Could Alaska's Natural Gas Help Power Hawaii?

By Larry Persily

Rather than accept rising energy costs as inevitable, Hawaii’s state government and utilities are working to bring online more renewables, including wind, solar and biofuel power. And they’re looking at whether importing liquefied natural gas could help reduce fuel costs and meet new environmental regulations.

The 50th state is similar to the 49th state, Alaska, where high energy costs also are pushing residents and their elected leaders to find a way to use more cleaner-burning natural gas and less oil.

Alaskans want to pipe abundant natural gas from the North Slope into homes and electrical generating plants in the state’s population centers. And while working on that, maybe also find a way to pull propane out of that gas stream and ship it to rural communities burdened by energy costs that rival Hawaii’s.

Among all 50 states, the average retail price for electricity in April was 11.95 cents per kilowatt hour, according to the U.S. Energy Information Administration. It was triple that in Hawaii. By comparison, Anchorage — Alaska’s largest city at almost 300,000 residents — looks like a bargain to Hawaii residents. Residential rates as of July 1 were between 8.5 cents and 13 cents.

But step outside Alaska’s population center, which mostly burns affordable natural gas to generate electricity, and the costs look more like Hawaii’s.

Golden Valley Electric Association, which serves the Fairbanks area, was charging a residential rate of 21.38 cents in July to cover its cost of burning a lot of expensive oil products.

Takotna, population 50, about 260 air miles northwest of Anchorage, paid for the painful distinction of the highest electric rates in the state. The residential rate averaged $1.02 per kilowatt hour last year. Fueling diesel-burning generators in remote villages comes at a high cost.

Alaska’s state-funded Power Cost Equalization program dropped the actual cost paid by Takotna residents to about 45 cents, but only for the first 500 kwh per month. Government offices, schools and commercial accounts get no state subsidy and pay the full tab. The subsidy last year covered 77,000 residents in 183 communities statewide, at a cost of $32 million.

Electricity costs so much in Hawaii for pretty much the same reasons as in rural Alaska. It costs a fortune to deliver fuel to remote places. And each state’s small, isolated market means no savings from economies of scale or cost sharing between communities.

The future for Hawaii, however, is renewable energy. More so than for Alaska.

In 2010, renewable energy sources provided 10 percent of Hawaiian Electric’s sales. Last year that total grew to 12 percent, on its way to meeting the state standard of 15 percent by 2015.

“Hawaii has created a legal mandate ... which requires that by 2030, 40 percent of the electricity sold by the Hawaiian Electric companies come from renewable sources,” the company said. State lawmakers adopted the 40 percent standard three years ago. The standard also mandates a 30 percent reduction in demand through energy efficiencies.

The Alaska Legislature went a different route two years ago, adopting renewable energy goals — not a mandate. Lawmakers said they wanted to see a 15 percent gain in energy efficiency by 2020 and half of the state’s energy coming from renewable and alternative sources by 2025. The law provides no penalty for failing to meet the goals.

Until renewables meet more of Hawaii’s energy needs, LNG imports are a cleaner-burning and maybe less-expensive option to oil.

But where to get the gas.

Alaska is one possible source. But federal law poses a big challenge to getting natural gas from Alaska. A provision known as the Jones Act — part of the Merchant Marine Act of 1920 — requires use of U.S.-built, U.S.-owned, U.S.-registered and U.S.-crewed ships when moving commercial cargoes between U.S. ports. The act was named for Sen. Wesley Jones of Washington state, who wanted to protect the shipyards and ports of his state.

No U.S. shipyard has built an LNG tanker since the 1970s, and those were subsidized by the federal government. Some industry estimates place the cost of a U.S.-built LNG tanker at double the price tag from South Korean shipyards, the world leader in the trade.

Options include pushing for congressional action to change the law, which could take years, or perhaps finding a tanker and an owner willing to petition for reflagging the vessel in the United States.

If there is a way around the Jones Act, or a ship is found that meets the law, it’s hard to estimate how much it might cost for Alaska LNG delivered to Hawaii. First, you’ve got to move the gas 800 miles from the frigid North Slope to an ice-free port at tidewater on the southern coast of the state.

Would the gas move in an efficient, large-capacity pipeline developed by ExxonMobil, BP and ConocoPhillips to serve growing Asian markets? Or would the gas move in a much smaller, state-sponsored pipeline, as is under consideration by Alaska lawmakers?

Rough, very rough estimates put the cost for treating North Slope gas to remove carbon dioxide, water and other impurities, piping it to a port and supercooling it into a liquid it at $7 to $13 per million Btu. Only a very large pipeline project with its economies of scale could get anywhere close to the low end of that estimate.

Add the cost of buying gas from the producers and the tanker expense of making the delivery, and Alaska gas could run from $11 to $17 landed at the dock in Hawaii — or more.

Even at the high end, it could be in line with today’s oil prices for power plants. The question for Alaska LNG will be: Could Hawaii get gas for less elsewhere?

Alaska’s other problem is that Hawaii doesn’t want to wait forever for its first gas delivery. And no project developer in Alaska is talking LNG before 2020 — at best.

An option to avoid the high capital costs of a liquefaction plant could be a smaller and less expensive compressed natural gas operation in Alaska, said a 2007 report on natural gas options for Hawaii. Compressed natural gas squeezes methane molecules into a smaller space but not nearly as tight as supercooled, liquefied natural gas. Transportation investments, however, would add up to more, since it takes more shipboard space and more voyages to deliver the same amount of gas.

But here, too, federal shipping laws are a problem. “Alaska would be a prime candidate for supplying CNG to Hawaii, assuming one could get an exemption from the Jones Act,” the report said.

With just 2,700 miles between potential LNG plant sites in Southcentral Alaska and Honolulu, Alaska certainly has a distance advantage over the Mideast nation of Qatar, the world’s largest LNG producer, and even Australia.

Alaska is the same distance as between Hawaii and the LNG plants proposed for Kitimat and Prince Rupert, British Columbia. To Canada’s advantage, however, the Canadian proposals are further along than Alaska’s plans. Several of the Canadian projects’ proponents say they could have their plants in operation before 2020.

And there would be no Jones Act issues with Canadian LNG deliveries.

Another option for Hawaii might be to bring in LNG from the Gulf of Mexico. The advantage could be lower-cost U.S. shale gas. The disadvantage would be the 7,000-plus miles a tanker would have to travel to reach halfway around the world — and that’s after the expanded Panama Canal opens to traffic in 2014.

Still, shipments between Texas and Hawaii would trigger the Jones Act.

Relaxing the Jones Act has been debated over the years without achieving any change. The issue has arisen again, especially with interest in lower-cost U.S. Gulf of Mexico LNG deliveries to Hawaii and Puerto Rico — or maybe Alaska LNG deliveries to Hawaii.

About the author: Larry Persily runs a federal agency in Washington, DC, and Anchorage, Alaska, created by Congress to coordinate and assist with permitting for an Alaska natural gas pipeline project. Before being appointed to that post by President Barack Obama in 2009, Persily worked for more than a decade in Alaska on oil and gas issues for three governors and the Alaska state legislature.

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