What to do with the natural gas glut produced by the U.S. fracking boom?
One answer: Planes, trains and automobiles.
With oil prices high, transportation could soak up the supply of cheap natural gas. BNSF, America’s largest railroad and one of the biggest consumers of diesel, said last week (paywall) it would launch a pilot project to test the use of liquefied natural gas (LNG) in locomotives. Shell, meanwhile, announced it would build two plants in North America to liquefy natural gas for use in transportation. That move follows Shell’s plans to build LNG filling stations at a network of truck stops in the U.S.
“The use of liquefied natural gas as an alternative fuel is a potential transformational change for our railroad and for our industry,” Matthew Rose, chief executive of the railroad controlled by Warren Buffett’s Berkshire Hathaway, said in statement.
A look at the numbers explains Rose’s enthusiasm. A gallon of diesel sold for an average of $4.09 a gallon in the U.S. on Monday, March 11, while LNG can provide as much energy for less than half that cost. And the California Air Resources Board estimates that LNG-fueled vehicles emit up to 25% fewer carbon, as well as far less particulate matter associated with heart and respiratory disease.
For years natural gas barons like the hedge-fund manager T. Boone Pickens have pushed for cars that run on compressed natural gas (CNG). But such vehicles never caught on. CNG can’t match the energy density of gasoline. That means drivers must refuel frequently—if they can find anywhere to do so.
LNG, on the other hand, packs far more energy and can be transported by ship and tanker truck, at a temperature of -260°F (-162°C). That makes it an appealing alternative for long-haul trucking and for railroads, which run on predictable schedules and don’t require gas stations every few miles.
Hence Shell’s plans to build an LNG facility in Louisiana, where the liquefied gas can be shipped up the Mississippi River, and in Ontario, Canada, where the plant will have access to shipping lanes on the Great Lakes. Shell plans to ”make LNG a viable fuel option for the commercial market,” Marvin Odum, one of Shell’s top executives, said in a statement. There are currently 14 liquefaction facilities in operation in the U.S., according to research firm Zeus Intelligence.
But while cheap LNG could transform transportation, the costs and risks are substantial. Many a fortune has been made and lost on wild swings in natural gas prices. And the current enthusiasm for natural gas as a vehicle fuel is due almost entirely to estimates that shale gas reserves will continue to yield cheap and abundant gas.
“The question is, how long will prices stay low?” asks Andrew Soare, an energy analyst with market consulting firm Lux Research. “There’s some uncertainty about depletion and anytime there’s a single source for a fuel the risk in supply is very big.”
Even reserves of shale gas turn out to last for decades, the global market will ultimately determine whether it gets used for transportation. For instance, if prices rise on the international market, producers of LNG are more likely to ship it overseas than up the Mississippi River, which would make it suddenly more expensive for any trains and trucks that have come to depend on it.
The risks for producers are substantial too. Natural gas may be cheap right now, but LNG plants are not. The U.S. Department of Energy estimates that a new liquefaction facility can cost between $1.5 billion and $10 billion, depending on its production capacity, and take years to build.
“If you look at some of the import terminals for LNG they’re idle because the dynamics of supply and demand for natural gas have switched so much in such a short time,” says Soare.
Finally, even if LNG is cheap in the long term, there’s an obstacle to adoption: It costs a lot upfront. Retrofitting a diesel locomotive to run on LNG can cost $1 million, according to a report in The Wall Street Journal. And LNG-powered tractor-trailers can run well into the six figures.
Boeing is also studying the use of the fuel as part of a contract with NASA, to see if it can build aircraft that meet stricter environmental norms. But it may be as much as three decades before you get to board one of them.
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