New Fortress Breaches Contract on Gas Supply, Puerto Rico’s Government Allows It

The House of Representatives ignores the communities that need to know the risks in case of an explosion in San Juan Bay.

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The IS INEOS Independence tanker anchored at the New Fortress Energy pier in the San Juan Bay area.

Photo by Ricardo Arduengo | Centro de Periodismo Investigativo

“Unhappy birthday,” sang ten protesters gathered in lawmaker Edgardo Feliciano Sánchez’s office on August 26. They brought balloons and a hollow cake, “like the empty promises,” said Sary Rosario of the group of community, religious and environmental organizations that oppose New Fortress. This company developed a natural gas (methane gas) terminal in the San Juan Bay area without permits and has kept the community in the dark about the safety of its operations.

The group complained to the Puerto Rico House of Representatives’ Natural Resources, Environmental Affairs and Recycling Committee, chaired by Feliciano Sánchez, for not acting on House Resolution 170. They have been waiting for a year for that committee to summon Wes Edens, founder and CEO of New Fortress, to explain what the environmental and security risks are.

Lawmakers from all political delegations submitted the Resolution in January 2021, and it was referred to that committee in August 2021. It held three site visits and one public hearing, according to the Office of Legislative Services’ procedural record. The measure, which sought to investigate how the New Fortress terminal was built, has been stalled for a year.

Reverend Carmen Julia Pagán (center), from the Puerto Rico Baptist Church, with David Ortiz of El Puente (left), and Sary Rosario from the Disciples of Christ Church (right), as well as representatives of communities of Cataño, Guaynabo and San Juan, which would be affected by the New Fortress gas terminal. They sing “unhappy birthday” to what they called the anniversary of the inaction of this case in the House of Representatives Natural Resources, Environmental Affairs and Recycling Committee during a visit to House Speaker Rafael ‘Tatito’ Hernández’s office in the Capitol.
Photo by Enid MSalgado Mercado | Centro de Periodismo Investigativo

“We don’t want to wait for an accident to happen,” said Myrna Conty, one of the environmental leaders who participated in the demonstration. She said the coastal neighborhoods of San Juan, Cataño and Guaynabo, which are located near New Fortress, live in a state of “anguish” over what may happen.

“New Fortress doesn’t have an evacuation plan that it shares with the community,” she claimed. Popular Democratic Party Rep. Feliciano Sánchez’s office told the Center for Investigative Journalism (CPI, in Spanish) that he would not comment for the time being. The legislator received the group of protesters in his office on August 29, but the meeting was led by his staffer Obed Rojas, who said it was not possible for the New Fortress executive to depose, according to Conty’s account. 

The narrative of high-ranking New Progressive Party leaders, such as former Gov. Ricardo Rosselló and his successor, Wanda Vázquez, praised the signing of New Fortress. After Hurricane Maria, which in 2017 destroyed the electrical grid and caused one of the longest blackouts in history, officials described the contract with the company as one of the most important for Puerto Rico.

It was “a new reality” to bring “substantial savings” and generate cleaner energy, Rosselló said. Meanwhile, José Ortiz, former executive director of the Puerto Rico Electric Power Authority (PREPA) praised the project in 2019 as “the first step, I would say almost a leap, for the transformation of Puerto Rico’s electrical system.”  

However, more than three years later, that promise has not yet been fulfilled—quite the contrary. New Fortress faced problems with the Federal Energy Regulatory Commission (FERC) since it did not follow the agency’s permitting process. PREPA suspects that the company stopped supplying gas for six months to sell it in other markets for better profits.

‘Hyped-up’ surprise announcement

Looking toward the walls of the El Morro castle, sitting in front of her home on the west coast of the bay in Cataño, Lissie Avilés began to see a parade of gas tankers that she had never seen, along with cruise ships and vessels. Regardless of her being a San Juan Bay area resident, no one had warned her community about the gas-related activity that was taking place at the southern end of the body of water, despite the possible risks to residents and surrounding businesses. Residential, commercial, and industrial facilities located at “considerable distances” could be affected by the explosion, fire, and thermal radiation in the event of an accident, and especially affect the Sabana de Guaynabo neighborhood, said Jorge Colón, professor of the Department of Chemistry at the University of Puerto Rico in Río Piedras, during a public hearing for House Resolution 170.

Community members learned in March 2019, after a press conference in which former Gov. Ricardo Rosselló announced “with great fanfare,” as Avilés put it, that the stateside company New Fortress would install a natural gas processing and distribution center facing PREPA’s San Juan Power Plant.

“We began to raise red flags over New Fortress’s permits, how they did what they did,” said the Cataño neighbor. The group of community and religious organizations in which Avilés participates alerted the FERC that New Fortress had not applied for permits to establish its gas terminal in San Juan, which prompted that agency to intervene and determine that it has jurisdiction over the facilities already built.

The United States Court of Appeals for the Circuit of the District of Columbia, in Washington DC, decided in favor of the FERC last June. Now, the gas importer must submit itself to the regulatory agency’s scrutiny, which requires a Declaration of Environmental Impact and explanations about the safety of New Fortress operations in Puerto Rico, said Pedro Saadé, one of the environmental lawyers who, along with Ruth Santiago, has supported the neighbors in their legal claims.

“For the communities, this is going to mean that they will now have some type of participation in this process,” Saadé said.

PREPA Executive Director Josué Colón told the CPI in an interview that he was unhappy with the company. “Obviously, what’s going on is very unfortunate.”

Colón, a fierce defender of natural gas as a bridge for transitioning to a system using renewable sources, inherited the troubled New Fortress project from his predecessor, Ortiz. “We believe that New Fortress, like any entity, must comply with all state and federal regulations. Those are the grounds for that terminal to be there. And that was what the Puerto Rico Electric Power Authority was told back then, when this project began,” said Colón.

Josué Colón, executive director of the Puerto Rico Electric Power Authority.
Photo by Ana María Abruña Reyes | Centro de Periodismo Investigativo

PREPA’s executive director insisted he is clear about the steps to follow considering the situation that New Fortress is facing with the FERC: “If the process  [with the FERC] concludes that this terminal cannot operate as was represented to the Puerto Rico Electric Power Authority, we will initiate the process to rescind the contract through our legal division, because we cannot have a contract with any entity that isn’t legally authorized to operate here. That’s the direct consequence. No choice.”

Now New Fortress must answer the FERC’s critical questions for surrounding communities, businesses, and industrial activities: What if an accident happens? How far will the spread of fire and gas reach? What neighborhoods can be affected? New Fortress claimed confidentiality on these issues before the FERC and the federal entity agreed not to disclose the information, so that these answers are unknown, even to the communities that could be affected.

“We are short of information to hold on to…Everything is done behind closed doors,” claimed Hernaliz Vázquez Torres, one of the leaders of the Sierra Club who went to the legislature to demonstrate and sing “unhappy birthday”. What little is known is that the FERC asked New Fortress to provide the documents used for its risk assessment, because it believes that the model used underestimates the consequences. So, if there’s an accident, the effects may be bigger than what the company says.

Puerto Rico Permits Management Office (OGPe, in Spanish) approved the construction without a site consultation, without public hearings and an Environmental Impact Statement, Saadé explained. The CPI asked OGPe Deputy Secretary María Reina Cintrón why the agency approved the terminal without the required process and if, in the wake of the Court of Appeals for the Circuit of the District of Columbia’s decision, it will review the New Fortress permit. Cintrón answered in writing that the site consultation and the public hearings were unnecessary because the company’s operations are in a heavy industrial district that allows it.

“All the participating agencies with jurisdiction in the assessment process of the environmental impacts” believed that the possible impacts could be evaluated and discussed through an Environmental Assessment, complying with all legal and regulatory requirements, instead of an Environmental Impact Statement, she said. The OGPe will not take additional action, she added, because it follows the determinations of the San Juan Superior Court, which in 2020 concluded that a legal case against the process for the construction of the terminal was unjustified.

As a result of the risk posed by the gas operation, the Coast Guard established a security perimeter in 2020 in San Juan Bay, from its mouth to its south end. When any ship enters carrying natural gas, there cannot be another within half a mile around it, which temporarily restricts navigation and the movement of other fuels through the area.

These problems had been foreseen and PREPA knew it. The public corporation commissioned a study, published in March 2017, two years prior to New Fortress’ arrival, which concluded that the costs and operational risks of building liquefied gas facilities in San Juan were quite high.

New Fortress’ failed legal maneuver

The parent corporation of the local gas company is New Fortress Energy, registered in Delaware and listed on the stock exchange as NFE. The company told its investors that it had built the facility so that it would not meet the FERC’s definition of an LNG (liquefied natural gas) terminal. In doing so, it made a legal interpretation to avoid the regulatory agency’s jurisdiction when it planned its operation in Puerto Rico, according to the most recent 10-K annual report it filed with the US Securities and Exchange Commission.

This is how they run their operation: they bring fuel from abroad to Puerto Rico, cooled to minus 260 degrees Fahrenheit to liquify it and significantly reduce its volume, which allows it to be transported at a lower cost. Its facilities in San Juan receive the gas through hoses connected from the Ineos Independence and Ineos Insight LNG tankers, which function as storage units and are refilled through the Coral Encanto and Coral Energy vessels.

It unloads the fuel in trucks to distribute it to industrial clients and simultaneously sends it through a pipeline to PREPA’s San Juan Power Plant, which is located next to the dock, according to documents submitted to the FERC.

The FERC contradicted New Fortress by pointing out that its facilities are considered a typical natural gas terminal because they meet three criteria that characterize this type of infrastructure. First, the equipment is used exclusively to unload imported gas into a US state or territory; second, the activities are carried out next to the import site through a hose connected to a tanker; third, the facilities are connected to an adjacent generating power plant (by a 10-inch-diameter, 75-foot-long pipe). These are part of the arguments with which the FERC proved it was right in court.

The FERC decision “is a failure of New Fortress to evade jurisdiction and proceedings before the FERC,” Saadé said. The consequences of the case have relevance for the entire US and territories, as it confirms the breadth of FERC’s jurisdiction and defines what can be considered a gas pipeline.

The court decision coincided with high prices of imported fuels, such as diesel, causing a significant jump in how much consumers pay for their electricity bills.

Before the decision, PREPA tried to defend the project before the FERC through its legal representatives, law firm King & Spalding. The public corporation insisted that the facilities had allowed it to “significantly” reduce dependence on diesel, a polluting fossil fuel. Among the benefits was achieving the electrical grid’s reliability and reducing sulfur dioxide emissions, for which the San Juan region is an environmental nonattainment area. That was the public corporation’s stance under Colón’s leadership, when New Fortress began failing in its responsibility to deliver the gas and put the energy generation at the San Juan Power Plant at risk.

The attorney who represented PREPA before the FERC is James F. Bowe, who accepted in a hearing before the Puerto Rico Energy Bureau that law firm King & Spalding has among its clients companies that New Fortress’ parent company owns. An associate of that firm, Steve Kupka, hinted at the bonanza ahead in a blog post: “There are clearly going to be many opportunities for King & Spalding clients to participate in the rebuilding of the Puerto Rico power grid, LNG projects and other renewable energy needs for PREPA.”  

Kupka has been identified as one of former Gov. Ricardo Rosselló’s campaign collaborators and was photographed with him in La Fortaleza in 2018, and tagging Rosselló’s lobbyist and former campaign manager, Elías Sánchez Sifonte, who no longer held public office.

Attorney Brittain Rogers left King & Spalding in 2013 to work for the Fortress Investment Group. He registered New Fortress with the Puerto Rico State Department under the name NEFEnergía LLC.

New Fortress operation ‘at risk’

Before and after the adverse decision in court, New Fortress has acknowledged in reports to its investors that the future of its operations in San Juan Bay is at risk, given the possibility that they may not be able to meet the FERC’s requirements. Failure to comply can result in the suspension of operations, the imposition of fines and remedial measures, the cancellation of permits, as well as potential administrative, civil, and criminal penalties, which can significantly increase expenses, New Fortress stated.

“But in the meantime, while this process takes place, our position is that Puerto Rico’s citizens should not be harmed. Because let’s say it’s decided that the terminal must close or cease operations, so we have to go back to using diesel,” PREPA’s executive director told the CPI. During the interview, he recalled that this fuel costs twice as much as natural gas, which would further strangle PREPA’s clients, who, in addition to seeing bill hikes, face inflation. “I like to use words that everyone understands. What’s going to happen is going to be violent.”

New Fortress crisis meant $27M expense for PREPA

The Ineos Independence showed its stern at the mouth of the San Juan Bay, sailed to the southern end of the body of water, and anchored in front of PREPA’s power plant. The public corporation expected New Fortress to resume gas delivery on March 25, 2022. Five months had already passed without it supplying the promised fuel. From that day on, the gas would only arrive intermittently, and PREPA had to wait until April 25 for the delivery to be normalized.

The problem in Puerto Rico was already happening before the Russian invasion of Ukraine, which began February 24, 2022, caused a dislocation in the global gas supply chain. New Fortress had announced that it would interrupt service in October 2021 without the six month-notice that its contract with PREPA requires. It said it would make emergency repairs to its terminal, which prevented it from operating. The non-compliance put PREPA in a bind because it would now have to buy more diesel to produce energy at the San Juan Power Plant.

“We told them no, that they couldn’t do that, that they had to comply with the contract,” Colón said. New Fortress insisted on the shutdown of its terminal. “We told them, ‘If you do it, we’re going to charge you.’” The charge refers to a contractual clause that forces the company to reimburse the difference in the cost of diesel, considering what PREPA would have paid if the company had supplied the gas. So far, the breach has represented $26.8 million between October 2021 and April 2022, which PREPA is claiming from New Fortress.

The drama unfolding in the San Juan Bay illustrates the bullying by certain companies that PREPA contracts, shows PREPA’s need to establish more effective agreements, and demonstrates the lack of a Puerto Rico Energy Bureau that regulates private actors in the electricity system quickly and forcibly. The non-compliance issues with New Fortress arose at a time when the federal government planned to dredge San Juan Bay, at an approximate cost of $488 million, precisely to allow access to large ships carrying natural gas.

New Fortress canceled the service to PREPA just when the gas price skyrocketed in the international market, where the company could get more money than what the public corporation would pay for it. Subsequently, the Spanish multinational Naturgy, which has a contract to deliver gas to PREPA’s Costa Sur power plant, also interrupted supply due to alleged insufficiencies with its supplier in Trinidad and Tobago.

PREPA’s executive director began to suspect that both companies were halting sales to Puerto Rico to take advantage of the increase in international prices. “And what did we do when we saw all these scenarios? We wrote to both companies and told them, ‘Hey, are you selling our fuel elsewhere?’ In other words, we went face-to-face here, so to speak, with their top executives,” said Colón. “And they reiterated that they’re not (selling our fuel elsewhere).”

On May 25, Crowley Maritime, a US company that offers transportation services between the US and Puerto Rico, opened its natural gas receiving and storage facilities in Peñuelas, in the southern coast, to distribute it to industrial customers. Even the Governor, Pedro Pierluisi, and Resident Commissioner Jenniffer González participated in the inauguration. That’s when it was revealed that Naturgy is the gas supplier for this project, the same company that said it did not have gas to supply to PREPA.

“Three days later, I sat down with the Naturgy officials here and told them, ‘That’s unacceptable to me… You can’t sell an ounce to anyone out of that terminal until you supply me with my one hundred percent,’” Colón said. “‘How’s it possible that you have  gas for that, and you don’t have gas for me?”’ The official said the executives of Naturgy in Spain told him they disagreed with what he was saying. “‘But I see it that way. And you know that if you do that, I’m going to sue you,”’ Colón added. A Crowley spokeswoman assured the CPI that this new business in Peñuelas continues to operate and that Naturgy continues to be its supplier.

New Fortress’ annual report details what it did last year with part of the commitments in Puerto Rico, Jamaica and Nicaragua. “Due to this significant increase in market pricing of LNG, we have optimized our supply portfolio to sell a portion of these loads in the market, and these sales have positively impacted our results for the third and fourth quarters of 2021.” Colón insisted that the company argued that this does not mean that it is using gas from Puerto Rico for international markets.

The CPI requested an interview with the founder and CEO of New Fortress at the beginning of the yearn was denied. After requesting a written reaction, the company alleged that it could not deliver the gas because the Coast Guard prevented it from operating while it was carrying out maintenance work on its terminal, which began in late 2021 and ended in February 2022. However, although it has allegedly already completed the repairs, New Fortress did not supply gas to PREPA until April of this year, after six months of non-compliance, as discussed at PREPA’s Governing Board meeting.

New Fortress did not answer the specific security risks for operations in San Juan or why it asked the FERC to keep the information confidential.

A chain of ongoing problems

After the 2019 press conference, in which the Government broke ground on the project in San Juan, the New Fortress terminal was supposed to be ready that same year, but the delays began. In 2020, New Fortress alleged that earthquakes, which happened in the island’s southern region, caused additional delays, although it began to supply the San Juan Power Plant that year. Construction was practically done by August 2021.

Due to the delay, from 2019 to 2021 PREPA paid a total of $8.50 per MMBtu (cost per million British thermal units) of natural gas instead of the $7.50 it had to pay when the construction was finished. Even with this discount, the deal with New Fortress to energize the San Juan Power Plant is expensive for PREPA, when compared to what it pays Naturgy to energize Costa Sur, at $5.75 per MMBtu, according to a document from the public corporation’s Governing Board.

New Fortress benefits from a tax decree granted by the government, which allows it to pay a rate of 4% of its profits until 2035, according to the annual report to investors published in March. The benefits from that decree reached almost $20 billion between 2020 and 2021.

PREPA told New Fortress in November 2021 that it was “shocked and baffled” that it had “crossed the line.” It had not relocated some lines that PREPA needed to receive Bunker C and diesel, which the company should have done by September 2021. The public corporation could not accept either of the two imported fuels on which it depends so much to energize the San Juan Power Plant.

The breach prompted PREPA to look for an alternative way to receive the diesel. At that time, it agreed with Texas-based Novum to be its new diesel supplier since it offered it 20% cheaper than the previous contractor, Puma. Colón thought he had found a solution at a five-minute walk from the San Juan Power Plant, in the nest of white, cream, brick and silver pipes of the Cataño Oil Dock, a dock used by five tenants, and through which a line passes connecting with the San Juan Power Plant.

On November 22, 2021, the new diesel supplier, Novum, arrived with 120,000 barrels to be injected into the pipeline. However, Puma refused to comply with the protocol of closing its valves to create the necessary pressure for the fuel to reach the power plant. PUMA’s action put power generation and the stability of the electrical system at risk, because PREPA had to pull Units 5 and 6 of San Juan out of service, Colón said at a hearing at the San Juan Superior Court in December 2021. PUMA claimed that the public corporation wanted to take away its pipes and valves to give them to its competitor (Novum), but Colón said PUMA really wanted more than a slice of the cake.

“Every time we put in a request for an offer aimed at correcting what was happening, PUMA’s response has always been to supply fuel to all PREPA’s facilities,” instead of the original proposal to distribute only to the San Juan Power Plant, Colón explained.

The court finally ordered PUMA to allow the use of the valves because of the harm that Puerto Rico could suffer by going back to selective blackouts due to the decrease in generation.

The actions of New Fortress, Naturgy and Puma reflect the problems PREPA faces by continuing to be tied to imported fossil fuels.

That strategy clashes with the uncertainty that Puerto Rico may or may not receive gas in the future. After the invasion of Ukraine, the European Union agreed with Washington to abandon Russian gas and acquire a third of its demand in the US market, which limited supplies.

On March 25 of this year, at a meeting of PREPA’s Governing Board, Charles E. Bayless, a retired academic who was a power company executive and who sits on that Board, recalled that the projections point to problems to get gas from the international market for at least five more years: “Up until then, there’s going to be a real shortage of capacity and unless we’re high up on the priority list, we still have a good chance of also not being able to get natural gas or the price is going to be very high.” 

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