Pasha Hawaii “selects” a foreign-owned yard to build Jones Act containerships

by Michael Hansen, Hawaii Shippers Council, May 22, 2017

On May 10, 2017, Pasha Hawaii Transport Line LLC (Pasha Hawaii) posted to their website a press release announcing they had “selected” a U.S. shipyard to construct two Jones Act containerships for their domestic California-Hawaii trade. The arrangement would involve a design for the cellular containerships with a capacity of 2,525 Twenty-foot Equivalent Unit (TEU)s, an option for Pasha Hawaii to order two additional sister ships, but did not constitute a firm order.

About six months ago in a previous press release dated November 16, 2017, Pasha Hawaii stated they were considering two different U.S. shipyards for the construction of two plus two 3,400 TEU containerships. The reduction in container capacity from 3,400 to 2,525 or 875 TEU is 26%. Presumably Pasha Hawaii made a decision that they would not capture the share of the California-Hawaii cargo volume they originally projected. The capacity reduction may also indicate a need to lessen their capital expenditures by ordering smaller ships.

PASHA JONES ACT FLEET

Pasha Hawaii currently operates lift-on/Lift-off (Lo/Lo) container and roll-on/roll-off (Ro/Ro) vehicle ocean transportation services between California and Hawaii ports with five (5) self-propelled seagoing ships. They presently employ: three (3) cellular containerships -- the ENTERPRISE, RELIANCE and SPIRIT – built in 1980 and acquired from the now defunct Horizon Lines Inc. in 2015; a single combination container Ro/Ro ship (“Con/Ro”)-- the MAJORIE C – built 2015; and, a single Pure Car and Truck Carrier (PCTC) -- the JEAN ANNE – built 2005. Paha Hawaii owns a sixth ship – the containership PACIFIC built 1979 – also acquired from Horizon Line in 2015 and said to be in reserve. It may currently be at a foreign shipyard in China for refit. (See Tables 1 & 2)

1/ Ship’s profile container capacity in twenty-foot equivalent units (TEU) from Pasha Hawaii website

2/ Ship’s Roll-on/Roll-off (Ro/Ro) vehicle capacity for automobiles from Pasha Hawaii website

3/ Containership classification originally assigned by first owner Sea Land Service Inc. (SLS) from U.S. military transport “C” series for cargo

4/ Ships acquired by Pasha Hawaii from Horizon Lines Inc. on May 31, 2015 and retained the same names without the “Horizon” prefix – all fully cellular gearless containerships

5/ Ship type: Pure Car and Truck Carrier (PCTC)

6/ Ship type: combination container Roll-on/Roll-off (Ro/Ro) known as a “Con/Ro”

The four ex-Horizon Lines’ containerships are steam-powered and now over 37 years of age. They need to be replaced generally due to age and in particular before an emissions regulation with new fuel standards for very low sulfur content will come into effect on January 1, 2020. In comparison to the age of Pasha Hawaii’s containerships, the average age of containerships in the international fleet is approximately 12 years and recently scrapings of containerships as young as 8 years have been reported. The emissions regulations are critical for Pasha Hawaii because steamships cannot burn the kinds of marine fuels that will be necessary to comply with the new regulations.

EMMISSIONS

The emissions regulations are part of the International Maritime Organization (IMO) international Convention for the Prevention of Pollution from Ships (MARPOL 73/78) Annex VI “Prevention of air pollution from ships” which came into force on May 19, 2005 to regulate among other things nitrous oxides (NOx), sulfur oxides (Sox), green house gases (GHG) and particulate matter. A revised Annex VI came into force on July 1, 2010, and its Regulation #14 established global caps for the content of SOx in marine fuels of 3.50% mass by mass (m/m) method by January 1, 2012 and 0.50% m/m by January 1, 2020. Steamships were exempted from the 2012 but not 2020 requirement.

In addition, vessels with keels laid after January 1, 2016, and engine power rated at 130 kilowatts (KW) (174 mechanical horsepower) or greater must comply with IMO MARPOL Annex VI NOx and GHG emissions standards known as the “Tier III requirements” for operation in Emissions Control Area (ECA). For domestic operators in the Pacific, that will be the North American Emissions Control Area (NA ECA), which extends 200 nautical miles from the U.S. and Canadian West Coasts and main Hawaiian Islands base lines. Approximately 25% of a typical voyage between the U.S. West Coast and Hawaii will be transiting the NA ECA. Tier III compliance can be achieved with LNG fueled diesel engines or certain NOx reduction technologies, none of which have been adopted by industry.

The U.S. agencies charged with enforcing MARPOL Annex VI – the U.S. Coast Guard (USCG) and the U.S. Environmental Protection Agency (EPA) – will accept “LNG ready” as compliance with Tier III for U.S. flag ships with keels laid after January 1, 2016 and engine power rated at 130 KW or greater.

Pasha Hawaii in their press release states their first newbuild containership would be delivered in the first quarter of 2020 and the second in the third quarter 2020. This would not replace their steamships before the IMO MARPOL Annex VI deadline of January 1, 2020 for SOx and particulates, and would certainly not provide any allowance for slippage in the delivery schedule, especially as no firm shipbuilding contract is currently in place.

SHIPYARD

Pasha Hawaii reports that they have “selected” the Keppel AmFELS LLC in Brownsville, Texas, to build the 2 plus 2 by 2,525 TEU Jones Act containerships. However, there is no building contract, as Pasha Hawaii noted in their press release, they are “in the process of finalizing contract specifications,“ meaning that for all practical purposes there is no binding agreement.

Keppel AmFELS primarily services the offshore oil and gas industry in Gulf of Mexico. It is a subsidiary of the publically-traded Keppel Corporation Limited of Singapore and part of the Keppel Offshore and Marine (Keppel O & M) business segment, which operates 20 shipyards in 9 countries specializing in the design and construction of equipment for the offshore industry.

We understand Keppel O & M will not supply the design for the Pasha Hawaii newbuild containerships. Rather Keppel AmFELS would construct the Pasha Hawaii containerships under license to another foreign shipyard (other than Keppel) that can offer a proven design for containerships in the intended TEU size range. The foreign provider of ship design is typically referred to by the U.S. shipbuilding industry as a “foreign technical partner.” As the Pasha Hawaii statement said they have not finalized the proposed containership specifications, it calls into question whether or not a foreign technical partner and a specific ship design have been chosen.

This is the second time Pasha Hawaii sought-out what would previously be considered a “second-tier” domestic shipyard, which is foreign-owned and primarily engaged in the offshore industry. Pasha Hawaii did this obtain lower cost domestic ship construction while remaining in compliance with the Jones Act U.S. build requirement.

Previously Pasha Hawaii constructed their JEAN ANNE (delivered 2005) and MARJORIE C (delivered 2015) at the VT Halter Marine Inc. shipyard in Pascagoula, Mississippi. Halter Marine built the two ships under license to other foreign shipyards. Both Halter Marine and Keppel AmFELS have experienced a slowdown in new construction work as a result of the downturn in the oil and gas business due to low energy prices and are seeking new kinds of work to keep their yard and employees busy.

VT Halter Marine is a wholly owned subsidiary of Vision Technologies Systems Inc. (VTS), a U.S. company based in Alexandria, Virginia. VTS is in turn, a wholly owned subsidiary of Singapore Technologies Engineering Ltd., a publically-traded Singapore corporation.

VT Halter Marine ran into significant problems constructing the Con/Ro MAJORIE C and delivery was delayed by about 24 months, which probably induced Pasha Hawaii to seek out another yard. The cost of the MARJORIE C has been variously reported as U.S. $178 million and $200 million. In addition, the yard losses have been reported as possibly being over $200 million for late delivery and correction of defects.

LIQUEFIED NATURAL GAS (LNG)

Pasha Hawaii stated categorically in their press release that they would fuel their newbuild containerships with liquefied natural gas (LNG) saying, “[t]he new vessels will operate fully on LNG from day one in service . . . . .”

The purpose would be to comply with IMO MARPOL Annex VI for SOx, NOx, GHG and particulate emissions standards for operation in the NA ECA.

This assertion ignores the problems TOTE Maritime operating Jones Act common carrier services in the Alaska and Puerto Rico trades encountered attempting to transition to LNG, and calls into question whether or not this is a realistic goal.

TOTE had planned to convert during 2016 their two existing Orca Class Jones Act Ro/Ro trailerships MIDNIGHT SUN and NORTH STAR (built 2003) employed in the Alaska trade from fuel oil to LNG at the Keppel O & M yard in Singapore. However, this plan was derailed when TOTE’s EL FARO was lost on October 1, 2015, off the Bahamas in Hurricane Joaquin; the EL FARO was to be repositioned to the Alaska trade to cover the route while the Orca Class ships were away at shipyard in Singapore. The LNG was to be supplied by Puget Sound Energy (PSE) from a $275 million peak shaving liquefaction plant to be built on the Tacoma waterfront – a project known as “Tacoma LNG” – which has been stalled if not permanently suspended by environmentalists lawsuits.

TOTE built two Marlin Class Jones Act containerships PERLA DEL CARIBE and ISLA BELLA (both delivered 2016) for their Puerto Rico trade lane that were to operate on LNG “from day one.” However, the ships are still largely operating on petroleum distillate fuels due to problems with supplying LNG to the ships including delays to the first LNG bunker barge to be built in the U.S. The barge was begun in 2015 at Conrad Industries, Morgan City, Louisiana, for delivery in 2016. The barge has not yet been delivered and the yard has already booked losses of $16.5 million on the project.

Originally TOTE’s LNG bunker barge was to operate from the Tacoma LNG project, but is now slated to operate at Jacksonville, Florida, where TOTE’s Puerto Rico service originates to fuel their two Marlin Class containership. In addition to the LNG bunker barge, a pier side liquefaction plant needs to be built at Jacksonville, which is reportedly under construction.

There is no LNG bunkering facility at any California port. Any proposal to construct a pier-side liquefaction plant would probably incur environmental objections, and a LNG bunker barge would likely be required. Alternatively, a LNG storage facility could be constructed on a waterfront site – probably in Los Angeles / Long Beach harbors – and supplied with LNG by road tank truck from existing liquefaction plants in the larger Los Angeles region.

In comparison to TOTE, Matson Navigation Company Inc. has chosen to continue burning fuel oil for their Alaska, China and Hawaii service by installing scrubbers on their existing motor ships (keels laid before January 1, 2016) to comply with IMO MARPOL Annex VI limits for SOx and particulate emissions. Matson plans to scrap their seven (7) steamships before the January 1, 2020 deadline.

For their current four containerships currently under construction or on order (which will have keels laid after January 1, 2016 and engine power greater than 130 KW), Matson will also have to comply with Tier III NOx and GHG requirements for operation in the NA ECA. Matson has chosen to build their ships “LNG ready” and operate on petroleum fuel (with scrubbers to comply with MARPOL Annex VI SOx and particulates).

FINANCING

A major hurdle for Pasha Hawaii will be to arrange financing for the newbuild containerships whether or not they construct 2 or 4 ships.

Based upon recent domestic construction costs for containerships and Con/Ro ships it seems reasonable to assume the cost for Pasha Hawaii newbuild containerships would be approximately $190 million each (2,525 TEU x $75,000 / TEU). As such, the total capital expenditure will be approximately U.S. $380 or $760 million depending on whether they build 2 or 4 ships. These are significant amounts. (See Table 3)

To finance their proposed newbuildings, Pasha Hawaii should be able to apply for the federal ship finance program – commonly known as Title XI – which is a loan guarantee program managed by the U.S. Maritime Administration (MARAD) for vessels built in the U.S. The program provides a long term loan guarantee of 30 years for up to 75% of the project cost and results in low interest rates.

Pasha Hawaii would have to provide minimum of 25% in cash typically from corporate resources.

The private lenders of the Title XI commitment amount (up to 75% of the project cost) and MARAD will want to see that Pasha Hawaii will be able to repay the loan.

As an analyst with a private investment firm said recently in respect of Pasha Hawaii obtaining debt financing for the newbuild containerships, potential lenders may look skeptically at the project because the investment is intended to support an existing business and not leveraged by an expansion of an existing business or entering a new business that would mean increased revenues to offset the debt service.

Although Pasha Hawaii’s Con/Ro MAJORIE C would have been eligible for Title XI financing, the MARAD records indicate the ship was not Title XI financed.

CONTAINERSHIP PACIFIC

It appears Pasha Hawaii’s Containership PACIFIC is currently at a shipyard in China. The ship reporting website Marine Traffic shows the HORIZON PACIFIC (the ship’s prior name) stopped at Nantong Port, a deepwater seaport on the Yangtze River Delta near Shanghai, on the East China Sea. As Pasha doesn’t operate any Transpacific services, there would be no other reason for the PACIFIC to be stopped in China other than to be in shipyard.

There are several shipyards in Nantong Port including COSCO (Nantong) Shipyard Co. Ltd. and Keppel Nantong Shipyard.

Matson Navigation Company Inc. has used the COSCO (Nantong) shipyard Co. Ltd. in the past to refit their older ships including most recently their three Alaska service ships for installation of scrubbers.

It would seem reasonable to assume that since Pasha is negotiating a newbuild contract for containerships with Keppel at their Brownsville, Texas, yard, that they may have decided to use Keppel’s Nantong yard to refit the PACIFIC.

The apparent purpose of sending the PACIFIC to shipyard in China would be to re-power the ship by removing the steam plant and installing a large diesel engine and scrubbers to comply with IMO MARPOL Annex VI SOx and particulate emissions standards which become effective on January 1, 2020. Because the PACIFIC is 38 years old there will not be an issue with Tier III compliance.

This is the program Horizon Line had announced in May 2012 to re-power and upgrade their ships in China, as they could not afford to build new Jones Act ships. Horizon Lines was forced to sell off its assets in 2015 prior to undertaking this program.

Pasha Hawaii may find re-powering and upgrading their four containerships in China the more attractive solution in comparison to building new ships in the U.S.

Key excerpts: 

Honolulu-based Pasha Hawaii today announced that the company has selected Keppel AmFELS in Brownsville, TX, a subsidiary of Keppel Offshore & Marine (Keppel O&M) for the construction of two new Liquefied Natural Gas (LNG) fueled containerships, with the option to order two additional vessels. Pasha Hawaii is in the process of finalizing contract specifications.

The new U.S. Jones Act vessels will carry 2,525 TEUs, including a fully laden capacity of 500 45-foot containers, 400 refrigerated containers, and 300 40-foot dry containers, with a sailing speed of 23.0 knots. Delivery of the first vessel is expected 1Q 2020, with delivery of the second vessel in 3Q 2020.

The new vessels will operate fully on LNG from day one in service, dramatically reducing environmental impact and increasing fuel efficiency. Energy savings will also be achieved with a state-of-the-art engine, an optimized hull form, and an underwater propulsion system with a high-efficiency rudder and propeller.

“As with the construction of our Jean Anne and Marjorie C, we look forward to working with an extremely qualified shipyard, based in the United States,” added Pasha, IV. “Pasha Hawaii is a firm believer in the Jones Act, and is proud to support our shipyards and the highly skilled workers who make valuable contributions to this important industry on a daily basis.”

Pasha Hawaii is a wholly owned subsidiary of the family-owned global logistics and transportation company, The Pasha Group, one of the nation’s leading Jones Act shipping and integrated logistics companies.