Jones Act Requirements Could Block Natural Gas Transport to Hawaii

BY MICHAEL HANSEN – The Honolulu Star-Advertiser ran a major business story today regarding the potential use of natural gas to fire electrical power plants in Hawaii.

This raises an important Jones Act issue:  What ships are they going to use?

The kind of 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 LNG carriers to bring in the fuel.

Currently there are no ships available in the Jones Act fleet to accomplish the movement of LNG from the contiguous United States to Hawaii.  There are no U.S. shipyards that have constructed a deep draft LNG carrier for the past 30 years.

In the mid-2000’s, a major California-based natural gas distributer looked into building 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 met their long term resource development schedule and if the yards did construct these vessels the capital cost of the ships would be too great and make the project unworkable.

The real promise of low cost natural gas currently emanates from the American Mid-West.  To move that resource to Hawaii, it would be necessary to transport LNG from the U.S. Gulf Coast via the Panama Canal to Hawaii.  This is a relatively 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.

The U.S. West Coast taken as a whole is a net importer of natural gas, importing almost entirely from foreign sources.  There are no pipelines over the Rocky Mountains to bring natural 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 to transport that natural gas to Hawaii.  The Jones Act prohibits the use of these Foreign Flag LNG carriers to transport cargo between domestic points.

There is a significant problem associated with this supply from Western Australia and Indonesia.  There is a high demand for this natural gas from the near-by and rapidly developing Asian nations, which will put upwards pressure on its price.   That coupled with the freight costs of a long transit, this gas will be more expensive landed in Hawaii than current domestic U.S. pricing might suggest.

This scenario is very similar to the crude petroleum oil being produced in the same region and currently imported by the Hawaii refineries at significantly higher prices than domestic U.S. crude 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 about 60 miles West of Prudhoe Bay.  This field contains very large proven reserves of both crude petroleum oil and natural gas.  Three major oil companies 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 so that the natural gas can be 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 arrange for shipment of the Alaskan North Slope (ANS) natural gas to Hawaii or for that matter the U.S. West Coast because of the economics of the Jones Act.  And, currently, 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 situation is much like the termination of ANS crude petroleum shipments to the Hawaii refineries at Kapolei, Oahu, Hawaii, brought about in part by the difficulties and costs of constructing crude carriers in the United Sates to comply with the U.S.-build requirement of the Jones Act.  For nearly 30 years, the two Hawaii refineries processed ANS crude petroleum oil – from the late 1970’s to the mid 2000’s.  And, 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, as required by the Oil Pollution Act of 1990 (OPA 90), of the crude carriers first employed in the trade.  The construction of 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 on line and make resumption of shipments to Hawaii feasible again – but only if there are crude carriers to deliver it.

Hawaii will only get access to cheaper ANS crude petroleum oil and natural gas, with an exemption from the U.S.-Build requirement of the Jones Act.  This exemption should be for the 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 in the noncontiguous trades.

Lt. Governor Brian Schatz was quoted in the article as expressing concern that the use of natural gas to fire the electrical power plants in Hawaii could adversely affect the two Kapolei refineries as they rely on sales of residual fuel oil to the power plants, the largest of which are currently oil fired.  It is true that natural gas would displace residual fuel oil and have some impact on the refineries.  However, there would be some benefits as well.  In addition, there is a strong export market in Asia for fuel oil, which the Hawaii refineries have sold into for many years (using Foreign-Flag tankers).

The lowest cost way to fire a crude petroleum refinery – which essentially operates like a still to produce fractional distillation of the crude  – is with natural gas.  If natural gas were brought into Hawaii on a large scale, 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 delivered by virtue of a U.S.-build exemption from the Jones Act.  And, such a Jones Act exemption would also allow the use of Foreign-built U.S.-Flag crude carriers, which could bring lower cost ANS crude to the refineries.  These would be significant benefits to the refineries.

Probably the most disconcerting part 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, and the PUC chairperson said it is the duty of the regulated utilities to make the best decisions for its ratepayers.   Is anyone leading this parade?  It appears not.  As a result, it seems we are headed in Hawaii for ever escalating motor gasoline prices and electrical rates.  And, one wonders what kind of economy might be left in Hawaii after several more years of ever higher transportation fuel costs and electrical rates?

Michael Hansen is President of the Hawaii Shippers Council

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