Last year, BNSF Railway’s Matt Rose startled the industry by revealing that his company would test locomotives fueled by liquefied natural gas (LNG), with the possibility of full-scale implementation of this new (for railroads) fuel source starting as soon as the end of 2014. At the time, I called this development “bigger than the shift from steam.”
Since then, we’ve been waiting. BNSF’s tests have already begun, using locomotives reconfigured by Electro Motive Diesel, a Caterpillar subsidiary, and soon by General Electric. Matt doesn’t share his secrets with me, obviously, so I’ve no idea how the tests and deliberations are going. Plus, I realize there are a host of issues to resolve, including regulatory matters, the logistics of refueling, and the high costs of converting the existing fleet of diesel guzzlers.
But the more I think about it, the stronger my conviction that the big railroads will tilt to LNG in a big way, and faster than most people would imagine. Here is what fuels (pun intended) my conviction:
1. A huge cost gets hit head-on. Diesel fuel is almost as big an expense item to railroads as total employee compensation. The days of big cuts in the head count are over. So LNG is a fat pitch, indeed. Even if you achieve only a 33 percent cost saving, you will have significantly reduced your cost of doing busiiness.
2. Rapid payback. I’ve read that the cost of converting an existing locomotive from diesel to LNG is at least half a million dollars — in other words, huge. But at the rate that road locomotives consume fuel, even that cost can be repaid by savings in two to three years. A return on investment of this magnitude is a no-brainer to most railroad CFOs.
3. Plentiful supply of fuel. We are awash in natural gas, thanks to hydraulic fracturing of rock formations by drillers. Every time the price of natural gas goes up, more drillers rush to the front lines and the price goes down—a nice supply and demand equation. Based on what I know now, this should hold true for decades to come.
4. Affordable. Railroads are no longer starved for capital. To say they are awash in money is no exaggeration. And what they don’t have, they can borrow, cheaply.
5. A regulatory miracle. Railroads and locomotive builders alike dread the advent of Tier 4 emission rules starting in 2015. The complex technologies necessary to comply with the pending regulation will make locomotives more costly to build and maintain. LNG holds promise of meeting Tier 4 standards with fewer bells and whistles.
6. A competitive necessity. Over-the-road truckers are already converting their tractors to natural gas. If one mode of transports significantly cuts costs, it tilts the board against competing modes that do not.
I’m not predicting that the diesel locomotive is a dodo. Diesels will be with us as long as there are railroads. You’ll see them working in yards, on local freights, and on smaller railroads. But it’s hard to imagine BNSF and its fellow Class I’s saying, nah, let’s forget this. And when one railroad makes the plunge to convert its road locomotives, the others will be forced to follow or be saddled with higher cost structures, which invites an invasion by unwanted hedge fund investors demanding changes in management.
It took railroads about one decade, from 1946 to 1956, to substantially convert their steam locomotive infrastructure to diesel. If LNG turns out to be a viable fuel source, a decade is not a bad timeline for conversion this time around.
The beauty of this blog, to me, is that there is never unanimous opinion. We learn from each other. So weigh in, readers. — Fred Frailey
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