Economic Calendar

Wednesday, May 23, 2012

Asian Stocks Snap Two-Day Rally on Greece, Japan Exports

By Yoshiaki Nohara - May 23, 2012 7:27 AM GMT+0700

Asian stocks fell, with the regional benchmark index snapping a two-day rally, as concerns mounted Greece may exit the euro zone and Japan’s trade data missed estimates, dimming the outlook for exporters.

Nintendo Co., a maker of video-game players that depends on Europe for a third of its sales, fell 2.4 percent. Mitsui & Co. (8031), a Japanese trading company, slid 0.9 percent. Woodside Petroleum Ltd. (WPL), Australia’s oil and gas producer, lost 1.5 percent as oil fell.

Pedestrians are reflected on an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

The MSCI Asia Pacific Index fell 1 percent to 112.63 as of 9:26 a.m. in Tokyo before the Hong Kong market opened. About nine stocks fell for each that rose, and all 10 industry groups on the measure slid.

“If Greece goes get out of the euro, then that will be a significant event for the market,” said Andrew Pease, Sydney- based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. The market wants to see “a political resolution out of Europe that will either prevent Greece from exiting or, if they do exit, will put in place a strong firewall to prevent contagion effects from going to other countries.”

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at

To contact the editor responsible for this story: Nick Gentle at


North Korea Denies Nuclear Test Plan as It Upgrades Rocket Site

By Sangwon Yoon - May 23, 2012 7:59 AM GMT+0700

North Korea denied planning a nuclear weapons test while a report indicated it’s upgrading a rocket launch site, conflicting signs that underscore the challenge of gauging the intentions of new leader Kim Jong Un.

The totalitarian regime is building a new launch pad for firing larger long-range rockets at its Musudan-ri site in the northeast, according to a U.S. university monitoring project on North Korea. The report came after North Korea’s Foreign Ministry said last month’s botched long-range rocket launch was intended “for peaceful purposes and we never anticipated military measures like a nuclear test.”

Kim has shown no sign of abandoning his country’s nuclear ambitions five months after succeeding his late father Kim Jong Il. U.S. and South Korean officials have said Kim’s government may soon detonate an atomic weapon to rebound from the embarrassment of the failed rocket launch.

“North Korea is trying to transition the current state of tensions toward one of dialogue,” said Koh Yu Hwan, a professor of North Korean studies at Dongguk University in Seoul. “By saying that they’ve never planned a nuclear test and turning that around as a theory espoused by the U.S., they are de facto saying they won’t conduct one.”

Construction at Musudan-ri began last summer and is in its “early stages,” the U.S.-Korea Institute at Johns Hopkins School of Advanced International Studies in Washington said on its website, citing satellite images taken April 29. The new facility resembles a recently completed Iranian missile center, hinting at a possible connection with Tehran, the report said.

‘Hostile Policy’

The U.S. must end its “hostile policy,” otherwise North Korea will “expand and bolster” its nuclear program, the spokesman said, according to yesterday’s KCNA report. South Korean Foreign Ministry spokesman Cho Byung Jae said the statement left the North’s intentions unclear.

“Until now North Korea’s words and actions have differed, so we take note of yesterday’s statement and will monitor to see how things progress from here,” Cho said.

In Beijing, Glyn Davies, the U.S. special envoy on North Korea policy, said he was “at a bit of a loss to imagine what they’re referring to when they talk about hostile policies.”

Davies, who spoke to reporters after meeting officials including his Chinese counterpart Wu Dawei, said he raised the issue of sanctions on North Korea and “the importance of reinforcing them and taking them very seriously.”

Separate satellite photos of Punggye-ri, a nuclear test site also in North Korea’s northeast, showed additional mining and excavation activity for an underground detonation, James Hardy, Asia-Pacific specialist at IHS Jane’s, said yesterday in an e-mail.

Building Reactor

The regime has also resumed building a light-water reactor at Yongbyon, its main nuclear enrichment facility about 90 kilometers (55 miles) north of the capital Pyongyang, Hardy said, citing aerial imagery published in early April. Such a reactor could supply fissile material for atomic weapons.

Satellite imagery from April 30 shows that the government is close to completing a containment building for a new experimental light water reactor, according to a separate report from the Johns Hopkins’ website.

Davies, who flies to Tokyo today, said May 21 in Seoul after meeting his South Korean and Japanese counterparts that the totalitarian government would face a “swift” response to further nuclear or missile tests.

North Korea on April 13 launched a long-range rocket that it said would put a satellite into orbit. The projectile disintegrated minutes after liftoff.

“That was a miscalculation on their part,” Davies said in Beijing yesterday. “They missed an opportunity to demonstrate their seriousness of purpose.”

North Korea fired rockets from the Tonghae Satellite Launching Ground at Musudan-ri ahead of underground nuclear tests in 2006 and 2009. Last month’s long-range rocket was launched from the Sohae Satellite Launching Station on the northwestern coast.

To contact the reporter on this story: Sangwon Yoon in Seoul at

To contact the editor responsible for this story: Peter Hirschberg at


U.S. Stocks Reverse Gain in Final Hour on Greece Woes

By Rita Nazareth - May 23, 2012 4:44 AM GMT+0700

U.S. stocks erased gains in the final hour of trading as concern that Greece would exit the euro and a tumble in Facebook (FB) Inc. shares overshadowed economic optimism.

Commodity and technology shares in the Standard & Poor’s 500 Index fell, while financial companies gained. Facebook slumped 8.9 percent, dropping 19 percent in two days. A gauge of homebuilders in S&P indexes rose 1.9 percent amid a better-than- estimated housing report. Best Buy Co. (BBY) rallied 1.6 percent after reporting first-quarter profit that exceeded estimates. Dell Inc. tumbled 12 percent at 5:43 p.m. New York time after forecasting revenue that missed analysts’ projections.

The Facebook Inc. logo is displayed in front of the company's headquarters in Menlo Park, California. Photographer: David Paul Morris/Bloomberg

May 22 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market. U.S. stocks erased earlier gains as concern that Greece would exit the euro and a tumble in Facebook Inc. shares overshadowed economic optimism. (Source: Bloomberg)

May 22 (Bloomberg) -- Bloomberg's Trish Regan, Adam Johnson and Alix Steel report on today's ten most important stocks including Best Buy, Urban Outfitters and Dell. (Source: Bloomberg)

May 22 (Bloomberg) -- U.S. stock-index futures were little changed after the benchmark Standard & Poor’s 500 Index posted its biggest gain in two months. (Source: Bloomberg)

Traders work at the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

About three stocks fell for each rising on U.S. exchanges at 4 p.m. New York time. The S&P 500 added 0.1 percent to 1,316.63, almost erasing a gain of 1 percent. The Dow Jones Industrial Average lost 1.67 points, or less than 0.1 percent, to 12,502.81. About 7.3 billion shares changed hands on U.S. exchanges, or 8.2 percent above the three-month average.

“Stocks did a 180,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “On a relative basis, the U.S. is the cleanest dirty shirt. Yet Europe is still a dominant story for the market.”

Stocks erased gains after Dow Jones reported that former Greek Prime Minister Lucas Papademos said the nation is considering preparations to leave the shared currency. European Union leaders are planning to gather in Brussels tomorrow to discuss how to revive growth. Equities rallied earlier today as sales of existing U.S. homes rose in April while investors speculated China and Europe will stimulate growth.

Europe Concern

Concern about Europe’s debt crisis drove the S&P 500 down as much as 8.7 percent from an almost four-year high in April. Still, the benchmark gauge was up 4.7 percent in 2012 amid better-than-estimated economic and corporate reports. About 70 percent of S&P 500 companies that reported first-quarter results beat analysts’ estimates, data compiled by Bloomberg show.

“We went from risk-on to risk off pretty quickly,” said Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co. “Greece is not a major economy, but there’s obviously fear of contagion in case it exits the euro. These outside factors will weigh on the market even as economic numbers are good.”

Measures of commodity shares in the S&P 500 had the biggest losses among 10 groups. Crude oil slipped as Iran agreed to let Western nuclear inspectors into the country, easing concern that the conflict over its atomic energy program would disrupt Mideast supplies. Gold and copper also retreated.

Coal Producers

Patriot Coal Corp. (PCX) slumped a record 35 percent to $2.18. The U.S. miner that last week warned of a possible customer default hired Blackstone Group LP and said it’s still working with lenders to finalize $625 million of loan and credit facilities. Peabody Energy Corp. (BTU) lost 3.9 percent to $23.65. Alpha Natural Resources Inc. (ANR) retreated 3.9 percent to $11.21.

Technology shares, which comprise 20 percent of the S&P 500, also retreated. Apple Inc. (AAPL), the world’s most valuable company lost 0.8 percent to $556.97. The shares rose as much as 2.2 percent earlier today.

Facebook, the social networking site that raised $16 billion in an initial public offering last week, plunged 8.9 percent to $31. The offering valued Facebook at 107 times trailing 12-month earnings, more than every S&P 500 member except Inc. and Equity Residential. The slump reinforces concern that the IPO was priced too high.

Too High

Sentiment toward the offering worsened yesterday after Facebook fell below the $38 price set by underwriters, burning investors who speculated the company would mimic IPOs such as LinkedIn Corp. (LNKD), which doubled on its first day. While bulls forecast benefits as companies shift advertising to the Internet, Brian Wieser of Pivotal Research Group LLC, said Facebook’s price is too high and the path to growth unclear.

“There’s always a risk of buying into excessive hype, using rules of thumb for valuation that are divorced from fundamentals,” Wieser, a New York-based analyst at Pivotal, said in a telephone interview yesterday. “There are many things that really speak to the uncertainty investors should be incorporating when they’re thinking about Facebook.”

Dell slumped 12 percent to $13.30 after the close of regular trading. The world’s third-largest personal computer maker lost share in the global PC market in the first three months of the year, according to market researcher Gartner Inc. Dell (DELL) has eschewed sales of less profitable PCs to boost its profit margin, which is causing revenue to slump, said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

Homebuilders, Banks

Homebuilders rallied as PulteGroup Inc. (PHM) advanced 2.5 percent to $9.08, while Lennar Corp. (LEN) increased 2.2 percent to $27.61. A measure of diversified financial shares had the biggest advance among 24 groups in the S&P 500, gaining 1.4 percent. The KBW Bank Index (BKX) rose 1.1 percent as 22 of its 24 stocks advanced.

JPMorgan Chase & Co. (JPM) jumped 4.6 percent to $34.01, rebounding from a 20 percent plunge following its May 10 disclosure of at least $2 billion in trading losses. Goldman Sachs Group Inc. reiterated its buy rating on the stock today, saying the company’s plan to halt share buybacks reflects a “prudent decision” to preserve capital given the volatility and uncertainty around its chief investment office’s holdings.

Best Buy added 1.6 percent to $18.46. The largest U.S. consumer-electronics retailer lured customers with discounts on smartphones, part of former Chief Executive Officer Brian Dunn’s efforts to compete with Inc. Lower demand for televisions and notebook computers reduced comparable-store sales in the quarter by 5.3 percent.

Urban Outfitters

Urban Outfitters Inc. (URBN) climbed 7.4 percent, the biggest gain in the S&P 500, to $28.10. The retailer that rehired co-founder Richard Hayne as chief executive officer this year reported first-quarter profit that beat analysts’ estimates on record sales.

Ralph Lauren Corp. (RL) added 2.7 percent to $150.27. The retailer of its namesake brand clothing reported profit that beat analysts’ estimates because of sales gains at its own shops and department stores.

Ariba Inc. (ARBA) surged 19 percent to $44.87, the highest level since 2002. SAP AG, the largest business-management software maker, agreed to buy the online-trading platform for businesses for $4.3 billion in the German company’s biggest push into cloud computing.

To contact the reporter on this story: Rita Nazareth in New York at

To contact the editors responsible for this story: Nick Baker at; Michael P. Regan at


Facebook Tumble Means Morgan Stanley Gets Blame for Flop

By Serena Saitto, Lee Spears and Joseph Ciolli - May 23, 2012 3:17 AM GMT+0700

Let the Facebook Inc. (FB) finger-pointing begin.

After one of the most anticipated initial public offerings in history, Facebook’s 19 percent drop this week prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the company’s greed and the Nasdaq Stock Market.

People walk by the Nasdaq stock market in New York, on May 18, 2012. Photographer: Spencer Platt/Getty Images

May 22 (Bloomberg) -- Jeff Corbin, chief executive officer of KCSA Strategic Communications, talks about the 19 percent decline in Facebook Inc.'s shares following the company's initial public offering. Corbin speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

May 21 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed blog and a Bloomberg contributing editor, and Max Wolff, an analyst at Greencrest Capital Management, talk about trading in shares of Facebook Inc. Facebook fell below its $38 offer price in the second day of trading. Kedrosky and Wolff speak with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

May 21 (Bloomberg) -- Darren Chervitz, research director for Jacob Funds, talks about Facebook Inc.'s stock price performance and the outlook for the social network firm. Facebook, the social networking site that raised $16 billion in an initial public offering, fell below its $38 offer price in its second trading day. Chervitz speaks with Trish Regan on Bloomberg Television's "InBusiness." (Source: Bloomberg)

May 22 (Bloomberg) -- Bloomberg's Dominic Chu reports that after one of the most anticipated initial public offerings in history, Facebook’s 11 percent drop on Monday prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the company’s greed and the Nasdaq Stock Market. He speaks on Bloomberg Television's "Inisde Track." (Source: Bloomberg)

May 22 (Bloomberg) -- Cliff Lerner, chief executive officer of Snap Interactive Inc., talks about the impact of the drop in Facebook Inc.’s shares on Snap's stock. Lerner talks with Trish Regan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York, on May 18, 2012. Photographer: Scott Eells/Bloomberg

A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York, U.S., on Monday, May 21, 2012. Photographer: Scott Eells/Bloomberg

Facebook Inc. Chief Financial Officer David Ebersman, seen here, was the point person on the deal, while Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg weighed in on major decisions throughout the process, people said. Photographer: Tony Avelar/Bloomberg

“It was like the gang that couldn’t shoot straight,” said Michael Mullaney, who helps manage $9.5 billion as chief investment officer at Fiduciary Trust in Boston. He said he placed Facebook orders for clients. “The underwriters mis- estimated what actual demand was, and there was pure execution failure coming out of the Nasdaq.”

Taking the most heat is Morgan Stanley, said Mullaney. The bank was lead underwriter among the 33 firms Facebook hired to manage the $16 billion sale of stock. The bank decided with Facebook executives to boost the size and price days before the May 17 IPO, ignoring advice from some co-managers, said people with knowledge of the matter, who declined to be identified because the process was private. Morgan Stanley (MS) talked with few of its fellow underwriters aside from JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) throughout the IPO, one person said.

“They overplayed the enthusiasm and probably just misread the atmosphere of the marketplace,” said Keith Wirtz, who oversees $15 billion as chief investment officer at Fifth Third Asset Management in Cincinnati and bought some stock in the IPO.

Blame Game

Facebook increased the number of shares being sold in the IPO by 25 percent last week to 421.2 million and raised its asking price to a range of $34 to $38 from $28 to $35. Had Facebook kept the original terms, investors may have had a better shot at a first-day pop. Instead, the stock was little changed in its debut because Morgan Stanley intervened to prevent it from falling below the IPO price.

The shares fell 8.9 percent to $31 at the close today, after an 11 percent drop yesterday.

Just days before Facebook raised the size and price of its IPO, the company began telling analysts to lower their sales forecasts, people familiar with the matter said. Morgan Stanley analysts were among those who cut their projections during the roadshow, said one person. The move also followed a May 9 filing in which Facebook said advertising growth hasn’t kept pace with the increase in users.

Investors Misled?

Some investors say they felt misled by the underwriters. According to one London-based fund manager who asked not to be named, bankers indicated demand was so strong that he placed a bigger order than he thought he would get, leaving him with 40 percent more Facebook shares than anticipated. He sold most of that stock on the first day of trading.

The decision to boost the price range reflected the demand in the market, said a person involved in the process. Michael DuVally, a spokesman for Goldman Sachs, and Pen Pendleton, a spokesman for Morgan Stanley, declined to comment. Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. Underwriters didn’t say how great demand was.

Morgan Stanley and Facebook consider problems with Nasdaq OMX Group Inc.’s computer systems among the reasons for the IPO’s performance so far, according to people familiar with the matter. Nasdaq’s trading platform was overwhelmed by order cancellations and updates that made the stock-market operator unable to finish the auction required to open trading. The U.S. Securities and Exchange Commission said it will review the trading.

Nasdaq Software

Nasdaq Chief Executive Officer Robert Greifeld said on a call with reporters on May 20 about the glitch that the opening delay “had no apparent impact on the stock price,” noting the share decline began after all brokers had received confirmation about their trades in the opening auction. Robert Madden, a spokesman for Nasdaq OMX, declined to comment beyond Greifeld’s statement.

Nasdaq said in a notice yesterday it delivered all outstanding execution and cancellation messages to brokers for their IPO cross orders at 1:50 p.m. Facebook declined 5.9 percent after 1:50 p.m.

Facebook CEO Mark Zuckerberg and the early backers should be held accountable for the stock drop, said Francis Gaskins, president of researcher in Marina Del Rey, California. Goldman Sachs, Accel Partners, Digital Sky Technologies and other existing holders boosted the number of IPO shares they offered in Facebook on May 16, a day after the company increased its price range.

‘Mispriced’ Market Value

“It’s a combination of Zuckerberg’s ego for that $100 billion market cap, and the shareholders selling who wanted an exit,” said Gaskins. “Somehow it just missed them that this was mispriced.”

Larry Yu, a spokesman for Menlo Park, California-based Facebook, declined to comment. Rich Wong, a partner at Palo Alto-based Accel Partners, and Yuri Milner, founder of Digital Sky Technologies in Moscow, didn’t respond to requests for comment.

Facebook Chief Financial Officer David Ebersman was the point person on the deal, while Zuckerberg and Chief Operating Officer Sheryl Sandberg weighed in on major decisions throughout the process, people said. At Morgan Stanley, Dan Simkowitz, chairman of global capital markets, was one of the main bankers on the offering. Michael Grimes, global co-head of technology investment banking at Morgan Stanley, also played a key role.

Underwriters did accomplish part of what they set out to do: turn paper into cash for pre-IPO holders.

“It was successful for the liquidating owners, absolutely, because they got all that and then some,” said Peter Sorrentino, a fund manager who helps oversee $14.7 billion at Huntington Asset Advisors in Cincinnati.

For the investors it was a different story.

“I shame the people who were lining up to buy the thing,” said Sorrentino, whose firm didn’t buy stock in the IPO and tried to talk clients out of purchases. “The financials were there, do the math. Everyone wanted to be caught up in the glamour offering of the year. People just had stars in their eyes.”

To contact the reporters on this story: Serena Saitto in New York at; Lee Spears in New York at Joseph Ciolli in New York at

To contact the editor responsible for this story: Tom Giles at


Facebook Investor Sues Nasdaq Over Delays in Offering

By Bob Van Voris - May 23, 2012 5:28 AM GMT+0700

A Facebook Inc. (FB) investor sued Nasdaq OMX Group Inc. (NDAQ) claiming the stock exchange “badly mishandled” Facebook’s initial public offering, delaying trading and failing to cancel orders when requested by customers.

Phillip Goldberg, a Maryland investor, said in a complaint filed today in Manhattan federal court that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. (SCHW) account the morning after the May 17 IPO. He is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook stock weren’t properly processed, according to the filing.

“Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute,” Goldberg said in the complaint. “In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.”

Goldberg, who claims Nasdaq acted negligently, is seeking unspecified damages. The U.S. Securities and Exchange Commission has said it will review the opening day of trading in Facebook shares on Nasdaq. The exchange has blamed poor design in the software used to drive auctions in IPOs.

Public Trading

Robert Madden, a spokesman for Nasdaq, didn’t immediately return a call seeking comment on the suit. Ashley Zandy, a spokeswoman for Facebook, the world’s biggest social network, declined to comment on the suit.

Goldberg claims that on May 18, he tried to make a series of limit buy orders through his online account. The trades failed to execute and he tried to cancel. Instead of canceling the trades, Goldberg’s account reflected the cancellation orders as “pending” throughout the day, he said.

Goldberg said that even with the cancellation orders, one trade, at $41.23, was executed about three hours after it was placed, when Facebook shares were trading at about $38.

Some investors lost money when their orders to cancel trades weren’t processed, as Facebook’s share price declined and buy orders were executed at the higher, earlier prices, Goldberg claimed. Others weren’t able to determine whether their orders had been executed, making it impossible to sell the shares and avoid losses, he said.

Thousands of Investors

Goldberg cited press reports blaming the delays on New York-based Nasdaq and claiming that as many as 30 million Facebook shares were affected. He said there are thousands of investors in the class he seeks to represent in the suit.

Goldberg alleged that Nasdaq was negligent in failing to ensure trades were executed quickly and correctly, in not exercising effective quality control and in failing to oversee employees and contractors involved in executing the trades.

Facebook, which raised $16 billion in its initial public offering, fell 8.9 percent to $31 today at 5:20 p.m. New York time. The price was $7 below Facebook’s $38 offer price.

The IPO valued the Menlo Park, California-based company company at $104 billion.

The case is Goldberg v. Nasdaq OMX Group Inc., 12-CV-04054, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at

To contact the editor responsible for this story: Michael Hytha at


Shale Glut Means $1-a-Gallon Savings at the Pump

By Eduard Gismatullin and Jeremy van Loon - May 22, 2012 9:59 PM GMT+0700
Tomohiro Ohsumi/Bloomberg
A liquefied natural gas (LNG) tanker operated by Energy Advance Co., a unit of Tokyo Gas Co., is moored at the company's Sodegaura plant in Sodegaura City, Chiba Prefecture, Japan, on Thursday, March 22, 2012.

Chad Porter wants to run his 18- wheeler trucks on frozen natural gas along a highway that crosses Canada’s Rocky mountains even before the world’s longest chain of refueling stations gets built to keep them fueled.

The chief operating officer of oil services company Ferus Inc. bought two vehicles to test liquefied natural gas and reckons switching from diesel may cut 22 percent from his fuel bill, or about $1 a gallon. At the moment, Calgary-based Ferus uses mobile tankers to refuel his trucks, which cost about C$100,000 ($99,000) more than conventional vehicles, adding expense to a project that’s about saving money. A Royal Dutch Shell Plc (RDSA) project will make it easier to fill up.

A Shell natural gas liquefying plant. Source: Shell

“Gas in our view will be the fuel of the future,” said Royal Dutch Shell Plc Chief Executive Officer Peter Voser. Photographer: F. Carter Smith/Bloomberg

Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Photographer: Jacob Kepler/Bloomberg

Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Switching engines to run on LNG is becoming economic because a glut of fuel from North America’s shale rocks has made the U.S. the world’s largest natural-gas producer and forced prices to record discounts versus crude oil.

“LNG holds great potential as a transport fuel,” Mark Williams, Shell’s director for downstream, said in a speech this month. “North America, for example, now has a century of gas supplies at current consumption rates. So gas is likely to gain market share in transportation.”

Special Coolers

Using LNG in vehicles has limitations, from fuel evaporation to the special coolers needed at filling stations to keep the gas at minus 162 degrees Celsius (minus 259 Fahrenheit), making it mostly suitable for long-haul trucks with large gas tanks. U.S. truckers spent more than $135 billion on fuel last year, according to American Trucking Association.

“We would take advantage of any infrastructure that gets built,” Ferus’s Porter said in an interview from his office in Calgary.

Shell agreed to work with filling-station owners Flying J Inc. to offer LNG to trucks along the highway, from Fort McMurray in Alberta, the heart of Canada’s oil industry, to Vancouver on the Pacific coast, more than 900 miles (1,600 kilometers) to the southwest. At today’s diesel prices, fuel for each run on the route by a typical 33,000-pound, 60-foot truck costs about C$550.

The roadway, which comes within about 235 miles of Mt. Robson, the range’s highest peak at 12,972 feet, passes through part of Canada’s oil and gas producing region, as well as the mining and forestry operations of companies including Teck Resources Ltd. (TCK/B)

‘See Opportunities’

“We see opportunities for a concept like this one in other areas of the world as well,” said Jose-Alberto Lima, Shell’s vice president for LNG and gas sales in Americas. He said Shell, based in The Hague in the Netherlands, doesn’t expect a rebound in gas prices anytime soon.

In addition to being cheaper, natural gas burned in trucks emits as much as 25 percent less carbon dioxide, as well as almost eliminating particulate matter and sulfur dioxide produced by diesel-powered vehicles, according to the Calgary- based Van Horne Institute. Using natural gas, a fuel where North America is self-sufficient, would also cut demand for imported crude oil.

Shell eventually plans to deploy LNG technology to power trains, ships and mining industry engines. Gas overtook crude oil to account for more than 50 percent of the company’s production for the first time this year. It expects to expand the use of LNG as a transport fuel beyond North America to Europe, China, Latin America and Australia.

Future Fuel

“Gas in our view will be the fuel of the future,” Shell Chief Executive Officer Peter Voser told shareholders today. The company has more than 40 trillion cubic feet of gas resources in North America, about 12 percent of the continent’s total at the end of 2010, based on data from BP Plc (BP/)’s Statistical Review of World Energy.

The Anglo-Dutch company’s Green Corridor project in Canada will make 300,000 tons of LNG a year. It plans to start production at its first small-scale gas liquefaction plant at Jumping Pound near the route’s halfway point next year.

“These trucks are more expensive than the traditional diesel trucks today,” Shell’s Lima said. “You need to have economies of scale to bring these costs down.”

Shell is cooperating with Vancouver-based Westport Innovations Inc. (WPT), the maker of cryogenic fuel tanks and the only currently available 15-liter gas-powered engine suitable for heavy-duty trucks running on LNG.

Compressed Gas

The second Canadian maker of gas powered engines is Cummins Westport Inc., which makes smaller 8.9 liter heavy-duty unit. The Vancouver-based joint venture of U.S.’s Cummins Inc. (CMI) and Westport has designed a motor able to run on either compressed natural gas, CNG, or LNG.

CNG is used for light- and medium-duty vehicles, such as buses and garbage trucks. LNG, which is using a cryogenic technology to chill gas and reduce it to one-six-hundredth of its original volume at low temperature, is offered mostly as a fuel for heavy-duty vehicles.

CNG, which is stored at ambient temperature, requires tanks with thicker walls to hold the pressure and provides less energy per volume. Therefore, long-haul trucks can take more LNG on board in lighter chilled tanks with less time required for refueling per energy unit.

“Drivers have been very receptive to LNG trucks, especially since they drive like diesel trucks,” said Cara West, a spokeswoman at Paccar Inc., which designs and manufactures trucks under Kenworth, Peterbilt and DAF nameplates and where Ferus bought its vehicles. “Dealers are receiving multiple inquiries from customers anxious to learn more about LNG trucks.”

Market Share

Paccar currently equips some of its Kenworth and Peterbilt models with LNG engines. The Washington state-based maker expects the gas-powered-truck market share in North America to expand to about 20 percent in the next several years, up from about 6 percent now.

With natural gas fuel taxed about 20 Canadian cents less a liter than diesel on equivalent basis, it takes less than five years for a driver to return extra investment benefiting from cheaper fuel, according to the Canadian Natural Gas Vehicle Alliance. Canada has more than 100 LNG powered trucks almost equally split between western and eastern parts of the country operated by Vedder Transport, a milk hauler in British Columbia, and Robert Transport, which operates in Quebec and is expanding the fleet.

In January, President Barack Obama said tax breaks for natural-gas powered trucks will help cut dependence on imported oil in the world’s largest crude-consuming country. “We, it turns out, are the Saudi Arabia of natural gas,” Obama said. The U.S Senate and House have been reviewing the bill to boost greater use of the gas.

Huge Resource

“The potential is there, and when you have this huge resource in the U.S., and you’ve got almost 10 million barrels per day imported being used for transportation fuels,” said Theepan Jothilingam, an analyst at Nomura Holdings Inc. At some stage, the U.S. government “will need to give a tax break and encourage both the technology and the execution of this technology.”

Billionaire investor Pickens has been lobbying for incentives to stimulate greater use of natural gas as a vehicle fuel to replace imported oil. Pickens is the largest shareholder of Clean Energy Fuels, a natural-gas supplier for bus and truck fleets, which is building America’s Natural Gas Highway across the U.S. to fuel long-haul trucks with LNG starting from the end of this year.

About 30 percent of U.S. “classic trucks” can be converted to run on LNG, which needs highly utilized vehicles running lots of miles to pay back for the additional engine costs by fueling it with cheaper LNG, said James Burns, Shell’s general manager for LNG in Transport, Americas. “Emissions is a key issue here as well both on local air emissions and green- house gas emissions.”

To contact the reporters on this story: Eduard Gismatullin in London at; Jeremy van Loon in Calgary at

To contact the editor responsible for this story: Will Kennedy at