Energy & Environment

Report Says Natural Gas Will Bring Major Cost Savings to Hawaii

·By Sophie Cocke

State of Connecticut

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Sophie Cocke

Sophie Cocke is a reporter for Civil Beat. You can reach her by email at sophie@civilbeat.com or follow her on twitter at @sophiecocke.
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Discussion

r of Blue Planet Foundation, pointed out that Hawaii Gas is a client of FACTS Global Energy, as the report discloses.


"Although FACTS takes great pains to claim that they don't have any vested interests in whether or not Hawaii imports LNG, there is a clear, unavoidable conflict of interest: FACTS works for Hawaii Gas, who has petitioned (federal regulators) to import LNG to Hawaii," wrote Mikulina by email.


FACTS Global Energy was founded by Fereidun Fesharaki, an international oil expert and former president of the International Association for Energy Economics. He is also a member of the Council on Foreign Relations. The study was lead by his son Shahriar Fesharaki, also an expert on oil and natural gas. Shahriar Fesharaki couldn't be reached for comment, but the study stresses that FACTS Global Energy will not receive additional compensation if Hawaii moves forward on natural gas.


"FGE undertook the present study with the intent of providing a fair and independent analysis with respect to the potential introduction of LNG into the state," the report says. "Beyond payment for this study, FGE will receive no compensation whatsoever whether the state decides to import LNG or not, and no matter under what terms it is imported."


UPDATED Shahriar Fesharaki disagreed there was any conflict.


"We have never comprised our independence to satisfy a particular desire of any client. In this case none of the parties asked us in anyway to take any particular stance on the study," he said an email to Civil Beat after this story was published. "Moreover, whether the State goes ahead with the LNG or not has no financial implications for FGE, particularly as 99 percent of our business is outside the state and often outside the USA. We don’t construct LNG terminals nor do we supply oil or gas."


Gov. Neil Abercrombie’s administration announced last year that it was moving toward importing LNG to Hawaii to provide relief to the local economy and residents who pay triple the national average for electricity.


The study was conducted to help develop a working plan for liquefied natural gas. Currently, Hawaii is almost completely dependent on oil for its energy needs.


In addition to a cost analysis, the study provides a better picture of the best sources and infrastructure for LNG, and evaluates the potential impacts the new fuel source could have on Hawaii’s two oil refineries and the renewable energy sector.


Shipping Location Is Key


In order to maximize savings, Hawaii should import LNG from either the West Coast or the U.S. Gulf Coast, according to the report. Compared to low-sulfur fuel oil, natural gas from the West Coast is projected to cost 43 percent less in 2030. LNG from the U.S. Gulf Coast is expected to be 31 percent cheaper.


The report also analyzed imports from Alaska, Australia and Canada, but warns that these areas carry a much greater risk. Projected savings are significantly less, about 8 percent for Alaska, 4 percent for Australia and 16 percent for Canada.


Given that price forecasts are uncertain, the report advises that major LNG imports not be undertaken unless the expected savings are substantial.


“Expected savings of, say, 10-15%, are probably not enough to warrant the large investments and long-term commitments required for bulk LNG imports; such savings could easily be wiped away by market fluctuations,” according to the report.


Natural gas prices have plummeted on the mainland, aided by hydraulic fracturing technology, which has opened up new reserves of the gas.


Critics say Hawaii won’t realize these savings because LNG will be linked to the Asia-Pacific market, where prices are substantially tied to oil. But the report says LNG coming from the U.S. will be in line with domestic natural gas prices.


Jeff Kissel, CEO of Hawaii Gas, the state’s only gas company, is helping the push for importing LNG. He said that the report backs up the company’s belief that it can get good prices for LNG that are not linked to Asian crude. He said it all comes down to direct negotiation with suppliers.


“There are people that say, ‘no, that is not the case,’” he said. “What I can tell you for sure is that our company, when we did all this work, determined that there are ways we can get it to Hawaii at a price that is not crude linked. And it provides very favorable economics, compared to what is going on with crude oil.”


Mikulina, of Blue Planet Foundation whose focus is on eliminating fossil fuel use, isn't convinced.


He called the report’s cost estimates “highly questionable” and says neither the U.S. West Coast or Gulf Coast have export facilities. The argument that domestic exports to Hawaii would be tied to the U.S. market undercuts the business rationale for U.S. export facilities — that exporters will be able to tap into the lucrative prices of the international market, he says.


Supplier Is Not A Problem


While there are currently no companies exporting LNG from the mainland, except in Alaska, the report says that finding a supplier is not a problem, at least when it comes to investors.


"Would someone invest the money to build such a project? The answer is certainly yes, and the number of possible sponsors is much larger than the number of companies that can develop major LNG export projects," according to the report.


The report recommends that Hawaii contract with two ships to import LNG in case there is any disruption in supply. And it says that finding a supplier, and negotiating a fuel price, should start early to get the best prices.


"The LNG business is not a supermarket. LNG buyers who get decent prices strike their deals before the projects are finalized; they do not wander the aisles looking at price tags," the report states.


Hawaii’s Oil Refineries


What will importing LNG mean for the state’s two oil refineries?


The outlook isn’t good. But the refineries, Chevron and Tesoro, are already in bad shape, according to the report.


Tesoro announced that it was leaving the Hawaii market last year. And both refineries are facing a reduction in local demand with the Hawaii Clean Energy Initiative. The state’s clean energy policy mandates a switch to 40 percent renewable energy sources by 2030 and a 30 percent reduction in electricity use.


“Hawaii’s refiners have had rocky economics for many years, and the issue of closure or sales has been revisited repeatedly,” according to the report. “Chevron doesn’t publish figures on performance of its individual refineries, but Tesoro does, and its Oahu refinery has the worst economics of any plant in its system.”


Representatives for Tesoro and Chevron could not be immediately reached for comment.


If Hawaii meets its clean energy goals, it will slash Hawaii oil demand 46 percent by 2030, according to the report. LNG imports would further reduce the demand for refined oil by up to 19 percent.


“LNG is certainly not good news for the refiners, but its impact is minor compared to the intended effects of the Hawaii Clean Energy Initiative,” the report states.


The Hawaii refineries, which employ about 800 people collectively, import crude oil that is then refined to fuel oil for electricity generation, gasoline and marine and jet fuel. Hawaii also imports oil that is already refined. If one or both of the refineries shut down, it could make Hawaii more vulnerable to disruptions in the global oil supply, energy experts warned last year.


Impact on Renewables


Regardless of Hawaii’s clean energy goals, the state will still have to rely on non-renewable sources for years to come for at least some portion of its energy needs. And diversifying with natural gas makes economic sense, the Abercrombie administration has argued.


The administration has instructed the electric utilities and state regulators to continue the aggressive push for renewables, while also exploring natural gas options.


The FACTS Global Energy report concludes that importing LNG will not hurt Hawaii’s push for renewables, except maybe in the transportation sector where natural gas-powered cars could compete more favorably than biofuels. The report notes that it is doubtful that biofuels will be as cheap as natural gas used in vehicles.


But groups such as Blue Planet Foundation and the Hawaii Sierra Club disagree and say that switching attention to natural gas could derail the state’s push for renewables and make Hawaii dependent on another fossil fuel source.


"We don't stop smoking by switching from cigarettes to cigars. Similarly, we don't wean ourselves off of fossil fuels by simply switching to a different fossil fuel," Robert Harris, executive director of the Sierra Club, said in an email.


The Sierra Club’s national chapter is working to stop mainland companies from exporting natural gas, including to Hawaii. The group has grown increasingly concerned about the environmental impacts of hydraulic fracturing, or fracking, which has been tied to water contamination and has raised concerns that some earthquakes may be caused by drilling.


Building a regasifcation plant in Hawaii, upgrading ports, and adding pipelines and other infrastructure for distribution will also cost hundreds of millions of dollars in capital investment, according to the FACTS report. The study notes that this cost needs to be kept in perspective — Hawaii spends about $6 billion a year on oil.


But Mikulina worries these expenditures will detract from the large-scale investments needed for the switch to renewables. And lower LNG prices could also make it more difficult for renewables to compete.




DISCUSSION: *Do you think that Hawaii should forge ahead with importing liquefied natural gas?