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March 7 (Bloomberg) -- General Electric Co. and Caterpillar Inc., the world’s largest locomotive makers, are rushing to develop natural gas-powered models in a potential shift from diesel’s six decades as the fuel of choice for railroads.
Three of the biggest U.S. rail carriers -- Berkshire Hathaway Inc.’s Burlington Northern Santa Fe LLC, Union Pacific Corp. and Norfolk Southern Corp. -- are working with manufacturers on using gas as an alternative power source for freight trains. CSX Corp. is studying the technology.
Tapping the nation’s glut of gas as a transportation power source opens a new front in the global competition between GE and Caterpillar. Liquefied natural gas holds the promise of cutting railroads’ costs, curbing greenhouse-gas emissions and ushering in the industry’s biggest change in fuel technology since diesel displaced steam in the 1950s.
“We are entering a new era where natural gas will be a major fuel,” Lorenzo Simonelli, chief executive officer of GE’s transportation unit, said in an interview. “If you believe the price advantage over diesel is going to stay here for the next 10 to 15 years, then LNG is a revolutionary fuel.”
Industrial goods such as locomotives and energy equipment are part of GE Chief Executive Officer Jeffrey Immelt’s push to emphasize manufacturing and shrink the finance unit, an initiative started after credit-market disruptions jeopardized the company. Caterpillar began its dedicated rail business with the 2006 acquisition of Progress Rail.
GE more than tripled to $23.68 today from a low of $6.66 during the financial crisis. The company’s stock traded at premiums of 50 percent to Caterpillar and 4.1 percent to the Standard & Poor’s 500 Railroad Index, on a price-earnings basis.
Caterpillar climbed 1 cent to $89.65 at the close in New York.
“In the last 12 months, there’s been a tremendous increase in activity around LNG within North America,” Simonelli said. “In the not-too-distant future, you’ll see some announcements being made about how we can apply LNG into a locomotive.”
Fuel trails only employee compensation among American railroads’ expenses, spurring a search for cheaper alternatives. Union Pacific, the largest U.S. railroad by revenue, burned 1.09 billion gallons of fuel last year at an average price of $3.22 a gallon, according to SEC filings.
That’s significantly costlier than liquefied natural gas. It costs truckers $2.99 to buy LNG with the same energy content as a gallon of diesel at Clean Energy Fuels Corp.’s Port of Long Beach facility, the world’s largest LNG fueling station, said Gary Foster, the company’s spokesman. That’s before volume discounts that can reduce the price by as much as 30 percent, he said, meaning some customers pay as little as $2.10.
Railroads are turning to locomotive makers, including Fairfield, Connecticut-based GE and Peoria, Illinois-based Caterpillar, for engines that can help them take advantage of those savings.
“A lot of the customers have come to us seeking us to develop the technology,” William Ainsworth, CEO of Caterpillar’s Progress Rail Services unit said in a telephone interview. “They’ve already run models on the fuel savings. It’s not that we have to pitch the fuel savings. We’ve just got to get the technology right.”
Caterpillar, the world’s largest maker of diesel and natural gas engines, expects to run a pilot program in North America with a locomotive engine that uses a mix of diesel and natural gas later this year, Ainsworth said.
“We’re spending some money on LNG to see if there’s an opportunity to switch from diesel,” Matt Rose, Burlington Northern’s CEO, said in an interview in January. “We’re working with both of our manufacturers as well as a bunch of suppliers on that.”
Warren Buffett, Berkshire’s billionaire CEO, said Burlington Northern will begin tests with natural gas locomotives this year during a March 4 interview on CNBC. Buffett bought the Fort Worth, Texas-based railroad for $27 billion three years ago in the largest acquisition of his career.
BNSF will begin the tests in the third quarter with units from both GE and Caterpillar, Rose said yesterday at an energy conference in Houston. He’ll make a decision in 2014 about whether to go ahead with the conversion of the railroad’s entire fleet, which could take up to a decade, he said.
Stricter emissions standards for locomotives set to take effect in 2015, in addition to cost savings, are pushing BNSF to look at natural gas to power its locomotives, Rose said.
Building an engine to run predominantly on liquefied natural gas with a smaller amount of diesel mixed in, a necessary step to maintain hauling power, is complex and the technology is in the “early development stage,” Tom Lange, a spokesman for Omaha, Nebraska-based Union Pacific, said in an e- mail.
That hasn’t stopped the freight rail industry from exploring the ramifications of a move toward natural gas. Union Pacific is leading a task force put together by the Association of American Railroads that’s reviewing safety standards for special fuel cars that trains will need since LNG is less energy-dense than diesel. The panel is also studying ways to ensure LNG-powered locomotives can be used across all of the largest railroads’ networks.
“Union Pacific is exploring the potential to use LNG, but it’s still very much in the early analysis phase,” Lange said. “We are working closely with locomotive and engine manufacturers, cryogenic fuel-tank suppliers and natural gas/LNG suppliers to complete our analysis.”
CSX, the largest railroad operating primarily in the eastern U.S., is “open to this technology and believe it is potentially viable but there’s still a lot of work to be done,” Kristin Seay, a spokeswoman for the Jacksonville, Florida-based company, said in an e-mail.
Norfolk Southern is working with locomotive manufacturers and studying compressed natural gas-powered engines in addition to LNG, said Robin Chapman, a spokesman for the Norfolk, Virginia-based railroad.
In addition to the technological challenge of developing a locomotive that can run on natural gas, the rail industry also faces the logistical hurdle of bringing the fuel to its networks, said Paul Bingham, an economist at CDM Smith, an Arlington, Virginia-based consulting firm.
“The Class 1 rails will make the investment and put in the fueling systems, but they still have to get the gas to those locations,” Bingham said in a telephone interview. “Some other third party is going to have to play in that.”
That may provide another opportunity for GE, which makes equipment it says can liquefy natural gas at any point along a distribution network. GE sold two of the so-called MicroLNG units to Seal Beach, California-based Clean Energy Fuels last year to help create a coast-to-coast network of LNG fueling stations for trucks.
“Like the move from steam to diesel, if it’s going to be that radical a transformation, that’s a lot of opportunity for sales in a lot of places,” Tony Hatch, an independent transportation consultant based in New York, said in a telephone interview.
--With assistance from Shruti Date Singh in Chicago and Bradley Olson in Houston. Editors: James Langford, John Lear