LNG cheap? Think again
Towards the end of Lavern Clarke's enjoyable article 'Jamaica's spectacular LNG record' (Financial Gleaner, December 4, 2015), she concluded: "With Bogue and Old Harbour in play, around a third of base load capacity would be fired by gas, a cleaner and, as important, cheaper fuel source that will allow JPS to produce and supply electricity to the grid at a price below 13 US cents per kilowatt-hour, and knock 1.2 million barrels of oil off the country's annual orders of crude".
All of this may be true, with one notable exception. LNG delivered to Jamaica at today's prices will be more than twice the price of fuel oil. It may well be that the LNG project will not only add some US$25m-US$45m to the current annual JPS fuel bill (based on your 1.2m barrel). Plus, the overall project will add J$200 million to J$300 million in capital costs to the JPS ratepayers.
The problem all starts with the misconception that LNG is cheap. It is certainly cheap based on prices reflected on the internationally recognised and established national pricing point (Henry Hub) for natural gas and LNG, as explained below.
However, LNG is not necessarily cheap when delivered to other parts of the world, and more so, when it has to be delivered in relatively small quantities, and has to be stored and regasified at the delivery point so it can be burnt in a power-generating plant. No wonder that it has been an uphill battle to introduce LNG to Jamaica.
Natural gas in the US is at a very low price at the national price reference. Currently, that price is about US$2.5/MMBTU. Getting that gas turned into LNG and shipping it to Jamaica is far from cheap. Even on a very large scale, the cost of liquefying, loading it on to a specialised ship (it's carried at - 1618C) adds up to being very expensive. The only exports from the US are from the massive Cheniere facility in Louisiana, and the first one started just recently. These ships are too large for Jamaican demand, and only small to medium-scale ships will make deliveries.
MORE EXPENSIVE OPTIONS
Shipments from other planned facilities will be far more expensive. Gas in Florida, for example, is about US$1/MMBTU more expensive than Henry Hub. On the scale contemplated for Jamaica (small by any standard), the landed cost of LNG will be in the US$12-$15/MMBTU range - more expensive today than the "expensive" diesel fuel that JPS plans to replace for the Bogue plant. The entire JPS LNG negotiation is seemingly shrouded in secrecy, and there has been no publication of prices and no oversight by any regulatory authority.
At a minimum, the Jamaica ratepayers, who will pay for the LNG in their electricity bills, should be allowed to see what they are being asked to pay. JPS passes the fuel cost through to the ratepayer and takes no risk on the price of fuel. JPS has absolutely no incentive to buy the lowest-cost fuel.
We all know that crude oil prices have been high over the past 10 years, but the same drivers that are pushing down LNG prices have caused crude prices to drop. Crude may increase in price, but then again, natural gas can hardly get any cheaper, and the cost of liquefying and transport will only go up and will always be in the US$5.5++ range and will increase with inflation.
LNG may be good for Jamaica. Fuel diversity is arguably good. In the short to medium term, the Jamaican ratepayers will pay an additional US$24-$45m/year for LNG over fuel oil. Sadly, the inconvenient truth is that the ratepayers will be subsidising the Government's misguided plans to make Jamaica an LNG hub and the expansion plans of JPS into the gas market. This begs the question, what will Jamaica gain from being a hub? Arguably nothing.
AES has a large-scale hub in the Dominican Republic with access to LNG and a large customer base in that country three times larger than Jamaican demand. They are also about to build a massive terminal in Panama giving them de facto control of LNG in the Caribbean. Re-exporting LNG from Jamaica or transporting within Jamaica adds another $2-4/MMBTU on top of cost of importing. And who benefits? The current LNG plans do not seem to call for LNG storage in Portland Bight. This means that the LNG supplier may, in the future, benefit from exports but Jamaica seemingly will not.
JPS and the Government should be hedging their bets by installing dual-fuel plants. There should be also transparency and accountability on the landed cost of LNG to both the Bogue and Old Harbour locations.