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Refiners, marketers press for Jones Act changes

Written by Maritime First

Petroleum marketers and refiners are planning a substantial effort to get Congress to change the Jones Act, a nearly century-old law they claim is driving up motor fuel and heating oil prices and severely inhibiting the flow of crude oil between US ports amid the ongoing domestic oil boom.

The Jones Act was modified in Nigeria  to become the Cabotage law.

But rather than repealing the law, due to the overwhelming support it has within the US shipbuilding industry and by members of Congress, the planned Capitol Hill lobbying efforts will be aimed at weakening the Jones Act. This could include new waivers to get the rising tide of light sweet crude from the Gulf of Mexico to East Coast refineries or modifying rules on the percentage of a vessels’ crew that must be US citizens.

“I’m not naive enough to think that Congress will repeal this thing,” said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, in an interview this week. “But, I think after 94-plus years, now it’s time to take a look at this thing and see how the Jones Act, … and the economic realities of 1920, fit in with the economic realities of 2014.”

The Jones Act, enacted as the Merchant Marine Act of 1920, requires all vessels shipping cargo between two US locations to be US built, crewed by at least 75% US citizens and be majority US owned. But these requirements have created dramatically higher charter rates and daily operating costs for US-flagged vessels, compelling oil shippers to move Gulf Coast crude to eastern Canada and other foreign ports rather than to US refineries in the Northeast, for example.

The Jones Act was originally put into place largely to help the US government to re-sell many of the cargo ships it built during World War I, according to a July 21 Congressional Research Service report on shipping US crude oil by water.

The costs of US-built tankers can be as much as four times the costs of those built in Korean, Chinese and Japanese shipyards, while the daily operating costs of a US-flagged ship, crewed by US citizens, is nearly four times that of a foreign-flag tanker, according to the US Transportation Department’s Maritime Administration.

In addition, charter rates for Jones Act-compliant tankers are averaging $75,000-$100,000/d, up from an average of $50,000/d two years earlier, according to the CRS report. Charter rates for foreign-flagged tankers are averaging $10,000/d for spot charters and $15,000/d for annual charters, the report said.

In an earnings call earlier this month, Thomas O’Malley, PBF Energy’s executive chairman, said the gap between moving crude on a US-flagged ship versus and foreign-flagged ship may be as much as $5/b. He said PBF, an independent petroleum refiner and supplier, was focused on moving crude by rail, rather than pay the premium for shipped by water.

“So when you look at Jones Act and just think about it clearly, Jones Act movement is somewhere between $6 and $7/b, while foreign flagged movement is, up to the East Coast, a little bit less than $2 a barrel,” he said, according to a transcript. “How can anybody take that delta up, I’m not quite sure, but we’re not considering Jones Act at the present time.”

Shipping crude from the Gulf Coast to other ports in the US can cost between $5-6/b, compared to the $2/b its costs to ship it on foreign-flag tankers from the Gulf to eastern Canada, according to the CRS report.

“For a Texas oil producer using a tanker with a capacity of 300,000 barrels, this rate difference amounts to receiving $1 million less for a shipment of oil to a US refinery than for a shipment to a more distant Canadian refinery,” the report said.

This year, more than twice as much Gulf Coast crude is being shipped to eastern Canada by water as is being shipped to US Northeast refineries, the report said.

“It’s cheaper to take it to a foreign country and bring it back,” said Drevna with AFPM. “It makes absolutely no sense.”

Drevna said his industry was focused on weakening the law’s requirements, such as the rule that it has to be crewed by at least 75% US citizens, a potential change which could lower transport costs or at least increase crew availability.

Rob Underwood, director of government relations with the Petroleum Marketers Association of America, called the Jones Act “outdated” and a “protectionist policy” but also conceded that repeal was unattainable considering its support within the US maritime industry.

He said instead, petroleum marketers were pushing for a US Government Accountability Office report on the impacts of the Jones Act. He said other changes may be possible, such as new allowances for waivers to ship the glut of light sweet crude in the Gulf to refineries in the mid-Atlantic.

Underwood said this lobbying effort was just beginning and likely would not fully begin until after the mid-term elections.

In the August 2011, due to the cutoff of oil from Libya, the Obama administration waived Jones Act requirements to move about 25 million barrels of Strategic Petroleum Reserve crude on foreign-flag tankers to refineries throughout the US.

Temporary Jones Act waivers have also been issue following Hurricanes Katrina and Rita in 2005 and superstorm Sandy in 2012.

Any changes to the Jones Act would also be a difficult task, considering congressional support for the law.

For example, the fiscal 2015 National Defense Authorization Act, which passed the House by a 325-98 vote but has yet to be voted on in the Senate, includes a congressional declaration in support of the Jones Act.

In April, shortly after being named chair of the Senate Energy and Natural Resources Committee, Senator Mary Landrieu, a Louisiana Democrat, held a Capitol Hill news conference highlighting the importance of the Jones Act to her state’s economy. The conference was notable because it was her first as chairman and because it was not motivated by any pending legislation, news event or apparent efforts at the time to weaken the law.

Senator Lisa Murkowski, an Alaska Republican, the committee’s ranking member and a leading proponent of loosening US restrictions on crude oil exports, backed the Jones Act following the release of a shipping industry-backed study in March on maritime jobs.

“The US maritime industry, supported by the Jones Act, provides vital services necessary for Alaska’s economy and quality of life,” said Murkowski, who is expected to become chairman of the energy committee if Republicans take control of the Senate in November’s mid-term elections

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