Text of pages 39-42 of the DBEDT Energy Office Hawaii Refinery Task Force Final Report Adopted April 9, 2014

3.1.6 Jones Act

Recommendation: Explore actions to allow Hawaii fuel supply to utilize foreign flag vessels from domestic ports in lieu of Jones Act vessels in order to expand supply sources into the state at more competitive prices. 

The Interim Report discussed the possibility to waive the Jones Act requirement to use only U.S. owned and operated vessels to deliver domestic produced fuels to Hawaii. “Several Task Force members have suggested that with the Jones Act waived, Hawaii may have more access to domestic supply as foreign flag vessels are typically much lower cost to charter than Jones Act vessels.” The Interim Report concluded that, while it may be true that waiving the Jones Act will increase Hawaii’s access to fuels at lower prices, it is very unlikely that the Jones Act would be waived for this purpose. This Final Report revisits this issue since it is a policy matter that could increase Hawaii’s access to fuel at more competitive prices. This would be a very positive factor with one or both refineries closed and Hawaii supply and prices therefore dependent upon access to fuel in a global market.

Jones Act Waiver Process

Jones Act waivers are normally applied for by individual shippers seeking to move a cargo from one domestic port to another, and who find that no Jones Act vessel is available for the shipment. When a shipper identifies the need for a waiver, the shipper must request U.S. Customs and Border Protection (Customs) to use a foreign vessel. Customs then seeks the advice of the U.S. Department of Transportation, Maritime Administration (MARAD) to confirm that no Jones Act vessel would be available for the voyage before making a decision by law (46 U.S.C. § 501). If the waiver is granted, it is normally a one‐time only grant. 

Hawaii Jones Act Vessel Use

In recent years the petroleum industry in Hawaii has had limited need for Jones Act vessels as part of the supply chain to Hawaii consumers. Virtually all crude deliveries are on foreign flag vessels (North Slope crude oil is rarely processed in Hawaii), and the primary import product, jet fuel, is typically delivered on foreign flag vessels from Asian markets. Both Chevron and Tesoro have used Jones Act vessels in the past to move products (finished and unfinished stocks) back and forth to mainland refineries, but these are normally limited in volume. In recent years, ethanol has been imported into Hawaii from domestic sources on Jones Act vessels. The limited need for Jones Act vessels for product movements into Hawaii is likely to be the norm with both refineries operating. 

With one or both refineries closed, Hawaii will need to seek supply from sources thousands of miles away. Domestic sources would include the West Coast (2,500 miles) and the Gulf Coast (6,200 miles), although available product on the West Coast is very limited. For key products like jet fuel and residual fuel which have very low export levels from the U.S. mainland, import sources would likely be Asian markets such as Korea, Singapore, and India, all of which are 5,000 to 10,000 miles away.  

Under an import‐based fuel supply regime, it will be important for Hawaii suppliers to have access to the broadest market for petroleum products. During the Tesoro transition period, virtually all products imported were foreign, primarily from Asia but also from as far away as Europe. Tesoro indicated that domestic supply was not competitive, in part due to Jones Act restrictions and cost versus foreign flag.  

Global market conditions are always in flux and, with the refineries closed, Hawaii suppliers may look to different markets for each needed cargo of fuel. Inability to access the domestic U.S. market—which has been growing significantly and is now exporting almost 2.5 million b/d of gasoline, diesel, and propane (due, in large measure, to stable/declining demands and strong margins for refiners to process price‐advantaged domestic light crude)—prevents Hawaii consumers from taking full advantage of the global market, as well as from sharing in the benefits of U.S. shale oil production growth. 

As shown in the Interim Report, the existing U.S. Jones Act fleet for petroleum is well utilized. New builds are taking place, but most of those have already been chartered. Any planned movements to Hawaii will require significantly more voyage time than normal coastwise movements, and this could adversely impact the capacity of even an expanded Jones Act fleet.

The need for secure supply of fuels is a key energy assurance issue for Hawaii. Even with the significant reduction in fossil fuels due to HCEI initiatives, Hawaii remains very exposed to imports of transportation petroleum products in the event of refinery closures. The exclusion of the domestic market as a source for these petroleum products increases Hawaii’s dependence on foreign sourced products and reduces options to secure competitively priced supply. Ideally, Hawaii could petition U.S. Customs for a blanket waiver to use foreign flag vessels in the event of the closure of one or both refineries, arguing supply security for a strategic national vanguard in the Pacific, consumer benefits from more import flexibility, and lack of Jones Act tonnage to supply Hawaii. A blanket waiver would provide more certainty of policy to shippers who would otherwise need to justify each individual movement through the Jones Act waiver process. 

Challenges

The arguments for a Jones Act waiver may be compelling; however, there are considerable challenges which may be difficult to overcome. Hawaii already receives a tremendous amount of critical products using Jones Act vessels, including food, automobiles, consumer goods, etc. The cost of receiving these goods via Jones Act vessels is already borne by Hawaii consumers every day, as evidenced by shelf prices for these goods. So, why should petroleum be treated any differently? 

Hawaii may also be criticized because its own policies on greenhouse gas (GHG) emissions clean energy are themselves significant contributors to the threats posed to the sustainability of refinery operations.  Critics may question why Hawaii should seek a Jones Act waiver to help secure cheaper and more  reliable fuel supply when the state’s intention for years has been to eliminate fossil fuel dependence.  

Finally, the ability to use foreign flag vessels from domestic ports does not guarantee Hawaii access to fuel at cheaper freight cost. Foreign flag vessel owners may find that Hawaii is a more costly destination to deliver products to, as there would be minimal backhaul opportunities from Hawaii and higher rates may have to be charged. 

What differentiates petroleum is that Hawaii already pays much higher prices for energy than the rest of the United States with minimal dependence on Jones Act vessels. If access to foreign sources of petroleum products is reduced (e.g., due to Chinese growth, Korean peninsula instability, Asian natural disasters impacting supply sources), Hawaii may need to rely on a significant amount of domestic supply and be exposed to higher freight costs. These costs will directly impact consumers. The State Energy Office is concerned about this exposure and the inability to leverage the huge change in domestic petroleum supplies from shale oil.

Future needs for petroleum imports into Hawaii therefore will not decrease maritime vessel usage or jobs, since minimal Jones Act movements occur with refineries running. Moreover, the ability of ship owners to build new vessels for Hawaii service may be difficult to justify due to the likelihood that Asian prices and foreign flag transport rates may make it difficult for a shipper to contract for long term domestic supply to Hawaii on a Jones Act vessel.

Despite the complexity of this issue and the fact that the approval of a waiver may be unlikely, the Task Force believes that the state should be positioned to prepare a request for a blanket waiver of the Jones Act for a period of time after one or both refineries have closed. This would provide a means of assessing the potential need for the waiver as well as assuring that Hawaii has access to the full global market of fuels in the initial period after closures. It should be noted that some Hawaii legislators are working with colleagues in Guam, Puerto Rico, and Alaska to argue for the elimination of the Jones Act requirement for these states and territories due to the impact of the Jones Act across all commodity costs.22 Hawaii State Senator Sam Slom states in the article that “it costs about $790 to ship a 40‐foot container from Los Angeles to Shanghai, but it costs $8,700 to ship the same container from Los Angeles to Honolulu.”  

The reliance on Asian markets for petroleum imports may have risks, as noted above, and the state should be prepared to support either a blanket waiver or individual shipper waivers if fuel supply into Hawaii is threatened. The efforts of Hawaii legislators to mitigate the Jones Act requirements will also have a positive impact on Hawaii’s ability to import competitively priced fuels with refineries closed. 

22 “Hawaii, Alaska, Territories Team up on Jones Act.” ABC News. March 14, 2014.

News Release: Full Text: Taskforce Report Plans 'Refinery Closure Scenarios'