Energy Musings - July 28, 2025

The order for a new LNG carrier placed at the Hanwha Philly Shipyard is the first concrete development in the effort to revive the U.S. maritime sector. We cover the order and unresolved issues.

U.S. Shipbuilding and LNG

Last week, Hanwha Philly Shipyard announced a monumental ship order. It will be constructing an LNG carrier for a sister company, Hanwha Shipping, a U.S. subsidiary of Korean Shipbuilder Hanwha Ocean. The vessel is estimated to cost 348 billion Korean won (roughly $252 million) and is slated for delivery in the first half of 2028. This would mark the first U.S. LNG ship ordered in nearly 50 years. Hanwha Shipping has an option for a second LNG carrier.

A Hanwha-built LNG carrier equipped with advanced propulsion technology.

The last U.S.-built LNG carrier, the SS Louisiana, was delivered in 1980 by General Dynamics’ Quincy, Massachusetts, shipyard. The vessel was delivered to Lachmar, Inc., a partnership of several subsidiaries of Panhandle Eastern Corp., at an estimated cost of $131 million in 1980 dollars, or approximately $510 million in today’s dollars. Panhandle Eastern, an interstate natural gas pipeline company, operated an LNG receiving terminal in Lake Charles, Louisiana. The vessel underwent multiple changes in ownership over its 45-year history. It is currently the LNG Abuja, sailing for Bonny Gas Transport, a subsidiary of Nigeria LNG.

Beginning in the 1970s, domestic interstate natural gas supplies failed to meet demand, resulting in a rationing of gas use, particularly during winter months in the Midwest and Middle Atlantic regions. To augment supplies, the U.S. interstate natural gas industry planned to bring supplies from abroad in the form of liquefied natural gas. These supplies were contracted from Asian, North African, West African, and Caribbean sources. To handle the imported volumes, receiving terminals were built in Maryland, Georgia, and Louisiana. Additionally, sixteen LNG ships were constructed to transport the LNG, including the Louisiana.

The impetus behind the LNG carrier order was the requirement announced by the Office of the United States Trade Representative (USTR) that, effective April 2028, 1% of all U.S. LNG exports be shipped on “U.S. flagged and U.S. operated” LNG carriers. Beginning in April 2029, however, the requirement shifts to “U.S.-built vessels,” along with U.S.-flagged and U.S.-operated, which is the requirement to operate under the Jones Act. LNG exporters that do not comply could lose their export licenses, even though the percentages apply to the overall industry and to ships that exporters do not own or control.

This regulatory requirement could put the rapidly growing domestic LNG exporting industry at risk. Currently, the U.S. has liquefaction facilities that enable the shipment of approximately 94 million tons of LNG annually. The industry has another 100 million tons of new liquefaction capacity under construction. Additional future capacity plans are being developed and are entering the approval process.

According to AXSMarine, a shipping consultancy, there are 792 LNG carriers in operation worldwide. South Korea and Japan dominate the LNG trade with a combined 703 vessels. Hanwha Ocean has just delivered its 200^th LNG carrier. China, which aims to become a major LNG carrier, has 58 vessels. The worldwide LNG carrier fleet includes five ships built in the U.S. in the late 1970s, which are currently laid up and not in service.

Reviving the U.S. maritime industry is a goal of the Trump administration. LNG ships could be a significant contributor to the effort. However, numerous challenges must be overcome. LNG ships are technically sophisticated vessels, meaning they require higher skill levels within the shipyards and among the labor force to build, and they are challenging to operate. They are also steel-intensive, meaning that domestic shipbuilding costs will be high. Estimates suggest that a 100% U.S.-built LNG carrier could cost $1 billion, roughly four times the cost estimate for the newly ordered vessel.

The project’s structure involved Hanwha Philly Shipyard signing the primary shipbuilding contract with Hanwha Shipping, a U.S. subsidiary of Hanwha Ocean. The contract is part of a joint-build model with Hanwha Ocean, the only company in the world with shipbuilding operations in both Korea and the United States.

Under the joint-build model, a significant portion of the construction will be carried out at Hanwha Ocean’s Geoje shipyard in Korea. Hanwha Philly Shipyard will be responsible for U.S. regulatory compliance and safety certifications, laying the foundation for a collaborative production framework. The model plans for Hanwha Ocean to transfer its advanced shipbuilding technologies to Hanwha Philly Shipyard gradually. Workers from the U.S. shipyard will travel to Geoje for training. Additionally, Hanwha will invest in upgrading the capabilities of Hanwha Philly Shipyard to enable it to construct modern, sophisticated vessels such as LNG carriers. A question is whether the workers and the upgraded yard will be ready to build the LNG carrier option vessel?

Challenging questions include: Will this vessel qualify as U.S.-built, given that a significant portion of the construction will be conducted in Korea? The USTR, and or other U.S. shipping regulators, must make that decision as the regulation requires the vessel to be U.S.-built. Vessels built abroad can be U.S.-flagged.

The definition of U.S.-ownership would become the next major issue if the vessel is ruled to be U.S.-built. Meeting both definitions would enable the LNG carrier to operate in domestic trade under the Jones Act. That could certainly help New England, which relies on expensive, foreign LNG supplies during the winter, and add to the supply capacity for serving Puerto Rico. According to our understanding, a U.S. subsidiary of a foreign corporation does meet the legal standard for a “person” under government regulations.

This status issue pertains to one of the claims in the lawsuit seeking to halt the construction of Equinor’s Empire Wind offshore project. Equinor is a Norwegian company, but the holder of the offshore wind lease is a U.S. subsidiary. That is acceptable under the Outer Continental Shelf Lands Act, which governs the ownership of offshore leases for mineral and wind development. However, the lawsuit claim is that this arrangement is acceptable for U.S. subsidiaries of foreign industrial companies but not for a government-owned or controlled company. Equinor is 70% owned by the Norwegian government.

The joint-build model is a potential way for the U.S. to revitalize its maritime industry in a less costly and efficient manner. Resolving the definitional questions will be critical for determining whether the joint-build model is the solution.

The LNG market is global. Consumers can choose to buy their LNG from any number of countries. They will be looking for the cheapest supplies, and the transportation cost is a component of that decision. Operating a $250 million vessel is considerably cheaper than operating a $1 billion cost vessel. The extent of the technology transfer agreement and investment in an upgraded Hanwha Philly Shipyard will reduce the final cost of an entirely built LNG carrier in the U.S., but the full amount is unknown. One suspects there will be a meaningful cost reduction.

The details of the LNG carrier construction explain the magnitude of the vessel’s lower cost estimate. This arrangement may indicate the most effective route for revitalizing the U.S. maritime industry. While the plan is an interesting initial step in reviving the domestic shipbuilding industry, regulators will need to weigh in on the definition of U.S.-built under the USTR requirement. There is also the issue with the vessel’s ownership, as that is critical for complying with the Jones Act cabotage rules. Definitions will dictate the future of the maritime industry revival.