OCTOBER 21, 2016 — Overseas Shipholding Group, Inc. (NYSE:OSG) says that its Board of Directors has approved the previously announced plan to separate its international and domestic businesses into two independent, publicly
It was a nasty winter, even by Alaskan standards. The city of Nome, Alaska was in trouble. A late November storm blocked a scheduled shipment and the city was running out of fuel. In an Arctic winter, fuel is as precious as blood. It powers more than cars and trucks, it runs generators to light up the 24 hours of darkness and it burns in boilers for heat when the outside temperatures regularly hit -50 degrees. Without fuel, all human life stops; and Nome’s tanks were running dry. The solution to the crisis lay in the belly of a Russian ice-strengthened tanker sailing just offshore. The problem was that her cargo of life-sustaining gas and diesel was loaded in Dutch Harbor Alaska, and a U.S. law designed to protect domestic shipbuilding was preventing her from completing the mission. Recognizing the urgency, Secretary of Homeland Security, Janet Napolitano, issued a one-time waiver of the Jones Act and the Renda steamed into Nome Harbor to deliver the fuel.
As changes in Arctic continue to unfold, incidents such as the one in Nome will become more common. In addition, the pace of change in Arctic has found the U.S. unprepared to assert her claims and to defend fragile ecosystems and populations. The Nome incident illustrates a stark choice for the U.S.: change how the country protects its domestic shipbuilding, or cede the Arctic to its geopolitical rivals.
The Jones Act requires that any ship carrying passengers or cargo between two U.S. ports must be built in the U.S., crewed by U.S. nationals, and owned by a U.S. company. The Act dates back to the 1920’s but the idea of protecting a domestic shipbuilding industry from foreign competition is as old as the country itself. The First Congress of the United States levied heavy tariffs on goods delivered on foreign ships. The Act serves that important role today; however, the economic reality is that Jones Act compliant ships are expensive to build and expensive to operate. So to maximize profits, large ships in the international trade are flagged in countries with favorable laws and tax treatment. Such “flags of convenience” create strange outcomes as cruise ships that pick up vacationers in Miami must first stop somewhere outside of the U.S. before discharging their passengers. Foreign flagged tankers, loading crude in Valdez may take that crude to a foreign port where it is pumped ashore, modified slightly, then reloaded on to the same ship before that ship sets sail for a U.S. refinery.
Opponents of the Jones Act point out the inefficiencies created when non-compliant vessels seek to skirt the law. They argue that the trade protection measure makes coastwise shipping prohibitively expensive as shipbuilders in the U.S. must operate under more expensive environmental and labor regulations. Similarly, the U.S. ownership requirement cuts off sources of capital to build those ships. Without the Jones Act, the argument goes, we could use international competition and realize benefits and efficiencies of moving freight over water. For example, we could put containers on barges that service coastal cities, thereby removing thousands of trucks from the already choked and crumbling interstate highways.
Proponents of the Act cite jobs and national security interests. During World War II the U.S. shipbuilding industry saved the world from fascism by building Liberty Ships faster than German submarines could sink them. Today, the market for Jones Act compliant vessels supports thousands of good paying jobs and preserves skills that would desperately be needed should the world face a similar crisis. The decline in domestic manufacturing under the auspices of free trade serve as a warning to those looking to open U.S. shipbuilding to foreign competition.
The Arctic presents a different problem. As the ice recedes, human demands in the Arctic will increase. Just this year, 1,000 passengers aboard the cruise ship Crystal Serenity sambaed and bunny hopped their way through the once impassable Northwest Passage. As a result of increased economic activity, settlements in the Arctic will grow. More people in the Arctic means more demand for ice class ships to resupply villages and outposts. More shipping also means increased demand for search and rescue and spill response. As demand for icebreakers and ice class ships increases, there are few Jones-Act certified ships to fill the need. In contrast, countries such as Finland have an excess of icebreaker capacity. Those ships, however, cannot operate between U.S. ports in the absence of a Jones Act waiver from the Department of Homeland Security.
In addition to support for economic activity, presence in the Arctic is critical for political reasons. Conditions in the Arctic are changing faster than most expected and wherever the ice recedes, it leaves behind a geopolitical vacuum. As the ice pulls back from the shore, it will expose trillions of dollars in natural resources. More importantly, it will uncover fragile and delicate ecosystems and leave indigenous populations exposed to potential exploitation. Russia has already staked its claim to a vast undersea territory stretching almost to the North Pole. In the last few years, Russia has been quietly rebuilding its fleet of Soviet era icebreakers. Today, Russia has scores of ice class ships, six nuclear powered icebreakers, and three more heavy crushers on their way. China, with no territory in the arctic, has two icebreakers with a third on the way. The United States, a country with the world’s most powerful and well equipped military, has one heavy icebreaker, and it is 40 years old. Congress has allocated funds for a second ship, but construction will not start until 2020 and the ship will not see ice until 2025. Protection of the environment and native people in the Arctic will require a U.S. presence and a U.S. presence will require icebreakers now.
Typical Jones Act problems involve competition between foreign and U.S. flagged ships. But with little or no U.S. ships to fill the need, the Jones Act forces a choice between using a foreign flagged vessel or nothing at all. As the situation in Nome demonstrated, that is not a choice when lives, the environment, or a critical national interest is at stake. The current administration can fix this. The Secretary of Homeland Security, using executive authority, can and should grant a temporary waiver for all ice class vessels operating from the Aleutian Islands in the south to the Canadian border in the north and in all U.S. points above the Arctic Circle, until such time as an equivalent Jones Act compliant vessel becomes available. Such a rule would allow the U.S. to immediately defend her geopolitical interests by freeing up the one available icebreaker. While the waiver is in place, existing foreign vessels could develop and test markets for commercial shipping with ice breaking capabilities. If it appears the market will bear the increased cost of a U.S. flagged ship providing those services, U.S. shipbuilders will build a ship and enter the market. When the U.S. ships move in, the waiver is lifted and the U.S. will protect that market under existing law. In this way, the rule would actually promote domestic shipbuilding by allowing other countries to highlight areas for growth while minimizing risks. Such a rule would also encourage efficiency and innovation without compromising or threatening existing jobs.
As President Lincoln said in his 1862 address to Congress “the dogmas of the past are inadequate to the stormy present.” The Arctic presents opportunities and challenges not seen by western countries since the days of Columbus. In times of crisis, we can, and should, look critically upon institutions fostered in a different time and for a different reason. The Secretary of Homeland Security recognized this crisis and granted a waiver for Nome. The Secretary should now do the same for the rest of the Arctic.
SEPTEMBER 28, 2016—Yesterday, General Dynamics NASSCO, San Diego, CA, delivered the 50,000 dwt Bay State, the fourth vessel in a series of five ECO Class product tankers under contract with American Petroleum
SEPTEMBER 22, 2016 — Philly Shipyard, Inc. held a ceremonial keel laying today for the third product tanker in a four vessel order for American Petroleum Tankers (APT), a Kinder Morgan, Inc.
SEPTEMBER 19, 2016 — GD NASSCO’s recent $511 million contract to build two 265 m LNG-capable ConRo vessels for Matson (see earlier story) is providing Korea’s Daewoo Shipbuilding & Marine Engineering Co.
AUGUST 17, 2016 — BAE Systems this week delivered the tug Sea Power to Seabulk Tankers, Inc. Built at BAE Systems’ Jacksonville, Florida, shipyard, the Sea Power will be used in Seabulk
JULY 20, 2016 — U.S. Customers and Border Protection’s Office of Field operations has set up a National Jones Act Divison of Enforcement (JADE). In a July 15 notice to the Area
The total capacity of these vessels is just over 7 million deadweight tons (dwt), with a total current value of $4.5 billion (See Table 1: Value of U.S.-Built Shipping). Globally, the United States (as a shipbuilding nation) is ranked in 11th place (in terms of dwt) and a respectable sixth place behind South Korea, Japan, China, the Philippines, Germany, and Turkey in terms of the current value of the U.S. built fleet. Based on the volume of ships on the water, the most prolific U.S. shipbuilder has been NASSCO, San Diego, CA, a unit of General Dynamics. NASSCO also operates shipyards on the U.S. East Coast in Mayport, FL, and Norfolk, VA. As of mid-March, VesselsValue estimated the ships being built at NASSCO had values of around $900 million (this value excludes delivered ships). NASSCO recently launched the 53,700 dwt MR tanker Independence, which VesselsValue currently values at $133.45 million (this excludes a premium for the Jones Act). The Independence will be joined by two MR2 tankers on order at NASSCO for Seabulk Tankers. As of mid-March, NASSCO had four MR2 tankers on its order book for American Petroleum Tankers. 
The San Diego shipyard delivered two LNG-fuelled 3,100-TEU containerships, including the lead of the Marlin class, the Isla Bella, in November 2015 to Tote Maritime. The Isla Bella, along with its sister, Perla dela Caribe, are now operating between Jacksonville, FL, and San Juan, PR.
The only other U.S. shipyard with bulker, tanker, and gas carrier vessels currently on its order book is Philly Shipyard, Philadelphia, PA (formerly known as Aker Philadelphia Shipyard Inc.) Philly Shipyard has built product tankers, crude carriers, and containerships. The Philly Shipyard built fleet is currently valued at just over $1 billion. Its order book consists of eight 50,000 dwt MR tankers and this design has been classed by ABS as LNG Ready, which provides the owner with the flexibility to choose to convert the ship to dual fuel operation in the future.
In early May, Crowley Maritime Corporation christened the Louisiana, third of four LNG Ready product tankers at the Julia Street Cruise Terminal in New Orleans, LA.
Like its sisters, the 600 ft Louisiana is based on a proven design from Korea’s Hyundai Mipo Dockyards (HMD) design. It can carry crude oil or refined petroleum products, as well as other chemical products.
Construction management services were provided by Crowley’s marine solutions group, which provides oversight and management in shipyards across the country for Crowley and other third-party companies. Philly Shipyard also built the tankers Texas and Ohio for Crowley, and the fourth ship in the program is under construction with delivery planned for third quarter 2016.
“The christening underscores our continued commitment to building and operating innovative vessels that deliver the best possible service and efficiency for our customers who depend on us for safe and reliable transportation of petroleum products,” says Rob Grune, Senior Vice President and General Manager, Petroleum Services. “And, as is the case with its sister ships, we designed and built the Louisiana to have the capability to be converted to LNG propulsion in the future, increasing the likelihood of a long service life as new emissions regulations are developed in the years ahead.”
JONES ACT FLEET CONSIDERABLY OLDER THAN WORLD FLEET
It’s no secret that the U.S. Jones Act fleet is considerably older than the average age of the global, non-U.S.-built fleet. The current U.S.-built fleet has an average age of 33 years old versus 13 years old for the global fleet. The most recent ships produced by U.S. shipyards have been tankers and the average age of U.S.-built tankers is only five years older than the global fleet. However, there has been virtually no U.S. investment in bulkers (many of them are part of the Great Lakes fleet). The U.S.-built bulker fleet has an average age of 46 years old versus nine years old for the global fleet. Even a relatively modern ship type, such as containerships, the average age of the U.S.-built fleet is 32 years old, considerably older than the average of 11 years old for non-U.S.-built vessels.
TOP TEN U.S. SHIPOWNERS
According to VesselsValue, the Top Ten U.S. shipowners ranked by value control around half the capacity (48%) of the U.S. fleet (see Table 2. U.S. Shipowners Ranked by Fleet Value).
The Top Ten Shipowners are tanker companies or the tanker arms of oil majors. The current most valuable U.S.-operated fleet is that American Shipping Co., a Norwegian public company controlling a fleet of 10 MR2 tankers built by Philly Shipyard and leased out to OSG, which charters them out to Jones Act qualifying companies. VesselsValue estimates this fleet is worth $830 million. The second most valuable U.S. fleet belongs to new entrant American Petroleum Tankers, which is a subsidiary of Kinder Morgan Terminals, with its fleet operated by Crowley Maritime Corporation, Jacksonville, FL. This fleet will be supplemented by MR tankers currently on the order book of NASSCO. However, in the last 12 months, the U.S. order book has been very quiet, with no bulker, tankers or gas carriers ordered.
SALE AND PURCHASE ACTIVITY
If there is one area where U.S. shipping has been active, it’s been in the sale and purchase market. The dire dry bulk market is one of the driving forces behind Scorpio Bulker selling 25 vessels in the last 12 months (March 2015 to March 2016) for a combined value (at the time of sale) of $878 million (where the sale price is undisclosed, the VV Value the day of the sale is used). Altogether 88 vessels have been sold by U.S. owners for a combined value (where the sale price is undisclosed, the VV Value the day of the sale is used) of $3.4 billion (see Table 3: Sales by U.S. Owners).
Of course, under the Jones Act, U.S. companies cannot purchase foreign-built vessels to operate in Jones Act trade routes. This reduces the pool of potential purchases, which in the last 12 months (March 2015-March 2016) have been limited to eight vessels, including four MR tankers from Philly Shipyard purchased by Kinder Morgan for a reported $568 million (See Table 4: Purchases by U.S. Owners).
JUNE 8, 2016 — The U.S. marine industry is condemning a measure proposed by Rep. Gary Palmer (R-AL) that would exempt Puerto Rico from the Jones Act – which requires waterborne cargo
MAY 21, 2016 — General Dynamics NASSCO on Thursday delivered Magnolia State, the second of five LNG-conversion-ready 50,000 dwt Jones Act tankers the shipyard is building for Kinder Morgan subsidiary American Petroleum
