The biggest U.S. rail carriers are collaborating with locomotive manufacturers to look into natural gas as an alternative fuel for freight trains. Most recently, CSX (NYSE:CSX) announced that it has partnered with GE (NYSE:GE) and will be launching a pilot program in 2014.  Earlier in March 2013, Burlington Northern Santa Fe (NYSE:BNI) partnered with GE and EMD, a division of Caterpillar (NYSE:CAT), to develop the natural gas engine technology that would be used in its pilot run.  Union Pacific (NYSE:UNP), along with the Association of American Railroads is studying the sustainability of LNG for use in locomotives. Below is an analysis of the opportunities and challenges for the railroad industry in shifting from diesel to LNG.
- Which Are The Areas Of Rail Shipment Growth In A Year Of Declining Overall Shipments ?
- CSX’s Q2 2016 Earnings Review: Lower Shipment Volumes And Fuel Surcharge Revenue Negatively Impact Results
- How Do Union Pacific, Norfolk Southern, And CSX Compare In Terms Of Efficiency Of Their Rail Networks?
- CSX’s Q2 2016 Earnings Preview: Lower Shipment Volumes And Fuel Surcharge Revenue To Adversely Impact Results
- Which Are The Prominent Growth Areas For Rail Companies This Year?
- Why Did CSX’s Metals Shipments Decline In Q1?
LNG may help reduce fuel costs and improve operating ratios if there is an abundant supply
As per Gary Foster, spokesperson for Clean Energy (NYSE:CLNE), the largest provider of natural gas fuel in North America, if we include volume discounts received with purchasing LNG, it would cost around $2.10 to buy LNG that will provide the same amount of energy output as a gallon of diesel, which costs around $4.  Effectively, this means that LNG might be around 50% cheaper than diesel.
Fuel accounts for more than 20% of the total operating expenses of a railroad carrier. At a time when railroads including Union Pacific, Norfolk Southern (NYSE:NSC) and CSX are trying to bring down their operating expenses to around 65% of their revenues, it makes sense to focus on reducing fuel costs. By opting for LNG, railroads will be able to reduce their fuel costs, thereby reducing their operating expenses.
Natural gas is already a preferred cheaper alternative to diesel for trucks and cars. It also has high demand since it is cheaper than coal and can be used for energy production. If LNG proves to be a viable alternative for locomotives as well, the demand generated by railroads might drive up LNG prices. This may erode the cost advantage of LNG over diesel. In order for the price difference between LNG and diesel to sustain for a long period, an abundant supply of natural gas is important. With drilling techniques like fracking, or hydraulic fracturing, oil and gas deposits have been freed from shale fields such as the Bakken formation. This has created a glut of cheap natural gas in North America.
LNG fuel gas emissions may meet the new U.S. EPA emissions standards
Another compelling factor that might drive railroad carriers to adopt LNG is its cost effectiveness in adhering to emission standards. The U.S. Environmental Protection Agency will be enforcing stricter emission standards from 2015 that will most likely require railroads to equip diesel locomotives with expensive emissions control equipment. Natural gas emits fewer greenhouse gases and particulates than diesel fuel. Tests conducted by GE on their NextFuel Natural Gas Retrofit Kit meet U.S. EPA Tier 3 standards.  Bob Fronczak, assistant vice president, Association of American Railroads believes that LNG fuel gas emissions may meet Tier 4 standards as well, though there is no data to present this. 
Capital expenditures may erode the cost benefits of LNG
A considerable amount of capital will be required to modify diesel locomotives so that they may run on LNG. The cost of modifying the diesel locomotive and adding a “tender” is estimated to be around $1 million.  The tender is required to store LNG and keep it cool. This means that with an estimated savings of $200,000 per locomotive a year  , it would take 5 years to reap any benefits from the cost savings. This time would be further increased if we take into account the costs for maintenance and infrastructure development.
No performance related issues in locomotives when using LNG fuel
Railroads will also be concerned about the locomotive performance when they are powered by LNG. According to Railway Age, a leading railroad industry magazine, not only will LNG powered locomotives provide the same performance as one fueled by diesel but will also travel longer distances without stopping to refuel. 
The logistics behind getting LNG to a fueling site is yet to be explored. This might present an opportunity for third parties like Clean Energy that have an established network of natural gas fueling stations across highways in North America. Clean Energy has already taken a step forward in this direction by signing an agreement with GE Transportation to provide LNG for GE’s initiative to test LNG locomotives. 
It would take another 1 or 2 years to carefully establish the viability of LNG as an alternative to diesel, and another 5 or more years before any profits can be reaped.
- CSX and GE Transportation Partner to Pilot Liquefied Natural Gas Locomotives, November 13 2013, www.csx.com [↩]
- BNSF to test liquefied natural gas in road locomotives, March 6 2013, www.bnsf.com [↩]
- GE Races Caterpillar on LNG Trains to Curb Buffett Cost, March 8 2013, www.bloomberg.com [↩]
- A few clean breakthroughs, September 27 2013, www.railwayage.com [↩]
- Experts weigh in on LNG, September 6 2013, www.railwayage.com [↩] [↩] [↩]
- Berkshire’s BNSF Railway to Test Switch to Natural Gas, March 5 2013, online.wsj.com [↩]
- Clean Energy Releases Fourth Edition of ROAD TO NATURAL GAS, June 17 2013, www.cleanenergyfuels.com [↩]