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Statement to Jamaica Parliamenton Energy and update on LNG Project by Minister Phillip Paulwell

As stated in Jamaica’s Parliament by the government’s Energy Minister, the Honourable Phillip Paulwell:  Mr Speaker, I rise to update this Honourable House on matters related to energy, and specifically the matter of LNG.

Electricity prices are the most important impediment to economic growth and job creation facing Jamaica today. Mr Speaker, there is no delicate way to repeat this: Jamaica will not move forward with electricity rates of 40 US cents per kilowatt hour. For us to achieve competitiveness in the global economy, we must reduce this burden on our manufacturers, our businesses and our people.

Mr Speaker, it is my goal to oversee the reduction of electricity costs in Jamaica, to between 15 and 18 cents per kilowatt hour, a rate that will allow Jamaicans to build industry, create jobs, and be competitive.

NATIONAL ENERGY POLICY

In November 2010, recognising the urgency of our nation’s energy situation, this Honourable House approved Jamaica’s first long-term National Energy Policy (NEP), and I would like to remind Members: with bi-partisan support.

Chief among the objectives of the NEP is, achieving: “a modern, efficient, diversified and environmentally sustainable energy sector providing affordable and accessible energy supplies”.

Guided by the National Energy Policy, this administration has identified a few main strategies to achieving our vision:

•Energy Efficiency and Conservation

•Fuel source diversification

•Development of the renewable energy sector and

•Modernization of the regulatory framework

The focus in the short to medium term, however, is to diversify the energy supply mix, and one key step to achieving this important aim, Mr Speaker, is the introduction of natural gas.

LNG VS Natural Gas

At this point, Mr Speaker, I would like to briefly explain the difference between LNG and natural gas, which has been a source of confusion. Natural gas is the cleanest-burning fossil fuel, and a fuel that is increasingly being incorporated into electricity generation and other heavy industry worldwide. It is a naturally occurring hydrocarbon complex found in underground rock formations of fortunate countries such as our Caribbean neighbours, Trinidad and Tobago. Around the world, there are significant reserves of this commodity being discovered regularly.

Natural gas, however, is not easily transported – the most efficient way to transport it is through pipelines, which are costly to construct and maintain. The safest, most efficient way to transport natural gas over long distances is in liquid form, as liquefied natural gas (LNG). The process of converting natural gas into LNG is called liquefaction and is achieved by cooling the gas to below minus 260 degrees Fahrenheit. That liquefaction process is energy intensive: requiring by some estimates up to 20 percent of the gas at hand.

This difference is critical because much has been said recently about the massive shale gas finds that have been made in the United States and the effect that shale gas will have on world prices. LNG, however, is a different product, costly to produce and in high demand worldwide, particularly among the industrialized countries in the Far East, such as China, Korea and Japan.

Natural gas today is traded around US$3 per MMBtu, and LNG is traded around $14 per MMBtu.

JAMAICA’S LNG PROJECT – A TIMELINE

Mr Speaker, I would like to give a timeline of events that have brought us to where we are today in respect of LNG. Jamaica has been exploring the use of natural gas as an alternative fuel source since 2001. In that regard, Jamaica had executed a Memorandum of Understanding (“MOU”) with Trinidad & Tobago for the development of an onshore liquefied natural gas (“LNG”) project in Jamaica based on LNG supplied by Trinidad & Tobago.

The negotiations with Trinidad & Tobago stalled indefinitely in or around 2006, as did subsequent efforts to secure LNG supply through alternate government to government negotiations. Notwithstanding the disappointment experienced, and in consideration of the continued burden of the cost of oil, the Administration persisted in looking at natural gas, (secured as LNG or CNG), and at coal, as possible substitutes for oil, up to when it left office in September 2007. In fact, the Cabinet took a decision to pursue coal as the preferred fuel source, and Mr. Speaker, had we stayed that course, our electricity prices would be about 50 per cent lower than they are today. But let’s move on.

The Administration that succeeded in 2007 took a decision to pursue LNG as an alternative energy source, and in November 2009, under the aegis of the Petroleum Corporation of Jamaica (PCJ) issued a Request for Proposal (RFP) for the Financing, Development Ownership and Operation of Floating Storage Regasification Unit (FSRU) and Natural Gas Transportation System.

That RFP was aborted subsequent to a report presented by the Office of the Contractor General of Jamaica (“OCG”). In light of the criticism in respect of the integrity of the project, the then Prime Minister established a new LNG Steering Committee, and a Ministerial Committee to oversee the LNG Project. The Prime Minister also formally transferred the LNG Project from the PCJ to the Office of the Prime Minister (“OPM”). This new LNG Steering Committee was chaired by Mr. Christopher Zacca and comprised key private sector participants as well as representatives of various GOJ agencies.

In April 2011, the LNG Steering Committee recommended that the RFP be re-tendered, and in June 2011, Cabinet approved the issuance of two RFPs: one, for the infrastructure, which sought contractors to finance, construct, own and operate the Terminal to be located in the Portland Bight Area on a 20 year Build-Own-Operate-Transfer (BOOT) basis. The Cabinet also approved a separate and concurrent RFP for the supply of 830,000 tonnes of LNG per annum (510,000 tonnes for the electricity providers and 320,000 tonnes per annum for the JAMALCO Alumina plant).

The original Bid Submission date of November 30, 2011 was extended to Friday April 27, 2012, at the request of the bidders, to allow sufficient time for the preparation and submission of their bids.

Arising from the change in the political administration following the December 29, 2011 general elections, the LNG Project was transferred from OPM to the Ministry of Science, Technology, Energy & Mining (“MSTEM”).

Upon assuming office in January 2012, I took the decision to continue the LNG Project, first, because I feel strongly that issues of national importance should not be politicized, and halted merely because it was started by the opposition; but also to preserve Jamaica’s credibility in the international arena, given the fact that the country already had an issue with the first iteration of the LNG Project.

In the spirit of continuity, the Government also retained the same LNG Steering Committee appointed by the previous administration, save for two persons.

In April 2012, at the closing of the RFP for the FSRU infrastructure, the LNG committee, having evaluated the two qualifying bids, declared Samsung the leader by a slim margin. Prices submitted by both bidders, however, were extremely high, and although the LNG committee recommended that the Government negotiate with both companies simultaneously, the advice from the Attorney General was that this would not accord with GOJ procurement rules. Samsung was therefore named ‘Preferred bidder’, with Exmar, the other finalist, in reserve if a satisfactory arrangement could not be arrived at with Samsung (and of course if Exmar was still interested in pursuing the project).

The bidding process for the supply of LNG was extended to July 27, 2012, and out of that process emerged bids from two companies: Shell and Morgan Stanley.

PRICE OF LNG

At this juncture, where all the bids in relation to the FSRU and the LNG supply have been evaluated and considered by the LNG Steering Committee, the Government now has a more complete picture of what the price of gas is likely to be. The bids received indicated that the best case scenario, given the imponderables related to the financing of the Special Purpose Vehicle (the Jamaica Gas Trust) and the pipeline infrastructure, is that the LNG Project, as conceptualised, would yield a price of US$15.60 per MMBtu.

At that price of US$15.60 per MMBtu, the overall estimated costs to the users would be somewhere in the order of:

– About 50% greater than what JAMALCO could accept (US $10 per MMBtu);

– 25% greater than the highest cost level that JPSCO could possibly go in order to achieve a 30 to 40% reduction of electricity to the users in Jamaica (US$12 MMBtu).

COST TO THE GOVERNMENT

Mr Speaker, on the matter of the cost to the Government, I would like to advise this Honourable House that since January 2012, the Government has made no new financial commitments towards the project.

The proposed budget for the entire project developed in 2011 was 5.4 million US dollars, of which, 2.8 million US Dollars have been spent to date.

LNG AND JAMAICA

Mr Speaker, I would now like to take this opportunity to clarify the Government’s position on LNG.

In the press two Sundays ago, a report stated that the Government was about to, and I quote: “…announce plans to abandon its long-stated intention to introduce liquefied natural gas (LNG)”. Today I wish to categorically state that this is not the case.

As I have indicated previously, natural gas is a viable option for Jamaica’s energy mix; it is cleaner and cheaper than oil, and a good fuel option in the fight against climate change.
Mr. Speaker, I am happy to reiterate to this Honourable House and to the people of Jamaica that LNG will indeed be introduced into Jamaica by 2015 – and that plans are well underway for this.
Given the result of the bidding process, however, it was determined that the Government had taken the matter as far as it could go. As a Government, we continue to support and facilitate private investors as we work together to achieve the best possible solutions. It is the considered view of the Government that the electricity and alumina producers would have much more flexibility in the procurement of fuel supplies and could use their international leverage to get the best possible prices.

We have modified the Government’s role in this LNG Project to better meet the needs and interests of all and to bring it in line with the country’s National Energy Policy, which calls for: “an energy sector that is driven by private sector investment within a policy and regulatory framework that fosters investment, competition, efficiency, a level playing field and transparency”.

Let me hasten to add, and to remind this Honourable House also, that the administration of which I am part had indicated in our 2011 Manifesto “Leading the Agenda for Progressive Change”, that the Liquefied Natural Gas (LNG) Project will be re-formulated within the context of a competitive exercise where the market makes a determination as to the fuel source.

Government, therefore, will remove itself from the process of fuel source selection and instead focus on creating the legislative and regulatory framework, which we aim to establish and promulgate during this fiscal year.

The LNG Steering Committee will now be disbanded with immediate effect, and be replaced with a body that includes members of the Jamaica Energy Council, the OUR and MSTEM. With the termination of the work of the LNG Steering Committee, there will be no need to access the remaining 2.6 million US dollars that was originally budgeted.

Mr Speaker, I take this opportunity to thank all those in Government and in the private sector who made their time and expertise available to get us to this point, and I recognize the invaluable contribution they have made to getting Jamaica closer to solving our energy crisis.

THE WAY FORWARD

As this Honourable House would be aware, the Jamaica Public Service Company (JPSCO) is obligated to bring into service by 2015 a new 360 megawatt gas fired combined cycle generation plant, providing new capacity to replace approximately 292 megawatts of aged plants (over thirty years old).

Following a number of meetings in Korea, Japan and Jamaica – I am pleased to announce to this House that I have a firm assurance from the JPSCO that they will undertake this LNG project within the timelines established, and will achieve a 30 percent reduction in the price of electricity to the consumer.

In the spirit of transparency, I will say to this Honourable House that the supply of LNG under a long-term contract may not commence by 2015, but JPSCO will be able to purchase LNG on spot price deals during that interim phase. Mr. Speaker, I commit to this Honourable House that as JPSCO provides details on its infrastructure and LNG supply arrangements, I will update the House.

Mr Speaker, this Government is tackling the matter of the nation’s energy crisis, and specifically the high price of electricity head on, and in short order I will address this Honourable House on other initiatives within the energy sector, including the proposal for feed-in tariffs for renewable energy; power wheeling; strategies for enhancing competition; and the proposal from the OUR to acquire greater enforcement powers.

 

Source: http://www.solamonenergy.com/article-statement-to-jamaica-parliament-on-energy-and-update-on-lng-project-by-minister-phillip-paulwell



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