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Is Liquefied Natural Gas a viable option?

Hawaii takes a look at natural gas

(page 2 of 2)

Why the delay?

That support doesn’t make the transition to LNG easy.

“Assuming you’re serious about LNG,” says Robbie Alm, “the infrastructure issues of siting and permitting are probably the biggest pieces of this. … You’re going to have to get it on shore in Hawaii in a condition that we can use in our power plants. Those are the regasification and offloading facilities. And since the state is going to be deeply involved in all this, I think to just say it’s up to the developer to figure out what they’re going to do doesn’t really get you there.”

Alm intones a list of agencies that will have to sign off on LNG plans: “You’ve got Coast Guard, Army Corps of Engineers, U.S. Fish and Wildlife, DLNR, Department of Defense, and at least one EIS, maybe two.”

Then, there are environmental concerns. Those start with the controversies that surround fracking, which could still derail the natural gas boom. Fracking has received a lot of critical coverage nationally because of its potential to contaminate the groundwater that communities depend on, but there are other environmental issues. For example, while it’s true that natural gas burns cleaner than oil, much of that efficiency is lost in converting raw natural gas to LNG and shipping it. Plus, as Jeff Mikulina, executive director of the Blue Planet Foundation, points out, there’s the issue of methane release associated with any natural-gas drilling. Methane is much worse than CO2 as an agent of climate change.

But Mikulina and other environmentalists are mostly concerned with what LNG would mean for renewable energy in Hawaii. “While now we have all these great policies in place to drive efficiency and renewable energy,” Mikulina says, “a cheap fossil-fuel source would create incentives that undermine everything from power-purchase agreements, to utility-grid renewal, to individual actions like installing solar power or replacing inefficient appliances. And if, as we suspect, LNG costs are toward the higher end, then what are we doing it for?”

Mikulina also questions the wisdom of sinking so much capital into LNG infrastructure. “Is that another half a billion dollars?” he asks. “If so, what could we get with that half billion in terms of grid modernization or more storage or other technologies that really do enable more renewables?”

How does it happen?

On the other hand, it’s not clear that the build-out for LNG would entail a major upfront capital investment by HECO or state and local governments. LNG developers are accustomed to amortizing their investments over the long term. As we’ve seen, they won’t even begin development of an export facility until they have fuel contracts to offset their costs. Robbie Alm points out that this formula can be flipped on its head: For the right price, an LNG developer will not just deliver the fuel, it will build and operate the infrastructure for you.

This is the kind of arrangement Puerto Rico has made with Excelerate, an LNG developer out of Houston. Closer to home, Shasha Fesharaki says he discussed a similar arrangement with a company called Gasfin. “They ran some numbers for what they could offer Hawaii if they were going to bring LNG from Kitimat, British Columbia, to Hawaii. They had a business model where they would charge about $4/MMBtu in fees. That’s for shipping, storage, regasification – everything all in – so there’s no huge upfront cost. You pay for this as you receive the fuel. In the case of Canada, with its LNG price of about $14/MMBtu ex-ship, that would make our cost in Hawaii about $18/MMBtu.” Again, that’s the equivalent of less than $100 a barrel for oil.

Rise of Hawaii Gas

One company not wringing its hands about LNG is Hawaii Gas (formerly The Gas Co.). According to CEO Jeff Kissel, the company expects to begin importing LNG as soon as the end of the year, which  raises the possibility of some ironic developments.

In some ways, Hawaii Gas’s motivations are similar to HECO’s. For example, both companies worry about their reliance on Hawaii’s two struggling oil refineries. “When I returned to The Gas Co. in 2008,” Kissel says, “the refineries were already having operational difficulties. Oil prices were headed toward $150 a barrel, and there were serious questions about the future of oil refining in Hawaii.” That represented a big threat for a company that derived almost its entire supply from one of those imperiled refineries. That’s why Hawaii Gas began to look at LNG. “I started more to assure supply rather than to reduce costs,” Kissel says. “The truth is, we expected that it would cost more, but be worth it as an emergency backup fuel. In subsequent investigations, though, we determined that it would cost less than our present feedstock, even in small quantities.”

This is the first of several advantages Hawaii Gas has over HECO. In addition, natural gas is an exact substitute for the synthetic natural gas it manufactures in its Kalaeloa plant. That means the infrastructural costs to add LNG to its system are negligible. But scale is probably the most important component of Hawaii Gas’s LNG plan. It allows them to start by bringing in LNG on Matson ships using relatively inexpensive refrigerated containers. That strategy is already being used by a company called Carib Energy to supply LNG to isolated markets in the Caribbean and Gulf of Mexico. That means most of the federal permitting hurdles have already been jumped, which is very different from the prospect facing HECO. It also allows Hawaii Gas to easily ramp up their LNG operations to fit demand. One of many ironies in this scenario is that the oil refineries could end up being major customers of Hawaii Gas. Most refineries on the mainland already operate on natural gas. “It takes a lot of fuel to operate a refinery,” Kissel points out. “Burn-ing natural gas, even at $18/MMBtu, makes a lot more sense than burning $130-a-barrel oil.” Hawaii Gas wants to supply that gas.

Hawaii Gas is so bullish on demand, Kissel says, that it’s also looking at bringing in one or two small LNG carriers. He cites as an example the Coral Methane, an LNG carrier built to service small, isolated markets in Norway and Sweden. This 384-foot ship, with a draught of 22 feet, could fit snugly in Kalaeloa Harbor without dredging or major harbor modifications. That could greatly simplify the logistics of bringing LNG to Hawaii, although, absent a Jones Act exclusion, it would have to be from outside the U.S. It’s also worth noting that the capacity of even a small LNG carrier like the Coral Methane far exceeds Hawaii Gas’s current demand. Kissel’s willingness to ramp up LNG imports in this way suggests another potential irony: Could Hawaii Gas replace one of the refineries as a major fuel supplier to HECO?

Kissel doesn’t completely shrug off the idea. “I can’t speak for the utilities,” he says, “but for small-scale electrical generation, like they use on Kauai or the units that the plantations use, those don’t require significantly more fuel than we could bring in. We could service them. And we could scale up to service the larger utilities, if that’s what they wanted. In fact, if they wanted us to, we’re obliged to, because we’re the gas utility.”

That may sound like hubris coming from the CEO of a company that processes less than 10 percent of the fuel HECO does. But it’s worth remembering that while Hawaii Gas may be comparatively small, its parent, the Macquarie Group, is a massive multinational that’s already active in the international oil and gas markets. So capital isn’t a problem.

However, there are still any number of ways LNG could go the way of other big, ambitious projects that have failed in Hawaii. Standing in the way are the usual impediments: NIMBYs, regulators, permitting agencies and environmentalists. Environmentalists here will be critical enough, but the real debate is already underway on the mainland, where the controversy over fracking is working its way through the courts. Who knows? The great glut in natural gas may turn out to be a bubble.



Hawaii’s Possible Sources of Liquid natural gas

Jones Act Sources

Existing facility in Kenai, Alaska, which currently supplies Japan.
Proposed Jordan Cove Energy Project in Oregon.

Non-Jones Act sources

Existing Sempra LNG import facility in Mexico.
Proposed projects in British Columbia.

Hawaii Business magazine invites you to comment on our articles and the issues they raise. Comments are moderated for offensive language, commercial messages and off-topic posts and may be deleted. Some comments may be chosen for inclusion in the magazine on the Feedback page.

Old to new | New to old
Sep 5, 2012 03:47 am
 Posted by  pcwag33

LNG is an absurd option, driven only by those who profit off of it. Iceland powers themselves via geothermal. Heavy cable can be run between the islands. Right now, China is developing renewable (green) energy infrastructures for many Pacific islands. The technology is there. LNG is dirty and dangerous.

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Sep 5, 2012 06:49 am
 Posted by  ronwagn Natural gas is the future of energy. It is replacing dirty, dangerous, expensive coal and nuclear plants. It is producing the electricity for electric cars. It will directly fuel cars,pickup trucks, vans, buses, long haul trucks, dump trucks, locomotives, aircraft, ships etc. It will keep us out of more useless wars, where we shed our blood and money. It is reducing CO2 emissions. Here are over 1100 recent links for you:

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Sep 5, 2012 08:43 am
 Posted by  fosburger

Great article Dennis.

Sep 13, 2012 01:46 am
 Posted by  LNG Consultant

The author neglects several other sources of LNG that are not subject to the Jones Act. Non Jones Act LNG may also be sourced from Peru, Indonesia, Australia, Russia(Pacific Basin) and Trindad (via Panama Canal). Very large liquefaction facilities are being fast tracked Shell and BG in British Columbia, Canada (Kitimat and Prince Rupert). Jones Act LNG may again be available from the ConocoPhillips Nikiski Plant that has produced LNG for over 30 years in Kenai, Alaska (new gas discovered).

Sep 13, 2012 02:05 am
 Posted by  LNG Consultant

Ten LNG carriers were built in General Dynamics Shipyard in Quincy, Massachusetts (LNG Aquarius Class)and can be reflagged and staffed in accordance with the Jones Act. At least eight are still in LNG shipping service. MOL operates 5 of these carriers and some are on short term charter and could be retasked to service Hawaii from any current nor future US LNG supplier.

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Sep 13, 2012 02:37 am
 Posted by  LNG Consultant

HECO has ~1.4GW of oil fired power facilities on Oahu alone, Honolulu(113MW), Waiau(499MW), Kahe(651MW)and Kapolei(120MW). More than 100 MMSCFD would be required, if only 30% of the HECO's Oahu capacity was converted to natural gas. That would require ~4500m3 of LNG per day. The Coral Methane has a capacity of only 7500m3 of LNG. The Coral Methane is far too small to serve Oahu's demands. A 125,000 m3 LNG carrier would supply above fuel for one month. The author needs to check his facts.

Sep 20, 2012 01:24 pm
 Posted by  The Hawaii Guy

I think a question needs to be answered: Why would the Hawaii energy consumer presumably pay (2) utilities' fuel adjusment clauses to have LNG if alternatives exist?

The Gas Company's LNG would be marked up for their exsting and TBD billions in new infrastructure for years to come. In that scenario, any increase in LNG pricing would be pushed through to the customer whereas a long term contract with a private broker could provide HECO a position to truly save our islands $$$.

Jan 24, 2013 11:24 pm
 Posted by  Knowitall

LNG is a great source of energy. Hawaii will pollute less, and electricity prices will go down.

Nov 15, 2013 07:10 pm
 Posted by  Dacservice

It ain't gonna save heco, when the people discover they can hav an off grid system immune to the IRP cost recovery, HECO'S days will be numbered!

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Nov 15, 2013 07:14 pm
 Posted by  Dacservice

There will be two classes of citizens, those who are connected to the grid, and those who own their own electricity, which will you be, a renter, or an owner? Your choice, maybe that new high powered sports car ain't looking so good now huh!

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