Crude oil shipments on all U.S. railroads could hit 700,000 b/d by the end of this year, up 40% from current levels, and top 1 million b/d in 18 months, said BNSF Railway Co. CEO Matthew Rose.
Rose spoke on Wednesday at IHS CERAWeek 2013 in Houston, expounding on the massive changes under way nationwide that have flowed into other industries since the unconventional natural gas and oil boom. The Berkshire Hathaway Inc. locomotive unit is seeing more crude shipments especially from the Bakken Shale. And it’s launching a pilot project this year to test whether liquefied natural gas (LNG) from abundant U.S. stock might prove more economic than the diesel now used in its freight trains.
“Enormous opportunity” abounds across the sector, he told the audience.
Crude oil accounted for less than 0.1% of total traffic in 2010, but it had risen to 1.7% in 2012. In January, crude oil accounted for 2.7% of its total rail volume.
BNSF plans to invest close to $200 million to add tracks and new sidings to its rail system serving the Bakken, Rose said. The additional crude tankers wouldn’t displace any of the traditional agriculture shippers in the region, he said. Some of the additions could be temporary until pipelines are permitted and built, but the increased rail traffic isn’t expected to slow, he said.
Railway operations cost more than pipelines, but rails can move more quickly in terms of shipping options, which is key for oilfields like the Bakken or the Eagle Ford Shale in South Texas, Rose said. Producers also like railroads for their “optionality,” which allows crude to be more easily moved to higher-priced markets.
Crude traffic may be one of the growth engines for the mighty rail system, but onshore natural gas may help to deliver products in a cleaner, more economic way, he told IHS CERAWeek delegates. The railway is working with General Electric and Caterpillar’s EMD unit to develop LNG engine technology that is to be used in a pilot rail project. Diesel now powers a 6,900-plus fleet of locomotives that traverses a network of 32,500 route miles across 28 states and two Canadian provinces.
“It comes down to the spread relationship between LNG and diesel,” said Rose. “Once you get that in your head you can make that decision pretty quickly.” Using LNG as an alternative to diesel offers a “potential transformational change for our railroad and for our industry.” A shift of this magnitude could be compared with freight trains’ conversion from steam power, he added.
“This is a really big idea but its truly laced with all sorts of challenges,” which Rose described as “daunting technical and regulatory challenges still to be faced. This pilot project is an important first step that will allow BNSF to evaluate the technical and economic viability of the use of liquefied natural gas in through-freight service, potentially reducing fuel costs and greenhouse gas emissions, thereby providing environmental and energy security benefits to our nation.”
Last year, diesel fuel on average cost $3.97/gallon, according to the Energy Information Administration. On an equivalent basis, natural gas last year cost about 48 cents at industrial prices. The lower costs could be a big deal to BNSF, which is one of the world’s top diesel consumers.
Last year alone BNSF hauled more than 1.7 million carloads of industrial products, including enough crude oil from the Williston Basin of North Dakota and Montana “to fill the tanks of more than 656,000 average-sized vehicles with gasoline every day.” It also hauled 2.2 million coal shipments in 2012, most of them from the Powder River Basin in Wyoming and Montana. In addition, BNSF carried one million-plus carloads of agricultural commodities and an estimated 4.7 million intermodal, or container, shipments.
Using natural gas to fuel locomotives isn’t revolutionary. The former Burlington Northern Railroad system used natural gas locomotives in the 1980s and 1990s. BNSF also tested LNG switch locomotives in Los Angeles until a few years ago when they reached the end of their useful life.
Two years ago a collaboration was launched by Canadian National Railway (CN), the country’s largest railroad, with Westport Innovations and Gaz Metro Transportation Solutions to test replacing diesel with LNG. Last fall CN retrofitted two locomotives to run on a mixture of 90% LNG and 10% diesel; the gas is being supplied by Encana Corp. CN is working with EMD, Westport and Gaz Metro on a longer-term project to explore a state-of-the-art natural gas railway engine and a standardized railway tender.
BNSF was created in 1995 by merging Burlington Northern Inc. and Santa Fe Pacific Corp., the parent of the storied Atchison, Topeka & Santa Fe Railway. Two years ago BNSF became a subsidiary of Warren Buffett’s Berkshire Hathaway, which has investments in a variety of big and small oil and natural gas-related endeavors.
Ginning up demand for natural gas has become a desperate endeavor by many U.S. operators, with some pushing for LNG export projects, while others hungrily eye supplies that could be used by expanding petrochemical companies or LNG-fueled truck fleets. The BNSF trial would be one more way to reduce gas stores.
It’s early days, said Rose. BNSF has no timetable on how long the pilot might last or where it would be used. Using natural gas in long-haul services is more operationally feasible today because of “improved economics and technology,” he said. The pilot would be the first — not the last — step to consider how the technology could be used, and even though it appears to offer “enormous potential,” diesel-to-gas conversions would be challenged on the regulatory front.
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