Industry Market Trends
Legislative and Economic Factors Causing Railways to Experiment with LNG Fuel
March 15, 2013
BNSF Railway Co. is one of the biggest U.S. consumers of diesel fuel in the country -- the second-biggest consumer of diesel fuel in the country next to the Navy, BNSF officials reckon. According to a recent Wall Street Journal article, they plan to soon experiment with using natural gas instead of diesel to power their locomotives.
Yes, part of the reason is the new federal regulations slated to come into effect in a couple years mandating stricter limits on pollution, limits which would hit diesel-powered locomotives. Natural gas-powered locomotives would qualify under the regulations.
$3.97 vs. $0.48: You Do The Math.
But that's two years in the future, and two years is a lifetime in politics. Regulations can be finagled. What's really driving the experiment is the astonishing price difference between powering with diesel and with natural gas these days. As the Journal says, "A gallon of diesel fuel cost an average of $3.97 last year, according to federal statistics. The equivalent amount of energy in natural gas cost 48 cents at industrial prices." As Marketplace reported, "BNSF happens to be owned by Warren Buffett's Berkshire Hathaway. Buffett is betting big on natural gas. If this latest natural gas play works, it could mean big profits and big changes for the entire rail industry." Oil's dominance as the fuel of choice for utilities and power plants was ended when coal became significantly cheaper -- after coal was replaced by diesel in railroads about half a century ago -- and now utilities are seeing the advantage in switching from relatively dirty coal to relatively clean natural gas. Yes, the lower price makes it an easier decision, too. If railroads switch over from diesel to natural gas that would put a serious dent in the oil industry.
The Fracking Factor
Natural gas's low price is due, of course, to the fracking revolution, which allows natural gas heretofore unobtainable to be extracted much more easily and cheaply than ever. Fracking has led to huge price reductions in natural gas, since we have so much more of it on hand these days, causing heavy diesel users to give it a second look. There have been tentative steps in that direction. Last September, Canadian National Railway Co. "retrofitted two locomotives to run on a mixture of 90 percent LNG and 10 percent diesel," the WSJ noted, adding that the railroad admitted "mechanical and fuel logistics challenges" with widespread conversion. The jury's still out on whether the conversion indicates whether retrofitting more locomotives would be worthwhile or not. The railroad industry isn't exactly known for its cutting-edge innovation. Using natural gas instead of diesel would be the biggest industry shift since diesel power swept away the steam-powered trains of Western movie fame.
Bloomberg reported recently that the world's leading locomotive makers, General Electric and Caterpillar, "are rushing to develop natural gas-powered models in a potential shift from diesel's six decades as the fuel of choice for railroads." In addition to BNSF, Union Pacific and Norfolk Southern are "working with manufacturers on using gas as an alternative power source for freight trains," and CSX Corp. "is studying the technology," according to Bloomberg. The changeover costs would be significant. As the WSJ says, "Just retrofitting a diesel locomotive and adding the tanker car could add 50 percent to a locomotive's roughly $2 million price tag" at first. Much of the complexity is in ensuring that changing fuel sources doesn't impair the locomotive's hauling power. To retrofit a locomotive to switch to natural gas would cost anywhere from $600,000 to $1 million each, said Normand Pellerin, assistant vice president for environment and sustainability for Canadian National Railways, which is running an LNG test train in Alberta, according to FuelFix.com. Using that as a rough guide, one ballpark estimate for BNSF retrofitting their fleet would run about $5 billion. Marketplace notes that not only will locomotives have to be redesigned, "they will need more fuel storage and new fueling stations. All that infrastructure is going to be expensive." But the move still makes sense to energy expert Amy Jaffe, who told Marketplace that even given all the conversion costs, "You can make money almost overnight." Jaffe says the oil companies aren't sitting on their hands waiting to be put out of business. "Shell has entered this market, BP is looking at this market, Conoco Phillips," she told Marketplace. Rose says right now BNSF is looking at getting pilot trains. New locomotives which run on liquefied natural gas are "being developed by units of General Electric and Caterpillar," the WSJ says, as well as dual fuel locomotives, which are expected to get rolling this fall. BNSF is considering retrofitting their existing stock sometime next year. And with close to 7,000 locomotives, there's a substantial cost involved with retrofitting. Essentially BNSF would be betting that the cost of natural gas is going to stay low for a long time, and there are experts who believe that, too. There are other options to consider. HispanicBusiness.com recently reported that David Rosse, a retired BNSF locomotive fireman and engineer of 44 years, says "with LNG you lose power and mileage. That's just the way it burns." He said a switch to waste vegetable oil -- which is, in fact, used by the Grand Canyon Railway Company -- would be smarter: "Vegetable oil burns clean; and the firebox and fuels are all clean. You won't get soot and stuff in the engine.""This could be a transformational event for our railroad," BNSF Chief Executive Matt Rose told the WSJ. It could be a boon for locomotive manufacturers as well.
Love Me Tender
Pellerin added that using LNG could possibly have the serendipitous result of bringing back an old railroad relic -- the tender car. Instead of being used to carry coal and wood for steam-powered trains, the car directly behind the locomotive would carry LNG. Raj Sekar, manager of engines and emissions research at Argonne National Laboratory, told the WSJ that it would take about five years before we see gas-powered locomotives taking over the rails. Long-haul trucking faces a much greater infrastructural obstacle to switching over, despite the lower fuel cost, than railroads do. Trains run along nice, set track, the same route every time, so refueling stations can be located for maximum value. Trucks roam a multitude of highways over the entire country, making it much more expensive and difficult to locate LNG refueling stations. Still, Shell has been working on establishing a network of LNG refueling stations for trucks, which are easily the biggest group of diesel users in the United States. And if LNG prices remain this low, you can bet somebody will figure out a way to give truckers the excuse they're looking for to switch.