One of the first acts that George Washington signed into law as president was a measure designed to protect American shippers by granting them favored treatment in serving domestic ports.
That history is carried forward today in what is known as the Jones Act, a 1920 law that, among other things, requires that ships hauling cargoes between U.S. ports be built in the United States, registered to U.S. owners, staffed predominantly by U.S. crews and fly a U.S. flag.
For potential domestic buyers of liquefied natural gas -- the supercooled form of the fuel that can be shipped via tanker to users physically isolated from pipeline infrastructure -- the Jones Act poses a unique challenge. As late as the 1970s, American shipyards made the dedicated tankers that keep LNG below minus 160 degrees Celsius (minus 256 degrees Fahrenheit). But today that business has moved to Asian shipbuilders that can crank out tankers at lower cost.
For many years, that has not much mattered, at least for Jones Act purposes: The United States has not had domestic trade in LNG, as the only export facility, which operated for 40 years out of Kenai, Alaska, shipped all of its limited output to Japan.
But with major U.S. exports on the horizon, the lack of Jones Act-compliant LNG tankers is coming into focus in the niche markets where offshore American fuel buyers see a bargain in domestically sourced LNG.
At the top of the list is Hawaii, where electric customers pay some of the highest costs in the nation for power made largely from diesel or from synthetic natural gas (SNG), a product refined from crude oil. But the islands are slated to lose their source for SNG, a Tesoro refinery that has struggled financially for years, leaving utilities in a tough spot.
"Hawaii is the most petroleum-dependent state in the United States," Hawaii Gas wrote in a filing with the Federal Energy Regulatory Commission seeking approval to ship LNG from the mainland. "However ... the decline in natural gas prices, the potential expansion of the LNG trade throughout the Pacific region, and advances in storage, shipping and distribution technology together provide a unique opportunity to introduce an alternative fuel into Hawaii."
Tesoro's refinery will close at the end of this month, and the state aims to be bringing LNG to Oahu in shipping containers, carried from the U.S. mainland on standard container ships, to provide emergency backup power for the island soon after. FERC has ruled that this will not require its involvement, since no specialized LNG import or export infrastructure is entailed, and plenty of Jones Act-compliant cargo ships are available to provide this service.
Hawaii Gas plans to ramp up to bring 20 specialized containers into service in a continual transportation loop, keeping its initial needs met. Starting in 2015, the utility envisions expanding that fleet to 120 containers, broadening its use of LNG to serve more of the island's electric load.
The next phase of its plan, slated to begin "after 2016," entails a heavy infrastructure build-out. At that point, the utility hopes to have an LNG import terminal in place to regasify the fuel upon delivery to Oahu in "bulk shipment" -- meaning on LNG tankers. The utility would serve statewide gas needs by distributing containerized LNG to other islands by barge, expanding access to the lower-cost fuel and helping to spread out costs.
Looking toward that day, Hawaiian state lawmakers last month introduced two bills calling on the U.S. Congress to exempt the three "noncontiguous jurisdictions" of the United States -- Hawaii, Alaska and Puerto Rico -- that are currently subject to the U.S.-built component of the Jones Act from that provision for large, oceangoing vessels.
"This exemption from the U.S.-built requirement will become very important in Governor [Neil] Abercrombie's plans to switch from petroleum based fuels to liquefied natural gas (LNG) for the purpose of electrical power generation," sponsor Rep. Gene Ward (R) said in a statement, describing the measure as modeled on exemptions secured by neighboring Guam and by Hawaii's cruise ship industry.
The Hawaii Shippers Council says the measure, which is similar to previous bills, would reduce freight rates to the state. "The proposed reform will create significant economic benefits that will flow through the system to businesses and consumers in Hawaii and other noncontiguous jurisdictions. As a result, the reform would reduce the cost of goods and petroleum products to residents" of those areas, the group said.
'It only takes 24 months'
Joe Boivin, a spokesman for Hawaii Gas, had no comment on the lawmakers' efforts and the Jones Act debate.
But comments by Eric Smith, vice president and chief commercial officer of the American Maritime Partnership, an organization dedicated to defending the Jones Act, reflect the depth of conviction held by the major maritime unions on the issue.
"Obviously there's very, very few American-flagged LNG carriers," Smith said. "If now, all of a sudden, a state like Hawaii wants to bring LNG into the state, they can do that. It can come from anywhere in the world. It doesn't have to come from the continental U.S."
"LNG from the Middle East is pretty cheap compared to gasoline or standard diesel. ... [Hawaiians] can bring it in from any place in the world," Smith added.
Smith blamed the lack of LNG tankers to serve upcoming export interest on shortsightedness by businesses that have not lined up new, U.S.-built tankers. "It's all about poor planning [by] the businesspeople. The businesspeople drag their feet, they don't plan properly, and then they blame the industry that could have saved them," he said.
Some estimates find constructing a modern LNG tanker in Asia would run around half the price of building it in the United States. Smith said he had no information on cost. But he said at least three domestic shipyards -- General Dynamics NASSCO on the West Coast, BAE Systems in Norfolk, Va., and Aker Philadelphia Shipyard -- would be capable of building such a vessel. "If they want to do it, they just need to call up a shipyard," Smith said. "It only takes 24 months."
Getting to the heart of the financial argument, Smith said he remains unconvinced that consumers bear any additional cost due to the Jones Act requirements. "It doesn't cost the consumer a single penny," he asserted.
Petroleum markets pinched
A recent study by the Government Accountability Office ended up at roughly the same place as Smith.
At the request of the U.S. House representative for Puerto Rico, non-voting Resident Commissioner Pedro Pierluisi, GAO looked at how the Jones Act affects the island's maritime trade industry and what the effects could be of amending it.
"The effects of modifying the application of the Jones Act for Puerto Rico are highly uncertain, and various trade-offs could materialize depending on how the Act is modified," GAO concluded.
GAO considered what might happen if Puerto Rico were fully exempted from the Jones Act and concluded that the reliability and other strengths of the main shipping routes serving the island could be threatened if competition sprang up with the limited pool of Jones Act-compliant vessels.
However, one of the commodity categories that showed signs of being hurt by the Jones Act's enforcement was petroleum products. One oil and gas company told GAO in an interview that it generally did not purchase oil and gas from U.S. suppliers because the overall cost, once transportation was included, exceeded that from foreign sources. For some products, it said, Jones Act-compliant vessels were not available.
With respect to LNG, GAO noted that that the island's electric power authority currently buys most of its natural gas from nearby Trinidad and Tobago, importing it on foreign-flagged tankers. Island officials have plans to source more LNG from the United States starting in 2014, GAO said, but face Jones Act hurdles to do so.
In evaluating the option of exempting Puerto Rico from just the U.S.-built component of the act, GAO appeared to tacitly acknowledge that the island could stand to benefit. "This partial exemption could ... reduce or eliminate existing and future shipbuilding orders for vessels to be used in the Puerto Rico trade, having a negative impact on the shipyard industrial base the Act was meant to support," reviewers wrote, while remaining silent on other potential downsides.
Puerto Rican representative Pierluisi, in a response to the GAO report, said he plans to pursue a bill to "relax" the Jones Act "to enable the shipment of natural gas and other fuel products from the U.S. mainland to Puerto Rico, thereby reducing the cost of electricity, improving air quality, and making Puerto Rico a more attractive place to raise a family and conduct business."
"The GAO report is particularly valuable in illuminating specific areas within the bulk cargo market where an important goal of the Jones Act -- to facilitate maritime commerce between U.S. jurisdictions -- is not being fulfilled in the case of Puerto Rico. In these particular instances, the Jones Act is actually serving as a barrier to, not an enabler of, domestic trade," he said.
Pierluisi said allowing "foreign vessels" to carry LNG to Puerto Rico would benefit mainland U.S. energy producers by opening a new market to them, while also reducing electricity bills for Puerto Rican consumers.
Smith's American Maritime Partnership, on the other hand, focused its few criticisms of the GAO report on its analysis of the LNG tanker market. "In contrast to its analysis of the container shipping market, GAO's review of the LNG and other bulk shipping markets is anecdotal, incomplete, misleading, and one-sided," AMP said in a statement. "In fact, there are already fully compliant American vessels available to transport LNG to Puerto Rico and, of course, others can be built in plenty of time."
40 options, or 3
There are, in fact, a number of ships in service today that could potentially supply Puerto Rico and Hawaii with LNG in compliance with current law: 40 and 3, respectively.
In 2011, Congress passed the America's Cup Act to allow three vessels to be flagged to the United States for participation in the America's Cup yacht race.
Thanks to a provision in the act secured by Pennsylvania lawmakers, it also authorized the Coast Guard to flag three specific LNG tankers, built in the United States in 1978 and 1979, back to the United States if their owner, a subsidiary of Sunoco Inc., sought to do so. The tankers were intended to ship a natural gas byproduct produced from the Marcellus Shale to Gulf Coast ports, according to media reports at the time.
Those three vessels today remain flagged to the Marshall Islands, and a Sunoco representative did not return calls regarding whether the company plans to carry through on the reflagging authority. Under the statute, the ships would no longer be eligible for a U.S. registration if they were sold to an unrelated company.
In addition to those three vessels, Puerto Rico could potentially tap into a larger pool of vessels that are exempt from the Jones Act requirements for the purposes of transporting LNG to Puerto Rico. Under a 1996 law, a category was carved out for vessels built overseas before that year or that were built in the United States before that year but were later reflagged elsewhere.
GAO interviewed the Transportation Department's Maritime Administration and the White House Domestic Policy Council and concluded that 37 vessels exist that could be used in the Puerto Rican LNG trade under the law.
That group of ships could be key for the island, although utility officials told GAO they worried about the safety and maintenance requirements of the relatively old tankers. Also, the vessels could currently be tied up in long-term contracts that make them unavailable, officials said.
A frank assessment
One jurisdiction where interest in coastal LNG transport has wavered over time is Alaska. In 2005, the state's Department of Revenue commissioned a study of Jones Act exemptions as part of a look at the potential to sell North Slope natural gas into the California market via a pipeline to the coast and ocean-borne shipping.
The results quickly shot that proposal down. Examining successful past campaigns for Jones Act waivers, the authors noted that they shared support from the maritime unions, affected members of Congress and the shipbuilding industry, among other features.
"The federal-Alaska state governments and North Slope producers are fully committed to building a pipeline that will deliver gas directly to the Middle West," the study said, referring to efforts at the time to connect Alaskan supplies to the North American natural gas grid in Alberta.
"The only scenario in which North Slope LNG transportation becomes possible is one where the producing companies fail to build a gas line from Alaska to the Middle West. Since this eventuality is unlikely to happen, there is no reason to believe waterborne transportation and LNG ships will have a role in marketing North Slope gas in the foreseeable future," the study concluded.
Much has changed in the natural gas industry since 2005, of course. The effort to build a pipeline from Alaska to the Midwest was abandoned in the face of shale gas production and historically low natural gas prices on the mainland. Alaska still has no real likelihood of selling natural gas to California, though, having turned its attention from the lower 48 states to Asian markets where LNG trades at a multiple of the predominant U.S. price.
But the Alaskan analysis bodes ill for Puerto Rican and Hawaiian efforts to break free of the Jones Act for LNG shipments, which face stiff opposition from groups like the American Maritime Partnership and lack broad-based support on Capitol Hill.
With natural gas producers and traders focused on the overseas export market and trading prices in Europe and Asia, the noncontiguous jurisdictions may find themselves, like Alaska, facing changed market conditions but no expectation of change.
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