Navigant Research Blog

Rail Looks to Move the LNG Market

John Gartner — September 13, 2016

Pipeline (2)The natural gas market in North America continues to have oversupply issues and a much lower price than other regional markets. Natural gas producers in Canada, Alaska, and other parts of the United States that are looking for new outlets for gas deposits may soon see new sales thanks to an old form of transportation—rail.

For the first time in decades, liquefied natural gas (LNG) is being used to power locomotives in the United States, and trains will soon begin delivering LNG by tanker for the first time. In June, the Florida East Coast Railway (FECR) began the first line in nearly 20 years to operate an LNG-diesel duel fuel train in the United States. The train runs between Jacksonville and Miami, and the company intends on converting all of its locomotives to dual-fuel setups.

Displacing Diesel

FECR is currently sourcing its engines from General Electric. Also offering LNG conversion kits to railway operators are manufacturers Energy Conversion, Inc. and EMD. Railroad operator BNSF is also testing LNG locomotives. The use of LNG in locomotives first began in the 1980s by Burlington Northern Railroad, but after several trials, engine conversion efforts lost steam, until efforts to put them back online returned just a few years ago.

The potential market for LNG as a rail fuel is considerable as diesel fuel consumed in the top 7 major freight railroads was about 7% (3.6 billion gallons) of the U.S. total diesel fuel consumption in 2012, according to the US Energy Information Administration (EIA). Supplying engines with LNG fuel while in operation requires the addition or modification of an LNG tender car. LNG tender manufacturers in North America include Westport Innovations of British Columbia and Chart Industries. The EIA expects that switching to cheaper LNG will more than repay the cost of converting the engine and tender car that holds the fuel.

Alternative to Pipelines

Rail is also being proposed as an alternative distribution mechanism to sometimes-contentious gas pipelines. The Alaska Railroad Corp. (ARRC) became the first rail agency to obtain approval from the Federal Railroad Authority (FRA) to transport LNG by rail tanker in October 2015. Transportation of LNG from where it is produced to interior markets in Alaska is likely to begin soon, and Union Pacific Railroad has similarly applied for permission to transport LNG in the lower 48. Specially designed LNG tanker cars are needed to store the fuel during transport, and new designs are currently in use in Japan and in Europe, where companies VTG and Chart Industries are collaborating.

LNG and oil pipelines continue to face opposition for their potential to endanger the environment that they pass through, so transporting LNG by rail could be a less objectionable method of distribution. Switching from diesel to natural gas also has environmental benefits. According to the EIA, natural gas produces 27.4% less CO2 than diesel when being burned.

Utilizing the railways for both delivery and consumption of LNG has inherent synergies, especially if the refueling depots and processing plants can be located near rail terminals. Until this market matures, some natural gas producers in Canada struggling to find options for exporting the abundance of natural gas are moving into the United States and Mexico in order to maintain growth.

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