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LNG Could Save Your Rail Stock Billions of Dollars

Source: Wikimedia Commons, Ron Reiring 

In 2012, the seven largest freight railroad companies spent $11 billion to guzzle more than 3.6 billion gallons of diesel fuel. But new government projections point to massive savings if corporations like Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) BSNF Railway and CSX Corporation (NYSE: CSX  ) can make the switch from diesel to LNG. Here's what you need to know.

LNG is in
Ever since steam engines went by the wayside in the 1940s and 1950s, diesel has been the freight train fuel of choice. So much so, that current freight rail consumption accounts for a whopping 7% of all diesel fuel consumption -- and it's not hard to see why. Diesel is readily available, cheaper than most alternative fuels, and prices have proved relatively predictable over the past decades.

But booming natural-gas production is paving the way for a cheap competitor: liquefied natural gas (LNG). According to new projections from the U.S. Energy Information Administration, LNG could account for up to 95% of freight rail fuel consumption by 2040 -- an astronomically larger amount than its current near-zero percentage.

According to the EIA, the expected difference in costs between diesel and LNG are more than enough to offset the approximately $1 million in additional costs for building and running a LNG locomotive. Even in the EIA's "Low Rail LNG" case, the new fuel will still account for 16% of total freight consumption by 2040.


And for those worried that the increase in LNG demand might ironically push prices higher and dump diesel back in the competition, the EIA also notes that even if 95% of freight trains switched to LNG, the overall demand effect on natural gas would clock in at less than 1%.

Berkshire Hathaway's LNG Action

Rail-invested companies like Berkshire Hathaway and CSX Corporation are well aware of the major opportunity awaiting their industry. Berkshire Hathaway's BNSF Railway has big plans -- and they include LNG. The rail company has taken a two-headed approach to dealing with its diesel addiction: increasing efficiency and exploring alternatives.

On the efficiency front, BNSF has increased its fleet efficiency by 7.7% since 1999, and has added more than 2,700 new locomotives to its ranks in the past decade. The new engines are, on average, 15% more efficient than their retired counterparts.

In the alternatives arena, the Berkshire Hathaway rail company has already been exploring LNG opportunities for at least a year. When the news broke, The Wall Street Journal noted that "[i]f successful, the experiment could weaken oil's dominance as a transportation fuel and provide a new outlet for the glut of cheap natural gas in North America." For its part, BNSF call its LNG efforts "the cleanest-burning locomotive technologies in existence." But the rail company is undoubtedly looking forward to a boost to its bottom line, as well. In 2013, the Berkshire Hathaway subsidiary spent a whopping $4.3 billion to consume 1.4 billion gallons of diesel. 

CSX Corporation's LNG Action

Source: CSX Corporation 

CSX Corporation isn't idling, either. The company announced last November that it would partner with engineering stalwart GE to explore its own LNG opportunity. In the initial press release, CSX Corporation COO Oscar Munoz noted:

[A]ggressively exploring this technology is consistent with CSX's focus on tomorrow, its long-standing commitment to efficient and environmentally friendly transportation, and its role in helping to promote US energy independence.GE Transportation has the know-how to provide the right LNG solution for our locomotive fleet and help us better understand the feasibility of LNG technology from a safety, operations and economic perspective. 

CSX Corporation and GE are currently running field tests and are exploring entirely new locomotive options, as well as cost-effective retrofits for its current diesel fleet. For its own part, CSX Corporation dished out $1.5 billion for 482 million gallons of diesel last year -- not exactly chump change.

The Energy Revolution
Record natural gas production and LNG technology aren't just revolutionizing the energy sector. As Berkshire Hathaway and CSX Corporation will attest to, the opportunity that this fuel provides is changing the landscape (and profit potential) of the entire U.S. economy.

Finding the right natural gas plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2014, at 2:53 PM, stevedc2013 wrote:

    It's not that cut-and-dried - like the tens of billions of dollars needed for LNG infrastructure.

    According to EIA, there are more than 25,000 locomotives in service with the Class 1 railroads. The capital cost of replacing all or a large part of them, equipping them with specially designed LNG tenders, and providing the associated fuelling infrastructure, would run into tens of billions of dollars, the EIA says.

    "The financing requirement of large capital expenditures complicates the rather straightforward calculation of locomotive fuel economics," the agency explains.

    "The amount of capital available to Class 1 railroads, either on hand or raised in capital markets, is an important factor in determining whether, or to what extent, railroads can take advantage of fuel savings over time."

  • Report this Comment On April 19, 2014, at 10:20 PM, speculawyer wrote:

    I'd like to see them electrify the rail but natural gas is a decent short-term fix.

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