market in a way that is friendly to investors and society as a whole,” IEA Executive Director Maria van der Hoeven said during the launch of Medium-Term Gas Market Report 2012. “As gas competes against other energy sources in all market segments, notably in the power sector, pricing conditions are a key element to keep it competitive everywhere. This medium-term report aims to facilitate investor decisions by providing a timely, in-depth analysis of the current trends and what we expect to take place over the coming five years.”

While Medium-Term Gas Market Report 2012 sees growth for natural gas in most regions, low economic growth, relatively high gas prices and strong growth of renewable energies will limit demand in Europe . Successful and timely developments of new resources should lift gas demand in the Middle East, Africa and Asia.

The report identifies other future sources of supply, with most incremental gas production coming from the Former Soviet Union (FSU) and North America . Further growth in unconventional gas will come mostly from shale gas in North America plus tight gas and coalbed methane (CBM) production elsewhere. Shale gas developments in other regions are likely to be concentrated in China and Poland.

Other key findings of the report include:

A quarter of new gas demand will come from China , another quarter from the Middle East and other Asian countries together, and a fifth from North America.

Low gas prices will result in gas generating almost as much electricity as coal in the United States by 2017.

Global gas trade will expand by 35%, driven by LNG and pipeline gas exports from the FSU region; most of this expansion occurs from 2015 onwards, following a period of further tightening of global gas markets.

Natural gas is the most important commodity with no global market price yet. Divergence among regional gas prices will decline but remain a feature of global gas markets. The emergence of a spot price in Asia would aid regional producers and buyers.

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In the wake of BP‘s (NYSE:BP) deadly Deepwater Horizon rig explosion and oil spill in the Gulf of Mexico, the Obama administration halted drilling activity and issuance of new permits. For roughly six months the Gulf lay fallow, and more than 33 deepwater wells were essentially shut off.

However, the Gulf is now experiencing a renaissance. The ban has been lifted, new permit issuance is rising and drilling activity is thriving again, thanks to high oil prices and growing global demand. Ultimately, that makes dealing with the various new government regulations and additional costs well worth it for many of the industry’s largest players.

It also creates a lucrative business opportunity for the companies that make advanced safety equipment — and an investing opportunity for investors.

The Goal: Preventing Blowouts

Before getting to those beneficiaries, let’s review the emerging regulatory landscape. In an effort to prevent another BP-style disaster, the newly reconfigured Bureau of Ocean Energy Management & Regulatory Enforcement (BOEMRE) and the U.S. Interior Department continue to add costly safety measures into new drilling permits. Stricter provisions for well blowouts and spill containments are now the norm for any exploration and production firms wanting to drill in the Gulf.

And it’s not just the U.S. that’s taking safety to heart. Regulators everywhere, from Europe’s North Sea to China’s coast, are considering more such provisions.

Key to those provisions are essential pieces of safety equipment: blowout preventers (BOP), which sit nearly five-stories tall and cost as much as $45 million each. A failed unit aboard BP’s Horizon rig was the main culprit for the disastrous fire and spill.

These devices are critical both onshore and off. At its core, a blowout preventer is a large, specialized valve used to monitor, control and seal oil and gas wells. BOPs are designed to regulate the pressures and uncontrolled fluid flows that occur during drilling. If the device fails to control the fluctuating pressure, a large blade, or ram, is designed to “cut” the pipe to choke the flow and prevent explosive gases from reaching the rig and crews on the surface. BOPs come in a variety of different styles, but they roughly function in the same way.

As Deepwater Horizon reminded everyone, blowouts can be particular hazardous events, despite the fact that “gushers” were an icon of oil exploration during the late 19th and early 20th centuries.

Following guidelines from a National Academy of Engineering report, the Interior Department has called for major changes to BOP design and testing to ensure they can work under a wide range of scenarios. BOPs will be beefed up with a second set of rams, which will increase the odds of it successfully slicing through the drill pipe to seal off an uncontrollable well. In addition, workers will need to be better trained to operate these devices in emergencies.

Already, many producers in the Gulf — including BP — have begun adopting two-ram systems in anticipation of the new regulations. Royal Dutch Shell (NYSE:RDS-A, RDS-B) has pledged to use two rams on its BOPs in exploratory drilling in the Arctic Chukchi and Beaufort Seas this summer.

Profiting From the New Rules

While some smaller shallow-water drillers, like Hercules Offshore (NASDAQ:HERO) have complained about the pending rules — an extra set of rams could make BOPs too tall for certain types of rigs — odds are the regulations will get enacted. Even the American Petroleum Institute (API), the largest oil-industry trade group, is considering adding a requirement for double-shear rams into its own BOP standards.

With the new requirements looming, it stands to reason that the companies making these advanced BOP systems should see increased business. Several oil service companies, like Cameron (NYSE:CAM) and Tesco (NASDAQ:TESO), produce BOPs, but the king of the group and perhaps the best choice for investors is National Oilwell Varco (NYSE:NOV).

It’s the leading maker of rigs, bits and other necessary drilling equipment, with its parts and components incorporated into nearly 90% of all drilling rigs on the planet. However, the coming BOP regulations could lift demand for National Oilwell’s products and increase its $10.3 billion rig technology backlog. The company’s Shaffer pressure control equipment and Koomey BOP systems are some of the most advanced and can be used in well depths up to 30,000 feet, temperatures of 650F and pressures of 15,000 psi. Likewise, Varco’s NXT BOP is double-ram compliant and should see increased demand as the regulations get enacted.

National Oilwell’s domination in “all things rig related” has allowed it to operate with very little debt and more than $8 of cash per share on its books. At the same time, the market’s recent fall has made NOV shares even juicier. At $65.69, they can be currently had for a P/E of just 12.7, at about $22 below the 52-week high in February.

That gives investors plenty of energy-value for not much price. Overall, the long-term trend of drilling deeper coupled with stricter safety mandates should help pad National Oilwell’s and investors’ pockets.

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FIAT is all set to pave its future ways by roping in alternative fuels. The automaker’s research team is working on the same at the Centro Ricerche FIAT, outside of Turin, Italy, their high-security research facility.

Unlike Toyota and others, who went behind gas-electric hybrids and pure batteries, FIAT is interested in compressed natural gas (CNG).  According to its General Manager, Stefano Re Fiorentin, CNG is a strategic asset that supports progressive migration from fossil fuels to biomethane and hydrogen from renewable resources.

He claims that the electric car still possesses some sustainability problems. They might have reduced the impact on environment but their range is too limited, recharging times are too long, and above all cost is too high.

He adds that a hybrid costs about $9,000 more than a conventional gas powered car and a battery-electric costs about $ 21,000 more. At the same time a CNG car will only cost about $ 4,000 more.

So is it something like a conversion into CNG? No, it is not. The new line-up features smaller, lightweight tanks and a small gasoline tank.

The design is also very carefully done, especially that of the filling mechanism. The cars are not very technologically different from conventional ones.

Engines are small and efficient. Maintenance costs are also reduced, with zero carbon residues in the engine.

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The petroleum industry’s accomplishments in wresting oil and natural gas from tight shale formations virtually assures plentiful supplies for coming generations.

The bad news is prices for fuel are likely to range from high to higher.

Oil producers are proving there’s a way to extract petroleum from hard rocks, but they are gambling real money to do it.

A conventional vertical well can cost from $2 million to $3 million, according to Davis L. Ford, a consulting environmental engineer and board member of Clayton Williams Energy.

But the horizontal wells hydraulically fractured to release oil and gas from across a shale formation take $7 million to $8 million.

Ford and Mohamed Soliman, chairman of the petroleum engineering department at Texas Tech, met recently in a conference room to share their thoughts about the future of petroleum.

Energy independence

They foresee nothing short of achieving energy independence for the United States through the new high technology available to oil and gas producers.

“Some people usually discuss, will the United States become self-sufficient in energy,” said Soliman, a former engineer with the Halliburton Co. “Not in oil. That’s never going to happen. But if we can use gas in transportation, then we can get there.”

Ford said, “What I hear from talking to large companies like Exxon and small companies like Clayton Williams … I’m hearing energy independence — forgetting about the amount of oil and gas — in 10 years.”

Ford suspects natural gas will become the dominant fuel in a few years. “It’s prolific, clean and available. We’re in a technological transformation like I’ve never seen in my lifetime.”

The engineers think natural gas will be adopted first by the trucking industry because of the rising cost of diesel fuel, and then automobiles will follow.

Soliman said of the new petroleum extraction technology, “This is actually very exciting. There are a lot of things going on.”

Is this going on all over the Permian Basin?

“It’s going on all over the world,” Soliman said. “I was in Vienna in Austria, and they have a company now drilling for gas in shale — in Vienna!”

Large reserves

Ford sees petroleum reserves lasting for a long time.

“When I’m around people like Dr. Soliman, and people from large and small companies, they’re all saying about the same thing: Our proven reserves — which means the bank will loan you money on them — our proven reserves in this country are almost 200 years. In Poland they are saying 300 years. Now that’s a guess, but when I was a young engineer, I would say in the 1970s and 1980s, our proven reserves were guesstimated to be at the most 20 or 25 years.”

Soliman, laughing at that past estimation, said, “We thought by the time we retired there would be no oil.”

Is there no end to it, then?

“Well … I can’t say that,” Soliman answered.

“Everything has an end,” Ford said.

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Natural gas prices have been low this year. You can’t complain about that. Recently, natural gas broke the psychological $2 mark which may beg the question of how much lower natural gas will go. It has since gone north of $2 but that doesn’t change much of anything. Natural gas is still relatively cheap. According to the United States Energy Information Administration, in June 2008, natural gas hit a high of $12.41 per thousand cubic feet. In just four years, natural gas has declined almost 80% and according to energy analysts, there is nothing stopping it from going lower. Here are four reasons why.

SEE: A Natural Gas Primer

1. The Markets Are Local
If you’ve spent any time being outraged at the price of gasoline, you’ve probably read up on the oil market. You know that it is a true global market. Any country with oil can hire a tanker to take it anywhere in the world. Although there are various oil markets, they react in tandem to global events keeping oil prices around the world close, compared to natural gas.

The natural gas market is different. Because the most efficient way to transport natural gas is on land, through pipelines, natural gas from American wells don’t go overseas. This is why natural gas in Britain is rising while in the U.S. it is falling.

2. Mild Winters
Winter is supposed to be cold, and this year it didn’t work out the way it normally does. In fact, for many areas of the country, it’s supposed to be very cold and the way to keep homes warm is with a gas powered furnace. In 2011, that didn’t happen. It was an unseasonably warm winter that left natural gas suppliers with too much supply. 

There’s so much left over supply that all of the salt mines, depleted oil fields and aquifers that hold the extra supply could be full as early as the fall, if production isn’t drastically cut. Basic economics dictates that too much supply and too little demand results in lower prices. 

SEE: Introduction To Weather Derivatives

3. 
Fracking isn’t new technology but in recent years, it has become more cost effective. For years, drillers knew that gas and oil were trapped in shale rock all over North America, but getting it out of the ground in a cost effective way was a challenge. That all changed with new technology and because of that, areas of the country that were once not viable drilling sites are now seeing activity resembling the historic gold rush.

However, fracking has greatly increased supply. More wells means more gas coming to the market and that, along with the mild winter, has created the perfect storm for gas prices. Consumers are happy but investors and energy companies are not.

SEE: How Shale Fracking May Hurt Your Investment

4. Lack of Consumer Demand
Currently, 31% of all natural gas consumption comes from power plants that use it to create electricity. Another 28% is used for other industrial purposes but only 19% is used by consumers. 

In the near future, that may change. As natural gas powered cars and the infrastructure to fuel those vehicles becomes more common, consumer demand for natural gas will increase. This will also help to address the supply glut that will likely continue to be an issue as more wells are drilled.

The Bottom Line
: Some energy analysts believe that natural gas will be significantly higher by the end of 2012, but others are more skeptical. With large scale demand years away and drillers showing no sign of a large scale decrease in production, natural gas prices may stay consumer friendly for much longer than 2012.

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