Jones Act leads to surreptitious imports of Russian LNG

by Michael Hansen, Hawaii Shippers Council, February 8, 2018

The New York Times published on January 30, 2018, the opinion-editorial “America’s Natural Gas Hurdles,” reporting that a cargo of Russian liquefied natural gas (LNG) was surreptitiously imported into the United States on January 28, 2018 at Boston, Massachusetts, in apparent violation of the sanctions imposed by President Barack Obama in 2014 in response to the Russian incursions in the Ukraine Republic.

The cargo originated at the Russian Yamal Gas Project, which is located on the Yamal Peninsula in Northwest Siberia bordering the Arctic Ocean, was discharged at the Isle of Grain LNG Terminal on Brittan, and then reloaded on another LNG carrier for discharge at Boston.

On the initial movement from Yamal to Isle of Grain, a newbuild specialized icebreaker tanker – of a type known as the “ARC7” – was employed on the Northwest passage along the margin of the Arctic Ocean from Siberia to Greenland.

The South Korean shipbuilder Daewoo Shipbuilding & Marine Engineering (DMSE) is contracted to build up to sixteen Arc7 double acting ice-class gas tankers for the project.[7] Tankers will be chartered and operated by the Russian national shipping company Sovcomflot. A double acting ship is a type of icebreaking ship designed to run ahead in open water and thin ice, but turn around and proceed astern (backwards) in heavy ice conditions. In this way, the ship can operate independently in severe ice conditions without icebreaker assistance but retain better open water performance than traditional icebreaking vessels.

As the author explains because of the Jones Act a cargo of domestic LNG could not be shipped to the North East to alleviate the shortage of natural gas due to the severe winter conditions. There are no Jones Act LNG carriers, and no U.S. shipyard has constructed an LNG carrier since the late 1970’s nearly 40 years ago, which would met the Jones Act domestic ship build requirement.

In the meantime, the U.S. is exporting LNG from Sabine Pass Liquefaction, LLC, a subsidiary of Cheniere Partners, a LNG export terminal located in Cameron Parish, Louisiana, which began operation in September 2016, to worldwide destinations on foreign flag LNG carriers. However, the LNG from this and five other U.S. export terminals currently under development can not be shipped to elsewhere in the U.S. where it may be needed.

Anna Mikulska with the Center for Energy Studies at Rice University’s Baker Institute for Public Policy wrote in Forbes on February 6, 2018:

...the U.S. has to import LNG not because it lacks sufficient natural gas production but because market and non-market mechanisms prevent natural gas from being delivered to the northeastern part of the country whenever demand increases rapidly and at a relatively short notice. The underlying obstacle here is insufficient pipeline and storage capacity to bring in and store otherwise abundant U.S. natural gas. In addition, the region is not able to cost-effectively import U.S.–sourced LNG due to barriers caused by the Jones Act. This 1920 policy prevents ships built and registered outside of the U.S. from delivering goods between U.S. ports. And there are currently no U.S.-made, U.S.-flagged LNG tankers….

This issue also affects the noncontiguous jurisdictions especially Alaska, Hawaii and Puerto Rico. Alaska is currently a small producer of LNG and ha the potential to become a very large producer but because of the Jones Act cannot ship to other U.S. ports. Puerto Rico currently imports LNG from Trinidad and Tobago, but would also like to purchase LNG from the U.S. Gulf of Mexico and expand its use. Hawaii has considered LNG and would be a natural pairing with Alaska.

Key excerpts from the NYT:

Despite American sanctions against Russian natural gas producers, a cargo of liquefied natural gas that was most likely produced at Russia’s Yamal plant arrived in Boston this past weekend.

This development would seem to fly in the face of the sanctions imposed by President Barack Obama in 2014, though those restrictions apply to the financiers and producers of Russian oil and natural gas, not the output. But the arrival of the gas in the Northeast after frigid temperatures does raise questions about whether President Trump’s efforts to pursue American energy dominance in the world are falling short.

The journey of this liquefied natural gas from the Yamal Peninsula in northern Siberia to Boston may at first appear like a well-orchestrated move from the Kremlin playbook to hide what might be an embarrassing delivery for the United States.

First, despite being the largest natural gas exporter in the world, Russia has ranked only seventh as an exporter of liquefied natural gas, and Yamal is expected to improve the country’s position (the United States is expected to be the third-largest L.N.G. exporter by 2020).

Thus it was under the proud eyes of Mr. Putin that the first cargo from Yamal L.N.G. was loaded into the Russian icebreaker/tanker Christophe de Margerie (named after the recently deceased chief executive the French energy company Total, which holds a 20 percent interest in the project.) The cargo was initially intended for Asia, but as gas prices soared in Britain, it made its way to the Isle of Grain terminal near London on Dec. 28.

Here the gas was briefly stored but never made its way to the British grid. On Dec. 30, the French energy company Engie’s Gaselys tanker picked up cargo and set off for Boston, where gas prices were soaring because of the cold winter.

Because the time between the unloading of the Russian vessel and loading of the Gaselys vessel at Grain was brief, it is safe to assume that the Gaselys vessel was carrying at least some, if not all, of the Russian gas from the Yamal L.N.G. project. The storage facility in London might also have been holding L.N.G. from other producers. Nonetheless the Russia news media has gloated over this gas delivery to Boston and claimed it as Russian.

In the globalizing natural gas markets, we can expect more of these trades. Once, natural gas was primarily a regional resource delivered by land-based pipelines, but in recent years, there has been a rapid growth in the shipping of natural gas in liquefied form across the globe. Indeed, another shipment of Russian liquefied natural gas via France is expected to arrive in New England in February.

Bottlenecks in the natural gas pipeline network this winter led to significant increases in oil-fired and dual-fuel electricity generation to meet energy demands in New England. That development demonstrates the importance, despite grass-roots environmental opposition, of building pipelines connecting the Appalachia gas-producing region — namely the Marcellus and Utica shale gas reserves — with New England markets. Otherwise, New England is likely to continue to have the nation’s highest energy prices and remain dependent on L.N.G. imports and burning oil.

Moreover, Washington and industry need to re-evaluate the 1920 Jones Act, which stipulates that shipping between United States ports must be on American built, registered and crewed vessels. None of the vessels carrying L.N.G. from the Gulf Coast meet this requirement and thus cannot supply New England with domestic gas.