No Natural Gas for Hawaii with the Jones Act
by Michael Hansen President Hawaii Shippers Council
The Honolulu Star-Advertiser ran a major business story on Sunday, April 15, 2012, regarding the potential use of natural gas to fire electrical power plants in Hawaii. As was reported in the article, "Liquefied natural gas is a real option for us and we're looking at it very seriously," said Lt. Gov. Brian Schatz. "It burns a lot cheaper and cleaner than coal or oil so it's attractive on a number of levels."
The prospective use of natural gas in Hawaii raises two important and unaddressed issues: Where will the large quantities of natural gas necessary for power generation actually come from? And, are there any ships to transport it?
The kind of oceangoing ship required to carry natural gas is a highly-specialized tanker known as an LNG carrier, which carries the liquefied natural gas (LNG) at very cold temperatures and at very high pressures. Large scale use of natural gas in Hawaii, such as to fire power plants, would require the use of large oceangoing LNG carriers to bring in the fuel.
There are no Jones Act ships available to transport the LNG from the contiguous United States or Alaska to Hawaii. No deep draft LNG carrier has been built in a U.S. shipyard for at least 30 years. To qualify to carry cargo between two domestic points, a Jones Act ship must be U.S.-Built, U.S.-Flag, U.S.-Owned and U.S.-Crewed.
In the mid-2000’s, a major California-based natural gas distributer, Sempra LNG, investigated building Jones Act LNG carriers in the U.S. to carry natural gas from Alaska to the U.S. West Coast. They concluded that the major shipbuilding yards in the U.S. could not build LNG carriers soon enough to meet their long term resource development schedule, and, if the ships were ever built in a U.S. yard, their capital cost would be so great as to make the project unworkable.
The real promise of low cost and plentiful natural gas currently emanates from the American Mid-West. To move that resource to Hawaii, it would be necessary to transport it from an LNG export terminal on the U.S. Gulf Coast via the Panama Canal to Hawaii. This is a long transit, and the costs of operating a Jones Act LNG carrier on such a lengthy route would in all likelihood preclude its consideration as it did in the Alaska case (which involved much shorter distances).
The West Coast is not a potential supply point. As a whole, the U.S. West Coast is a net importer of natural gas, importing almost entirely from foreign sources. There are no pipelines over the Rocky Mountains to bring natural gas from the American and Canadian Mid-West to the Pacific Coast.
Alternatively, there are extensive new natural gas fields being developed offshore Western Australia and in Indonesia. Although these sources are also relatively far away, it would be possible to charter, from the existing international fleet of Foreign Flag LNG carriers, sufficient tonnage through the regular course of business to transport that natural gas to Hawaii. The Jones Act prohibits the use of these existing Foreign Flag LNG carriers to transport cargo between domestic points.
There is a significant costing issue associated with this supply from Western Australia and Indonesia. The high demand from the near-by and rapidly developing Asian nations invariably put upwards pressure on its price and places a premium on this resource. That well-head premium coupled with the freight costs associated with a long transit to Hawaii, will make the landed cost of Australian and Indonesian natural gas more expensive than current domestic U.S. pricing would suggest.
This natural gas scenario is very similar to the crude petroleum oil being produced in the same South East Asian region and currently imported by the Hawaii refineries at significantly higher prices than domestic U.S. crude oil including that produced on the Alaska North Slope. In part, this has led to higher motor gasoline prices and electric rates in Hawaii.
Another alternative source of natural gas for Hawaii is the Thompson Point oil and gas field on the Alaska North Slope (ANS) about 60 miles West of Prudhoe Bay. This field contains very large proven reserves of both crude oil and natural gas. Three major oil companies, BP, ExxonMobil and ConocoPhillips, have recently signed an agreement with the Alaska State government to develop the field and build a natural gas pipeline from the North Slope to the ice-free port of Valdez where the natural gas can be converted to LNG and exported. This development has the potential of being a relatively low cost source of natural gas for Hawaii over many years.
However, there will be no way to ship the ANS natural gas to Hawaii, or, for that matter, to the U.S. West Coast, because the economics of the Jones Act make it unfeasible. Therefore the oil companies developing the Point Thompson field and pipelines plan export all the ANS natural gas to foreign countries, in particular the large Asian users, Japan, South Korea, Taiwan and China.
This ANS natural gas situation is much like the termination, during the mid-2000’s, of ANS crude oil shipments to the two Hawaii refineries at Kapolei, Oahu, Hawaii – operated by Chevron U.S.A., Inc. and Tesoro Corporation respectively. This occurred, in part, because of the difficulties and costs encountered during the 2000’s constructing crude carriers in the United Sates to comply with the U.S.-build requirement of the Jones Act.
Prior to that and for nearly 30 years, the two Hawaii refineries processed ANS crude petroleum oil – beginning in the late 1970’s. And, for many of those years the ANS represented at least half of the crude they processed. Today ANS crude is only shipped to the U.S. West Coast, none to Hawaii.
Shipments of ANS crude to Hawaii ended with the retirement of the older single-hulled crude carriers first employed in the trade. Their retirement was required by the Oil Pollution Act of 1990 (OPA 90), which was passed following the EXXON VALDEZ accident in 1989.
Constructing the replacement fleet of double hulled crude carriers proved so cumbersome and expensive, an insufficient number were built to also cover the Hawaii deliveries. The development of the Point Thompson field will bring new ANS crude oil on line and make resumption of shipments to Hawaii feasible again – but only if there are crude carriers to deliver the cargo.
The only plausible way Hawaii will get access to lower cost ANS crude oil and natural gas, with an exemption from the U.S.-Build requirement of the Jones Act. The Hawaii Shippers Council has proposed that this exemption should apply to the all noncontiguous domestic jurisdictions – Alaska, Guam, Hawaii and Puerto Rico – and only for large self-propelled ships. Such an exemption would permit the use of Foreign-Built U.S.-Flag ships including LNG carriers and crude carriers in the noncontiguous trades.
Lt. Gov. Brian Schatz was also quoted in the article as expressing his concern that the use of natural gas to fire the electrical power plants in Hawaii would adversely affect the two Kapolei refineries. The refineries rely on sales of their residual fuel oil to the power plants in Hawaii. The larger power plants in the State are currently oil fired.
While it is true that natural gas would displace residual fuel oil in the power plants and have an impact on the refineries. There would be several benefits for the refineries from access to a large scale natural gas supply and the U.S.-Build exemption. In addition, the refineries do have a strong export market in Asia for their residual fuel oil, which they have sold into for many years (using Foreign-Flag tankers to effect the shipment).
The lowest cost way to fire a crude petroleum oil refinery – which essentially operates like a whisky still to produce fractional distillation of crude oil – is with natural gas. If natural gas were brought to Hawaii on a large scale for electrical power generation, it would also be available to the refineries and assist them in lowering their operating costs. This would be particularly true in the case of ANS natural gas because of the relatively short distances involved.
A U.S.-build exemption from the Jones Act for the noncontiguous domestic trades would also significantly benefit the Kapolei refineries with their cargo movements. The exemption would allow the use of Foreign-built U.S.-Flag crude carriers, which could bring lower cost ANS crude to the refineries. And, lower cost Foreign-Built U.S.-Flag product carriers could be used to exchange refined petroleum products with the U.S. West Coast.
Probably the most disconcerting parts of the article were the statements by Hawaiian Electric Company (HECO) and Hawaii Public Utilities Commission (PUC). The HECO spokesperson said it’s up to the State of Hawaii to tell them what fuel to burn in their power plants, and the PUC chairperson said it is the duty of the regulated utilities to make the best decisions for its ratepayers including which fuel to use.
One must ask: Is anyone leading this parade? I don’t see a leader, do you? Without effective leadership and workable policies we are headed for ever escalating transportation costs, fuel prices and electrical rates in Hawaii.
It makes one wonder what will be left of the State’s economy after several more years of the current energy and transportation policies?