The Biggest Loser: Puerto Rico and LNG
On October 2019 the Catalunya Spirit LNG tanker dropped off a natural gas shipment in Puerto Rico originating from Yamal LNG in Siberia. This marks the second time in the last 3 years that Russian gas has made its way to US territory. The case of Puerto Rico marks an exceptional loss to US businesses due to the proximity of this island to US mainland LNG exporting terminals.
The main issue is that prevents US exporters from supplying LNG to Puerto Rico is the lack of US-flagged LNG tankers. The Jones Act requires that all goods transported by water between US ports must be carried on US-flagged ships, constructed in the US and owned by US citizens. Consequently, while US gas cannot be delivered via LNG tankers, it can be delivered using ISO containers which can then be carried by US cargo ships. However, an individual container can only hold approximately 20 tons of LNG and there are only 75 ISO tanks available for Puerto Rico’s gas imports compared to the roughly 75,000 tons of LNG that can be transported in a single LNG tanker. This severely limits the potential for US firms to sign long term contracts with the Puerto Rican Electric Power Authority (PREPA) and individual industrial clients; these two parties represent all natural gas purchases on the island. Currently these are the only parties interested in buying LNG in Puerto Rico. This represents a lost revenue opportunity for US LNG exporters given that in 2018 Puerto Rico imported 1.25 million tons of LNG.
The Jones Act incentivizes Puerto Rico to look at non-US sources to fulfill its increasing gas demand. In 2018 almost all imports came from Trinidad and Tobago. The average price in Puerto Rico is $7.98 per MMBtu . This means US firms are losing out on approximately $490 million in revenues from LNG exports every year. While US firms could potentially supply LNG for less than half of the current average price, rising demand is forcing Puerto Rico to import from more expensive sources instead. Recent reports from the DOE show that the island paid $9.23 cents per MMBtu for the Russian LNG cargo it received in October.
Puerto Rico should be on the minds of most LNG exporters in the US due to its expanding gas demand. Hurricane Maria in 2017 devastated the island and the entirety of its existing infrastructure. However, it also presented a unique opportunity to transition the island away from oil-fired generation and introduce a more diversified portfolio. As part of this effort to transition away from dirtier fossil fuels, the PR government unveiled a new $20 billion dollar plan to strengthen and modernize the power grid. One of the goals for this new plan is to increase the use of natural gas . While Puerto Rico would benefit from cheaper Henry Hub-linked LNG from the US mainland, the Jones Act discourages spot purchases from US firms.
This diversification plan includes a heavy investment into gas infrastructure. In addition to the existing EcoEléctrica LNG import terminal with a 2.1 mtpa regasification capacity, the island is also expected to convert San Juan Units 5 and 6 to operate with natural gas. This will add an estimated 864 MW to current natural gas generation capacity on the island . LNG delivery is still a factor of speculation however it is likely that New Fortress Energy will supply this site via ISO containers from its proposed FSRU near San Juan. According to a recent report on the future fuel mix in Puerto Rico, approximately 55% of total electricity generation could be fueled by natural gas by 2038 (compared to 22% today). This would result in more than $760 million in annual revenues from natural gas purchases . This provides additional incentives for US LNG exporting firms to find a way around the Jones Act.
Currently there are 3 options available for US firms to work around the Jones Act, each with its own costs and benefits. The first and most obvious option is to wait until the US develops its own LNG tankers. This option is highly unlikely because it is estimated that the total cost of construction for one US tanker would be $450 million, about twice as much as carriers constructed in South Korea . The second option is for US firms is to pressure the administration to waive the Jones Act by executive authority, specifically for Puerto Rico’s LNG imports. This way US firms can export their LNG using foreign built tankers, while also helping Puerto Rico benefit from low Henry Hub prices. The biggest cost for this strategy would be the time spent waiting to access Puerto Rico’s gas market, this would again benefit foreign gas firms. Third, firms can invest in renting or buying ISO containers to send their LNG to the island. The revenues from using ISO containers assuming the island continues to buy gas at $7.98 per MMBtu would be less than $8,000 per container.
Small-scale LNG options are inefficient when compared with the potential for exporting 70,000 tons of LNG in a single shipment via an LNG tanker. Ultimately this points to the need for a waiver on the Jones Act because US firms are currently operating at a disadvantage against foreign firms. Despite the necessity for policy intervention the decision is dependent on the executive administration’s priorities and beliefs, recently the administration pledged to uphold the Jones Act. Without adequate government support US firms will struggle to compete in this domestic market.
Emanuel Castro is a student in the Master of International Affair Program at Columbia University, School of International and Public Affairs and has worked as a consultant with PREPA.
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