Natural Gas Policy in Puerto Rico

A brief summary of Puerto Rico’s energy sourcing past, coupled with an outline of how recent island administrations have come to the conclusion that liquid natural gas (LNG) – provided primarily from the United States – is likely to provide the most cost-effective solutions providing for continued economic growth for the Commonwealth.

Fernando Pena
Fernando Peña

Invited Contributors: Fernando Peña and Colleen Newman co-authored this piece exclusively for The Review. Fernando serves as an attorney for the Office of International Trade, U.S. Customs and Border Protection, and its predecessor agency in the U.S. Treasury. Colleen served as the energy advisor to Puerto Rico Governor Luis Fortuño in his Washington office.

Like many other islands in the Caribbean, Puerto Rico is heavily reliant on imported diesel and bunker fuels to run its electricity generation system principally because it does not have its own source of oil and natural gas that it can utilize. Puerto Rico began its dependency on oil-fired generation back in the 1950s. The U.S. allocated Puerto Rico generous quotas for imports of foreign (Venezuelan) oil when its price was lower than domestic oil. At a time when all energy sources were external, the Government of Puerto Rico promoted the establishment of mid-stream oil companies, such as the Commonwealth Oil and Refining Company (CORCO), to refine foreign crude for the U.S. market and supply local consumption at extremely competitive prices. As part of Puerto Rico’s Operation Bootstrap, a bold initiative to industrialize Puerto Rico and create jobs on the island from the 1950s through the 1970s, attracting the capital intensive refining process would reduce external dependency and sought to create downstream petrochemical firms to consume the refining byproducts[i].   Because of this abundant supply of inexpensive refined oil, Puerto Rico developed most of its generating capacity around oil-fired plants. Meanwhile, the price of foreign crude skyrocketed with the formation of the modern oil cartels and the ensuing Arab oil embargo.   The cost advantages of refining in Puerto Rico quickly disappeared and, therefore, the CORCO refinery was shut down in the early 1980s. Puerto Rico continued to rely on oil-derived fuels but instead of having inexpensive domestic supplies, the island had to purchase its fuel supplies in the global energy markets, which has made electricity generation increasingly expensive over the past few decades.

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Currently oil-derived fuels make up approximately 65% of generation on the island[ii]. Other sources of generation include natural gas, coal, hydropower and an increasing percentage of renewables such as wind and solar. Reliance on oil-derived fuels has made energy costs on the island expensive (average of 25-30 cents per KWh) and this, in turn, has been a factor that has hampered economic growth on an island that has had persistent unemployment over 13% since 2006. Because of these higher energy costs and their adverse impact on the island’s economic growth, when Governor Luis Fortuño took office in 2009, developing a comprehensive energy strategy for Puerto Rico became a top priority for his Administration. The Administration’s strategy was to diversify the island’s energy generation supply from oil-derived fuels to cleaner and cheaper sources of energy such as renewables and natural gas. This process also involved the Puerto Rico Electric Power Authority (PREPA), the island’s sole utility, which generates, transmits and distributes electricity to approximately 1.5 million customers on the island of Puerto Rico and as well as to the nearby islands of Vieques and Culebra[iii].   PREPA has five major generation plants that produce almost 3500 MW of electricity[iv]. This includes two plants on the southern part of the island – Costa Sur and Aguirre – and three in the north, which include San Juan, Palo Seco and Cambalache. Currently Puerto Rico has one terminal that can facilitate liquefied natural gas (LNG) deliveries which is owned by Ecoeléctrica and provides natural gas to its own 540 MW plant and, as of 2012, to the nearby Costa Sur plant on Puerto Rico’s southwest coast[v].

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Transition to Natural Gas

Puerto Rico’s focus on transitioning the oil-burning plants to natural gas began back in 2010, when Excelerate Energy approached the Government of Puerto Rico about building an offshore LNG terminal (i.e., Gasport) to supply PREPA’s Aguirre power plant, which sits on the southeastern side of the island. This project is now expected to be in service by early 2015 and, to date, the permitting process in Puerto Rico and with FERC has moved forward relatively smoothly.   In addition, in April 2012, PREPA converted its Costa Sur plant over to 50% natural gas that is using the LNG brought in to service the Ecoeléctrica terminal.

In addition to converting the Aguirre plant, for much of 2011, the government of Puerto Rico and PREPA contemplated building a 90 mile pipeline that spanned from the Ecoeléctrica LNG terminal across the island to Arecibo and over to San Juan in order to provide natural gas to the northern power plants. This project was called “Vía Verde” by Puerto Rico’s government. Although the route followed a major highway in the region and would be made with state of the art materials, there were many who objected to the project for various reasons including environmental and safety concerns, preferences for using more renewable energy sources, such as solar and wind generation for energy consumption, as well as concerns that the Ecoeléctria terminal would not be able to handle the additional volume of natural gas necessary to supply all of the northern plants in Puerto Rico, after meeting its own and Costa Sur’s demands. In 2012, the government of Puerto Rico decided to pull the permit request from the U.S. Army Corps of Engineers for the Vía Verde pipeline and study other transport options for delivering natural gas supplies to the northern plants.

EPA Regulations and their impact on Puerto Rico’s natural gas policy

On December 16, 2011, the U.S. Environmental Protection Agency (EPA) signed the mercury and air toxic standards (MATS) rulemaking, which would impact both new and existing coal and oil fired electric utility steam generating units (EGUs)[vi]. Many in the utilities industry see this rulemaking as the most significant rule that will shape the electricity industry and generation choices moving forward. The MATS rulemaking, which calls on these units to reduce their emissions of mercury and other pollutants by 90% within a three year timeframe (EPA has said that it would grant sources four years for compliance if needed in many cases and up to 5 years in cases where EPA, in conjunction with the U.S. Federal Energy Regulatory Commission (FERC) determines that reliability may be impacted)[vii].

In light of these new regulations, which Puerto Rico will have to comply with under the Clean Air Act, a multiagency intersectorial group was formed to provide recommendations to the Governor on the best options for bringing natural gas to the island. Specifically the group included the Secretary of State, the PREPA Executive Director as well as high level representatives from the Government Development Bank for Puerto Rico, the Environmental Quality Board, the Department of Consumer Affairs, and the Puerto Rico Federal Affairs Administration, as well as private sector stakeholders such as the Puerto Rico Manufacturers Association and the Association of Engineers. This group, consisting of top Government officials and key industry stakeholders was then broken down into three subgroups with responsibilities for assessing different angles of this issue. These included:

  • a technical working group responsible for assessing available information on air emissions sources, technologies and feasible alternatives to comply with the MATS and other Clean Air Act related regulations;
  • an economic working group that examined the alternatives and looked at the costs; and
  • a legal working group that examined strategies other states had devised to comply with the MATS regulations as well as how legislative and judicial activities might impact implementation.[viii]

The committee’s report noted that the two major generation plants in the south, Costa Sur and Aguirre, are well on the road to conversion to natural gas, so the recommendations in the report focused on possibilities for bringing natural gas to the northern plants. These options included:

  1. using the Aguirre terminal to supply natural gas in small vessels from Aguirre to another satellite terminal that would be located in the northern part of the island;
  2. using buoys for barges in the north while also utilizing a portion of the proposed Vía Verde pipeline in the North that would run from Arecibo to San Juan;
  3. moving forward with the Vía Verde pipeline project and expanding the Ecoeléctrica terminal; and
  4. using compressed natural gas (CNG).[ix]

Of these possibilities, the only one that the committee eliminated was building the Vía Verde pipeline as proposed because it was determined that the Ecoléctrica terminal could not meet the demand for natural gas that must be in place by the 2015-16 conversion timeframe that EPA calls for under the MATS rule.[x]

After the report was issued, Puerto Rico’s government made the report publicly available and presented the findings to key federal regulatory agencies with jurisdiction over the project including the EPA, FERC, and the U.S. Army Corps of Engineers and requested technical assistance to ensure that PREPA chooses the best option to ensure that Puerto Rico is able to comply with the MATS regulations within 2015-2016 compliance timeframe. In addition, the Government Development Bank of Puerto Rico (GDB), which under the Governor’s Executive Order declaring an energy emergency (EO-2012-06) was directed to purchase fuel supplies for PREPA, looked towards potential LNG exporters in the mainland U.S. such as Cheniere for future LNG purchases that are likely to be engaged in exporting to the Caribbean and elsewhere around the world over the next several years.

 Natural Gas policy moving forward in the Garcia Padilla Administration

On January 2, 2013, Alejandro Garcia Padilla was sworn in as the 11th Governor of Puerto Rico. Although the first 100 days of his administration focused on addressing downgrades to the island’s credit rating and other urgent issues, the administration has continued to move forward on the natural gas front. In late April 2013, Excelerate Energy and PREPA filed their formal application with FERC to obtain the necessary permits to move forward with construction on the LNG offshore terminal project. As part of this process, FERC will hold a series of hearings but it expected to issue a final Environmental Impact Statement (EIS) by early 2014 so the Gasport project would be on track to be in service by early 2015.[xi]   In addition, the Aguirre Gasport project is expected to have twice the natural gas storage capacity as would be necessary to fuel the Aguirre plant, so these extra volumes could be used for the northern plants that PREPA is expected to supply using a LNG barge making rounds to a northern satellite terminal. The Costa Sur plant is expected to run entirely on natural gas by this summer. As for the northern plants, PREPA has requested proposals from interested energy companies on options for supplying natural gas to the three plants – which could include LNG or compressed natural gas options. PREPA is then expected to determine which bids to accept on a plant-by-plant basis, so a few suppliers could be involved in this process[xii].

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The new administration remains very interested in exploring the possibility of securing a long term contract with Cheniere or another U.S. supplier once they are able to export LNG, but there must be Jones Act compliant vessels that are cost effective compared to foreign vessels available to transport the LNG to the island. The Jones Act is a U.S. law regulating coastwise trade that requires that domestic goods shipped from one U.S. port to another be transported in vessels with a U.S. crew, which has traditionally priced fuel sources from the U.S. out of the market as compared to foreign vessels. Although the Fortuño administration had expressed interest in asking the U.S. Congress for an exemption to the Jones Act that would only cover fuels, this would have been a very tall order due to the opposition from U.S. ship builders, organized labor and other stakeholders to such a move. There have been instances where individual ships have been exempted in legislation, however, so there may be a way that the Government of Puerto Rico could work with a LNG supplier to find the ship(s) and ask for specific legislation to exempt the vessel(s).

Conclusion

Although time will tell how Puerto Rico’s natural gas conversion moves forward, it is clear that the island must move in this direction for both economic and environmental reasons. However, there are many obstacles to address in a very short timeframe. If all goes well, Puerto Rico is likely to be a major consumer of LNG exports, potentially from the mainland U.S., and prices for energy will be reduced for consumers on the island which could lead the way for future economic growth.

© Latin American Energy Review 2013

About the Authors: 
Fernando Peña
has served as an attorney for the Office of International Trade, U.S. Customs and Border Protection, and its predecessor agency in the U.S. Treasury, since 2003.  He specializes in advising U.S. and foriegn agency clients, including the U.S. Trade Representative and the Department of Commerce’s International Trade Administration, regarding the application of international trade and import compliance laws, focusing on tariff classification, valuation, country-of-origin marking, and eligibility for preferential trade regimes.  He was a member of the U.S. team that negotiated rules of origin for several free trade agreements including CAFTA, Colombia, Perú and South Korea.

From 2010 to 2012, Mr. Peña was on an intergovernmental assignment as Deputy Executive Director of the Office of the Governor of Puerto Rico where he served as a senior policy advisor on trade, transportation and energy matters.  In that capacity, he represented his agency in Puerto Rico’s Intersectoral Committee for Environmental Compliance and Energy Alternatives, which examined the island’s options for converting to natural gas.

Mr. Peña holds a Bachelor of Science in Foreign Service from Georgetown University and a Juris Doctor from the University of Puerto Rico School of Law.

Colleen Newman has worked on energy policy issues in both the public and private sectors for 20 years. Most recently she served as the energy advisor to Puerto Rico Governor Luis Fortuño in his Washington office. In that role, she worked with the Governor and his energy team in Puerto Rico to develop strategies to diversify Puerto Rico’s energy generation mix from diesel and bunker fuels to cleaner and cheaper sources of energy such as natural gas, solar and wind technologies. In addition, she worked closely with the U.S. Government to obtain funding and technical support for energy projects on the island.

Prior to joining the Governor’s Washington DC office, she also served governor Fortuño in his role as Congressman in the U.S. House of Representatives and advised him on energy, natural resources, and agriculture issues of importance to Puerto Rico. Ms. Newman also spent several years working on energy policy in the private sector, as the Government Affairs Advisor to the law firm of Brickfield, Burchette, Ritts and Stone P.C. In this role, she provided analysis and advocacy on key pieces of energy policy legislation and climate change activities considered by Congress and U.S. federal agencies such as the Federal Energy Regulatory Commission and the Department of Energy.

Ms. Newman has a B.A. in Political Science from Loyola University in Baltimore, MD and a M.A. in International Commerce and Policy from George Mason University in Fairfax Virginia.

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[i] James L. Dietz, Economic history of Puerto Rico: institutional change and capitalist development, Princeton Univ. Press, 1986, pp. 253-254.

[ii] Puerto Rico Electric Authority: A Stronger PREPA, Presentation by Otoniel Cruz and Nelson Moralez, Puerto Rico Credit Conference 2012.

[iii] PREPA website http://www.prepa.com/

[iv] Puerto Rico Electric Power Authority: Towards a Stronger PREPA.

[v] Ecoelectrica webpage http://www.ecoelectrica.com/about/whoweare.html

[vi] EPA Factsheet on the Mercury and Air Standards for Power Plants http://www.epa.gov/

[vii] Ibid.

[viii] Intersectorial Committee on Environmental Compliance and Energy Alternatives: Report on the Necessary Measures to Comply with EPA Regulations, and the Conversion to, and use of Natural Gas in the Northern Power Plants. June 15, 2012. Pgs. 6-7.

[ix] Report on the Necessary Measures to Comply with EPA regulations. Pg. 4.

[x] Report on the Necessary Measures to Comply with EPA regulations. Pg. 19.

[xi] Caribbean Business, April 19, 2013. http://www.caribbeanbusinesspr.com/

[xii] Electricity Rates Reductions to Start in 2015. John Marino. Caribbean Business. May 9, 2013.

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