While the U.S. commercial shipbuilding industry outperformed the U.S. economy between 1992 and 2001, this period witnessed the construction of barely a dozen large ocean going vessels for our U.S. domestic trades with an aggregate cost of not much more than $500 million. In contrast, U. S. national transportation needs for the current decade will require the construction of four to five dozen such commercial vessels which, taken together with the building of smaller vessels to meet our other domestic needs, will involve shipbuilding contracts in excess of $6 to $7 billion. The majority of this work is federally mandated by the Oil Pollution Act of 1990, or involves the replacement of vessels in our U.S. non-contiguous trades that have reached the end of their useful lives. The balance is driven by U.S. population growth and environmental concerns that are not likely to abate.
These U.S. national transportation needs are clear and immediate. However, the means for financing the vessels to meet these needs remains uncertain. During the last such period of major U.S. shipbuilding activity two important federal government assistance programs administered by the U.S. Maritime Administration (MarAd) under Title VI and Title XI of the Merchant Marine Act of 1970 (the "1970 Act") were employed to meet vessel financing needs. To date, in this decade, there has been only limited recourse to these two potentially important financing programs. And, the Bush Administration Office of Management and Budget ("OMB") has apparently targeted both of these programs for termination. What conclusions can we draw concerning U.S. shipbuilding to meet our U.S. national transportation needs for the current decade?
The U.S. Shipbuilding Scene: Vessel Needs
The Jones Act and the Passenger Vessel Services Act reserve the carriage of cargo and passengers between U.S. ports to vessels built in the United States, operated under U.S. registry and owned and operated by U.S. citizens. These Acts protect U.S. shipbuilders from competition by foreign shipyards and provide a relatively stable maritime investment opportunity. While the world shipbuilding market is such that U.S. shipbuilding opportunities are limited to the U.S. domestic trades, there are well documented, existing and near-term transportation needs which will provide significant building opportunities for U.S. commercial shipbuilders. The most important opportunities are those which result from the Oil Pollution Act of 1990 and the needs for double hulled vessels in our U.S. coastwise and Gulf of Mexico energy related services. These and other petroleum related requirements should provide varieties of employment which will bridge the entire spectrum of shipyard size. Supplementing this work, and of equal importance for our larger shipyards, are the ocean-going container and RoRo tonnage fleet replacements needed for our non-contiguous services, and perhaps for the initiation of coastwise feeder operations. Smaller yards should find ample supplemental employment in producing a wide variety of vessels, with perhaps the single most important subject matter being the vessels for expanding passenger and passenger/vehicle ferry services.
OPA ‘90 —
The Oil Pollution Act of 1990
Crude Carriers & Product Tankers and Barges
OPA '90 requires the complete replacement of single hulled tank vessels to be used in the U.S. petroleum crude and product carrier and related trades in five-year intervals at the end of 2005, 2010 and 2015. The current U.S. flag tanker fleet is comprised of 103 vessels. Sixty-seven of these are product tankers and 36 are crude carriers. Ten of these vessels are double hulled and of recent construction. The remaining 93 vessels will be phased out at the above-mentioned five-year intervals. The replacement of Alaska crude carrier tonnage by the major energy companies involved in North Slope production is underway. The replacement of product carriers, the greater number of which are owned by independent operators, has hardly begun.
Alaska Crude Carriers
General Dynamics, National Steel & Ship Building Company (NASSCO) has orders for four double hulled 185,000 dwt tankers for British Petroleum's Alaska service with deliveries scheduled for 2003 through 2006. The purchaser holds options for two additional vessels. Northop Grumman Ship Systems - Avondale, has a five vessel series of 125,000 dwt double hulled crude oil tankers underway for use by Phillips Petroleum with deliveries scheduled to commence during the last quarter of this year and run through 2006. Taken together these deliveries should fill a substantial portion of the OPA '90 Alaska crude transportation needs in the absence of the opening and development of additional Alaskan acreage for petroleum production.
Oil Product Carriers
Apart from an initial four vessel group of OPA '90 product carrier rebuilds by AHL Shipping Company
at Avondale, and a five vessel series completed in 1999 by Newport News Shipbuilding & Dry Dock Company, very little of this construction has been placed under contract. The Jones Act product carrier fleet is currently fully employed. OPA '90 requirements will remove four vessels from service in 2003, two vessels in 2004, two vessels in 2006, one vessel in 2007 and three vessels in 2008. There are no vessels under contract for current construction. The Kvaerner Philadelphia Shipyard
, Inc. has letters of intent for two projects representing a total of six product carriers. However, each of these projects, one for Keystone Shipping Company and one for AHL, is apparently conditioned upon financing arrangements which include MarAd Title XI awards. And, MarAd is said to be unwilling to proceed with either project in the absence of energy company charters that would assure the vessels' long term employment. So it appears that these transactions are on hold.
There have been warnings from the Shipbuilders Council of America and others that current tanker construction is not proceeding at a pace which will be sufficient to meet OPA '90 replacement requirements, and of a coming product tanker construction crunch. There has also been speculation that energy company potential users are withholding charters which might support this domestic product tanker construction, with the expectation that these companies will be able to obtain waivers which will allow them to charter foreign built product tankers to meet their carriage needs in the coastwise trade. Some product carrier vessel needs could be met by double hulled barges. There is substantial construction of this sort. The vessel tonnage requirements might also be lessened to the extent that U.S. product needs are met by imports of foreign refined products on non-U.S. flag vessels. However, by almost any calculation one arrives at a figure of no fewer than 12 to 14 product tanker newbuildings being contracted for completion in the current decade.
Oil Supply and Infrastructure Support Vessels
Oil and gas deep water drilling developments in the Gulf of Mexico appear likely to require some number of floating petroleum storage and operating vessel platforms (FPSOs). While these FPSOs can be of foreign construction, the shuttle vessels necessary for the transport of the crude petroleum to shore-side will require U.S. construction. There is talk of a need for 500,000 bbl capacity small tankers and/or articulated tug barge units for this service, perhaps two to four such shuttle vessels for each of perhaps four or five FPSOs. This could produce orders for perhaps as many as 16 to 20 vessels.
It may be that these vessels can be financed based upon energy company charters and without MarAd Title XI guarantees. But if energy company charters cannot be obtained by Keystone and AHL for their current product carrier transactions at Kvaerner, it is difficult to see why energy company charters should be forthcoming in this FPSOs setting. Perhaps these crude carrier shuttle vessels will be financed by the energy companies themselves in the same fashion as the Alaska tankers. The timing for the environmental approvals and shipyard work necessary to put the FPSOs themselves in place seems somewhat uncertain.
Any additional petroleum or gas start-up production in the Gulf of Mexico or Alaska will require support vessels or barges for the construction and start-up in addition to the tanker needs for the follow-on crude transport.
Oil Product Carriers for U.S. Navy Needs
There is a pressing need for fleet fuel supply vessels for the U.S. Navy and its Military Sealift Command. The existing fleets of U.S. Navy fuel supply vessels are nearing the ends of their useful lives. There is no apparent current plan for vessel replacement. Beyond this, there is no capacity to meet any expanded Navy needs which might result from any of a number of causes. The existing fuel supply fleet was created under "build and charter" programs which involved private sector operators, and private sector financing using the MarAd Title XI program.
A program to address these needs might have been a matter of priority for the new Secretary of the Navy and the new Maritime Administrator. However, given that the Navy is now reported to have even cut back on the funding of the routine maintenance of the Ready Reserve Force, which is managed for the Navy by the Maritime Administration (with the result that several ROS-5 ships, which are fully crewed and supposed to be ready to go on 5 days' notice, have had to be reclassified as ROS-10 and their crews sent home) auxiliary support vessels do not appear to be a likely priority. It has also been reported that when the Military Sealift Command recently needed a tanker in the Indian Ocean it was forced to resort to chartering one with an Iraqi crew. And, the question has been asked "Why was the USS COLE refueling at an Aden dockside location instead of at sea?"
The Military Sealift Command has stated that in a war emergency they would need 46 such vessels for fuel supply. Today, there are only a total of 48 product carriers in the Jones Act fleet. This number will drop to 36 in 2008. Perhaps 16 to 20 vessels are needed.
Container & RoRo
Tonnage - Non-Contiguous Liner Trades
The container and RoRo fleets of the established carriers serving Alaska, Hawaii and Puerto Rico are aged. While none of these trades is experiencing rapid growth, the involved vessels are expensive to operate and increasingly expensive to maintain. Replacement plans are well underway by one of the major carriers for Alaska. Totem Ocean Trailer Express (TOTE) will be replacing three Sun Shipbuilding & Dry Dock Company built RoRo vessels with
two newly commissioned 600 trailer vessels now being built at NASSCO.
Some years ago, the Matson Navigation Company, the predominant carrier in the Hawaiian trade, adopted a maintenance program designed to prolong the service lives of its vessels and so to postpone new construction. As the Hawaiian economy appeared to be returning to health in 2000, fleet replacements became a subject matter of discussion, only to be postponed by the damage to the Hawaiian tourism economy following September 11. Now it appears that Matson is prepared to move forward with Kvaerner with a four vessel contract (two firm and two under option) for the Kvaerner 35,000 dwt container vessel design. If so, this is certainly a major step forward for everyone involved in this transaction and for U.S. shipbuilding more generally.
The fleet serving Puerto Rico is truly antique. Two of the five Lancer class container vessels used by Navieras de Puerto Rico were commissioned 1968, the others in 1969, 1970 and 1971. The two SUN-built RoRos used by Sea Star Line first entered service in 1974. The numbers for the required new vessel tonnage have appeared substantial. But, overtonnaging in this trade (less than break even rates and the resulting financial problems) have until now caused operators to postpone replacements. The recently announced Sea Star purchase of Navieras should alleviate some of the overtonnaging. However, once TOTE newbuildings for Alaska and MATSON newbuilding for Hawaii are complete, TOTE will have three SUN-built RoRo vessels, and Matson will have two SUN-built RoRo combination vessels, surplus to their needs. These could be substituted for the Lancers and might be a satisfactory fit with the two SUN-built ro/ros which Sea Star currently operates.
Perhaps CSX Lines LLC rumored sale situation offers the largest measure of vessel new buildings open
to speculation. What if an ambitious, well financed purchaser were to come forward? This would certainly signal CSX fleet replacements in all three of the non-contiguous trades, Alaska, Hawaii and Puerto Rico, and probably force Sea Star to newbuildings for Puerto Rico rather than the substitution of existing SUN-built RoRos.
Coastwise Liner Trades
Recent highway gridlock on major sections of the U. S. interstate highway system, coupled with projections for the growth of U.S. container commerce over the next decade and beyond has focused attention on the need to augment existing and projected highway and rail facilities with a waterborne alternative. The problem has been a subject for increased study and discussion in the last three to four years. The Interstate 95 and Interstate 5, East Coast and West Coast, corridors present the most serious current and projected gridlock problems. On the East Coast, gridlock caused on-shore delays in container deliveries sometimes now exceed the number of days involved in the container's Atlantic crossing. The most immediate problem blocking this development is said to be a lack of adequate shore-side infrastructure. It seems likely that most of these movements will be by RoRo feeder barges or RoRo vessels, with distance dictating the choice between barge and vessel. Either design should be able to at least partially avoid expensive container handling facilities and make use of existing infrastructure and roadstead sites. There is a clearly existing transportation need. With the proper choice of equipment operators could accelerate this development. Perhaps the TOTE and Matson SUN-built RoRos will find a home here? It is difficult to assign a newbuildings figure for these trades in the presence of so many variables.
This article is reprinted, in part, with permission of MarineNews. Mr. Cook discusses the vibrant opportunities in the Passenger and RoRo/Passenger Ferry segments in the June 10, 2002 edition of MarineNews. For a copy, call 212-477-6700 or e-mail: [email protected]
There are current domestic trades shipbuilding opportunities for fleet replacement and expanded needs for our OPA '90 and other coastwise and Gulf of Mexico energy related services; fleet replacements for the non-contiguous services; and vessels for expanding ferry needs in passenger and passenger/vehicle services in coastwise, Great Lakes and inland services. These opportunities are likely to continue and expand as they become more clearly defined during the course of the decade. What does this mean for U.S. shipbuilding? In reviewing the domestic transportation scene we can probably agree upon the areas of need, and upon the vessel design and shipyard construction solutions. The problem that remains is that of attracting the equity capital and long term debt financing necessary to fund these projects on a basis which is sufficiently economical to allow project success. In the end, U.S. shipbuilding opportunities during the current decade will be constrained, not by transportation needs, or vessel design or shipyard capacity, but by the lack of reasonably priced capital which is likely to be dedicated to meeting national waterborne transportation needs
About the Author
H. Clayton Cook, Jr., B S Princeton University, LL B The University of Virginia. Mr. Cook served as General Counsel of the U. S. Maritime Administration from 1970 to 1973, where he was responsible for the implementation of the Merchant Marine Act of 1970, and the drafting of the Federal Ship Financing Act of 1972. Upon completing his government service, Mr. Cook joined Cadwalader, Wickersham & Taft as the partner responsible for the development of that firm's Washington Maritime practice. Mr. Cook continues his law practice today as Counsel to Bastianelli, Brown & Kelley, Chartered, in that firm's Washington, D.C. offices. He is also a partner in Management & Transportation Associates, Inc., a management consulting firm based in Essex, Connecticut. Mr. Cook's email address is [email protected]