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Is Liquefied Natural Gas a viable option?

Hawaii takes a look at natural gas

(page 1 of 2)

Some people call it a partial energy solution for Hawaii, while others dismiss it as just another dirty fossil fuel blocking the path to a renewable energy future

How quickly things c​hange.

Ever since the Hawaii Clean Energy Initiative was announced in 2008, the assumption has been that Hawaii’s new sources of power would come from renewable energy: wind, solar, geothermal, biofuels and others. These cleaner, local sources of energy were supposed to gradually wean us off our addiction to dirty and expensive oil, and dirtier but cheaper coal.

However, the dramatic decline in the cost of clean-burning natural gas is shaking up these assumptions. Using natural gas could lower energy costs and, along the way, transform the power structure of power in the Islands. But other experts say the environmental cost of natural gas versus renewable energy is too high to pay, both for Hawaii and the rest of the world.

Recent advances in gas-drilling technology – particularly horizontal drilling and the environmentally controversial technique known as fracking – have begun to tap previously inaccessible gas reserves locked in the vast shale fields of North America. As a result, gas prices have plummeted to all-time lows. This spring, they dipped below $3 per million Btus (MMBtu). That’s the equivalent of less than $17 for a barrel of oil. In comparison, last year, HECO spent an average of $127 a barrel for oil. The price of natural gas is cheap enough to compete with coal on the mainland. So, how can Hawaii get some of that inexpensive gas?

The answer, according to key players in Hawaii’s energy sector, is liquefied natural gas. LNG is natural gas that’s been cooled to minus 160 degrees C so that it condenses into a liquid. LNG’s big advantage is that it consumes only about 1/600th the space of regular natural gas. That makes it practical to safely ship in large quantities. Regular natural gas is transported by pipeline, but, for isolated markets like Hawaii, that’s not viable. LNG may solve that problem.

If only it were that simple.

What LNG means for Hawaii

LNG isn’t just a different fuel, it’s a whole new infrastructure. Shasha Fesharaki, COO of the Honolulu-based consulting firm Facts Global Energy, sketches out the pieces:

  • Liquefaction facilities to convert the gas to a liquid;
  • LNG carrier ships to bring the fuel to Hawaii;
  • Regasification facilities to convert the liquid fuel back to a gas;
  • Storage and pipelines to handle the natural gas once it’s ashore; and
  • Modifications to each utility’s electrical generators to accommodate the new fuel.

Each piece presents challenges. First, there are no LNG export facilities in the U.S. Before the fracking binge, when the gas industry expected a shortage of LNG, several import facilities were built. Many of these have now applied for export licenses from the Federal Energy Regulatory Commission. Only two, though – the Sabine Pass and Excelerate projects, both on the Gulf of Mexico – have gotten the go-ahead. Other projects are in the works on the West Coast, particularly in Oregon and British Columbia. These projects would be ideal for Hawaii, but the Oregon projects still await FERC approval, and all of the projects face permitting issues that could stretch out for years.

The shortage of LNG carriers is the most immediate impediment. According to Fesharaki, that’s because of the Jones Act, the 1920s-era legislation that makes it illegal to ship goods or passengers between two U.S. ports unless you use an American-made, American-owned and American-crewed vessel. There are no Jones Act ships to bring LNG here.

According to Michael Hansen of the Hawaii Shippers Council, the last U.S.-flagged LNG carrier slid off the skids more than 30 years ago; today, it would be prohibitively expensive to build and operate a new one. One alternative, Hansen says, would be to apply for an exemption from the Jones Act, which is what Puerto Rico is doing. Like Hawaii, Puerto Rico depends disproportionately on oil to generate electricity, so it’s going ahead with its own LNG plans and hoping the exemption comes through.

Fesharaki points out that LNG infrastructure includes a lot of costly decisions. One option, he says, is to choose traditional onshore regasification and storage. These facilities would probably have to be at Kalaeloa on Oahu’s southwest tip, but it’s not clear if there’s enough room for them. They could also cost upward of $1 billion to develop, especially if we have to dredge the harbor to accommodate a large LNG carrier. Another option is a vessel called a floating storage regasification unit (FSRU). This is essentially an LNG carrier with onboard regasifiers.

It can be moored permanently, either in a berth, or to an offshore pipeline that brings the natural gas ashore ready for consumption. The FSRU option can cost half the price of an onshore facility, but there are technical issues that would have to be settled before we could go that route. The primary issue: Can an FSRU withstand Hawaii’s sea conditions?

Where to get the gas?

But we’ve gotten ahead of ourselves. Is there any point in building costly LNG infrastructure if we’re not sure we can get that mainland natural-gas at $3/MMBtu? Maybe. It turns out natural gas supplies are expanding around the world. So, while we might not be able to buy gas from the U.S. market, prices elsewhere may be low enough to make LNG worth our while.

HECO thinks so. Robbie Alm, executive VP for public affairs at Hawaiian Electric Co., puts gas prices in context. “We’ve seen $2.98/MMBtu on the mainland,” he says, “but, by the time you made a contract, got it here and added in the shipping and building the regasification facilities, I think the numbers will be much more like the numbers discussed at the recent Hawaii Clean Energy conference: $11/MMBtu to $17/MMBtu. And most of the people in that room leaned toward $17/MMBtu.”

On the other hand, he notes, $17/MMBtu might be low enough. For example, Japan and South Korea, the world’s largest consumers of LNG, are paying about $18/MMBtu for long-term contracts. “$18/MMBtu is the equivalent of $100-a-barrel oil,” Alm says. “We’re at $130 a barrel now, so those types of numbers look pretty attractive. Maybe they don’t look $5/MMBtu attractive or $10/MMBtu attractive, like some people are pointing to, but not bad, especially if you could get a steady supply, and you were able to take 25 percent or 30 percent of our power and devote it to LNG instead of oil for the time being. That’s a huge hedge.”

Why now?

This isn’t the first time Hawaii has discussed LNG. Fesharaki and his company have already written two reports on LNG for the Hawaii Energy Policy Forum, one in 2004, and another in 2007. In both instances, the economics of LNG didn’t make sense.

What’s changed is the price, of course, but there are also changes in the way the LNG industry is structured. Traditionally, LNG developers have needed long-term, high-volume contracts to justify building a liquefaction and export facility. In 2005, HECO’s Alm says, “the LNG people basically said we’d have to give them virtually all our capacity for 20 years, plus all the capacity of our largest independent power provider, Kalaeloa. That meant we wouldn’t have been able to do any renewables. We couldn’t take any wind, solar or geothermal.”

That didn’t jibe with Hawaiian Electric’s goal of reducing its reliance on fossil fuels, especially the Hawaii Clean Energy Initiative’s standard of getting to 40 percent renewables by 2030. But the glut in shale-gas has made the natural gas industry more flexible, Alm says. “Now, the LNG folks are coming to town saying, ‘Oh, we don’t need all your capacity anymore. We need a much smaller increment.’ That means we can simultaneously pursue our renewable goals and use LNG to substitute for whatever portion of our portfolio that was going to be left in oil.”

Changes in environmental laws have also made the capital investment for LNG less daunting. Ron Cox, HECO’s VP for generation and fuel, says that to comply with new EPA air-quality standards, expected to take effect in 2014 or 2015, HECO will have to install expensive scrubbers and precipitators on its old boilers. But, Cox says, if the utility switched to cleaner-burning natural gas, those upgrades wouldn’t be necessary. “We’re looking at $900 million to $1 billion” to comply with upcoming EPA regulations, he says. “That would be a huge expense. When you compare that kind of number to the potential costs of the infrastructure to support the delivery of LNG, LNG doesn’t look so bad – especially if the fuel is cheaper and cleaner.”

The state’s regulatory climate has also changed. Alm points out that former Gov. Linda Lingle, given the option of LNG, delivered “a resounding ‘No.’ ” Now, he says, both Gov. Neil Abercrombie’s office and the Public Utilities Commission have asked the utility to take another look at LNG. PUC chair Mina Morita puts it this way: “They need to do their due diligence. If they’re not looking at LNG, if they haven’t at least considered it, that would be bad, because it’s both a lower-cost fuel and cleaner.”

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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