present - Oliver Wyman

The 2013 locomotive fleet of the seven Class I railroads
• 66% of fleet is primary road
fleet
Units
30,000
25,000
• Bulk of railroad investment
in locomotives
37%
20,000
15,000
10,000
5,000
• Key driver of operational
efficiency
29%
7,770
11%
23%
6,445
Total Fleet
4-axle
0
© Oliver Wyman
4-axle DC
6-axle low hp DC
6-axle >4k hp DC
6-axle >4k hp AC
3,155
EMD 6-axle
<4k hp
2,590
2,930
5,265
EMD
GE
1
1. Natural gas as
a locomotive
fuel
2. Tier 4
emissions
standards
© Oliver Wyman
2
Natural gas locomotives: A watch point for railroads

Natural gas as a fuel offers
cost savings…

…But a range of issues must be
resolved to use it widely
• Cost savings potentially on
order of 50% (at current prices)
• NG vs. diesel price differential must be
sustained to provide payback period
• Trucking industry moving
toward natural gas:
• NG-powered locomotives in early testing
phases; no major player has committed
significant capital as yet
– Continued expansion of NG
fleet
– NG refueling infrastructure
being constructed
• NG trucks could narrow rail’s
cost advantage
© Oliver Wyman
• NG handling infrastructure and equipment
(including fuel tender cars) must be developed
and built; will add costs
• No NG locomotive yet meets new Tier 4
emissions standards
3
Natural gas could reduce trucking costs by ~15%, narrowing
the cost advantage of intermodal vs. truck by ~24%.
Cost of Operations (Indicative)
Cents per ton-mile, excludes financing costs
9¢
Intermodal has a 60% cost
advantage vs. diesel
truck…
6¢
3¢
¢
8.0
6.8
5.0
2.8
Rail
Intermodal
…Breakeven
distance for
intermodal
movements
could climb
above 750
miles
Truck on Diesel Truck on NG
Note: Truck on NG assumes a 15% operating cost reduction for LNG trucks, Average truck load of 15 ton
Source: American Association of Railroads, Bureau of Transportation Statistics – Commodity Flow Survey, Morgan Stanley
© Oliver Wyman
4
Natural gas truck engines can provide operational cost savings
of ~$0.12/mile, with a payback period of under five years.
Est. Annual Cost Savings: LNG Spark Engine vs.
Diesel
$ per mile
Capex Spending
$000, excl. cost of capital
$0.12
difference
170
125
140
100
$0.15
$1.20
Diesel Ops
Cost
$0.03
Maintenance,
refueling frequency,
weight penalty
$1.08
Fuel and DEF Incremental LNG Ops Cost
savings
operating
costs
Diesel
Incremental capex
over diesel
Payback period (yrs)
Diesel
Kits
Spark Compression
Ignition
Engine
$25K
$40K
$70K
3.2
3.3
4.5
Note: Cost savings estimates are based on the following assumptions: Diesel price of $4.10, LNG price of $2.95 per DGE, 100,000 Average mile per year of, Diesel exhaust fuel of price of $3/gal, engine
efficiency of 6 MPG and incremental fueling cost of $15 per stop; No interest cost. Cost of operations include fuel, maintenance, driver wages, insurance, tire costs and may vary from $1.12 - $1.20. DEF(Diesel
Exhaust Fuel) savings only apply to spark ignited engines. Incremental maintenance costs do not apply to compression ignited engines
Source: Thetruckersreport.com and Oliver Wyman analysis, Cummins Inc., National Economic Policy Institute
© Oliver Wyman
5
Refueling stations for trucking are being built out, with a
significant number of additional LNG stations planned.
CNG and LNG Station Network (Includes only stations servicing semi-trucks)
CURRENT
CNG stations available for semi-trucks
Source: Clean Energy. Note: Stations servicing only cars or box trucks are excluded
© Oliver Wyman
PLANNED
LNG stations available for semi-trucks
6
Natural gas could offer fuel cost savings of over 50% vs.
diesel; natural gas prices would have to double to erase this
advantage.
Natural Gas and Diesel Monthly Prices to 2015
$/DGE (Diesel Gallon Equivalent)
$7
Diesel
Wellhead NG (HH)
$6
LNG imports
$5
Wellhead NG (HH) - Forecast
Diesel - forecast
• Natural gas prices can
be subject to significant
volatility, however, as
exemplified by LNG
imports, which act as a
proxy for marginal prices
$4
$3
$2
$1
$0
2004 2005
Structural
change in gas
2006market
2007 2008
2009 2010 2011 2012 2013 2014 2015
Source: Energy Information Administration (EIA) commodity prices and short term energy outlook, NEPI, Railway Age
Note: Conversions assume 12.1 gallons of LNG per MMBtu and 1 DGE = ~1.70 Gallon of LNG
© Oliver Wyman
• Opening up of US shale
fields has caused a
structural change in
natural gas prices
7
A stable, sustained price differential would improve the
attractiveness of natural gas as a locomotive fuel.
Outlook on Natural Gas
• Prices subject to significant short-term
variability, due to weather
• Regional prices more variable than diesel,
due to supply constraints
• Next two years: continued expansion of
production should keep prices low
• Longer term, what could increase prices?
– More use in electric generation
– More use in industry for chemical
feedstock and heat
– Development of an export market
© Oliver Wyman
Outlook on Diesel
• Prices expected to remain low, given
improved fuel efficiency, mediocre
economy, increasing use of NG as a
fuel
• However, some regulatory factors
could put upward pressure on prices:
– Ultra-low sulfur requirements
adding cost to refiners,
– Exports to South American markets
could increase, as these do not
require ultra-low sulfur specs
8
LNG locomotive power development will require long testing
periods, standardization, and infrastructure deployment.
Builders
Railroads
•
NextFuel kits – Tier 3
compliant low-pressure
system for EVO units, tests
in 2014 on CSX/BNSF
•
•
2 units in short-haul tests in 2013
Plans for line-haul testing in 2013
with 2 4300-hp EMD converted
units
•
Collaboration with Westport
on HDPI fuel systems and
storage/tender tech
4300-hp retrofitted mainline
units testing in 2014
Commercial operation
expected by 2017
•
Testing 3 EMD and 3 GE LNG units
in 2013-14
•
Testing GE NextFuel converted
EVO units in 2014
•
Plans to test LNG units in late 2014
GFS conversion kits for GE
7FDL engines – operation
expected in 2014
•
AAR Natural Gas Fuel Tender TAG
working on LNG tender standards
with Class I input
•
•
Others
•
Source: Company websites, Railway Age Sep 2013.
© Oliver Wyman
Others
9
Wide adoption of LNG traction is complicated by uncertain
payback times and complex fuel network logistics.
Logistics
• Refueling network must be built; diesel network be maintained
• Local storage/liquefaction often uneconomic; higher transport costs
• Limits on locomotive stand-down time
• Difficult to estimate operations cost; potential high tender cost
Payback
time and
• Long payback period, even with $200K per unit fuel savings
economics • Natural gas may not provide same HP in large engines
• Current conversion kits not Tier 4 compliant, limits deployment
Tier 4
compliance • Wider adoption of LNG may lead to easier Tier 4 compliance
Regulation • Regulatory changes needed, LNG moves by rail need FRA waiver
and safety • Fuel tender requirements and standards must be established
Source: AAR expert statements, Railway Age Sep 2013.
© Oliver Wyman
10
Generally, CNG is not practical for linehaul operations…
Relative Energy Density
DGE
Pros and Cons of LNG vs. CNG for Rail
LNG
100%
60%
Pros
• Higher energy density
• Fast fueling times
• OK for long-distance
transport
• Simpler storage,
management
• Unlimited hold times
Cons
• Cryogenic fuel tanks,
evaporation systems
• 3-4 day hold time limit
• Liquefaction and
delivery infrastructure
• Cryogenic hazards
• Low energy density
(large fuel tanks)
• Fueling stations must
be near pipeline
networks
• Long fueling times
• Pressurized vessel
hazards
Trucking
• Preferred for long-haul
• Preferred for short haul
25%
Diesel
LNG
CNG
CNG
Source: Westport and Clean Energy CNG/LNG Webinar materials, June 2013
© Oliver Wyman
11
…But could be efficient in yard work, although the
market is small and alternatives exist.
• Low relative fuel consumption makes
investments in new low-HP locomotives
unattractive
Investments costs per switcher, $M
1.9
1.5
• Diesel-based genset technology provides:
– Lower up-front investment (~15 years diff.
payback)
– No fuel conversion costs
• No clear evidence CNG gensets produce
significantly lower emissions
CNG
Annual fuel costs per switcher, $000
• Widespread adoption of CNG truck engines may
level playing field in future
Source: Manufacturers’ datasheets, railway websites
Based on $59M total investment per 31 units in IHB, 1.5 mil/unit price of genset, approx.
4$/gal diesel, 2$/DGE CNG, 25 000 gal diesel baseline annual consumption, 10% CNG eff. Loss, 20% genset efficiency gain
© Oliver Wyman
GenSet
80
55
CNG
GenSet
12
1. Natural gas as
a locomotive
fuel
2. Tier 4
emissions
standards
© Oliver Wyman
13
More stringent Tier 4 emissions standards go into effect on
January 1, 2015.
• Will compliance increase loco purchase prices?
Impact on life cycle • Will fuel efficiency take a step backwards?
• Will exhaust gas treatments add maintenance
costs?
and servicing costs?
Trucking industry
precedents
Single builder
market?
Long-term
impacts?
© Oliver Wyman
• Emissions restrictions for trucking increased
purchase prices, reduced fuel efficiency,
required new exhaust gas scrubbing systems
• Only GE has announced a Tier 4-compliant
locomotive without scrubber technology
• To date compliance with emissions restrictions
was achieved by improving fuel combustion
and efficiency
• Will Tier 4 create a burden on the railroad
industry?
14
As of 2015, allowed emissions of NOx, HC, PM must be
significantly reduced.
NOx (g/bhp-hr)
• Tier 4 requires significant emissions
reductions for particulate matter, nitrate
oxides (NOx), hydrocarbons (HC)
11.8
8.0
11.0
7.4
• Remanufactured locos (Tier 0-3) subject
to tighter standards from manufacture
date for NOx and PM
Tier 0
Tier 1
– Tier determined by initial manufacture
Particulate Matter
date
0.26
0.26
– “Remanufactured” if at least 25% of
0.22
0.22
parts weighted on value are used
Source: EPA. Note: Tier 1-2 locomotives must meet both switch and line-haul standards of the
same tier. Applies to locomotives with 1006 hp or higher
© Oliver Wyman
8.1
5.5
5.5 5.0
1.3 1.3
Tier 2
Tier 3
Tier 4
(g/bhp-hr)
0.10
• Otherwise, loco is considered new, Tier 4
standards apply
Linehaul
Switch
0.13
0.10
0.10
Linehaul
Switch
0.03
Tier 0
Tier 1
Tier 2
Tier 3
0.03
Tier 4
15
Only GE will have a Tier 4-compliant locomotive available in
2015 that does not require exhaust treatment…
GE
Evolution Series Advance
Power 4 locomotive
• Started field testing
• Does not require exhaust aftertreatment
• Reduces exhaust scrubbing
gear by 4,000 pounds
Cummins
QSK95 Power Module
• Replaces diesel-electric system in
base loco carbody
• Meets Tier 4 exhaust aftertreatment
• Trials to begin in 2014, series
production in 2015
Source: GE, Environmental Leader (September 30, 2013) Railway Gazette (September 30, 2013). Media images copyright GE and Cummins.
© Oliver Wyman
EMD
• Tier 4 freight loco status
unknown – potential for 2-cycle
engine based on current 710
engine?
• Passenger loco offering:
– 4-cycle engine vs. 710
platform
– Uses exhaust gas after
treatment
16
…But US freight volumes have grown by 3.8 percent/year
since the recession, suggesting locomotive demand of 600+
units/year.
US Class I Revenue Ton-Miles
Trillions
1.78
Fleet Replacement
Requirements
Pre-recession
volumes
1.69
1.73
1.71
1.53
CAGR: 3.8%/yr
CAGR: 0.7%/yr
2008
2009
2010
2011
High hp road
locomotives
(66% of fleet)
18,560
Lifespan
30 years
Replacement
rate
620/year
2012
Source: AAR, Oliver Wyman analysis
© Oliver Wyman
17
Industry capacity may be insufficient to meet locomotive
demand.
Class I Locomotive Requirements Through 2024
Average number of units per year
Actual Deliveries,
2004-2013
2014-2024
Yield Scenario
(0.5% CAGR)
Volume Scenario
(1.8% CAGR)
1,004
751
719
369
208
EMD
96
Growth
543
GE
623
Replacement
635
If only GE can produce Tier
4-compliant locomotives
without exhaust gas aftertreatment , the railroad
industry will have to:
• Accommodate scrubber
equipped locomotives
• Keep older locomotives
in service longer
• Look for alternative
approaches to Tier 4
requirements (e.g.,
natural gas?)
Source: Train Magazine, Locomotives 2013 and Oliver Wyman analysis
Note: Total fleet of road locomotives estimated based on a current fleet of 28,155 of which 63% are 4,000 hp or above. New locomotives assumed to be substantially all high hp locomotives (vs., 4 axle
locomotives). Estimate based on 3.8% average annual volume growth
© Oliver Wyman
18
Although LNG is potentially a cleaner fuel than diesel, it is not
currently viewed as a solution for Tier 4 compliance.
• LNG has a lower carbon content than diesel
• Overall LNG emissions level determined by
engine conversion type, engine tuning, and
after-treatments
• Most current solutions are Tier 3-compliant: GE
NextFuel, Westport/EMD HPDI, Cummins Tier
4-compliant QSK dual-fuel engines
• Until the economics of LNG conversion are
established, it is unlikely to be viewed as a
“silver bullet” for Tier 4 compliance
Source: International Mining June 2012; Railway Age September 2013; GE NextFuel publications, Westport publications,
© Oliver Wyman
“There are huge environmental
and economic benefits
associated with going to LNG.
We believe that LNG’s
greenhouse gas emissions will
be lower than diesel fuel & able
to meet Tier 4 standards, though
there is no data at present to
support this.”
– Bob Fronczak, AAR AVP for
Environmental and Hazmat
19
So…will the industry face a locomotive “crunch” in 2015?
So far, only one Tier 4compliant locomotive
without exhaust gas
treatment
Railroads show no signs of
reducing new locomotive
orders, some are already
power short
Tier 4 locomotives are
likely to be more costly to
buy and operate
© Oliver Wyman
Real potential for
a locomotive
shortage in 2015
New locomotives
may be more
costly and
inefficient to own
and operate than
previous models
20

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