Lifting the crude export ban could substantially change the Jones Act dynamics

by Michael Hansen, Hawaii Shippers Council, December 28, 2015

Seatrade Magazine published on December 20, 2015, an Op-Ed “The Force Awakens? US lifts 40-year ban on crude exports” comments on the potential changes to the domestic tanker shipping market that are likely to occur with the lifting of the crude oil export ban, which was a provision in the recently enacted Bipartisan Budget Act of 2015 (H.R. 1314; P.L. 114-74).

The author of the piece reports advice from well respected ship brokers specializing in tanker trades -- Poten & Partners (Poten) and Mallory Jones Lynch Flynn & Associates (MLFJ) – who indicate that over time there is likely to be an increase in international crude oil tanker business transporting U.S. crude oil exports from the U.S. and a decrease in domestic tanker business in the Jones Act market. They indicated the crude exports would be from the Texas Gulf Coast and the Louisiana Offshore Oil Port (LOOP).

In fact, Poten was quoted, “This [Jones Act] market did receive a boost from the coastwise transportation of crude oil in the past, but these movements, which already declined significantly in 2015, may disappear altogether.”

There has been a spurt of construction of newbulding Jones Act medium Range (MR) tankers in the 50,000 Deadweight Ton (DWT) capacity ordered from General Dynamics NASSCO shipbuilding yard in San Diego and Norwegian-owned Philly Shipyard Inc. (formerly, Aker Philadelphia Shipyard Inc.) in Pennsylvania for Crowley Maritime Corporation and Kinder Morgan Inc.

The forecasted decline in demand for domestic Jones Act tanker movements does not bode well for continued newbuild tanker orders for the shipbuilders and the owners of newly built tankers who may be saddled with redundant tonnage.

Elsewhere, commenters have noted the lifting of the crude oil export ban (including the prior requirement that exports of Alaskan crude oil must be carried on Jones Act qualified tankers), this could result in shipments of North Slope Crude (NSC) to Asia (in particular, to Japan) significantly reducing demand for Jones Act crude tankers in the domestic Alaska trade moving NSC to the U.S. West Coast and Hawaii.

The consequences of lifting the crude export ban could substantially change the Jones Act dynamics.

Key excerpts:

The 40-year ban on crude oil exports from the United States has now been eliminated, as part of the $1.1trn bill, which fixes the US government’s budget through late 2016. Just prior to adjourning for their holiday break, the US Congress passed the bill, which was signed into law by President Obama.

Politics on Capitol Hill are impossibly complex; in a nutshell, the US oil producers - who lobbied hard to end the export prohibition - could claim victory, as could environmental interests - who sought a continued ban on oil exports but gained a lengthy extension on incentives for investments in renewal energy.

Views on possible shipping market impacts are now emerging; with a feeling that US crude oil exports will be a positive for tanker trades over a period of time, though not instantly. When the oil producers began pushing for the change, two years ago, the spread of Brent (representing worldwide oil prices) over WTI (representing US prices) was steadily over $10 per higher for Brent, and the tanker boom had not started. Effectively, US producers – benefitting from the boom in shale oil, were shut out of a raging bull market in oil where prices exceeded $100/barrel. At present- in a sub $40 per barrel crude price environment, Brent’s premium over WTI has shrunk to circa $2 per barrel- severely reducing the incentives to export crude oil, and, indeed, leading to increased US imports.

Analyst Court Smith, from broker MJLF, emphasized the need to modify oil transport infrastructure for exports where around 500,000 barrels per day has been moving to Canada, writing: “Most of the exports originate from Houston, Corpus Christi, or St. James (La.). LOOP has broached the topic of reversing lines for export, however this would not occur until 2018.”

Not everybody wins, however. Poten cited possible negatives looming for the US flag Jones Act tanker market. Its Jedi warriors/researchers wrote: “The lifting of the US crude oil export ban will probably be a net negative for the US Jones Act market. This market did receive a boost from the coastwise transportation of crude oil in the past, but these movements, which already declined significantly in 2015, may disappear altogether.”