November 19, 2019 3:22PM

Needed: Straight Talk on the Jones Act and LNG

Last week Aaron Smith, president and CEO of the Offshore Marine Service Association, testified before the House Subcommittee on the Coast Guard and Maritime Transportation. As the head of a group which ardently backs the Jones Act it was no surprise that Smith used his opening statement to press for an even more restrictive interpretation of the law's provisions. Shortly after that statement he then had this exchange with Rep. Bob Gibbs (R-OH), the subcommittee's Ranking Member:

Gibbs: "We're exporting LNG now—largest producer in the world of natural gas and oil. And my understanding is...we pick up LNG shipments in the Gulf area and then they export to other countries but to get LNG in needed areas of the country, like in New England area for example, they have to get it from foreign. What can we do to adjust, fix it? How can we handle it so we can, Americans can burn LNG, natural gas, domestically-produced LNG and natural gas?"

Smith: "Sure. Thank you for the question, Ranking Member Gibbs. The American maritime industry is willing to meet any challenge. And in fact, what we're best at is overbuilding the market. If you give us the signals that a market will be protected, we're probably going to build too many ships for it. And if you, with these signals now that LNG is going to be protected by this administration, what we're seeing is even the European trade magazines are already saying that there's going to be U.S. LNG capacity. One of my members just launched an ATB, an articulated tug and barge, to transport LNG. And I know that they can take that design, and are taking that design, to produce more of those so we can have that. It is my understanding, although this isn't necessarily exactly what we do on a day-to-day basis, but it's my understanding that we are right now basically at the export...there is no extra capacity in the export terminals. Once there is, we will have the vessels capable to carry that."

Let’s review what happened here: Congressman Gibbs, perhaps mindful of New England’s need to import Russian liquefied natural gas (LNG) last year—and Puerto Rico’s complete dependence on foreign LNG—asked how U.S. LNG can be transported to these places. Smith responded with talk of excessive shipbuilding, LNG bunkering barges, and a lack of export capacity.

It was an astonishing display of misdirection.

Beyond the bizarre notion that market “protection” (i.e. reduced competition) leads to oversupply—surely news to economics professors everywhere—Smith’s citing of barges as evidence of the Jones Act fleet's ability to transport LNG is preposterous. There are a total of two such Jones Act-compliant vessels, the Clean Jacksonville and the recently-launched Q-LNG-4000. Both are primarily used for the refueling of other vessels.

What they are not used for, nor even capable of, is transporting bulk quantities of LNG for use in large-scale electricity generation. Neither vessel, in other words, will allow either New England or Puerto Rico to replace foreign imports with U.S. LNG.

The Clean Jacksonville, for example, has an LNG capacity of 2,200 m3 while the Q-LNG-4000’s capacity is—as its name implies—4,000 m3. In comparison, the Gaselys, an LNG carrier that delivered Russian gas to New England in 2018, has a carrying capacity of 154,500m³.

LNG barges and LNG carriers both transport LNG in the same sense that bicycles and buses both transport people. But one is not a substitute for the other.

The claim, meanwhile, that there is a lack of LNG export capacity to meet domestic needs doesn’t pass the smell test. Consider the following:

  • The International Gas Union’s 2019 World LNG Report shows 29 of 37 LNG-importing countries meeting at least some of their needs with U.S. LNG (and one of the importers listed that didn’t purchase U.S. LNG, Puerto Rico, is subject to the Jones Act). The idea that the United States has sufficient LNG to export it all over the world, yet none available for domestic maritime transport, seems suspect.
  • An August 2018 McKinsey & Co. analysis noted that foreign LNG purchased to meet New England’s needs the previous winter was “$1.6/mmbtu above the cost of loaded spot LNG” at the LNG export facility at Sabine Pass, Louisiana. “The core restriction preventing traders from capitalizing on this arbitrage” according to McKinsey, was not a lack of export capacity, but rather the Jones Act.
  • A July 2019 Wall Street Journal article about the U.S. natural gas boom noted that “These days, it’s a hassle getting gas from drilling fields like the Marcellus and Utica shales in Appalachia, and the Permian Basin in West Texas, to customers in northern cities,” citing a lack of domestic LNG tankers and a “99-year-old law [that] prevents foreign tankers from shipping gas within the U.S.”
  • A July 2019 report from S&P Global Platts states that “Platts Analytics estimates that as much as 60%-80% of US LNG was either swapped or sold on spot/short-term tender in 2018.” The existence of such a vibrant spot market speaks to the availability of U.S. LNG for those willing to meet the market price.

Smith’s unwillingness to paint an accurate picture of the situation is understandable. Admitting that the Jones Act and the vessels that serve under its restrictions are incapable of meeting the U.S. economy’s needs would be a bitter pill to swallow. Indeed, it would call the law’s entire logic into question.

So here’s the straight talk that Smith is unwilling to provide: the “fix” for allowing Americans to burn domestically-produced LNG is repeal or significant reform of the Jones Act.

As long as the Jones Act exists in its current form, the ships needed to transport U.S. LNG to domestic customers will not. The math simply doesn't add up. No LNG carrier meeting the Jones Act's restrictions, particularly its costly U.S.-build requirement, will be competitive in the international transport market. And with purely domestic business insufficient to keep such a ship employed on a full-time basis, there is no economic case for its construction.

It's good to see members of Congress asking questions about the inability of Americans to consume U.S. LNG. But as long as the Jones Act lobby is tasked with responding, needed facts will remain elusive.