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Mixing gas in Mexico way around Jones Act Commingling Alaska, foreign gas might be a solutiuon Larry Persily Petroleum News Juneau Correspondent
Proponents of shipping liquefied natural gas from Alaska to the West Coast may have found a way around the federal law requiring expensive U.S. ships with U.S. crews to move the LNG. It involves mixing Alaska gas with foreign LNG at a terminal in Mexico before shipping some — but not too much — of the gas into the United States.
If Alaska gas is mixed in with foreign LNG at the same terminal, and then a volume of gas at least equal to the Alaska LNG is used in Mexico, the argument could be made that no Alaska gas made it across the border into the United States, and therefore the federal shipping requirement for interstate transportation would not apply. Issue discussed in Customs ruling The scenario is explained in a 2002 Customs ruling on LNG shipments.
The 83-year-old federal law, called the Jones Act, requires that only U.S.-flagged vessels and crews may carry cargoes between domestic ports. It’s a significant problem for efforts to sell Alaska LNG into the Southern California market because there are no U.S-flagged LNG tankers and it could take at least four or five years to build a fleet of ships.
Domestic vessels are also more expensive to build and operate than tankers with foreign crews.
The Jones Act would be an issue even if Alaska LNG were landed in Mexico for eventual shipment to California. The law states, “No merchandise … shall be transported by water, or by land and water … between points in the United States … either directly or via a foreign port … in any other vessel than a vessel built in and documented under the laws of the United States.” Gas authority looking into issue The Alaska Natural Gas Development Authority is researching the issue as it continues working toward promoting a state-owned and operated pipeline and liquefaction terminal to move natural gas from the North Slope to market.
One target for the authority’s marketing efforts has been Sempra Energy, the San Diego-based energy company looking at building an LNG receiving terminal on Mexico’s Baja Peninsula to serve the Southern California market.
Harold Heinze, chief executive officer of the authority, has given his board members a copy of the 2002 letter from U.S. Customs to a Washington, D.C., law firm in which a Customs official explains how “commingling” Alaska and foreign LNG could work.
The Customs ruling was issued in response to an inquiry from an unnamed U.S. company. Such requests for rulings often hold the company name confidential, and neither Customs nor the law firm has revealed the identity of the company. The Customs agency is in charge of enforcing the Jones Act.
“We’ve looked around to see who requested this and we’ve come up blank,” Heinze said. “It’s a mystery to me.”
Heinze received his copy of the September 2002 Customs ruling from a Texas law firm, where an attorney read a news story about the Alaska gas authority’s work and forwarded a copy of the Jones Act ruling. The law firm did not return a call from Petroleum News.
Assumptions behind Customs ruling The Customs ruling was based on the following hypothetical facts as set out by the company that requested the opinion:
• The company and another U.S.-based energy company would construct an LNG receiving terminal and regasification plant in Mexico.
• Foreign-flagged vessels would carry Alaska LNG to the plant, where it would be commingled with LNG from an overseas source.
• After regasification, some of the gas would be burned in Mexico and some shipped via pipeline to the United States. The U.S. customers would be buying their gas from the Mexico facility, not directly from an Alaska supplier.
• The terminal would receive an average of 300 million cubic feet of LNG per day, with Alaska LNG to meet about half the supply.
• A volume of gas at least equal to the amount brought in from Alaska would be used in Mexico by either power producers or local gas distributors.
“All of the LNG brought to Mexico for processing will be necessarily commingled, as it is impractical to segregate the Alaska-source LNG from the foreign-source LNG at the terminal and during the regasification process,” the Customs ruling stated.
“Customs will approve the company’s proposed plan,” the ruling said, on the condition the company must always maintain records to show that an amount of gas at least equal to the Alaska LNG is first sold in Mexico before any of the remaining commingled gas is shipped to the United States. Benefits of avoiding Jones Act The benefits of not needing to use U.S.-flagged vessels could be significant to the Alaska gas authority. Instead of needing to place orders immediately for a fleet of seven or eight U.S.-built LNG tankers — and finding money to pay for the tankers — the authority could use foreign ships to carry some of its gas to a receiving terminal in Mexico, Heinze said.
The authority likely would still need maybe three U.S.-built tankers because the volume of Alaska LNG would exceed the amount used in Mexico, he said. That additional volume of gas would need to go on Jones Act ships.
Another possibility, he said, would be to find and buy or lease the last LNG tankers that were built in the United States more than 20 years ago and later were reflagged as foreign vessels. They could be used again for interstate trade if they were reflagged back to the U.S. merchant fleet. Too much Alaska gas could be an issue The volume of gas, however, could be a problem. The unnamed company in the Customs ruling referred to possibly bringing 140 million to 200 million cubic feet per day of Alaska LNG to the terminal in Mexico, but Heinze is talking with Sempra about moving as much as 1 billion cubic feet per day of Alaska LNG. That much gas would far exceed the amount used in the Baja and equals close to 20 percent of Mexico’s entire gas consumption in 2002.
Large new power plants in Mexico could burn up a lot of gas supplying electricity for Southern California, but it would be difficult to use up the entire 1 bcf per day of Alaska LNG to totally escape the Jones Act — which would mean needing U.S. tankers to carry some of the gas.
The state gas authority would also need to use U.S. tankers if it were to deliver any LNG directly to a U.S. terminal.
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