LNG by Rail – Are we Ready Yet?

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Clifton Linton, editor of Energy Transport Insider, provided the rail information for this post.

In this post we'll look at an energy transportation option that many would never have considered before - LNG by rail.   The recent announcement that Dominion Energy (NYSE:D) and Duke Energy (NYSE:DUK) have canceled their Atlantic Coast Pipeline project due to increasing costs and delays due to regulatory uncertainty has market observers wondering whether the region's potential as a global gas supplier will ever be realized.

Western Pennsylvania in particular could be a key source of LNG-by-rail cargoes.  The initial destination most often mentioned is New England. That region is seeing growing natural gas demand as consumers shift away from heating oil for home heating. The area, however, faces supply crunches during the peak demand of the winter months and sometimes in the hottest summer months. That's when pipeline capacity maxes out and local natural gas prices spike.  Regional prices are high enough that trucks are already used to fill the supply gap during these peak demand periods, along with imported LNG in the winter.

Plans to add more pipeline capacity to expand deliveries to Massachusetts have run into strong objections from local residents and governments. That’s led to a growing clamor to use rail to deliver more gas. Rail is more efficient than trucks in moving large volumes of LNG, and the region already has LNG storage at key peaking fuel destinations.   If gas producers could ship LNG by rail, would they?

That’s no longer a rhetorical question following the June 19 ruling by the Pipeline and Hazardous Materials Safety Administration (PHMSA) and Department of Transportation which authorized the bulk transportation of LNG by rail. The ruling complies with the April 2019 Presidential Executive Order “Promoting Energy Infrastructure and Economic Growth.”

The Federal Railroad Administration and PHMSA did allow some LNG by rail shipments prior to the ruling for pilot projects.  One pilot program is in Alaska, where LNG is being railed to Fairbanks to improve air quality. And the government is allowing LNG to be hauled by the Florida East Coast Railway in what are known as ISO containers. These are intermodal cryogenic tank containers that are loaded on top of a flatbed rail car.  The containers can be transferred to trucks for the final move to the end user site.

In December 2019, the Feds also granted a special permit to Energy Transport Solutions to ship unit trains (100-car trains) of LNG from a New Fortress Energy natural gas plant under construction near Wyalusing, PA to an export dock at Gibbstown, N.J., the Wyoming County Press Examiner reported, at the time.

But the challenges are formidable.   As a energy transport mode, rail cars typically find themselves ranking lower in cost than trucking, but still much higher than pipelines.   An LNG tank car likely will have a capacity of 30,680 gallons of LNG. A truck can carry about 10,000 gallons.  Very similar to the volume moved by propane trucks and railcars, but the cost per Btu of energy delivered is somewhat higher since a gallon of propane has about 11% more energy value LNG.

You also can’t use an ordinary tank car for LNG. They are not designed to carry cryogenic cargoes. Natural gas liquefies when chilled to -260 degrees Fahrenheit. If it warms above that temperature, the gas will vaporize, expand and vent out of the tank car’s pressure relief valve. If that continues, the tank car will arrive at its destination, but it'll be empty.

There’s a special class of tank cars designed to carry cryogenic cargoes - the DOT-113. This tank car is a big rolling thermos. It is a tank within a tank. Between the two is a vacuum used to keep the LNG cold. PHMSA’s rule specified that LNG must be transported in DOT-113C120W9 tank cars. The rule includes new safety requirements such as a thicker carbon-steel outer tank. The problem, there are maybe a handful of these cars.

“There is virtually no fleet,” said Richard Kloster, president of Integrity Rail Partners, Inc., a rail industry consulting firm.   The cars cost an estimated $200,000 each to build, or $20 million for a 100 car unit train sized fleet.   In addition, facilities for liquefaction, loading, and offloading at the delivery location would need to be built to create the rest of the value chain.    A one unit train sized operation would be able to move about .25 bcf of gas equivalent in terms of heating value, but the trip would take anywhere from 10 to 30 days depending on the route.

According to a PHMSA study ("Risk Assessment of Surface Transport of Liquid Natural Gas") , the total estimated 2019 transportation cost for an LNG move from Pennsylvania to Massachusetts by rail was $5.16/Mmbtu, only $.21/Mmbtu lower than the cost to move LNG by truck in an ISO container.  This includes the cost to liquefy, transport, store, and regasify the LNG, but not the cost of the gas itself.   The reason there is so little difference in the 2 modes is that rail movements would still require trucking to move the LNG to an end destination not directly connected to the railroad.

In spite of all this, use of rail would triple the volume of domestic LNG that could be delivered during peak demand periods compared to trucking, at a lower cost.   The New England region, with Boston as the biggest market, imports LNG from Canada and overseas producers through 3 LNG terminals.   With the average January-February gas price averaging $12.70/Mmbtu at the Algonquin Citygate in 2014-2018, it seems the opportunity still exists to displace some of these imports.

Whether this opportunity is good enough to justify the capital needed to capture it for a primarily seasonal market remains to be seen.   It seems more likely that would be LNG rail shippers will need to follow New Fortress Energy's example to seek year round business via export to other regions.   But with this new development, and the challenging outlook for new pipelines, it could be time for producers to take another look at the "virtual pipeline" option.