TACKLING THE TANKER DILEMMA: A CALL FOR A NEW NATIONAL DEFENSE TANKER CONSTRUCTION PROGRAM
by Warren Leback
Former Maritime Administrator Warren Leback is calling for a new National Defense Tanker Construction Program to help finance the construction of U.S.-flag tankers that will need to be replaced as a result of the Oil Pollution Act of 1990. Captain Leback, who served as the Maritime Administrator from 1988-92, says OPA 90 will require the phase-out of 92 tankers between now and 2015. In the following article, Leback examines the composition of the current U.S.-flag tanker fleet, including which vessels will be phased out over the next 15 years, and how a new National Defense Tanker Construction Program may offer the best possible solution to financing replacement vessels.
The current U.S. flag tanker fleet consists of 103 domestic-built and three foreign-built vessels, with a deadweight capacity of 7,821,662 tons. Sixty-six tankers are product carriers with a deadweight capacity of 2,677,379 tons and 39 crude carriers with a deadweight capacity of 5,144,283 tons. Included in the 106 tankers are three new buildings of 375,000 deadweight tons. There are two 125,000 dwt tankers on option as follow-ups to the three new buildings at Litton Avondale, New Orleans. In addition there are two 125,000 dwt tankers projected for construction in 2003.
Of the 106 vessels, 13 are OPA-90-exempt because they are of double hull construction delivered between 1998 and 2000. They can operate beyond the OPA-90 phase-out date of 2015. The remaining 93 tankers under OPA-90 rules are phased out between 2000-2005, 2010 and 2015. It is possible that several vessels can be extended beyond 2015 by reason of being double hull even though they will be in excess of 35 years of age. The phase-out is as follows:
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| YEAR | VESSELS | DEADWEIGHT | YEAR | VESSELS | DEADWEIGHT |
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|
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|
106 |
7,821,662 |
|
|
|
2,818,684 |
|
66 |
5,008,978 |
|
|
|
2,455,312 |
|
45 |
2,547,666 |
|
|
|
1,744,689 |
|
13 |
802,977 |
BOOM AHEAD?
It would appear the domestic tanker fleet will create a shipbuilding boom over the next 15 years. However, there are three factors to be considered before predicting such a boom.
Alaskan Crude Oil Production The North Slope crude oil production is declining and by 2015, the seven vessels building or on option or projected may be sufficient to carry the North Slope production. To increase the demand for new crude carriers the Alaskan National Wildlife Reserve and the offshore fields must be opened for production. This is an important factor to be considered when projecting replacement tonnage required.
Coastwise Product Carriers Here, as in crude carriers, projecting replacement tonnage has been carefully analyzed. The U.S. is importing each year an increasing amount of refined products. These are coming from refineries in the Caribbean basin, Western Europe and the Eastern Mediterranean. The product is being delivered directly to the distribution terminal. Further, there has not been a new refinery constructed in the U.S. in more than 20 years. There is less product today moving by water from the refineries to the distribution terminals. The literal pipelines have taken away product that previously went by tanker. The average size of current product carriers is about 30,000-40,000 dwt. The controlling factor is the receiving terminal. Careful review must be made of the current coastwise movement, the projected movement and receiving terminal facilities.
Coastwise Ocean Service Product Barges There are currently 47 ocean service barges ranging from 20,000 to 30,000 dwt, with an estimated total deadweight of 1,175,000 tons. These barges are either of double hull construction or can be refitted to meet OPA-90 requirements. They are principally used in the New England and Cross-Gulf services. The barges must be considered in view of the fact an articulated tug barge unit having the capacity of about 22,500 tons can be built for an estimated $25 million. Moreover, crewing, capital costs and operating costs make them a competing factor to self-propelled tankers.
Given these factors, one can not assume the replacement requirements are going to be one for one or ton for ton.
One gets a better perspective of the problem as to the loss of vessels through 2015 by the following:
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2,677,379 |
40 |
5,144,283 |
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|
873,711 |
17 |
1,944,973 |
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|
899,750 |
10 |
1,555,562 |
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|
|
475,941 |
9 |
1,268,748 |
Leaving 10 product carriers at 427,977 dwt and three crude carriers at 375,000 dwt which OPA-90 exempt. Again, careful consideration must be given to replacement tonnage.
An analysis of the ownership/management of the 106 tankers shows there are 16 companies of which four are owned by major oil companies, one is an operating arm of a major oil company and 11 are either independent owners or ship managers. By 2015, there will be under this forecast two independent owners and two major oil companies. These being AHL Shipping Company, Arco Marine Inc., Hvide Marine Inc. and Mobil Oil . A recap of the current fleet and owner/operators in shown as follows:
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| Amerada Hess Corp. |
6 |
282,000 |
| AHL Shipping Company |
4 |
155,876 |
| Arco Marine Inc. |
10 |
1,507,593 |
| Chevron Shipping Inc. |
4 |
187,795 |
| Coscol Marine Corp. |
4 |
171,899 |
| Crowley Petroleum Trans. |
2 |
82,259 |
| Hvide Marine Inc. |
11 |
478,508 |
| Interocean Ugland Mgt. |
2 |
346,766 |
| Keystone Shipping Co. |
16 |
1,416,205 |
| Marine Transport Lines |
11 |
686,499 |
| Maritrans-Eastern |
4 |
143,364 |
| Mobil Oil, U.S. Fleet |
1 |
45,367 |
| OceanShips Inc |
5 |
157,723 |
| OSG Ship Management |
9 |
728,069 |
| Sabine Transportation Co. |
8 |
452,441 |
| Sea River Maritime Inc. |
9 |
979,298 |
| Totals |
106 |
7,821,662 |
ABS Record 2000
The financial cost of replacing the 92 tankers being phased out between 2000 and 2015 is a problem. It can be assumed the crude carriers could be financed by the consortium of major oil companies controlling the Alaska crude oil production. They, in the interest of protecting the environment to the greatest extent possible and minimizing the risk of spills, will want to control the crude carriers.
Financing the product carriers is a problem since the greater number of current product carriers are controlled by the independent owners. To date, the Maritime Administration's track record on Title XI approvals for product carriers has had its problems and could with the Hvide bankruptcy face further problems. It is apparent that both the major oil companies for reasons of liability are reluctant to enter into long term charters. If they would enter into such charter deals, it would allow the independent owner the necessary wherewithal to construct new product carriers. This is the problem that must be solved. If not, a possible alternative would be to permit foreign-built, U.S. flag tankers to operate coastwise. Such an alternative would face considerable opposition in Congress, and from the shipbuilders and labor.
The phase-out of the current 92 tankers will impact on available sea-going crews to man the Ready Reserve Fleet in times of national emergencies. The 92 vessels provide employment for an estimated minimum of 3,864 seamen (92 vessels x 24 seamen x 1.75). The 1.75 represents 1.75 men for each seagoing billet. Therefore, as the vessels are phased out there is a corresponding loss in employment. With loss of employment qualified seamen will leave the industry. The losses are projected to be:
Year Loss of Seamen
2005 1,680
2010 1,260
2015 924
Total 3,864
The OPA-90 exempt fleet provides employment for 500 seamen. The full mobilization of the Ready Reserve Force will require an estimated 2,760 seamen without vacations or shipping rules requirements. This requirement can be handled in the near term between 2000 and 2005 using the available seamen from MSP fleet, the prepositioned fleet, and the tanker fleet. But beyond 2005 manning becomes a critical issue.
Having laid out the problem, what would be a solution? It may be worth considering a product carrier building program using the resources of the private sector, MarAd and the Defense Department. Since it is apparent in the national defense and economic defense of the country a building program is needed. Consider the following as a possibility:
As background there are currently 66 domestic product carriers in the U.S. flag fleet. Twenty-three are to be phased out of the petroleum product trades by 2005. Of those, nine have been phased-out or will be phased-out by the end of 2000. These nine are either engaged in the grain trades or are awaiting scrapping. Ten new double hull tankers averaging 44,573 dwt each have been delivered and are in service. This leaves a net loss of 13 tankers with a total deadweight of 445,734 tons. At present there are no contracts pending for the construction of replacement tankers.
The problem confronting the replacement of these tankers is the financing. The 23 product carriers are owned by the independent tanker owners. These vessels for the most part are employed in spot market, short-term charters and some with charters running five years. This type of market makes it difficult to finance the vessels either through Title XI mortgage insurance or private financing. The major oil companies and refiners are not prone to charter the vessels for their economic life which had been the method to finance the vessels built in the 1970's.
Therefore we must look to a program that will provide for the construction and employment of the replacement vessels. In 1937 the Maritime Commission and the Navy proposed a National Defense Tanker Construction program under Section 509, Title V Merchant Marine Act, 1936. That program was a success. It was based on the tanker owner and the government being partners.
In proposing a new National Defense Tanker Construction program it is necessary to review the 1937 program which in its concept addressed the legal issues covering government support for domestic tankers. The legal issues were resolved as set forth in the Maritime Commission’s official meetings and in particular the minutes of the December 21, 1937 meeting. The basis leading up to the approval are outlined as follows:
Two legal issues had to be addressed to permit the program to go forward, namely:
1. Whether the tankers may be constructed under section 509 of the Merchant Marine Act, 1936, which authorized the Commission to fund the construction of vessels engaged in the domestic trade. In this regard section 509 provided in part:
"Any citizen of the United States may make application to the Commission for aid in the construction of a new vessel to be operated in the domestic trade (excepting vessels engaged solely in the transportation of property on inland rivers and canals exclusively)…but no construction subsidy shall be allowed (except for the cost of national-defense features which shall be paid by the Commission)…".
2. If so, whether additional construction costs arising by reason of the installation of speed features substantially in excess of commercial requirements may be paid by the Commission as national defense features.
In this regard, the official minutes of the Maritime Commission for December 21, 1937, provide in part:
"Commissioner Land notified the Commission that bids for the construction of twelve tankers had been received by the Standard Oil Company of New Jersey and that the company had arranged for their construction by four shipyards at a cost of $3,129,667 each. He explained the nature of the various items which comprised the national defense features and stated that they amounted to $880,250 per vessel. Acceptance of these bids would provide the Navy Department with twelve tankers available for national defense purposes at a cost slightly in excess of the cost of one model tanker built by the Navy Department in accordance with its own specification. Thereupon, by the unanimous "yea" vote of the members present, the Commission authorized the Chairman to enter into a contract with the Standard Oil Company of New Jersey for the payment of the national defense features incorporated in the twelve tankers to be constructed by that company." (Emphasis added).
Funding for the national defense features for the tankers came out of the Construction Loan Fund, a revolving fund originally established by section 11 of the Merchant marine Act, 1920. See now section 206 of the Merchant Marine Act, 1936. Appropriations were expressly authorized to replenish this revolving fund.
An article in SNAME TRANSACTIONS (Vol. 84, page 177, (1976)), contained the following description of the program:
":[The CIMARRON class].commercial tankers resembled Navy fleet oilers to a remarkable degree. Twin-screw propulsion at 13,500 normal ship drove these ships at 18 knots, helped with a 9 percent of midship area bulbous bow. This letter feature did not generally appear on tankers until nearly two decades later. Several tankers of this series saw service in coastwise merchant operation prior to the onset of hostilities, when they were immediately requisition."
Therefore using the foregoing which settled the legal issues under Section 506 and Section 11 of the 1920 Act for funding plus Section 206 Act covering the replenishing the revolving fund the mechanism is in place to implement a National Defense Tanker Construction program.
Addressing the persistent question of government subsidies the tankers will be partially funded by the Navy which will provide access to such tankers over the next twenty years. The cost of the program to the Navy is substantially lower than constructing tankers for the exclusive use by the navy.
The proposed National Defense Tanker Construction program would provide for the construction of up to twenty (20) 35,000 deadweight ton product carriers and incorporating National Defense features that will permit them to serve immediately when required as Naval auxiliaries. The program incorporates the following:
Basic 35,000 deadweight tanker
National Defense features:
- Increased speed requirement
- Underway refueling capability
- Capability to handle a minimum of six (6) grades of fuel
- Independent piping systems
- Quarters for additional personnel when required
- Other features as may be required
Financing
- Owner to provide 12.5 percent equity of delivered cost including national defense cost
- National Defense feature cost to be 30 percent of the delivered cost
- Title XI mortgage guarantee to be 57.5 percent of the delivered cost.
The owner would be required to agree to the following which would make the vessel available to the Navy by:
Time Charter which the rate would cover:
- Operating Expense
- Debt Service
- Administrative and General Expense
- Twelve (12) percent pretax return on effort.
Purchase The government would have the right to purchase the vessel under the following terms:
- Payment of the remaining debt
- Payment of the equity necessary to construct a replacement vessel of the same characteristics.
The Navy could as required time charter the vessel for short or long term employment at their option.
It is proposed that during the life of the vessel that:
An annual payment by the Navy to maintain the National Defense features
Deck, Engineering and Communications Officers would be required to enroll in the Naval Reserve or be exempted because of age.
Using an estimated cost of 60 million dollars the breakdown to the participants would be:
Owner's Equity at 12.5% $7,500,000
National Defense features at 30.0% $18,000,000
Title XI Mortgage Insurance at 57.5% $34,500,000
A twenty (20) ship program would require a $360 million dollar appropriation by the Navy and a $690 million dollar commitment under Title XI.
Comparing this proposal with that of the "T-5", Time Charter Contracts covering the following product tankers
Paul Buck
Gus W. Darne II
Samuel L. Cobb
Richard G. Matthiesen
Lawrence H. Gianella
The proposal is more cost effective to the Navy and MARAD. The "T-5" Time Charter Contracts covering the period 1982 through 2005 cost the Navy an estimated $310,515,721 per vessel where the National Defense Tanker proposal will cost over a twenty (20) year period an estimated $39.8 million dollars per vessel.
In closing, the product carrier shortfall is serious. The crude carrier situation is not critical at this time with 875,000 deadweight tons with being delivered, constructing and projected. There is a solid case to be made for a National Defense Tanker Construction program.
The participation by the owner, the Navy and MARAD is the most economically cost efficient program to meet the domestic and national defense needs of the country.
TABLES
PRODUCT CARRIERS & CRUDE CARRIERS CURRENT FLEET YEAR 2000 (total vessels and tonnage)
PRODUCT CARRIERS & CRUDE CARRIERS CURRENT FLEET YEAR 2000 (by vessel type)
PRODUCT CARRIERS & CRUDE CARRIERS OPA-90 PHASE-OUT 2000-2005
PRODUCT CARRIERS & CRUDE CARRIERS OPA-90 PHASE-OUT 2010
PRODUCT CARRIERS & CRUDE CARRIERS OPA-90 PHASE-OUT 2000-2015
PRODUCT CARRIERS & CRUDE CARRIERS OPA-90 EXEMPT
PRODUCT CARRIERS SCHEDULED PHASE-OUT OPA-90 1996-2005
U.S. FLAG TANKER FLEET-2000
Crowley Petroleum Transport Inc.
Sabine Transportation Company Inc.
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