Rail on track for LNG fuel, but schedule isn’t set

HOUSTON — Those hoping for natural gas-powered car fleets on the nation’s highways might want to first look to railroads, where analysts say there’s a more compelling case to pioneer natural gas-pulled trains.

The switch to natural gas as a transportation fuel has been driven by the fuel’s continued low price compared to diesel. Around 2005, ballooning gas production sent benchmark natural gas prices at the U.S. Henry Hub down to a fraction of the international oil price benchmark. Prices have stayed that way, and as a result, the fuels derived from natural gas have been cheap enough to have many companies considering putting up the extensive investment required to switch away from crude oil-derived fuels.

The potential cost savings are impressive. Garry Hart, of engineering and consulting company Black & Veatch, estimated that switching just 200 locomotives to LNG fuel would cut $60 million to $80 million from a railroad’s annual fuel budget.

If everything was switched, the benefits could be even greater, according to an analysis by Nicholas Chase with the U.S. Energy Information Administration. Chase estimated that the seven top U.S. railroad companies consumed about 3.6 billion gallons of diesel fuel in 2012 at a cost of about $11.5 billion. Fuel translated to about 23 percent of the companies’ total operating costs.

Railroads are also well positioned to experiment with alternative fuels because trains run on fixed routes. Companies could convert particular legs to run natural-gas fueled cars without facing the uncertainty about fuel supply that has been one of the biggest deterrents holding back alternative fuels on highways.

But pioneering a switch to natural gas-based rail fuel would require a massive investment. Setting up a locomotive that runs on liquefied natural gas is about $1 million more expensive than the current diesel-fueled model and requires another car, called a tender, to house the fuel.

The extra expense is one of the major reasons railroads have yet to switch.

“There are 25,000 locomotives out there, and you’re talking about $1 million extra per piece,” Chase said. “When you start talking about that, you’re talking about a lot of money. The amount of money it would take for the infrastructure, the new maintenance, the training of the crews, it’s a lot of money and you would have to swallow it upfront or go to capital markets.”

Railroad companies would also need to build the infrastructure needed to fuel liquefied natural gas trains. There are a few different ways that could happen, and none of them are cheap, Hart said. Building a reasonably-sized liquefaction plant that would take natural gas and convert it into LNG fuel can cost about $60 million.

The sizable investments would mean the railroads would need to take some considerable risk to change fuels. In addition, they’d be subject to new regulations and need to iron out the various logistical challenges as well.

But there is a precedent for all this: In the early 1900’s railroads rapidly switched from steam and coal powered locomotives to diesel-powered trains. In the freight segment, diesel powered locomotives first appeared in 1941 and had totally captured the market by 1961, Chase said.

Chase cautioned that the switch to natural gas from diesel isn’t as attractive to railroads as the historical switch from steam to diesel.  Steam locomotives carried exorbitant annual maintenance costs and required extensive watering infrastructure to be built along the tracks. Diesel locomotives could travel about twice the distance annually compared to steam-powered trains and could even be turned off at much shorter notice.

If railroads embraced LNG fuel with the same urgency they embraced diesel decades ago, LNG fuel could garner about 95 percent of the energy used by freight rail in 2040. That’s not as likely as a gradual adoption, Chase said, which would have LNG fuel supplying about 35 percent of total freight rail by 2040.

In a report on the switch, Hart said that railroads have been testing locomotives and could have them ready for a large-scale roll out by 2016. A transition may take some time, he said, but looks inevitable if natural gas continues to flow.

“It’s an environmental positive and has a financial incentive. One would only have to look at the shale boom in NA, to look at the projection of recoverable shale gas and compare that to the future of oil,” Hart said.  “Natural gas has a long-term advantage that should be considered now.”