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How Warren Buffett Could Change the Future of Freight Rail How Warren Buffett Could Change the Future of Freight Rail

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How Warren Buffett Could Change the Future of Freight Rail

The Oracle of Omaha is testing natural gas fueling for his company, BNSF Railway. The success of this project may prompt other railways to follow suit.

Warren Buffett, the country's second-wealthiest man, is well known in the business world as a disciplined cost-cutting powerhouse—with the ability to turn struggling investments into lean and profitable enterprises.

In his most recent business interests, Buffett's dollars and cents approach has been no different: BNSF Railway, acquired by Buffett's company Berkshire Hathaway in 2010, is trying new methods to combat the cost of diesel.

 

BNSF, the second-largest freight rail network in the country, announced in March that it would begin testing liquefied natural gas (LNG) fuels for its locomotives. For BNSF, natural gas retrofitting is an opportunity to take advantage of affordable natural gas prices.

"The railroads are definitely experimenting with converting to natural gas," said Buffet, chairman of Berkshire Hathaway in a March CNBC interview. "When you get natural gas for [mmBTU] $3.50 and you look at where oil is, you've got to look at converting any kind of an engine to natural gas."

"We can save hundreds of billions of dollars annually as we get more self-sufficient in oil and gas, so it's got big, big consequences," he added.

 

But just how transformational the natural gas shift will be for the rail industry depends largely on the success of the BNSF's test period, the end of which has not yet been announced.

In the meantime, however, other railway companies are beginning to follow suit, with CSX, Union Pacific and Norfolk Southern having all stated an intent to begin trials with natural gas as a replacement fuel.

The switch over to natural gas is "one of the most significant developments in railroading since the transition from steam to diesel," said Oscar Munoz, CSX's chief operating officer, in a statement.

Investing in natural gas trains has "the potential to increase efficiency and reduce costs by offering substantially increased range between refueling stops, and by taking advantage of today's lower cost of LNG versus diesel fuel," Melanie Cost, a spokeswoman for CSX, added.

With natural gas prices hovering today at about $20 per barrel equivalent, a natural gas alternative is beginning to look more attractive to executives—especially when oil persists at close to $100 a barrel.

Experts tend to agree that natural gas adoption can transform the rail industry, especially if the shale revolution continues to sustain lower gas costs.

"I think economically it's attractive and that's why BNSF is looking into this, as well as some other carriers," said Nicholas Chase, an economist with the U.S. Energy Information Administration. "They are very interested in it because of all the talk and all the interest in shale gas. They are looking at the price difference between diesel and LNG."

That price difference, Chase says, may be significant enough to surpass the upfront costs many railway executives will have to pay for converting their trains for natural gas.

"Railroads tend to be a fairly conservative industry, so they are going to think about it and they are going to test it," Chase said. "The question will become: Will they go for it? Will they just bring some main lines into it? Or will they just go all out and bring their whole stock from diesel to LNG?"