The eagle ford shale play in Southern Texas appears to be producing more than enough oil for the regional refineries to crack. Crude Oil is banned from export out of the US (with the special exception of Canada). That means the destination for the oil is refineries elsewhere along the Gulf Coast and up the East Coast. Oil moves by barge from Corpus Christi to Houston, Port Arthur and sometimes Lake Charles along the intercoastal waterway. Oil moves by ocean going barges and vessels to Lake Charles, Port Arthur, LOOP, Louisiana, Philadelphia and New Jersey. There is so much oil moving out of Corpus Christi, the pilots recently changed some of the transit rules to accommodate increased traffic. Daylight transit restrictions and a two pilot requirement are in place for the larger tankers.
The US also has an almost 100-year old statute on the books called the Jones Act. This law requires that all cargo being moved domestically on the water must be done on American flagged vessels that are built in US Shipyards with few exceptions. 5 years ago the domestic tanker trade was mostly limited to crude tankers moving oil from Alaska down to the West coast, and to product tankers moving gasoline and diesel into Florida where there are no pipelines to deliver the fuel. Vessel operators in this trade were “hanging on” with slim profit margins. The US tanker fleet was dwindling as there was little demand to move oil across the water.
How things have changed. Recent day rates for US flag tankers are well in excess of USD $60,000, when only a few years ago the rate was substantially less. Traders are having trouble finding US Flagged tankers for term charter. In many cases, Jones Act tankers are under long term contracts already. What is a shipping company to do? The answer…
Get more ships of course! The most cost-effective solution would be to pick up some used tankers on the open market at a reduced rate as the global market for these tankers is not as rosy. But don’t forget the Jones Act. In order to reflag a foreign tanker, various costs are incurred. These costs usually outweigh the additional costs of building in a domestic yard. So we have the makings of a new building boom on our hands. NASSCO in San Diego and AKER in Philadelphia have several years’ worth of orders on their books. Gulf coast yards are not as lucky. Years of focus on government contracts have created a vacuum of expertise in tanker newbuilds. That said, it is almost certain we will see additional US Shipyards receive orders for domestic commercial tankers in the coming months. Unless, of course, one of the two laws that have created this paradigm are rescinded. If the US allows crude exports or repeals the Jones Act, domestic crude would almost certainly find its way to foreign flag bottoms more often that US Flag tankers.
PortVision drives energy supply chain management, with ship tracking, dock management, and vessel fleet tracking solutions powering the industry. Need help seeing the big picture, whether within the Jones Act or beyond? Then contact us and let’s discuss your specific needs today.