I’ve been wrapping my arms around the announcement this week that BNSF Railway will test-fuel locomotives with liquefied natural gas (LNG), with a view toward starting large-scale conversions away from diesel fuel as soon as 2014. This is a game-changing development, and holds out the promise of altering railroad economics even more than the switch from steam to diesel locomotives seven decades ago.
“This could be a transformational event for our railroad,” BNSF’s chief executive, Matt Rose, told the Wall Street Journal. The numbers show how right he is. The railroad last year bought 1.4 billion gallons of diesel fuel, at an average price of $3.20 per gallon. That $4.5 billion expense essentially equaled what the railroad spent on employee compensation.
Now suppose you replaced diesel fuel with LNG costing, say, the equivalent in Btu delivery to 50 cents a gallon (the current price is 48 cents). Now your fuel bill has shrunk to one-sixth its former size. I suspect BNSF won’t try a total conversion. Say it makes half its locomotive fleet LNG-friendly. The savings would still be in the realm of $1.9 billion per year. My back-of-the-envelope math suggests that the one-time conversion costs, including investments in LNG infrastructure, could be paid back in the space of two years. Yes, a 50 percent annualized return, the sort that investors dream about but seldom see. And then those savings just pour into the bottom line of Warren Buffett’s great big model railroad.
What this does is alter the economics of ground transportation. It changes how railroads price the movement of crude oil, instantly making rails far more competitive with heretofore less-expensive pipelines. It shrinks the miles (we used to say 700) at which rail is competitive with highway. Is it now 500 miles? 400?
It’s like topping a hill and seeing in front of you a whole new Powder River Basin. Oz.
Will it work? Burlington Northern tried this starting in the 1980s, later using two SD40-2 locomotives (see above) with a tethered tank car of LNG. Steve Ditmeyer, one of the BN officers involved in the test, says the experiment ended largely because diesel fuel prices didn’t rise as expected, while those of natural gas did. But the technology worked.
Today, hydraulic fracturing and directional drilling have created a Niagara of natural gas likely to last for decades at affordable prices. No guarantees, but railroads willing to roll the dice have an opportunity that doesn’t often knock on the door. Canadian National is also testing LNG, and Norfolk Southern is said to be exploring compressed national gas in locomotives, this technology being easier to implement but not able to take a train as far as liquefied gas. BNSF’s vision, for example, is to power an LNG-driven train from Chicago to California or Washington without having to refuel.
The biggest risk is doing nothing. Imagine railroads standing still while long-distance trucks convert to natural gas. It's already happening, actually. Pilot Flying J has put LNG pumps in more than 100 of its travel centers, and opens new ones every week. All of the makers of heavy duty truck engines have LNG-compatible models. So BNSF’s bold initiative should be applauded and closely watched. In life as well as love, victory goes to the bold. — Fred W. Frailey
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