Economic and environmental concerns are turning Hawaii toward consideration of LNG to replace oil and coal. But its sources of natural gas would not necessarily be from U.S. shale fields.

“Hawaii’s geographical location puts it in a position to take part in both Asian and North American markets,” researchers at the University of Hawaii wrote in a recently published working paper. Canada offers geographic advantages.

“Due to Canada’s shorter shipping distance, it would be more attractive than Australia since delivered gas prices also reflect transportation costs,” the researchers wrote in the paper, titled “An Economic and GHG Analysis of LNG in Hawaii.” “But this route is contingent on British Columbia and Canada approving exports from the West Coast of Canada.”

The shale gas “revolution” in the U.S. has led to a rapid decline in natural gas prices within the continental U.S. That is not the case in Hawaii, which imports all of its fossil fuels. Hawaii generates most of its electricity from costly oil-fired plants, which burdens its citizens with power rates that are nearly four times the U.S. national average, according to the U.S. Energy Information Administration.

The state government has also declared a goal to reduce greenhouse gas emissions to 1990 levels, excluding aviation, by 2020.

Honolulu-based Hawaiian Electric Co. has announced plans to begin importing LNG in containers as early as 2016 as a replacement fuel for power generation on several islands. A company spokesman told a local media outlet that containerized LNG may be its best option until a bulk LNG terminal can be built.

“The thought is that long-term, it’s environmentally more sensible and quite frankly, more economic, to use LNG instead [of dirtier fossil fuels],” Thomas Moore, Houston-based partner with Mayer Brown LLP, told Midstream Business. “And really it’s the same issue in Puerto Rico. The thought is that importing LNG from Trinidad or even from the United States into Puerto Rico is much more cost-effective than burning diesel, for example. Again, if the prices change and turn upside down, that will turn out to be a bad decision, but based on the current market, it’s probably the right decision.”

Economic and environmental considerations are not the only drivers of this shift. The state’s two oil refineries, operated by San Ramon, Calif.-based Chevron Corp. and Houston-based Par Petroleum Corp., face an uncertain future, according to RBN Energy LLC, as their owners ponder the economics of continued operation.

Hawaii receives very little oil from Alaska or the Lower 48 states as a result of the Jones Act. That legislation sets standards that raise costs, including requirements that the vessels be made in the U.S. and operated by U.S. crews. As such, Chevron’s refinery gets about 75% of its crude oil from Thailand, Vietnam and Argentina. Par Petroleum’s facility imports an even higher percentage from Russia, Saudi Arabia and Libya.

Hawaii already relies on renewable sources to provide 18% of its electricity needs. Hawaiian Electric says it is looking to convert oil-fired plants to LNG in the near term, and build new LNG infrastructure to replace deactivated plants. Cost savings to consumers could reach 20% by 2030, the company said. The University of Hawaii paper estimated savings at between 6% and 25%.

“Typically, the LNG molecules are available at around a 15% discount to oil,” Cameron Gingrich, Calgary-based director of gas services for Ziff Energy, told Midstream Business. “So if you’re powering Hawaii today with crude oil or distillates or whatever, you basically have a greater carbon footprint than you would have with gas, and you’re likely paying a 15% premium to what you paid for gas, as well.

“There are certainly a lot of benefits to switching to natural gas and there is a cost curve with a lot of economic gas in Canada and the Lower 48,” he said. “Whether Hawaiians have the ability to have the scale to impact any further discounts in negotiations remains to be seen, but you see Puerto Rico—they’ve been powering with LNG for the last dozen or so years. Certainly small islands have the opportunity to step away from the high cost of crude-based power to lower-cost, gas-based power.”

RBN’s analysis concurs: “While significant dollars will be spent in converting or replacing the islands’ old oil-fired plants, fuel costs would go down. For example, in 2017—the first year LNG would be used—the per-MMBtu [million Btu] cost of LNG (shipped in ISO containers) would be $2.05 less than that of low-sulfur fuel oil used to fire most of the utility’s units. By 2022, when LNG first starts coming in via bulk shipments, the savings will balloon to $8.52/MMBtu, and by 2030 the savings will be even greater: $13.41/MMBtu. LNG also would be cheaper than diesel.”

The intermodal ISO container factor is key to viability. Giant LNG import terminals, like those built along the Gulf Coast prior to the dramatic increase in production from shale plays, cost billions.

“The big thing in Puerto Rico, and Crowley [Maritime Corp.] is already doing this, is the intermodal ISO container,” Tom Campbell, director for Stratas Advisors, a Hart Energy company, told Midstream Business. “The order book for them is huge right now—you wouldn’t get one until 2018 to 2019. You’re saving a lot of cost, you’re scaling for the market.”

“That kind of intermodal solution is tricky for LNG because moving LNG is very expensive, it’s really not cheap,” he cautioned. “It really only works in high energy-cost markets, but island markets in the Caribbean, Hawaii, Guam are ideal for that. They’re doing it now and I think that practice will only continue. All you need is the container. It’s an elegant solution in a lot of ways.”