Will the Colonial Pipeline cyberattack necessitate a Jones Act waiver?
by Michael Hansen, Hawaii Shippers Council, May 10, 2021
A Friday, May 7, 2021, cyberattack shutdown the Colonial Pipeline Company that operates the largest petroleum products pipeline system in the U.S. It supplies clean petroleum products (primarily motor gasoline, jet fuel and diesel) from refineries on the U.S. Gulf Coast to much of the middle and lower Atlantic states from Georgia to New Jersey. The shutdown continued on Monday, May 10, 2021.
According to the Company’s website, the 5,500 mile long Colonial Pipeline transports clean petroleum products from Pasadena, Texas, north to Linden, New Jersey, and New York Harbor, supplying about 45% of these products consumed on the East Coast.
The Wall Street Journal (WSJ) news article, “Colonial Pipeline Shutdown Threatens to Magnify Gasoline-Price Surge,” published May 10, 2021, reported Colonial said Monday that they “hoped to substantially restore service on the pipeline by the end of this week [Sunday, May 15. 2021].”
NBC News in a news article, “Colonial pipeline hack claimed by Russian group DarkSide spurs emergency order from White House,” published May 10, 2021, reported, “The FBI said that ‘the DarkSide ransomware is responsible for the compromise of the Colonial Pipeline networks.’ “
NBC noted, “[its] believed to be operated by a Russian cybercrime gang referred to by the same name. Like many ransomware gangs, DarkSide makes money by hacking a victim’s network, encrypting their files so they can’t be accessed and threatening to publish them online if they’re not paid a hefty fee.”
The Oil Price Information Service (OPIS), an IHS Markit Ltd. company, advised by email release on Saturday, May 8, 2021, “Previous OPIS analysis has suggested that some summer days could see 9.5 million barrels/day or so of consumption [for motor gasoline in the middle and lower Atlantic states], straining the ability of transport truck drivers to move product from terminals to stations.”
OPIS further reported, “Northeastern supply can readily be supplemented by foreign imports of gasoline, and indeed gasoline and various components have averaged over 1 million barrels/day for three consecutive weeks.”
This statement acknowledges the importance of European supply of motor gasoline shipped on foreign flag tankers primarily to the six New England states. This trade exists because of the lack of domestic refining capacity on the East Coast, limited pipeline capacity and the high cost of Jones Act shipping from the center of U.S. refining on the Gulf Coast.
OPIS opined, “One other possibility deserves mention. With hurricanes or even superstorms, U.S. regulators have occasionally suspended the Jones Act so that suppliers can move barrels between deepwater ports at cheap foreign flagged tanker rates. One could make the case that the Biden Administration might consider such a move sooner rather than later if Colonial software issues persist.”
The issue of a Jones Act waiver was also taken up by gCaptain, an online a provider of daily industry news to the global maritime and offshore industry and editorially supportive of the Jones Act.
gCaptain published on May 10, 2021, the opinion-editorial (op-ed), “Colonial Pipeline – To Waive Or To Not To Waive The Jones Act.” It outlines a set of conditions the Biden Administration should follow if the Colonial Pipeline is not returned shortly to full operation and a Jones Act waiver needs to be issued.
gCaptain recommends the first option should be to use the existing Jones Act tankers, noting “. . the nation can call on 57 Jones Act compliant tankers in the US fleet, of which 44 are on the Gulf and East coasts. These ships are largely used to transport distillate fuel to areas not serviced by the pipeline, such as Florida and New England.”
Though gCaptain concedes, “The 44 tankers average about 45,000 deadweight tons, which is equal to 8 million gallons of gasoline [per ship].” However, they note, as the Colonial Pipeline has “ . . a daily capacity of 100 million gallons, it would take large numbers of vessels to be able to meet this requirement.”
A back of the envelope calculation, assuming a round voyage (U.S. gulf / Middle Atlantic / U.S. Gulf) of about 7 days, would indicate a total of approximately 85 oceangoing tankers would be required to carry 100 million gallons per day. As most of the Jones Act tankers are dedicated to existing requirements and could not be freed to substitute for the Colonial Pipeline, this option would fall far short.
Their second option would be “Ideally, the entry of such vessels [medium range foreign-flag clean product tankers] into the American cabotage trade should require the ships to be reflagged, and bareboat chartered to US firms so that they could manage them and replace their crews with American mariners. However, the timeframe of the [current Colonial Pipeline] closure may preclude this from happening, but if the shutdown is long-term, then this should be a consideration.”
There is no provision in U.S. law to provide for this approach, and any legislative effort to enact an enabling statute would in all likely be opposed by the Jones Act lobby as it would breach the industry's sacrosanct domestic build requirement.
A more practical approach roughly along the same lines would be to allow U.S. ship operators to bare-boat charter (akin to an equipment lease) foreign-flag tanker ships and employ U.S. crew onboard. This is a commonly used practice in the Australian cabotage trade that would be faster to implement, more flexible and less permanent.
The third gCaptian option, “Should American carriers be unable to provide the necessary tonnage and carrying capacity, then limited waivers should be granted for foreign-flagged tankers to participate in the trade on a case-by-case, single voyage basis.”
This is the usual procedure for temporary short-term Jones Act waivers. The authorizing statute is 46 USC § 501, “Waiver of navigation and vessel-inspection laws,” which was originally enacted in 1950.
The statute has typically been used to issue temporary administrative trade waivers to allow foreign flag ships (and U.S. flag vessels not coastwise eligible) to lift defined domestic cargoes, for shipment between defined U.S. places, and complete the loading, transportation and discharge of those cargoes all within a limited period of time, which is usually not more than a week or two.
Although administrative Jones Act waivers have been granted for 70 years, the administrative procedures that generally have been past practice were formalized and tightened in statute up by a section of The National Defense Appropriation Act for Fiscal Year 2021 (NDAA FY 2021) as follows:
• Strengthen the differentiation between waivers granted for military and commercial operations and specified that DOD waivers must in fact be for military operations. .
• Specify the time duration of waivers for commercial operations “by head of agency” to the usual practice of 10 days with extensions up to 45 days.
• Increased and made far more specific the reporting requirements for waivers applicable to commercial operations.
These changes could make issuing administrative Jones Act waivers more difficult than in the past.
In addition, President Biden may not be as keen as President Trump was to issue Jones act waivers. On January 25, 2021, President Biden signed an Executive Order (EO) strengthening what are known as “Buy America” provisions in federal law and policy. Both Pres. Biden’s "Buy America" EO and accompanying briefing statement included explicit declarations of his administration’s support for the Jones Act and its inclusion his Buy American policy.
At the end of the day, for the Biden administration, whether or not to issue a Jones Act waiver will depend on several factors including: how long the Colonial Pipeline is shutdown; the severity of the product shortages along the East Coast; and, the political calculation of Jones Act lobby support versus harm inflicted on consumers.
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