Maritime Transportation: Implications of Using U.S. Liquefied-Natural-Gas Carriers for Exports
Released: 2015-12-03T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: More than 30 companies have received approval from DOE for large-scale exports of U.S. LNG—natural gas cooled for transportation—beginning in 2015 or 2016 via specialized LNG carriers.

Congress is considering whether to propose legislative language that would require U.S. LNG be exported via U.S.-built-and-flagged carriers with the goal of supporting U.S. shipbuilders and mariners. Congress included a provision in statute for GAO to review the number of vessel-construction and operating jobs that would be created in the U. S. maritime industry each year in 2015 through 2025 if exported LNG were required to be carried (1) before December 31, 2018, on vessels documented under the laws of the United States and (2) after such date, on vessels documented under the laws of and constructed in the United States. This report discusses (1) DOE and industry expectations for the market for U.S. LNG exports and (2) how the proposed requirement could affect jobs in the U.S. maritime industry and the broader U.S. economy.

GAO reviewed and analyzed economic forecasts of the LNG market and interviewed relevant stakeholders including officials from DOD, DOE, the Department of Transportation, Coast Guard, and the U.S. Trade Representative; representatives of mariner groups, three U.S. shipyards that expressed interest in this market, the five U.S. liquefaction facilities that are under construction, and economic-research firms that have studied the LNG market.

section_title: What GAO Found
paragraphs: According to Department of Energy (DOE) and industry expectations, in the next few years the United States is expected to change from a net importer of natural gas to a net exporter, with those exports destined for different regions of the world, especially Asia. Five large-scale U.S. liquefaction facilities—necessary for conversion of natural gas to liquefied natural gas (LNG) (see fig. below)—are under construction with a projected capacity to export more than 12 percent of U.S. natural gas production in 2020. According to representatives from these five facilities, their liquefaction capacity has already been sold mainly through 20-year contracts and their customers are responsible for transporting the LNG to export markets. Based on estimates from these liquefaction facilities, transport of the full capacity of these liquefaction facilities will require about 100 or more LNG carriers. Currently operating LNG carriers are nearly all foreign built and operated. LNG carriers have not been built in the United States since before 1980, and no LNG carriers are currently registered under the U.S. flag.

The proposed requirement to transport exports of LNG via U.S.-built-and-flagged carriers could expand employment for U.S. mariners and shipbuilders if it does not reduce the expected demand for U.S. LNG. According to representatives of U.S. mariner groups, between 4,000 and 5,200 mariners would be needed to operate the estimated 100 LNG carriers needed to transport the five U.S. facilities' full capacity of LNG once the five are fully operational. Based on the current capacity of U.S. shipyards we spoke with, building 100 carriers would likely take over 30 years, with employment in U.S. shipyards increasing somewhat or becoming more stable, according to shipyard representatives. Department of Defense (DOD) officials also indicated that any policy or requirement that increases and stabilizes jobs in the U.S. maritime industry could support military readiness. However, according to industry representatives, U.S. carriers would cost about two to three times as much as similar carriers built in Korean shipyards and would be more expensive to operate. Based on GAO analysis, these costs would increase the cost of transporting LNG from the United States, decrease the competitiveness of U.S. LNG in the world market, and may, in turn, reduce demand for U.S. LNG. The extent of these effects depends on customers' circumstances and business decisions. For example, several stakeholders told us implementing the proposed requirement may prompt customers to attempt to modify, renegotiate, or terminate their existing contracts for liquefaction. Additionally, limited availability of U.S. carriers in the early years of construction may decrease the amount of LNG that could be exported from the United States for a period of time, leading customers to seek alternate sources. Further, a reduction in the level of expected U.S. LNG exports could impact the broader U.S. economy, including potential job and profit losses in the oil and gas sector.

section_title: Letter
paragraphs: Worldwide, trade of liquefied natural gas (LNG)—that is, natural gas that  has been liquefied for the purposes of storage and transportation—has  the potential to increase from about 241-million tons annually in 2014 to  about 424-million tons by 2020, according to the International Gas  Union. As advances in natural gas extraction technology have  dramatically increased the amount of domestic gas extraction, the role of  the United States in this market is poised to change from that of a net  importer of natural gas to a net exporter. As of September 2015, more  than 30 companies have applied to and been approved by the  Department of Energy (DOE) to export U.S. LNG from large-scale  liquefaction facilities, and exports are expected to begin in 2015 or 2016  via specialized LNG carriers.

There have long been questions about the health of the U.S. maritime  industry, and its capacity to meet the needs of the U.S. military, including  shipbuilding and mariner needs. To support the U.S. maritime industry  and better ensure its capacity to meet military needs, the Jones Act  and  Cargo Preference laws were enacted to help support a market for U.S.  shipbuilding and mariners. Currently, Congress is considering whether to  propose legislative language that would require that U.S. LNG be  exported via U.S.-built-and-flagged carriers with the goal of supporting  U.S. shipbuilders and mariners and increasing jobs in those industries.  The Howard Coble Coast Guard and Maritime Transportation Act (Act) of  2014  included a provision for us to report on the number of positions that  would be created in the U.S. maritime industry each year from 2015  through 2025 if LNG exported from the United States were required to be  carried (1) before December 31, 2018, on carriers documented under the  laws of the United States; and (2) after such date, on carriers  documented under the laws of and constructed in, the United States.  Currently, LNG carriers are nearly all foreign built and all are foreign  flagged. This report discusses:  current industry and DOE expectations for the market for U.S. exports  of LNG and how that market is expected to operate; stakeholders’ views on how the proposed requirement to use U.S.- flagged-and-built carriers for LNG exports could affect jobs in the  maritime, shipbuilding, and other related sectors; and potential effects of the proposed requirement on the market for U.S.

LNG and the broader U.S. economy, including other industries.

To describe current industry and DOE expectations for the market for  U.S. exports of LNG, and how that market is expected to operate, we  collected and analyzed information on economic forecasts of the LNG  market, including the U.S. Energy Information Administration’s (EIA)  Annual Energy Outlook. We interviewed DOE officials and  representatives from four economic research and consulting firms that  have published reports on the prospective market for U.S. LNG and LNG  “liquefaction” companies that have begun construction of U.S.  liquefaction facilities to better understand DOE’s estimates about  expected U.S. LNG exports and the world LNG market and to assure  ourselves that the estimates are sufficiently reliable for the purposes of  this report. We identified economic research and consulting companies  based on a literature review. We also interviewed the four companies  associated with the five approved and under-construction domestic export  facilities (as listed on the Federal Energy Regulatory Commission’s list of  approved import/export terminals in the continental U.S.) regarding their  plans and expectations. In addition, we interviewed representatives from  the identified economic research and consulting firms and energy  companies regarding expected export capacity, customer plans, and the  number of LNG carriers needed to transport expected U.S. LNG capacity.  We also analyzed this information to develop our own estimate of the  needed carrier capacity.

The provision in the Act regarding this work specifies that GAO report on  the number of positions that would be created in the United States’  maritime industry each year beginning with 2015 through 2025 if the  proposed requirement were implemented. As the proposed requirement  had not been introduced as legislation as of October 2015, the dates  referenced in the Act may change. As such, to describe stakeholder  views on the potential effects of the proposed requirements on maritime  jobs and the economy and to determine the potential effects of these  requirements on the market for U.S. LNG and the broader U.S. economy,  we have referenced timeframes more generally, rather than referring to  specific dates. To describe stakeholder views on the extent to which the  requirement of U.S.-flagged-and-built vessels for LNG exports could  affect domestic jobs in the maritime, shipbuilding, and other related  sectors, we obtained and analyzed the views of selected maritime- industry stakeholders, as well as related documents they provided on the  capability and capacity of U.S. shipbuilders and estimated costs and  requirements to build and operate LNG carriers. These stakeholders  included representatives of three shipbuilding companies; shipping  companies (one shipbroker and one LNG carrier operator); the four major  marine officer and unlicensed mariner unions in the United States; and  officials from DOE, Department of Transportation’s (DOT) Maritime  Administration (MARAD), and Department of Labor (DOL). We selected  maritime stakeholders (including shipbuilders, mariner unions, and  shipping companies) for interview based on recommendations from  government and industry stakeholders and their capacity to provide  services related to LNG carrier construction and operation. For instance,  we selected the ship broker and ship operator based on the fact that they  are currently involved in shipping LNG. We selected U.S. shipbuilders  from a list of 11 large and active shipbuilding companies in the U.S. as of  April 2015 based on their stated interest and capacity to build LNG  carriers. We also interviewed MARAD, Department of Defense (DOD),  and U.S. Coast Guard (USCG) officials to obtain their views on potential  benefits for military readiness, including the U.S. maritime industry’s  capacity to meet military needs.

To identify the potential effects the proposed requirement may have on  the broader U.S. economy, we collected and analyzed economic  forecasts and testimonial evidence from industry stakeholders and  economic research and consulting companies (as discussed earlier). We  then assessed the resulting evidence using established economic theory  and reasoning to describe potential effects of the proposal on world  demand for U.S. LNG and jobs in other relevant U.S. industries. To  illustrate the cost impact of a U.S.-flagged-and-built carrier requirement  for LNG exports, if all other factors remain equal, we developed a set of  hypothetical assumptions based on discussions with industry  stakeholders, a 2011 MARAD report on the costs of operating U.S.- flagged vessels, and economic theory. For the purposes of estimating  the potential costs of the proposed requirement, we made what we  believe to be conservative estimates, including estimates of the cost of  building LNG carriers in the United States and the costs of operating  those carriers, in order to ensure that we do not overstate those potential  cost effects. Due to the hypothetical nature of the proposed requirement  as well as challenges related to predicting market outcomes, the  estimated cost impacts are meant to be solely illustrative and should not  be taken as a prediction. We interviewed U.S. Trade Representative  officials and industry stakeholders regarding potential implications for  U.S. trade. Additionally, we interviewed the U.S. Coast Guard and  selected (as mentioned above) U.S. LNG liquefaction companies and  shipping companies regarding potential security implications for LNG  customers related to transporting LNG via U.S.-flagged-and-built carriers.  See additional information on our scope and methodology in appendix I.

We conducted this performance audit from March 2015 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Liquefied Natural Gas
paragraphs: Natural gas is a fuel that can be used in many contexts, similar to  gasoline, heating oil, and other crude-oil derivatives and is considered  more environmentally friendly than oil derivatives. In its gaseous form,  natural gas is transported by pipeline. LNG is natural gas cooled to -260  degrees Fahrenheit, at which point it becomes a liquid, and its volume is  reduced by 600 times—allowing for ease of transportation via specialized  LNG carriers over long distances. This cooling process takes place at  liquefaction facilities. Figure 1 illustrates this process.

Depending on the context, different units of measurement are used to  describe volumes of natural gas and liquefied natural gas, as well as their  respective energy content. For the purposes of this report, the  conversions used are outlined in table 1.

section_title: World Market for Natural Gas
paragraphs: Through 2015, the United States has been a net importer of natural gas,  along with Japan, India, South Korea, Taiwan, and others. Ocean  transport of LNG began in the late 1950s and early 1960s. According to  the International Gas Union, Japan and South Korea are currently the  largest importers of LNG, and as of 2014, the largest supplier/exporter of  LNG was Qatar, followed by Malaysia, Australia, Nigeria, Indonesia,  Trinidad, and Algeria. As discussed in greater detail in the following  section, according to DOE, the market for LNG has changed recently due  mainly to technology enhancements in the extraction of natural gas from  shale formations and changes in energy needs.

section_title: Federal Role in Maritime and LNG Industries
paragraphs: Several federal agencies oversee or are involved in LNG exports or the  U.S. maritime industry:

Department of Energy: Under Section 3 of the Natural Gas Act  (NGA), the import or export of LNG and the construction or expansion  of LNG facilities requires authorization from DOE.  In 1984, DOE  delegated the responsibility to approve or deny applications for LNG  facilities to the Federal Energy Regulatory Commission (FERC).

Federal Energy Regulatory Commission: In keeping with its  obligation to authorize LNG facility siting and construction under the  NGA, FERC reviews applications to construct and operate LNG  export facilities onshore or in state waters.  FERC’s review is  considered a federal action and subject to the National Environmental  Policy Act (NEPA).

Coast Guard: Within the Department of Homeland Security, the U.S.

Coast Guard is responsible for administering and enforcing  requirements for U.S.-flag registry (e.g., determining whether vessels  meet U.S.-owned-and-built requirements). USCG is also responsible  for credentialing mariners and maintains records on all mariners who  hold valid merchant mariner credentials, including data on mariners  who may serve on U.S.-flag vessels that support the DOD during  times of war or national emergencies.

Maritime Administration: MARAD’s mission is to foster and promote  the U.S. Merchant Marine and the American maritime industry to  strengthen the maritime transportation system—including the  shipbuilding and repair industry—to meet the economic and national- security needs of the nation. MARAD administers the Federal Ship  Financing Program (commonly referred to as Title XI based on the  part of the Merchant Marine Act of 1936 that established the  program), which provides a U.S. Government guarantee of private  loans to (1) U.S. or foreign ship owners for the purpose of financing or  refinancing either U.S. flag vessels or eligible export vessels  constructed, reconstructed or reconditioned in U.S. shipyards and (2)  U.S. shipyards for the purpose of financing advanced shipbuilding  technology and modern shipbuilding technology of a privately owned,  general shipyard facility located in the United States. In general, under  the Federal Credit Reform Act of 1990, appropriations to cover the  estimated subsidy costs of a project must be obtained prior to the  issuance of any letter of commitments for loan guarantees.

Department of Defense: As we have noted, the military strategy of  the United States relies, in part, on the use of commercial U.S.- flagged ships and crews and the availability of a shipyard industrial  base to support national defense needs.

In addition to the roles described above MARAD and DOD jointly manage  programs intended to increase capacity for the military, including those  related to sealift capacity. Sealift is the process of transporting DOD’s and  other federal agencies’ equipment and supplies required during  peacetime and war. First, the Voluntary Intermodal Sealift Agreement  (VISA) program was established to provide DOD with “assured access” to  commercial sealift and intermodal capacity to support the emergency  deployment and sustainment of U.S. military forces.  To meet national  defense or other security needs, DOD may use commercial sealift  capacity, to the extent it is available, to meet ocean transportation  requirements. This commercial sealift capacity includes U.S.-and-foreign- flagged vessels and/or intermodal capacity to support DOD’s needs. In  the event voluntary capacity does not meet DOD’s contingency  requirements, DOD may activate VISA as necessary.

A second program, the Maritime Security Program (MSP), is administered  by MARAD and is intended to guarantee that certain kinds of militarily  useful ships and their crews will be available to DOD in a military  contingency. Currently, MSP provides direct payment of $3.1 million per  year for up to 60 militarily useful U.S.-flagged vessels participating in  international trade to support DOD.  DOT determines the commercial  viability and DOD determines the military usefulness of vessels that seek  participation in MSP. According to MARAD, as of October 2015, there  were 165 large oceangoing vessels operating under the U.S. flag, 139 of  which have been categorized as militarily useful. If needed, vessels in  MSP would be activated through the VISA program.

section_title: DOE and Industry Expect the United States to Play a Large Role in the LNG Market over the Next 10 Years
subsections: section_title: DOE and Industry Expect the United States to Become a Significant Exporter of LNG
paragraphs: According to DOE, due to advances in extraction technologies and  growing worldwide demand for natural gas, the United States is expected  to become a net exporter of natural gas in the next few years. For  decades the United States has been a net importer of natural gas, and as  recently as just a few years ago the prospects that the U.S. would  become a net exporter in this market seemed doubtful. For example,  EIA’s Annual Energy Outlook 2011 did not have any projections for net  exports of natural gas by the United States, but the next year’s Energy  Outlook did show projected exports and those projections in more recent  years have risen.

According to EIA, this evolution in the U.S. natural gas industry relates to  the discovery of more energy resources as well as advances in hydraulic- fracturing and horizontal-drilling technologies. Moreover, studies we  reviewed noted that the pricing of natural gas in many other regions of the  world has traditionally been linked to oil prices, while in the U.S. prices  are set based on supply and demand conditions in North America.  Economic theory suggests that these differing price mechanisms in  various regions of the world have encouraged some companies to invest  in U.S. natural-gas liquefaction and export facilities with the intent to  profitably sell U.S. natural gas in other regions where natural gas prices  have generally been higher, particularly when oil prices are high. More  recently, however, DOE officials told us that as the LNG export market  has developed, oil-linked pricing is coming under pressure as buyers are  benefiting from more options and demanding more flexibility in their  purchases. Nevertheless, demand for natural gas is expected to be  strong with growing demand in the coming years.

Beyond the cost of natural gas, there are other key costs that are  important in determining U.S. competitiveness in the LNG export market.  Unlike the transport of natural gas by pipeline, the transport of LNG  requires the product to be stored and transported at extremely low  temperatures, necessitating LNG carriers to have expensive technology  to accommodate such cold-storage transport. In terms of transportation  costs, the United States does not have an advantage over some other  sources of natural gas or LNG for the large importing countries in Europe  and Asia. For example, according to a study we reviewed as of now,  much of Europe is supplied with natural gas by pipeline. As a result, LNG  from the United States is less likely to be an economical source of natural  gas to that region under many possible market conditions. While some  Asian markets—notably Japan and Korea—have little pipeline gas  supply, exports from planned liquefaction facilities in Australia and East  African countries will have a proximity advantage (that is, shorter and thus  likely less expensive transportation) to Asian countries over the United  States. As such, according to economic reasoning, the question of the  extent to which a cost advantage in gas supply is offset by cost  disadvantages in transport plays an important role in determining U.S.  competitiveness in the world LNG market.

Recent investments in liquefaction facilities are an important indicator that  market conditions are such that the United States is expected to be  competitive in the market for LNG exports. Despite higher transportation  costs for U.S. LNG as compared to LNG from other countries into key  export markets in Asia, investors were willing to commit substantial  resources to develop the liquefaction facilities needed for that trade, as  evidenced by their construction. In particular, five large scale liquefaction  facilities are currently under construction in the United States, with one  facility expected to come online by the end of 2015 and all five facilities  expected to be operational within about 3 years (see table 2).  The total  daily capacity of these five facilities is nearly 10-billion cubic feet (bcf) of  natural gas, which constitutes about 12.4 percent of expected U.S.  natural gas production  and approximately 18.1 percent of the world’s  expected LNG capacity in 2020.  The business model used by the U.S.  facilities currently under construction has helped to increase the business  certainty of the liquefaction facilities, likely increasing their ability to obtain  financing. In particular, according to representatives from the five  facilities, the liquefaction capacity being built in the United States has  been contracted out under 20-year contracts to buyers—mostly importers  in Asian countries. Further, these contracts specify that buyers must pay  for liquefaction services provided by the specific facility whether or not  they choose to use all the capacity for which they contracted (that is,  regardless of the amount of gas the customer chooses to have liquefied).

Investments in facility construction, and the contracting of the associated  capacity, have helped to position the United States as an emerging LNG  exporter. Based on discussions with DOE officials, liquefaction facilities,  and economic consulting firms, the expected level of U.S. exports over  the next several years is tied, among other things, to the amount of  liquefaction capacity of these five facilities. However, the fact that,  according to liquefaction facility representatives, the liquefaction capacity  is already under contract and liquefaction facilities are expected to  receive payments for their full capacity does not mean that the capacity  will necessarily be fully used all the time. Volatility in world market  conditions may at times cause capacity to be underutilized due, for  example, to periods of reduced demand such as during a recession.  Moreover, other world suppliers are expected to enter the market over the  next several years, and this could reduce the relative attractiveness of  U.S. LNG. Even customers that have already purchased liquefaction  capacity may choose not to use all the capacity for which they contracted  from U.S. liquefaction facilities if new supply sources are more  economical. As a result, some market uncertainty exists as to whether the  full U.S. LNG capacity from the five facilities will, in fact, be exported over  the next 20 years, even though liquefaction facility representatives stated  that capacity is already under contract.

Additional uncertainties regarding U.S. exports of LNG relate to whether  more capacity for liquefaction is likely to be developed beyond the  capacity currently under construction. A number of additional liquefaction  facilities have applied for approval from DOE and FERC in the past few  years, and, as of September 2015, DOE has approved more than 30  companies to export LNG from large-scale liquefaction facilities.  However, based on current demand, representatives from liquefaction  facilities told us that it is unlikely that some of those additional facilities will  ever be built. Thus, while confidence regarding U.S. exports in the next  few years under expected market conditions is driven primarily by the  capacity commitments in liquefaction capability, longer-term forecasts are  more uncertain due to unknowns regarding macroeconomic conditions,  increased exports by other countries, as well as whether additional  liquefaction capacity will be profitable to develop.

section_title: Customers of U.S. LNG Have Responsibility for Transporting LNG from Liquefaction Facilities
paragraphs: According to representatives from the liquefaction facilities we spoke with,  under current business models and contracts, the costs associated with  importing LNG (including, for example, feed gas, liquefaction services,  and transportation) are separate, and U.S. liquefaction facilities have no  responsibility for shipping LNG. According to representatives at all five  U.S. liquefaction facilities, customers take possession of the LNG at each  facility’s loading terminal, and customers arrange for LNG carriers to  transport the LNG at their own expense. For example, representatives  from one liquefaction facility explained that their customers may contract  for the services of existing LNG carriers on long-term charters or may  contract for construction of new carriers to transport U.S. LNG exports.  See figure 2 for pictures of two styles of LNG carriers. A representative  from another liquefaction facility told us that its customers have already  contracted to build new LNG carriers to serve their needs in the new U.S.  export market.

Transportation costs borne by contracted overseas customers include  vessel operating costs, such as fuel and labor, and capital costs, such as  the purchase and financing of LNG carriers. Costs for transporting U.S.  LNG vary depending on the destination. Thus, transportation costs affect  the total delivered price of LNG to customers. Figure 3 shows an example  from two liquefaction facilities of the costs that, combined, represent the  total “landed” price of LNG for customers in Europe and Asia. According  to representatives of the five liquefaction facilities, U.S. LNG customers  are primarily from Asian countries, but some cargos are contracted to  companies in Europe and would likely incur lower shipping costs.

section_title: About 100 or More LNG Carriers May Be Needed to Transport Expected U.S. LNG Exports in the Coming Years
paragraphs: Estimates of the number of LNG carriers necessary for transporting U.S.  LNG vary, but based on estimates of representatives from the five  liquefaction facilities with whom we spoke, about 100 or more LNG  carriers will be needed to transport U.S. exports once liquefaction  facilities are fully operational. Stakeholders, including DOE officials and  shipbuilder representatives, estimated the number of needed carriers to  be as low as 25 and as high as 200. However, based on their knowledge  of the contracted liquefaction capacity, representatives from liquefaction  facilities, one shipbuilder, and an international association of LNG  importers told us that about 100 LNG carriers will be needed for  transporting U.S. exports and that most of these carriers have already  been ordered or are under construction. This estimate is generally in line  with our analysis of the needed carrier capacity to transport roughly 9.77  bcf per day (the currently contracted capacity of U.S. facilities) based on  the factors below (see app. I for more information on this analysis):

Most modern LNG carriers have a cargo volume of between 160,000  to 170,000 cubic meters.

Most U.S. liquefaction capacity has been contracted to customers in  Asia.

According to a ship-building company we spoke with, a one-way  voyage for an LNG carrier from the U.S. Gulf Coast to Japan can take  approximately 30 days (or about 60 days, roundtrip) through the  Panama Canal.

According to the shipbroker and other maritime stakeholders we spoke  with, the current world LNG carrier fleet includes over 400 carriers, with  another 160 new carriers scheduled for delivery by the end of 2018.  Maritime stakeholders we spoke with said there is currently an  overabundance of LNG carriers available in the world’s LNG shipping  market relative to current demand, due in part to a speculative rush of  orders. However, these stakeholders expect this to change in the next  few years as increased LNG capacity from the United States and  Australia begins to come online and older LNG carriers are taken out of  service, at which point additional carriers may be needed.

As mentioned previously, currently operating LNG carriers are nearly all  foreign built and flagged. For example, a ship broker we spoke with  estimated that Korean shipyards have built about 250 of the 350 LNG  carriers delivered in the last 20 years and also have the largest share of  LNG carriers under construction. According to MARAD officials and a  shipbuilder representative, LNG carriers have not been built in the United  States since 1980, and no LNG carriers are currently registered under  U.S. flag.

section_title: If the Proposed Requirement Does Not Reduce the Expected Demand for U.S. LNG, It Could Expand Employment for U.S. Mariners and Shipbuilders
subsections: section_title: If Demand Is Not Reduced, Maritime Stakeholders Say the Proposed Requirement Could Expand Employment for U.S. Mariners, Though Time Would Be Needed for Training
paragraphs: While we cannot reliably estimate the total number of U.S. mariner jobs  that would be created due to the possibility that the proposed requirement  could reduce demand for U.S. LNG (discussed in the next section), Coast  Guard officials and representatives from four mariner unions estimated  that each U.S.-flagged LNG carrier would likely employ a crew of between  40 and 52 mariners, as discussed below. According to Coast Guard  officials and representatives from mariner unions we spoke with, LNG  carriers typically require about 20 to 26 mariners to operate, depending  on the type of propulsion system used in the vessel. According to  representatives from mariner unions, this number is a fairly average crew  size for a large ship; in comparison, the average container ship requires  about 20 mariners. A ship’s crew is comprised of officers and unlicensed  mariners. For example, according to representatives from one mariner  union, a typical LNG carrier may be operated by 11 officers (including  deck and engineering officers) and 15 unlicensed mariners (7 deck crew,  5 engine crew, and 3 stewards). To estimate the total number of mariner  jobs each LNG carrier would support, mariner groups told us that this  number should be doubled to 40 to 52 to account for vacation time, other  types of leave, and training. Assuming that demand for U.S. LNG is not  decreased and that 100 LNG carriers would be needed to transport the  five U.S. facilities’ full capacity of LNG once they are fully operational,  approximately 4,000 to 5,200 mariners could potentially be employed on  U.S.-flagged LNG carriers. However, as discussed in the next section,  implementation of the proposed requirement would likely lead to  decreased demand for LNG.

All currently operating LNG carriers are foreign-flagged (as discussed  previously) and, according to mariner unions we spoke with, employ few  U.S. officers and no unlicensed U.S. mariners.  According to  representatives from the mariner groups we contacted, about 180 active  U.S. officers have the training and experience to work on LNG carriers,  but the last time any U.S. unlicensed mariners worked on LNG carriers  may have been over a decade ago. While all U.S. flagged vessels are  required to hire predominantly U.S. citizen mariners,  maritime  stakeholders told us that foreign-flagged vessels may be able to hire the  least expensive crews available with the necessary skills.

U.S. mariners may not be immediately available to operate LNG carriers  due to training and experience requirements and expectations from  carrier operators. In the shipping industry, there are minimum experience  requirements for working on LNG carriers, as discussed below.  Representatives from mariner unions we spoke with stated that the U.S.  maritime industry has the capacity to accommodate the potential demand  for LNG carrier crews and recruiting mariners would not be an issue.  However, based on requirements for obtaining necessary credentials,  ensuring officers and unlicensed mariners have sufficient experience and  training could take years. According to a representative from one mariner  union we spoke with, unlicensed mariners need to complete a one-week  LNG-carrier training class. However, qualification for employment on LNG  carriers also requires experience working on an LNG carrier. For  example, Coast Guard requirements for a “tankerman” credential  (certification required to work on a tank vessel, including LNG carriers)  include at least 90 days of experience as well as at least 10 loadings or  unloadings of liquid cargo while working on the tanker.  According to  Coast Guard officials, currently there about 300 U.S. mariners holding a  national endorsement as Tankerman‐PIC (person in charge) that is valid  for liquefied gas tank vessels. For an LNG carrier, the latter requirement  could take 10 months or more to satisfy. According to representatives  from a shipping brokerage company we spoke with, it could also be  difficult for U.S. mariners to gain the necessary experience aboard a  foreign-flagged LNG carrier (necessary due to the current lack of U.S.- flagged LNG carriers) because of the relatively higher costs associated  with U.S. unlicensed mariners—discussed later in this report—compared  with available foreign mariner crews competing for those jobs.

Increased employment opportunities for U.S. mariners, if they did occur,  could have benefits related to military readiness. DOD and MARAD  officials told us that any action that increases the number of U.S. mariners  available to operate the reserve sealift fleet is beneficial. However, we  found in August 2015 that while MARAD has stated that there is a need  for additional mariners for military purposes DOD has had a sufficient  number of mariners to meet its past needs.  In fact, we found that  according to Coast Guard data, the number of mariners potentially  qualified to operate the reserve sealift fleet has increased, from 37,702 in  2008 to 54,953 in 2014. While MARAD estimates that only 11,280 of  those mariners are available, we found that MARAD had not fully  analyzed the availability of mariners for a prolonged activation, and we  recommended MARAD conduct a full analysis.  As such, it is unclear to  what extent the additional mariner capacity possible under the proposed  requirement would provide a benefit to military sealift capacity.

section_title: A Few U.S. Shipyards Expressed Interest in Building LNG Carriers, but a Number of Challenges Exist
paragraphs: Representatives from 3 of 11 companies we contacted operating large  and active U.S. shipyards expressed interest in building LNG carriers.  However, the shipyards would need to acquire the equipment and  technology to build specialized LNG-containment systems that store LNG  at minus 260 degrees Fahrenheit. In order to license this technology,  shipyards must pay a licensing fee and successfully complete a  qualification process, which includes building a mock-up of the  containment system, to be certified to build the containment system.  Although some U.S. shipyards are currently gaining experience building  LNG-powered vessels, shipbuilders and others we spoke with stated that  this experience is not comparable to building the large containment  systems required for transporting LNG for trade. Specifically, LNG- powered vessels use containment systems with a capacity of about 900  cubic meters. These systems are generally purchased overseas and  welded onto the vessel. Conversely, according to shipbuilders, LNG  carriers have larger containment systems, with approximately 170,000  cubic meter capacity, that must be constructed within the carrier.

Based on information from shipbuilders, we found that construction of  LNG carriers in U.S. shipyards presents several challenges that could  likely mean higher costs and longer lead and construction times than  those for Korean shipyards, which currently build most LNG carriers:

Shipyard infrastructure: Only two of the three shipyards in our  review currently have docks long enough to accommodate  construction of the LNG carriers necessary for international trade  (approximately 1,000 feet long) without substantial capital  improvements.

Availability: The two shipyards with docks large enough to build  these LNG carriers currently have vessel orders that take up their  shipbuilding capacity through approximately 2018, after which  representatives stated they may be available for building LNG  carriers. However, we believe that given the limited dock space,  orders they may receive in the near term for other types of vessels  may delay future construction of LNG carriers.

Timeline: Representatives from those two shipyards with docks long  enough to build LNG carriers estimated that it would take about 4 to 5  years to build an LNG carrier from the time of initial contact with a  buyer. According to one representative, the process of building  capacity, preparing for construction, and constructing the first LNG  carrier would include: development of carrier specifications, qualification to build the LNG containment system, detailed design of the carrier, construction of the carrier,  installation of the containment system, and final testing of the carrier and containment system.

Productivity: Representatives from those two shipyards stated their  shipyard can produce one and two large vessels a year, respectively.  Based on these rates, we estimate it would take over 30 years to build  the 100-carrier fleet potentially needed for U.S. exports. These  shipyard representatives stated that as more carriers are built,  efficiency may increase and construction may gain speed. Increased  efficiency might somewhat reduce the number of years it would take  to provide an adequate fleet for this trade. In comparison, according to  representatives from a ship brokerage, major Asian shipyards may be  capable of delivering between 50 and 80 large ships in 1 year, for  reasons discussed below.

As a result of U.S. shipyards’ capacity constraints, as well as their  anticipated lower productivity than foreign shipyards, LNG carriers built in  U.S. shipyards would likely cost more than those currently built in foreign  shipyards. According to industry representatives we spoke with, new LNG  carriers built in Korean shipyards, where the majority of LNG carriers are  currently built, are generally priced from $200 to $225 million. Currently,  no U.S. shipyards build LNG carriers, so there are no actual carrier prices  for comparison. However, representatives from the three U.S. shipyards  we spoke with estimated that U.S.-built carriers would cost about two to  three times as much as similar carriers built in Korean shipyards,  depending on factors such as volume.  Based on this range cited by U.S.  shipyards, the cost of U.S.-built LNG carriers could range from $400 to  $675 million. Another factor that contributes to cost differences between  U.S. and Korean shipyards, according to representatives from a shipping  brokerage company we spoke with, is that Korean shipyards have made  capital investments in equipment that increases efficiency such as cranes  that can lift 2,000-4,000 tons, compared to cranes in U.S. shipyards that  can lift 600 tons.

section_title: If LNG Customers Contract to Purchase U.S.-Built Carriers, Construction of Those LNG Carriers Could Provide Employment in U.S. Shipyards, according to Shipyard Representatives
paragraphs: Officials from the two U.S. shipyards with sufficient dock space stated that  hiring of U.S. shipyard workers would depend on the number of LNG  carriers ordered and would rely in part on foreign workers.  Representatives from one shipyard roughly estimated that for an order of  one large LNG carrier they might hire about 1,000 short-term U.S.  workers and hire an additional 250 to 300 skilled Korean workers for the  duration of the build time to ensure the work is done correctly. However, if  they had contracts for a larger number of carriers, they would likely hire  fewer Korean workers, who would gradually be transitioned out as U.S.  workers were trained to complete the work. A representative from the  second shipyard stated that the skills needed to build the LNG  containment system do not exist in their current workforce, so for an order  of two LNG carriers, they would likely hire skilled foreign shipyard workers  to do the work in order to mitigate risk and increase schedule  predictability, even if the costs of employing a foreign workforce may be  slightly higher than using U.S. workers. Representatives also stated that  they would be unlikely to increase capacity by opening another shipyard  to build LNG carriers alongside other vessels, so they might not hire any  additional new workers. Nonetheless, they noted that this LNG work  would add to the stability of the shipyard’s current 1,100 shipbuilding jobs,  and lead to a more skilled workforce.

This shipyard employment estimate is roughly comparable to estimates  using Bureau of Labor Statistics (BLS) estimates on job creation. Based  on employment estimating tools from BLS, construction of a $450-million  ship (as noted above, a conservative estimate of the cost to build an LNG  carrier in the United States) is associated with 1,675 jobs in the  shipbuilding industry. However there are a number of caveats associated  with this estimate. For example, the numbers in BLS’s estimates  represent averages for all types of ship and boat building, and are not  specific to LNG carriers. Additionally, the number of shipbuilding workers  would likely remain steady across the production of multiple ships over  time, so it would not provide new jobs for every additional carrier ordered.  For example, the estimated need for 100 LNG carriers to serve the U.S.

LNG export market will not result in 167,500 jobs. And finally, while jobs  may be created in the shipbuilding sector, a certain number of the jobs  would likely be taken by people who are currently working in other  construction or related industries, such as welders or other skilled trade  workers. As such, while shipbuilding jobs might increase, not all of that  increase necessarily represents net new jobs for the overall economy.

Increasing or stabilizing jobs in the shipbuilding industry for a period of  time, if it occurred, could have additional benefits for military readiness.  DOD officials told us that there is no military use for LNG carriers  because the carriers are too specialized for current military needs.  However, in addition to offering stability for U.S. shipbuilder jobs, as long  as a market for U.S. LNG is at or near currently expected levels, the  proposed requirement could help maintain shipbuilding capacity in the  event it is needed for military purposes. Officials from DOD and MARAD  stated that any actions that increase the capacity of U.S. shipyards as an  industrial base would be indirectly beneficial for the Navy and military  readiness in general.

section_title: U.S.-Built Carriers Would Increase Transportation Costs and Would Likely Reduce Demand for U.S. LNG
paragraphs: The proposed requirement would increase the cost of transporting LNG  from the United States, which would decrease the competitiveness of  U.S. LNG as compared to other sources. This decreased competitiveness  may in turn reduce demand for U.S LNG. The extent of this reduction is  unclear. Additionally, any reduction in demand for U.S. exports due to the  proposed requirements and resulting changes to the LNG market may  decrease jobs in other U.S. industries such as the liquefaction and the oil  and gas industries.
subsections: section_title: The Proposed Requirement Would Increase Transportation Costs For U.S. LNG Exports
paragraphs: As we have noted, transportation costs for LNG are a fairly significant  portion of the overall cost of the product in import markets. Based on  information shared with us by representatives from U.S. liquefaction  companies regarding current expected costs of the key phases for the  LNG export supply chain—gas supply, liquefaction, and transportation— shipping costs are expected to make up about 26-percent of total costs  for U.S. LNG delivered to an Asian market. Representatives from  liquefaction companies, shipping companies, and an economic consulting  company we spoke with currently expect U.S. LNG exports from the  United States over the coming years to be transported on carriers built in  foreign countries—primarily Korea and Japan. If these exports were  required to be transported on U.S.-built and U.S.-flagged carriers, the  costs associated with transport would be higher, as described below.

The requirement to ship U.S. LNG on U.S.-built-and-flagged carriers  would affect both the cost of carrier construction, as noted above, as well  as carrier operation. Our conversations with the 3 shipbuilders and 2  shipping companies have suggested that the purchase price of a U.S.- built LNG carrier is likely to be at least double—and could be significantly  more—the cost of an LNG carrier constructed in South Korea. In addition,  operating costs for U.S.-flagged carriers would be higher than for  internationally flagged carriers. According to a 2011 MARAD study, U.S.  crews are generally more highly paid than international crews and certain  other operating costs associated with U.S. flagging requirements, such as  insurance costs, are also higher. The study found that operations costs of  U.S.-flagged vessels of various types were, on average, about 2.7 times  that of foreign-flagged carriers. However, based on our discussions with  one mariner union, the differential for the costs of crewing U.S-flagged  LNG carriers compared to international carriers may be less than the cost  differential for the types of vessels MARAD surveyed. This is because,  according to three mariner unions we spoke with, LNG carriers require  more highly skilled mariners, so crew costs for international LNG carriers  are generally higher than crew costs on other types of ocean-going  vessels.

The higher costs of building and operating U.S. LNG carriers may make it  more challenging for shippers to obtain financing for construction of U.S.- built carriers than for carriers built in other countries. A critical question  regarding any large capital project is whether potential investors believe  that the asset will be profitable enough to warrant the investment,  particularly if financial returns carry substantial risk. To better understand  the cost implications of a requirement that U.S. LNG exports be carried  on U.S.-built-and-flagged carriers, we conducted an analysis designed to  develop a general estimate of the additional shipping revenues that  investors must believe will be earned over the life of the investment to  provide reasonable certainty that the investment is financially viable.   Although we do not have data to conduct a detailed estimate, by making  some hypothetical assumptions we are able to provide an illustration of  the potential cost impact of a U.S.-built-and-flagged carrier requirement  for LNG exports, if all other factors remain equal.  These assumptions  include:

The U.S.-built carriers would be financed through 25-year debt at a 4  percent rate of interest.

A U.S.-built LNG carrier of approximately 170,000 cubic meter  capacity will be priced at $450 million, about twice that of such  carriers being constructed for this trade in Korea.

Operating costs of the U.S.-flagged LNG carriers would be 50-percent  higher than an internationally flagged LNG carrier (likely a  conservative estimate, compared to the MARAD study cited above).

A U.S. carrier would make six deliveries of LNG each year to an Asian  destination. This suggests an annual capacity of over 23-trillion  British thermal units (Btu) of energy per LNG export carrier.

We found that, under these assumptions, the additional transportation  costs associated with a U.S.-built-and-flagged LNG carrier would be  roughly $0.73 per MMBtu of delivered energy product. Based on our  discussions with U.S. liquefaction companies, we understand that an  estimated shipping rate for LNG from the U.S. to market destinations in  Asia is roughly $3.00 per MMBtu under the status quo market  environment, suggesting that a requirement for U.S.-built-and-flagged  carriers to transport U.S. LNG would be associated with about 24-percent  higher shipping rates if all of the additional cost were passed on to the  buyer.

section_title: Increased Transportation Costs Would Reduce U.S. Competitiveness in the LNG Market
paragraphs: Higher shipping rates likely associated with U.S.-built-and-flagged carriers  would decrease the competitiveness of U.S. LNG, but the extent to which  this would occur and its effects are uncertain. As we have noted, world  supply and demand conditions determine the extent to which there is a  market for U.S. LNG exports, and those conditions would be affected by  higher shipping costs for U.S. LNG exports. The increase in shipping  costs may increase the delivered price for U.S. LNG relative to non-US  LNG and other energy sources. A higher relative price may in turn reduce  demand for U.S LNG. However, it is difficult to know the extent to which  these added costs would affect U.S. LNG exports because of the variety  of additional supply and demand factors that may also affect purchasers’  decisions.

First, leaving aside the higher cost of U.S. LNG to purchasers, the  shipyard capacity in the United States could present a major limiting  factor for accommodating U.S. exports under a U.S.-built-and-flagged  requirement. As we noted earlier, the U.S. shipbuilding industry does not  have the capacity to build the carriers needed for the expected level of  this trade in the near term so it will take many years for enough carriers to  be built to service the expected level of exports. As such, the manner in  which any U.S.-built requirement is implemented would be a critical  element in the market consequence of this requirement. If U.S.-built  carriers were required within, for example, 5 years of the requirement’s  passage, total carrier capacity available to ship LNG would itself be a  major limiting factor for exports. Because capacity would likely only be  able to come online gradually over more than 3 decades, limited LNG  would likely be exported for some period of time, requiring purchasers to  import from other sources in the early and intermediate years. This  reduction in the currently planned exports of U.S. LNG may cause the  U.S. export industry to not develop as currently planned—particularly if  liquefaction facilities were unable to enforce provisions of their contracts  that require them to pay regardless of services used (see further  discussion below). Moreover, in the interim years, importers may be  developing new sources for their product and contracting for long-term  purchases from these other suppliers. Such circumstances would likely  undermine any substantial development of U.S. exports. However, the  ability to reflag international carriers to the U.S. flag might be able to  occur in a more timely fashion such that this ability to reflag could mitigate  a substantial impact on exports related to LNG carrier availability if the  requirement for U.S.-built carriers were phased in over a longer term.

A second factor that may influence the market effect of this requirement  relates to customers’ existing financial commitments. As discussed  previously, according to representatives of liquefaction facilities, all of the  LNG liquefaction capacity for U.S. exports is already committed under 20- year contracts—that is, customers have already agreed to pay for  liquefaction services for a long period of time whether they fully use the  service or not. Additionally, according to liquefaction companies we spoke  with, some of these customers have contracted to lease foreign-built  carriers on a long-term basis and/or have contracted for the construction  of new carriers in foreign shipyards for the transport of U.S. LNG. These  existing financial commitments may constrain the manner in which these  purchasers can adjust their business plans in response to a U.S. carrier  requirement.

Several stakeholders told us that implementation of the proposed  requirement and associated increases in transportation costs could  prompt customers to attempt to modify, renegotiate, or terminate their  liquefaction contracts. Specifically, according to two liquefaction  companies and a representative from an economic research and  consulting company, customers might try to excuse their contractual  obligations by invoking contract law doctrines such as force majeure  (generally defined as unforeseeable circumstances outside the control of  the contract parties that prevent compliance with a contract) or  impracticability (generally defined as where contract performance of an  act  can only be rendered at excessive or  unreasonable difficulty). While the outcome of such potential litigation is  uncertain, any litigation could create delays and add to market  uncertainty, which may, in turn, reduce the market for U.S. LNG. If  customers are able to modify, renegotiate, or terminate these contracts,  the liquefaction facilities would likely experience reduced profits, which  might adversely affect their operations.

Similarly, purchasers would need to be able to finance the U.S.-built LNG  carriers to be able to continue their plans to purchase U.S. LNG. As we  noted, the increased cost of U.S.-built vessels could make it more  challenging to finance these vessels. Moreover, existing commitments to  lease or contract for foreign-built tankers could add an additional  obstacle. If customers are not able to modify, renegotiate, or terminate  contracts for leased tankers or for the building of new tankers in foreign  shipyards, customers’ ability to purchase U.S. LNG may be constrained  because they may not be able to finance additional tankers built in the  United States. In that case, whether or not they must pay for liquefaction  capacity they have contracted for (without receiving any LNG),  purchasing U.S. LNG might no longer be a financially viable option.

section_title: Proposed Requirement and Changes in U.S. LNG Exports May Have Ripple Effects through the LNG Supply Chain
paragraphs: A reduction in the level of expected U.S. LNG exports due to higher  shipping costs could have effects on sectors of the economy involved with  the LNG export supply chain. Reduced or eliminated exports would  render some or all of the capacity in liquefaction facilities unnecessary, so  some jobs that have been or are expected to be created in these facilities  would be lost. For example, representatives from one facility stated that  they expect to employ more than 200 individuals once the facility  becomes operational. Further, if contracts for the purchase of liquefaction  were modified, renegotiated, or terminated by customers (for example,  through the litigation process or through default), these facilities could be  less profitable, which could lead to financial implications for their  investors. Further, as discussed above, the potential gain in jobs in the  shipbuilding and mariner occupations that the carrier requirement would  be designed to promote might not be fully realized if U.S. LNG exports  were reduced. If, for example, the market for U.S. LNG were eliminated,  no LNG carriers would need to be built in the United States.

In addition, in the gas extraction industry, any reduction in exports would  likely cause a small loss in the number of jobs, since there would be  reduced demand for natural gas supplies.  Another possible effect of  reduced U.S. exports would be reduced revenues for oil and gas  companies involved in energy extraction, which could have a further  effect of reduced investments by these companies. Finally, reduced  exports could lead to a small decrease in the price of natural gas in the  domestic market, since more of the supply of the product would be  maintained for domestic use.

section_title: Stakeholders Expressed Concerns about Potential Trade Implications
paragraphs: Representatives from economic forecasting firms, one shipbuilder, and  one liquefaction company we spoke with stated concerns that the  proposed requirement may have implications under existing trade  agreements, including: potential legal action to challenge the requirement brought in various potential adverse effects on current or future trade negotiations, and potential retaliatory trade practices, such as foreign government  action to protect one or more industries within their respective  countries.

section_title: Few Stakeholders Cited Safety and Reliability Benefits
paragraphs: A few stakeholders have proposed that the requirement may also have  some safety and security benefits beyond military readiness. For  example, one mariner union raised the possibility of U.S. carriers being  perceived as safer than those built and/or flagged in other countries.  However, other stakeholders, including the Coast Guard, stated there is  no reason to believe U.S.-built-and-flagged carriers would be any safer  than foreign LNG carriers. According to industry reports, as of February  2015, there have been no major accidents involving LNG carriers.  Similarly, Coast Guard officials stated that they have  protocols/procedures in place to help ensure safety of the United States  from ships coming into U.S. port and that they saw no security benefit  associated with reducing the number of foreign shippers entering U.S.  waterways and ports.

section_title: Agency Comments
paragraphs: We provided a draft of this report to the Departments of Defense, Energy,  Homeland Security, and Transportation and the U.S. Trade  Representative for their review and comment. We also provided a draft of  this report to DOL for informational purposes. DOE and DOT provided  technical comments, which we incorporated as appropriate. DOD  provided technical comments, which we incorporated as appropriate, as  well as formal comments. In its comments, which are reprinted in full in  appendix II, DOD stated that it appreciated that we noted that U.S.  national security plans and strategies rely, in part, on the ability to draw  on U.S. commercial ships and mariners as well as the existence of a  domestic shipbuilding industrial base.  USTR and DHS had no comments.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of Energy, the  Secretary of Homeland Security, the Secretary of Labor, the Secretary of  Transportation, and the U.S. Trade Representative. This report is also  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-2834 or FlemingS@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix III.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Howard Coble Coast Guard and Maritime Transportation Act of  2014  includes a provision for GAO to report on the number of positions  that would be created in the United States maritime industry each year in  2015 through 2025 if liquefied natural gas (LNG) exported from the United  States were required to be carried: (1) before December 31, 2018, on  vessels documented under the laws of the United States; and (2) after  such date, on vessels documented under the laws of the United States  and constructed in the U.S. This report discusses: (1) current industry and  Department of Energy (DOE) expectations for the market for U.S. exports  of LNG, and how that market is expected to operate, (2) stakeholders’  views on how the proposed requirement to use U.S.-flagged-and-built  carriers for LNG exports could affect jobs in the maritime, shipbuilding,  and other related sectors, and (3) potential effects of the proposed  requirement on the market for U.S. LNG and the broader U.S. economy,  including the market for U.S. LNG and other industries.

To describe current industry and DOE expectations for the market for  U.S. exports of LNG, and how that market is expected to operate, we  collected and analyzed information on economic forecasts of the LNG  market including the U.S. Energy Information Administration’s (EIA)  Annual Energy Outlook for several years, including 2015. We  interviewed DOE officials and representatives from four economic  research and consulting firms who have published reports on the  prospective market for U.S. LNG and LNG liquefaction companies that  have begun construction on U.S. liquefaction facilities to better  understand DOE’s estimates about expected U.S. LNG exports and the  world LNG market and to assure ourselves that the estimates were  sufficiently reliable for the purposes of this report. We identified economic  research and consulting firms for interviews based on work they  performed relevant to this topic. We determined that reports issued by  those companies were reliable for our purposes based on our reading of  the methods and analysis used as described in their published reports.  We also interviewed the four companies associated with the five  approved and under-construction export facilities (as listed on the Federal  Energy Regulatory Commission’s list of approved import/export terminals  in the continental U.S. as of July 2015) regarding their plans and  expectations. We interviewed representatives from the identified  economic research and consulting firms and energy companies regarding  expected export capacity, customer plans, and the number of LNG  carriers needed to transport expected U.S. LNG capacity. We also  analyzed this information to develop our own estimate of the needed  carrier capacity. To estimate the necessary number of carriers needed to  transport U.S. LNG capacity, we made the following assumptions:

U.S. liquefaction capacity of 9.77 bcf per day, based on information  from the five under-construction U.S. facilities;

330 liquefaction days per year, assuming that liquefaction facilities  would operate at 90 percent productivity; carrier capacity of 170,000 cubic meters LNG, based on information  from industry stakeholders; and six round-trip voyages per carrier, per year, based on: Information from the five liquefaction facilities that a majority of  U.S. LNG capacity is contracted to customers in Asia, and

Statements from stakeholders that a round trip voyage to Asia  would take about 60 days.

Under these assumptions, we calculated a need for approximately 870  carrier voyages per year to transport U.S. LNG exports, or about 145  carriers total. However, depending on destination (some U.S. capacity  has been contracted to customers in Europe, which would require less  time per round trip), expected productivity of liquefaction facilities (at least  one liquefaction facility we spoke with expects to operate at about 80  percent efficiency), and the amount of gas customers eventually purchase  and liquefy (customers may, at one time or another, choose not to use  their entire contracted capacity), we believe 100 carriers, as estimated by  the liquefaction companies we spoke with, is a reasonable estimate of  projected need.

The provision in the Act regarding this work specifies that GAO report on  the number of positions that would be created in the U.S. maritime  industry each year in 2015 through 2025 if the proposed requirement  were implemented. As the proposed requirement has not been introduced  as legislation as of October, 2015, the dates referenced in the Act may  change. As such, to describe stakeholder views on the potential effects of  the proposed requirements on maritime jobs and the economy and to  determine the potential effects of these requirements on the market for  U.S. LNG and the broader U.S. economy, we have referenced  timeframes more generally, rather than referring to specific dates. To  describe stakeholder views on the extent to which the requirement of  U.S.-flagged-and-built carriers for LNG exports would affect jobs in the  maritime, shipbuilding, and other related sectors, we collected and  analyzed information on the capability and capacity of U.S. shipbuilders  and estimated costs and requirements to build and operate LNG carriers  based on documentary and testimonial evidence from selected maritime  industry stakeholders. These stakeholders include representatives of  three shipbuilding companies; two shipping companies (one shipbroker  and one LNG carrier operator); the four major marine officer and  unlicensed mariner unions in the United States; and officials from DOE,  Department of Transportation’s (DOT) Maritime Administration (MARAD),  Department of Homeland Security’s U.S Coast Guard, and Department of  Labor (DOL). We selected maritime stakeholders (including shipbuilders,  mariner unions, and shipping companies) for interview based on  recommendations from government and industry stakeholders and  capacity to provide services related to LNG carrier construction and  operation. For instance, we selected the shipping companies based on  the fact that they are currently involved in shipping LNG. We selected  U.S. shipbuilders from a list of 11 large and active shipbuilding companies  in the United States as of April 2015 based on their stated interest and  capacity to build LNG carriers. To estimate the employment required to  support a given level of ship-building, we relied on the Bureau of Labor  Statistics’ Employment Requirements Table (ERT), which is a commonly  used methodology. However, this type of analysis has limitations:

Estimates for the ERT are based on the ship and boat-building  industry as a whole, using the Domestic Nominal ERT. According to  BLS, it is not possible to obtain more precise estimates of the job  supported in the construction of LNG carriers specifically.

The ERT is based on a snapshot of the economy at a given time and  does not take into account changes in productivity based on increases  in production (for example, economies of scale).

All estimates refer to jobs, but not necessarily full-time.

These estimates include the effect of inputs into production, but not  the additional impact of spending by these employees on consumer  goods. If these effects were included, (sometimes called multiplier  effects) this would induce additional employment gains outside the  shipbuilding industry.

We relied on the most recent ERT available, which was 2012, so the  table does not take more recent changes into account.

We also interviewed MARAD, Department of Defense, and U.S. Coast  Guard officials to obtain their views on potential benefits for military  readiness, including U.S. maritime-industry capacity to meet military  needs.

To identify the potential effects of the proposed requirement on the  market for U.S. LNG and the broader U.S. economy, we collected and  analyzed economic data and forecasts and testimonial evidence from the  industry stakeholders and economic research and consulting companies  we spoke to (discussed earlier) and assessed the resulting evidence  using established economic theory and reasoning to describe potential  effects on world demand for U.S. LNG and jobs in other relevant U.S.  industries. To illustrate the cost impact of a U.S.-flagged-and-built carrier  requirement for LNG exports, if all other factors remain equal, we  developed a set of hypothetical assumptions based on statements from  industry stakeholders, a 2011 MARAD report on the costs of operating  U.S.-flagged carriers, and economic theory. These assumptions include:

The U.S.-built carriers would be fully funded through 25-year debt at a  4 percent rate of interest.

A U.S.-built LNG carrier of approximately 170,000 cubic meter  capacity will be priced at $450 million, about twice that of such  carriers being constructed for this trade in Korea (a conservative  estimate of construction costs, based on statements from shipyard  representatives, and others).

Operating costs of the U.S.-flagged LNG carriers would be 50-percent  higher than an internationally flagged LNG carrier (likely a  conservative estimate, compared to the MARAD report, based on  statements from stakeholders that the different in cost might not be as  large for LNG carriers and in an effort to ensure our analysis does not  overestimate the potential costs of operating U.S.-flagged LNG  carriers).

A U.S. carrier would make six deliveries of LNG each year to an Asian  destination. This suggests an annual capacity of just over 23 million  MMBtu of energy per LNG export carrier.

For the purposes of estimating the potential costs of the proposed  requirement, we made what we believe to be conservative estimates,  including estimates of the cost of building LNG carriers in the United  States and the costs of operating those carriers, in order to ensure that  we do not overstate those potential cost effects. Due to the hypothetical  nature of the proposed requirement as well as challenges related to  predicting market outcomes, the estimated cost impacts are meant to be  solely illustrative and should not be taken as a prediction. We interviewed  U.S. Trade Representative officials and industry stakeholders regarding  potential implications for U.S. trade. Additionally, we interviewed the U.S.  Coast Guard and selected (as described above) U.S. LNG liquefaction  companies and shipping companies regarding potential security  implications for LNG customers related to transporting LNG via U.S.- flagged-and-built carriers.

We conducted this performance audit from March 2015 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Comments from the Department of Defense

section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Acknowledgments
paragraphs: In addition to the contact above, Catherine Colwell, Assistant Director;  Amy Abramowitz; Pedro Almoguera; Ben Bolitzer; Ken Bombara; Brian  Chung; Katie Hamer; Geoff Hamilton; Delwen Jones; Sara Ann  Moessbauer; Josh Ormond; and Oliver Richard made key contributions to  this report.


Question-summary annotations: questions: question: How is the United States expected to change according to DOE?
answer: According to Department of Energy (DOE) and industry expectations, in the next few years the United States is expected to change from a net importer of natural gas to a net exporter, with those exports destined for different regions of the world, especially Asia.

question: What is the purpose of liquefaction facilities?
answer: Five large-scale U.S. liquefaction facilities—necessary for conversion of natural gas to liquefied natural gas (LNG) (see fig. below)—are under construction with a projected capacity to export more than 12 percent of U.S. natural gas production in 2020.

question: What will transport of the full capacity of the US liquefaction facilities require?
answer: Based on estimates from these liquefaction facilities, transport of the full capacity of these liquefaction facilities will require about 100 or more LNG carriers.
child_questions: question: What is the current state of LNG carriers for this transport?
answer: According to representatives from these five facilities, their liquefaction capacity has already been sold mainly through 20-year contracts and their customers are responsible for transporting the LNG to export markets. Currently operating LNG carriers are nearly all foreign built and operated. LNG carriers have not been built in the United States since before 1980, and no LNG carriers are currently registered under the U.S. flag.

questions: question: What could the proposed requirement to transport exports of LNG do?
answer: The proposed requirement to transport exports of LNG via U.S.-built-and-flagged carriers could expand employment for U.S. mariners and shipbuilders if it does not reduce the expected demand for U.S. LNG.

question: What do shipyard representatives say about building carriers?
answer: According to representatives of U.S. mariner groups, between 4,000 and 5,200 mariners would be needed to operate the estimated 100 LNG carriers needed to transport the five U.S. facilities' full capacity of LNG once the five are fully operational. Based on the current capacity of U.S. shipyards we spoke with, building 100 carriers would likely take over 30 years, with employment in U.S. shipyards increasing somewhat or becoming more stable, according to shipyard representatives. Department of Defense (DOD) officials also indicated that any policy or requirement that increases and stabilizes jobs in the U.S. maritime industry could support military readiness.
child_questions: question: What do industry representatives say about building carriers?
answer: However, according to industry representatives, U.S. carriers would cost about two to three times as much as similar carriers built in Korean shipyards and would be more expensive to operate.

question: What does GAO say about the cost of building carriers?
answer: Based on GAO analysis, these costs would increase the cost of transporting LNG from the United States, decrease the competitiveness of U.S. LNG in the world market, and may, in turn, reduce demand for U.S. LNG.

question: What do stakeholders say about building carriers?
answer: The extent of these effects depends on customers' circumstances and business decisions. For example, several stakeholders told us implementing the proposed requirement may prompt customers to attempt to modify, renegotiate, or terminate their existing contracts for liquefaction. Additionally, limited availability of U.S. carriers in the early years of construction may decrease the amount of LNG that could be exported from the United States for a period of time, leading customers to seek alternate sources.

question: How would a reduction in the level of expected U.S. LNG exports impact the economy?
answer: Further, a reduction in the level of expected U.S. LNG exports could impact the broader U.S. economy, including potential job and profit losses in the oil and gas sector.

questions: question: What is Congress considering regarding shipbuilding?
answer: Congress is considering whether to propose legislative language that would require U.S. LNG be exported via U.S.-built-and-flagged carriers with the goal of supporting U.S. shipbuilders and mariners.
child_questions: question: What provision in statute did Congress include for GAO?
answer: Congress included a provision in statute for GAO to review the number of vessel-construction and operating jobs that would be created in the U. S. maritime industry each year in 2015 through 2025 if exported LNG were required to be carried (1) before December 31, 2018, on vessels documented under the laws of the United States and (2) after such date, on vessels documented under the laws of and constructed in the United States.

question: What does this report discuss?
answer: This report discusses (1) DOE and industry expectations for the market for U.S. LNG exports and (2) how the proposed requirement could affect jobs in the U.S. maritime industry and the broader U.S. economy.