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Jones Act burdens US coastal shipping and impacts energy markets

Sandy Fielden, RBN Energy LLC

Most Americans only come into contact with the Jones Act when they wonder why their cruise ship stopped off at a foreign port. This maritime legislation from a bygone era (1920) is nearly a century old. The Jones Act increases costs for US coastal shipping. That constraint has restricted the availability of waterborne options to alleviate recent US energy supply bottlenecks. Today we look at the impact of the legislation in energy markets.

The US American Phoenix, a 339 MBbl oil tanker built in Mobile, Alabama, was launched earlier this year on June 21, 2012. The American Phoenix is the only US-built tanker to be launched so far in 2012. On her maiden voyage in August, the American Phoenix delivered a cargo of gasoline from Lake Charles, Louisiana, to Port Canaveral, Florida, two US ports.

The American Phoenix is a Jones Act vessel. The Jones Act is actually the Merchant Marine Act of 1920, although it came to be known as the Jones Act after its sponsor Senator Wesley Jones. The Merchant Marine Act is a federal statute that regulates maritime commerce in US waters and between US ports. Section 27, better known as the Jones Act, deals with cabotage (coastal shipping) and requires that all goods transported by water between US ports have to be carried in US-flag ships, constructed in the United States, owned by US citizens, and crewed by US citizens and US permanent residents. That’s why your cruise ship stops off at a foreign port – to keep staff costs down by avoiding the Jones Act. There’s a reason that buffet is bottomless.

Also regulated by the Jones Act is the repair or refurbishment of ships at overseas shipyards. The provision limits foreign repair work on the hull and superstructure of a US-flagged vessel. That means once a US-flagged vessel is built, you can’t go and get cheap repairs at some body shop down in the islands. Although interested parties get very animated either way defending or criticizing the Jones Act, its original intention was admirable – to ensure the existence of a strong US merchant marine as part of national security.

Several other regulations since the Jones Act also impact the operation of US-flag vessels. The Oil Pollution Act of 1990 requires double hulling of US coastal tank vessel fleets by 2015. The Maritime Security Act of 1996 created the Maritime Security Program (MSP). The MSP provides a fixed retainer payment to US-flag vessel owners in exchange for providing the US Department of Defense with assured access to their vessels and related transportation services and infrastructure during times of war, national emergency, or when otherwise deemed necessary by the Secretary of Defense. In October of 2011 the MSP paid participating owners about $8,500 /day. That subsidy can be viewed as compensation for Jones Act restrictions.

What is the impact on US energy commodity movements? A 2009 US Department of Transportation (DOT) maritime tanker vessel survey provided a summary of coastal tanker routes used by Jones Act vessels including crude carriers, product tankers and tank barges. The 12 Jones Act crude carriers primarily move crude from Alaska to West Coast ports. Thirty nine product tankers serve the coastal and inter-coastal petroleum products and chemicals trades.

Energy Information Administration (EIA) data show most refined product movements taking place between the Gulf Coast and the Northeast (more about that route later) but inter-coastal movements are also important on the West Coast.

Approximately 270 tank barges serve coastal and short-haul inter-coastal petroleum products and chemicals trades. Product tankers and tank barges also lighter imported crude oil at US Atlantic and Gulf Coast ports. [Lightering means offloading tankers too large to enter ports onto smaller vessels]. Articulated tug barges (ATBs) now carry larger cargoes (the equivalent of about 75 MBbl of refined product) over longer distances on the ocean. In addition a fleet of barges moves crude oil and refined products along the inland US waterway system but these do not travel coastal routes.

The Jones Act imposes cost and operational constraints on companies wishing to move crude oil and refined products between US ports. A DOT Department of Maritime Administration (MARAD) study in 2011 estimated the average cost of operating a US flag vessel to be 2.7 times higher than foreign-flag equivalents. [Operating cost is the cost of crew, stores, maintenance, insurance and overhead – not the voyage costs (fuel and port charges) or the capital costs.] That is because US law – especially employment law, regulates Jones Act vessels increasing manning levels and crew cost.

These additional operating costs do make a difference. For example, a tanker voyage from the US Gulf Coast to New York (approximately 2,000 miles round trip) on a Jones Act tanker costs roughly the same per barrel as for a similar-sized foreign vessel (300 MBbl) travelling from Northwest Europe to New York (approximately 3,400 miles round trip). If the movement from the Gulf Coast to New York were on a smaller Jones Act barge, the cost per barrel would be double that of a Jones Act tanker.

Jones Act vessels such as the American Phoenix are considerably more expensive to build than similar foreign-made vessels. Most ships nowadays are built in South Korea or China where labor costs are lower and economies of scale are available. There is a limited market for US-flag vessels and a lack of competition to build them. The high cost reduces the number of available ships and barges because companies put off replacing old vessels as long as possible. Reducing the fleet further increases charter costs when demand for ships increases.

Although the majority of existing US crude (80%) and refined products (63%) movements are by pipeline, the US coastal and inland waterways should provide flexibility when new pipelines are being constructed and when existing pipelines have limited capacity. Current dramatic changes in US crude oil supply and refinery economics have highlighted the fact that waterborne alternatives to pipelines are restricted by high costs and fleet limitations that result from the Jones Act. These limitations have shown up so far in two situations and they may become more of an issue in the future.

The first was when East Coast refineries closed down because of poor economics resulting from relatively high international crude prices. The EIA became concerned and conducted studies of alternative refined product supplies when the 300 MB/d Philadelphia refinery was threatened with closure (that closure was eventually averted). The EIA concluded that if the refinery closed 180 MB/d of refined products would need to be shipped into the Northeast to meet demand.

The most obvious source of that supply was Gulf Coast refineries, yet it seemed likely that the products would need to be imported because there were insufficient Jones Act vessels available to move product from the Gulf Coast. Historically, requests for waivers of certain provisions of the Jones Act have been granted by the US Maritime Administration in cases of national emergencies or in the case of strategic interest but the waivers have only been used in “emergency” situations such as the aftermath of Hurricane Katrina in 2005.

The second recent supply dilemma again involves East Coast refineries – this time their crude supplies. We understand that the new American Phoenix has already delivered a cargo of Eagle Ford crude or crude condensate in early September from Corpus Christi, Texas, to Bayway in New Jersey (Phillips 66 refinery). There may be many more such movements. However, the number of Jones Act tankers available to make this journey is limited.

Most of the Jones Act crude tankers in service are on the West Coast and the total fleet is 12 vessels. So while it could make economic sense to ship US domestic Eagle Ford crude to East Coast refineries and reduce their reliance on imports, the Jones Act is restricting this capability. [Note: once the Panama Canal is expanded in 2015, movements of Gulf Coast crude to the West Coast will become more economic].

As the US becomes more self-sufficient in energy, the flexibility to make coastal movements of crude oil and refined products could go a long way to improve transport logistics. Not just crude and refined products. If some of the 19 currently planned LNG export terminals are built, then coastal LNG movements could be an economic alternative to pipelines, perhaps as a floating storage alternative for the heating season. Similarly liquid petroleum gas (LPG) coastal movements could alleviate current delays waiting for pipeline infrastructure to get natural gas liquids to market. These movements between US ports are all currently restricted by Jones Act requirements.

It would be great to think that the American Phoenix is the first in a line of new US-flag vessels coming on stream in time to help alleviate some of the logistics issues currently facing US energy supplies. However, the economics of waterborne inter coastal movements are so handicapped by the Jones Act that it is unlikely we will see a new fleet of US-built tankers anytime soon. Political support for the Jones Act is still strong because of the security and employment that it affords.

As a result it seems more likely that US East and Gulf Coast waterborne movements may end up being orchestrated from island-based offshore terminals in the Caribbean using foreign vessels rather than US-based port-to-port movements.

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