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Jones Act presents problem No U.S. LNG ships means Alaska needs fast construction or congressional waiver Larry Persily Petroleum News Juneau Correspondent
In addition to finding buyers for its gas, promoters of an Alaska liquefied natural gas project also need to find LNG tankers to carry the gas to market.
That will not be easy.
Federal law requires that only U.S.-flagged vessels with U.S. crews may carry goods between domestic ports. If Alaska�s LNG is headed to a California receiving terminal that means someone has to place an order for several tankers very quickly or ask Congress for a waiver of the law.
The last LNG tankers were built in a U.S. shipyard 20 years ago but later were re-flagged as foreign vessels, eliminating them as an option for Alaska-California trade. And even if Alaska�s LNG were off-loaded at a Mexican port on the Baja and then piped to California, as some have proposed, the federal law likely would still stand in the way of using foreign tankers.
Baja may not solve problem U.S. Customs is in charge of enforcing the Jones Act, which Congress adopted in 1920. Although he has not seen the opinion, Harold Heinze of the Alaska Natural Gas Development Authority said a recent Customs ruling determined that LNG tankers pulling into proposed Baja ports with U.S. gas destined for California would fall under the Jones Act.
Whether the Jones Act would apply to Alaska gas going by ship to Mexico and then by pipe to California would depend if it were transformed into a �new and different product,� said Erlinda Byrd of U.S. Customs.
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.�
�There are no U.S.-flagged tankers right now,� said Heinze, chief executive officer of the state-financed gas authority, which is pushing hard to win a contract with Sempra Energy of San Diego to supply Alaska LNG to the Southern California market.
Running out of time The gas authority � if it had financing � could place a shipyard order for tankers, but Heinze said they likely could not be built in time for what he says is Alaska�s opportunity to enter the market in 2007 or 2008.
While it would be hard to build a fleet of tankers so quickly, it is possible, said Cynthia Brown, president of the American Shipbuilding Association.
�If the natural gas industry wants to carry LNG out of Alaska � they need to plan ahead and start placing their orders,� she said. Shipyards will not build on speculation, Brown said. �It will require the investment community to be willing to come up with capital.� She estimated it would take four to five years to design and construct LNG tankers at a domestic shipyard.
The nation�s six large shipyards are running far under capacity and would be interested in getting into the LNG tanker business, Brown said. �We need more orders. We need business.�
Heinze said it would take a fleet of seven or eight tankers, each carrying the standard 130,000 cubic feet of LNG, to move 1.5 billion cubic feet per day of Alaska gas to the West Coast market.
The cost at foreign shipyards for tankers of that size is running about $150 million each, though the cost would be more at a U.S. shipbuilder. Domestic costs higher Though the Jones Act is intended to preserve and protect U.S. shipbuilding and maritime jobs, increased costs are a consequence of the law. For oil tankers, the cost of building and operating a U.S. tanker is twice as much as a foreign vessel, said Roger Marks, a petroleum economist with the Alaska Department of Revenue.
A spring 2003 report from Cambridge Energy Research Associates said the global LNG tanker fleet is expected to increase from 137 ships in 2002 to 194 in 2006. Growing demand for LNG in the Far East and the United States is pushing producers and shippers to place a record level of orders with foreign shipyards, Cambridge Energy said.
The last U.S.-built LNG tankers were constructed with federal subsidies, Brown said. The Construction Differential Subsidy Program ran from 1936 to 1981 to help offset the higher cost of U.S. shipbuilding and to counter foreign subsidies, she said. The subsidies were available only for U.S. customers that would be using the ships in international trade.
There were no subsidies for ships operating in U.S. trade, Brown said. Federal waiver an option If the Alaska gas authority or others interested in the Alaska-California LNG trade cannot obtain financing and place shipbuilding orders in time to enter the market, Heinze believes a temporary waiver from the Jones Act would be an option.
�There is a good basis to ask for relief,� he said. �There is no way to satisfy the requirement,� especially if the gas authority is looking to strike a deal with Sempra for its 2007 start-up date or with Mitsubishi Corp., which is looking at opening an LNG receiving terminal in Long Beach, Calif., in 2008.
The authority might need to ask Congress to lift the Jones Act requirement until a fleet of U.S. tankers could be built, Heinze said.
Federal law allows the Customs Service to grant temporary waivers but only for national defense, said Glen Nekvasil of the Maritime Cabotage Task Force. Such a waiver was approved during the 1991 Gulf War, he said. The task force is a coalition of companies working to preserve cabotage laws and in support of the U.S. domestic marine shipping industry.
A waiver would require congressional action and would involve U.S. Rep. Don Young, chairman of the House Transportation Committee. Phone calls to the Alaska Republican�s office were not returned for this story.
The American Shipbuilding Association�s president said the group would oppose a federal waiver.
The Alaska gas authority�s other problem is that Indonesia recently announced an agreement to supply Sempra with up to 1 billion cubic feet per day of LNG, starting in 2007. If the agreement holds, it could bump Alaska out of the running as a Sempra supplier for its proposed Baja terminal.
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