The Jones Act has been blamed for everything from higher prices of goods and oil to a shortage of rock salt supply in the Northeast during the past winter, but the 94-year-old U.S. federal statute governing the U.S. coastal shipping trades will not be going away anytime soon.
The solid status of this deeply entrenched U.S. federal maritime law is reflected in heavy investments by oil, logistics and shipping companies in this lucrative domestic shipping sector. Last December, Kinder Morgan spent nearly $1 billion in its acquisition of its first Jones Act tanker assets when it bought American Petroleum Tankers and State Class Tankers. The market outlook for U.S.- flagged oil tankers remains bright, and some companies are banking on that.
The Jones Act shipping market has enjoyed a revival in the past few years. Prior to the rapid growth in domestic oil production, U.S. shipping and shipbuilding industries have been in the doldrums. Several shipyards were forced to shut down due to a lack of new ship orders and demand.
So far, the Jones Act Medium-Range oil tanker fleet is pegged at about 44, with 13 new ships on the way in 2014-2016. Most U.S. oil companies do not own these ships, but many charter and operate these ships on long-term contracts.
According to U.S. shipping sources, BP operates two clean and four dirty Jones Act tankers, Chevron has four, ExxonMobil has five, Crowley Maritime seven, Koch one, Morgan Stanley one, Overseas Shipholding Group one, Phillips 66 seven, Petrobras one, Seabulk three, Shell two, Tesoro two and U.S. Shipping Corp. two.
For newbuildings, ExxonMobil will receive two new Jones Act tankers in 2014, Crowley four in 2015-2016, American Petroleum Tankers four in 2015-2016 and Seabulk three in 2016. Ship orders at U.S. shipyards on the Gulf Coast, California and Philadelphia are full for the next three years.
The insatiable demand for U.S.-flagged oil tankers has taken off in the past few years in tandem with the rapidly growing domestic oil production, and it is not showing any sign of slowing down despite an estimated fleet size increase of more than 25% over the next two years.
The strong demand for U.S.-flagged tankers or Jones Act ships has led to a sharp price spike in U.S. coastal freight rates and a very tight vessel supply. This in turn pushed the Southeast oil products markets to rely more on higher-priced imports from Europe than the U.S. Gulf Coast more than a year ago due mainly to difficulty in securing Jones Act ships to deliver products. The higher costs are passed on to consumers.
The high-cost domestic shipping law is essential because it helps to maintain a critical military strategy for the U.S., which relies on the use of U.S.-flagged ships and crews and the availability of a shipyard industrial base to support national defense needs, according to the American Maritime Partnership.
The Jones Act requires all goods transported between U.S. ports to be carried by U.S.-flagged and U.S.-built ships, and these ships must be owned and crewed by U.S. citizens and U.S. permanent citizens.
The domestic American maritime industry strengthens U.S. national security at zero cost to the federal government, it said. The domestic maritime fleet provides capacity and manpower that the armed forces can draw upon to support U.S. military operations. American ships, crews to man them, ship construction and repair yards, intermodal equipment, terminals, cargo tracking systems, and other infrastructure are available to the U.S. military at a moment's notice in times of war, national emergency, or even in peacetime.
Also, the Jones Act ensures a strong and vibrant maritime industry, which helps ensure the United States maintains its expertise in shipbuilding and waterborne transportation. The U.S. Navy's position is clear -- repeal of the Jones Act would "hamper America's ability to meet strategic sealift requirements and Navy shipbuilding."
Without American maritime, the U.S. would be dependent on foreign-owned and foreign-flagged vessels for the transport of waterborne commerce in and around the country. The Jones Act is also critical to U.S. economic security. The 40,000 Jones Act vessels operating in the domestic trades support nearly 500,000 American jobs and almost $100 billion in annual economic impact.
Apart from the national security argument, some tanker analysts said that the high demand for Jones Act tankers is also supported by better economics and practicality when compared with pipelines.
"It is much simpler to charter a ship than to approve and build a pipeline," to meet the rising shipping demand, Megan McCurdy, who works in business development and consulting at shipbroker and energy advisor Poten & Partners in New York, told OPIS recently.
Like rail, ocean tanker shipping also offers more delivery flexibility to more destinations than pipelines.
With 13 new Jones Act tankers joining the existing active fleet of about 44 tankers in 2014-2016, the influx of new tonnage would have a limited negative impact on the spot Jones Act daily rates.
"However, we continue to be fairly bullish on demand for these assets in both the crude oil and clean refined product trades alike in the near term," McCurdy said.
Increased crude oil flowing from the Midcontinent into Texas in general will help support higher trade volumes to other refiners in the region as well as the U.S. East Coast, she said. In addition, healthy refining margins in the U.S. Gulf Coast supports domestic trade fundamentals for refined products as well.
McCurdy added that the entire Jones Act fleet includes more than 300 ocean-going tank barges and tankers that are capable of transporting petroleum in the "blue water" or offshore market. There are also thousands of smaller units involved in the "brown water" or inland petroleum transportation market.
Despite some of the prevailing market sentiment of a tight vessel supply, McCurdy said that the Jones Act tanker and barge market today is adequately supplied.
Tanker assets regularly engage in relet business and experience much higher utilization rates as a result. Installed pipeline capacity and deliverability help establish the marginal cost of Jones Act transportation, but it is only part of the equation.
"U.S. Gulf Coast refined products supplies, whether moved by pipe, barge or tanker, still have to compete with European or locally available supplies to satiate demand in the Northeast," she said.
Despite the oil market perception of more clean refined products tankers converting to dirty because a comparatively higher demand for crude transportation over oil products, McCurdy said that there has not been any rate premium for dirty versus clean trading on a sustained basis historically.
"However, we have seen an increased interest in improving flexibility of units (tankers and barges) in order to carry crude oil. Certain modifications may have to be made, namely, installing vapor recovery system to enable vessels to carry crude oil, in addition to clean and dirty refined petroleum products," she said.
"Units (vessels) will switch back and forth between clean and dirty trading over time, but not a voyage by voyage basis. At present, we see strong demand for both crude oil trading and clean refined products, and vessels will elect to participate in the trades that will yield the highest returns," McCurdy said.