Why Warren Buffett, Bill Gates and Railways Are Betting Big on LNG

“Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy.” — Warren Buffett, 2013 letter to Berkshire Hathaway shareholders

According to the company’s most recent fact sheet, Berkshire Hathaway subsidiary BNSF Railways ships enough coal every year to power 10% of America’s houses, and enough crude oil to fill the gas tanks of nearly 650,000 cars every day. Transporting energy is pretty important to BNSF, and BNSF is pretty important to Berkshire, having generated some $3.8 billion in net income in 2013.

BNSF spent $4.5 billion on almost 1.5 billion gallons of fuel in 2013, making it one of the largest buyers, if not the largest buyer, of diesel in North America. Shifting to natural gas as a fuel could save the company hundreds of millions of dollars every year, but there are a number of technical and regulatory challenges that must be overcome before any large-scale adoption happens. The company first announced that it was going to test natural gas locomotives about a year ago, and that it would be working with both GE and Caterpillar’s EMD unit, starting testing in late 2013.

GE “all-in” on natural gas General Electric’s involvement in natural gas extends beyond locomotives. The company is also working with Clean Energy Fuels in a number of ways, including offering financing for trucking companies to acquire natural gas-powered tractor-trailers, and agreeing to co-finance and build LNG production facilities in the coming years. Additionally, GE’s energy unit is a key supplier to the natural gas production business, as well as one of the primary manufacturers of the gas turbines that utility companies use to make electricity from natural gas. As it says in the company’s annual report, GE can participate in every part of the natural gas value chain.

Considering that almost half of the $103 billion in revenue that GE’s industrial business did last year came from its Power & Water, Oil & Gas, and Energy Management segments, and it’s easy to understand why GE is investing big-time to participate in the natural gas boom.

The diesel-burning locomotive, the workhorse of American railroads since World War II, will soon begin burning natural gas — a potentially historic shift that could cut fuel costs, reduce pollution and strengthen the advantage railroads hold over trucks in long-haul shipping.

Natural gas “may revolutionize the industry much like the transition from steam to diesel,” said Jessica Taylor, a spokeswoman for General Electric’s locomotive division, one of several companies that will test new natural gas equipment later this year.

Any changes are sure to happen slowly. A full-scale shift to natural gas would require expensive new infrastructure across the nation’s 140,000-mile freight-rail system, including scores of fueling stations.

The change has been made possible by hydraulic fracturing drilling techniques, which have allowed U.S. drillers to tap into vast deposits of natural gas. The boom has created such abundance that prices dropped to an average of US$3.73 per million British thermal units last year — less than one-third of their 2008 peak.

Over the past couple of years, cheap gas has inspired many utilities to turn away from coal, a move that hurt railroads’ profits. And natural gas is becoming more widely used in transportation. More than 100,000 buses, trucks and other vehicles already run on it, although that figure represents only about 3% of the transportation sector.

Natural gas may revolutionize the industry much like the transition from steam to diesel

The savings could be considerable. The nation’s biggest freight railroad, Union Pacific, spent more than US$3.6-billion on fuel in 2012, about a quarter of total expenses.

But even under the most optimistic scenario, there’s no way all of that diesel will be replaced. Railroads and locomotive makers are looking primarily at ways to retrofit existing machines to burn a mix of diesel and natural gas because that will be the quickest and easiest way to adopt the new technology.

Locomotive makers have not yet set the prices of their retrofit kits, but railroads expect they will be cheaper than a new locomotive costing roughly US$2-million.

Using both diesel and natural gas also offers some advantages over using natural gas alone. The diesel can provide the spark needed to ignite natural gas without redesigning locomotive engines, and the diesel helps provide horsepower.

“It’s so early in this that we’re still working to understand the potential savings,” said Louis Renjel, vice-president of strategic infrastructure at CSX railroad.

Locomotive makers say natural-gas engines could also significantly reduce emissions compared with diesel locomotives, but the potential cost savings is the biggest reason the rail industry is eager to make the change.

From the outside, natural gas locomotives will not look much different, but they will have to pull a tank car behind the engine to carry enough liquefied natural gas, or LNG, to have a similar range to diesel units.

Both of the major locomotive manufacturers, General Electric and Caterpillar’s Electro-Motive Diesel, have developed prototypes that will be tested by Union Pacific, CSX, BNSF and Canadian National railroads beginning this year.

If the projected cost savings are realized, railroads would improve their profits and better compete against trucks, where they already hold the advantage on deliveries longer than 500 miles.

“They can lower their costs further and widen their advantage over trucks,” Edward Jones analyst Logan Purk said. But he sounded one note of caution: Natural gas prices have always been volatile, and they could climb if gas exports expand significantly and more industries switch over to natural gas.

Another issue is the design for the fuel tender cars that will haul liquefied natural gas for the locomotives. That’s something that will have to be standardized because the major freight railroads regularly pass locomotives back and forth to keep trains moving efficiently.

Once they agree on a design for the tenders, the railroads may have a hard time getting enough of them because tank car manufactures are already struggling to keep up with demand. Customers sometimes wait up to three years for new tankers.

This isn’t the first time railroads have flirted with natural gas locomotives. Both Union Pacific and BNSF spent several years working on the concept in the late 1980s and 1990s, so the industry isn’t starting from scratch.

Industry officials say the rising natural gas prices that helped scuttle their earlier experimentation with the fuel should not pose a problem this time because significant new sources of natural gas are now available.

Peter Roosen is CEO of VeRail, which is developing natural gas conversion kits for low-horsepower locomotives, such as those used in rail yards.

Warren Buffett and Bill Gates

In the third week of August 2008, two of the richest men in the world took a brief tour of the tar sands. As Warren Buffett (of Berkshire Hathaway) and Microsoft’s Bill Gates viewed the immense strip-mined bitumen fields and the vast infrastructure for tar sands development, much of the business press made it seem as though this was just another celebrity tour of a region that has seen many celebrities come to marvel at the size of the tires on the big yellow trucks.

Just months previous, however, in an interview with the Financial Post (Feb. 7, 2008), Buffet had compared the tar sands to Saudi Arabia and stated: “The tar sands are probably as big a potential source of production 15 to 20 years from now. It would surprise me if the world wasn’t wanting to use 200 million barrels per day [of oil] in 15 or 20 years. The tar sands are the biggest single possibility to fill the gap that, it looks like, will otherwise develop in the next decade or two.”

Known to be long-term friends, Buffett and Gates are reported to often invest together. In 2008, Buffett and Gates had a combined estimated net worth of $120 billion.

The Host

The host was tar sands developer Canadian Natural Resources Ltd.  The two billionaires toured Canadian Natural’s $9.3 billion Horizon site, located about 100 km north of Fort McMurray.

As a tar sands developer, Canadian Natural doesn’t have the same “name recognition” as other big players, so it’s curious that the Buffett/Gates tour would be hosted by them, rather than, say, ConocoPhillips -partner with EnCana Corp. and, at the time, part of the Syncrude tar sands consortium. Buffett had been investing in ConocoPhillips since at least 2006, so one would think that company would host the tour, not Canadian Natural. But the Globe and Mail reported that the trip was arranged by engineering/construction giant Kiewit Corp., a contractor on Canadian Natural’s Horizon project.

Nonetheless, a look at Canadian Natural’s board of directors is helpful. Four are especially noteworthy:  there’s Frank J. McKenna, former premier of New Brunswick, former Canadian Ambassador to the US (2005-2006), and a director of Brookfield Asset Management Inc. There’s Gary Filmon, former premier of Manitoba, chair of Canada’s Security and Intelligence Review Committee, and director/trustee of several income funds. There’s Catherine M. Best, a director of Enbridge Income Fund Holdings Inc. And there’s Gordon D. Griffin, former US Ambassador to Canada (1997-2001), director of CIBC, Transalta Corp., Canadian National Railway, and registered US lobbyist for Nexen Energy Inc., part of Syncrude.

The Guests
The entity overseeing Bill Gates’ personal investment portfolio is Cascades Investment LLC, based in Kirkland, Washington. By 2006, the stock portion of Cascade’s portfolio was worth about $3.4 billion, with $1.4 billion of that invested in shares of Canadian National Railway Co. (CN).

Gates has been investing in CN since at least 2000, and during that time CN has been on a buying spree.  CN bought up provincially-owned BC Rail in 2004, a controversial decision by then-Premier Gordon Campbell that made CN the only rail carrier in Northern BC – a decision that continues to rankle much of the electorate.

In 2006, CN bought 2 short-line railways in Northern Alberta: Mackenzie Northern Railway in the northwest and the Lakeland & Waterways Railway in the northeast. By the time of the Buffett/Gates visit, CN had also purchased Athabasca Northern Railway Ltd., linking Fort McMurray to Edmonton.

For his part, Warren Buffett had been busily buying up shares in the Burlington Northern Santa Fe Railway (BNSF), which since 2006 has been moving diluents – diluting agents necessary for mixing with tar sands bitumen – from US refineries in the Gulf Coast, California and Kansas to the Canadian border (at Superior, Wis., Noyes, N.D., Sweetgrass, Mont., and New Westminster, BC).  The carloads of diluents are then handed over to CN and transported to Edmonton for  shipment to the tar sands.

So by August 2008, when Buffett and Gates made their surprise visit to northern Alberta, they were not just celebrities making a casual tour, but already involved in the future of the area.

In fact, just weeks after their tour, BNSF’s Manager of Businesss Development, Jane Halvorson, told Railway Magazine (Nov. 2008), “We’ll continue moving diluents, but there is opportunity to offer rail service as an alternative to pipelines to get the bitumen blend to the refineries.” That, she added, would depend on “partnerships with the Canadian railroads.”

Buffett bought the rest of Burlington Northern Santa Fe Rail that he didn’t already own for $26 billion in 2010, while Gates has been gradually increasing his stake in CN. Clearly, a key part of the tar sands future, as the billionaire tycoons see it, is “pipelines on rails.”

Source: http://westcoastnativenews.com/why-warren-buffett-bill-gates-and-railways-are-betting-big-on-lng/?utm_source=rss&utm_medium=rss&utm_campaign=why-warren-buffett-bill-gates-and-railways-are-betting-big-on-lng