Hawaii could benefit from importing liquefied natural gas so long as it secures a good, gas-price-linked supply deal and carefully navigates the regulatory and logistical obstacles of infrastructure build-out, according to a consultancy's new report.

The study, by international firm FGE-Facts Global Energy for the University of Hawaii's Hawaii Natural Energy Institute, illustrates that the American archipelago is much like any other importer when it comes to managing the risks and rewards of potential LNG imports.

"The potential of LNG to cut fuel costs in Hawaii is enormous [and] LNG could play an important role in allowing renewables to be accommodated in Hawaii's energy system," the report says.

But the study warns that fuel cost savings for the state -- which it says could be as great as 47 percent, depending on natural gas sourcing -- are highly dependent on volatile world oil and gas prices.

"Small levels of savings could be wiped out by relatively small movements in oil or gas prices," the report says. "For that reason, we believe that large-scale LNG imports for Hawaii should only be pursued if the expected percentage savings are quite substantial."

"Large-scale" imports is a relative term. The study is based in part on a proposal by the Hawaiian gas utility to build regasification infrastructure for LNG carriers far smaller than the tankers that would service export terminals proposed for construction along the Gulf Coast and elsewhere on the mainland.

The Hawaiian model would initially rely on containers that can be carried either on ships or, singly, on trucks. As the state's infrastructure gradually evolved, it would move to larger tankers or LNG barges (EnergyWire, Nov. 30, 2012).

Hawaii's LNG container shipping would not rely on the massive liquefaction facilities contemplated as part of large export terminals but could be filled up from smaller sites like those that liquefy natural gas for use as a trucking fuel.

Still, the infrastructure needed in Hawaii to regasify the fuel and distribute it would require "at least hundreds of millions of dollars." The report puts that estimate in perspective alongside the more than $6 billion that the state is estimated to spend yearly on oil.

Complications of a small-scale project

While its relatively small-scale need makes LNG a complicated proposition for Hawaii, other issues are important to consider as well, the report says.

Currently, the state has two refineries that turn crude oil into useful products. The refining capacities of the two facilities exceed the state's needs, but they are currently able to dictate market prices. Still, it is an open question how long the refineries will continue to operate, especially given an aggressive state renewable energy commitment that would cut oil use and damage the already-weak economics of the plants by 2030 if energy targets are met.

"The concept sometimes proposed that a private, unregulated supplier should build LNG import facilities, and provide the LNG, would perpetuate the [duopoly] problem the utilities have faced for decades," the report warns.

Noting that the gas utility's LNG conversion proposal is the only fully public plan on the table, the report says other entities have considered building an import terminal as well. "Whatever the ownership structure and business model selected, cooperation between Hawaii end-users ... is essential for the project to succeed," the report says.

Another issue it flags is that of over-reliance on a single LNG tanker. While the state's needs could be met by one vessel making trips to and from the West Coast or elsewhere, the report says, that would expose the state to risk if it were lost at sea. Since such a vessel would likely need to be custom made to comply with the Jones Act, a shipping law requiring that trips between U.S. ports be made by U.S.-built ships, Hawaiian buyers would be better served by having a "fleet" of at least two ships, the report said.

But the most important issue for the state's market is the one faced by potential buyers anywhere in the world -- whether it can tap into natural gas at low, mainland U.S. prices.

Buying LNG at Gulf Coast or West Coast gas-linked prices could save the state between 31 percent and 47 percent on fuel costs, the study found, while buying from Alaska, Canada or Australia, at oil-linked prices, could lead to higher payments or savings of up to 16 percent -- a threshold that the authors said may not justify the risks involved.

If potential buyers can come up with a sound plan, the report says, buyers will need to move quickly and aggressively to secure the best deal before export projects are finalized. "LNG is not a grocery store," the report said. "The best long-term contracts will never be found by putting the process out to general bid. ... LNG is not sold based on 'sticker prices.'"

Click here for the FGE-Facts Global Energy study.