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Saturday, November 28, 2020

Maritime Logistics Professional

Apples and Oranges

Posted to Global Maritime Analysis with Joseph Keefe (by on December 10, 2015

Introducing the Jones Act Discussion into Energy Exports is a Decidedly Bad Idea.

For the record, I’m an unapologetic, vociferous proponent and defender of the Jones Act. At the same time, I’m also a pragmatist. All of that said, the long and circuitous course line to legalizing U.S. crude oil and LNG exports is finally moving towards the likelihood that someday, under some future conditions, that this will be a viable business niche that will greatly benefit the U.S. economy in so many different ways. Yes, some of that will come on the waterfront in the form of maritime-related jobs and infrastructure. Sadly, and at the same time, demanding that U.S. built and flagged LNG carriers be part of the mix will short-circuit the process before it ever begins.

With that in mind, the U.S. Government’s General Accounting Office (GAO) recently explored the “Implications of Using U.S. Liquefied-Natural-Gas Carriers for Exports.” Prominent in that discussion is the Congressional debate as to whether to propose legislative language that would require U.S. LNG to be exported via U.S.-built-and-flagged carriers with the goal of supporting U.S. shipbuilders and mariners. As the U.S. Department of Energy (DOE) and the industry it regulates look toward a time when the United States is expected to change from a net importer of natural gas to a net exporter, with those exports destined for different regions of the world, especially Asia, GAO says at least five large-scale U.S. liquefaction facilities – necessary for conversion of natural gas to liquefied natural gas (LNG) – are under construction with a projected capacity to export more than 12 percent of U.S. natural gas production in 2020. Much of that output has already been sold via long term contracts.

With eyes on the low hanging fruit represented by as many as 5,000 mariner positions and the boon to U.S. shipbuilding, should the U.S. flag requirement be enacted, it is understandable that Jones Act stakeholders would embrace the concept. Even GAO says that as many as 100 LNG carriers might be needed to fully satisfy that mandate. Nevertheless, LNG carriers have not been built in the United States since before 1980, and no LNG carriers are currently registered under the U.S. flag. Beyond this, the estimated cost of a typical Jones Act compliant, oceangoing LNG carrier would likely be three times as much as it would cost in other places – something that will have to be amortized over time, as a function of the cost of transportation. And, says GAO, it would take 30 years based on current domestic shipbuilding capabilities and infrastructure.

The bigger picture is even more daunting. That’s because, based on GAO analysis, these vessels and their associated operating expenses would increase the cost of transporting LNG from the United States, decrease the competitiveness of U.S. LNG in the world market, and may, in turn, reduce demand for U.S. LNG. You think? And, says GAO, several LNG sector stakeholders insist that the proposed requirement might prompt customers to attempt to modify, renegotiate, or terminate their existing contracts for liquefaction.

Finally, and as the export program kicks off, the limited (non-existent) availability of U.S. carriers in the early years of construction could reduce the volume of LNG that could be exported from the United States, leading buyers to look elsewhere for energy. Of course, shippers could request Jones Act waivers in these cases, a process that the current administration has shown itself to be a more than willing and prolific partner. It is therefore more than possible that when organized labor finally awakens from this era of ‘hope and change,’ they will realize that this administration did them no favors, whatsoever. But, I’m straying off-message here. Or, am I?

The key benefits of exporting LNG – and crude oil in general – are many, and cannot be argued. A marked reduction in a trade deficit that is already heavily steeped in energy imports to begin with would be the first immediate windfall for the U.S. economy, tax revenues, and everything else. Looking to the broader economy, exporting energy does nothing but benefit the greater economy through jobs, infrastructure improvements and the tax revenues that stem from that side of the ledger. This is something that will have a snowball effect if it ever does get rolling. But, not with the millstone of increased transport costs tightening around the export equation’s neck.

Given current energy prices and market conditions, the discussion might just amount to nothing more than idle banter, especially as the White Knight lure of LNG fades a bit as the price differential between it and traditional fuels has narrowed. Still, one can’t ignore the current climate discussions going on in Paris. Something – perhaps not to the scale and/or satisfaction of the environmental sector – will evolve from those talks, and without a doubt, LNG is going to be a bigger part of the solution.

Separately, even Jones Act opponents in Puerto Rico are taking aim at the proposed, modified cabotage rules. Already the most vocal critics of the Merchant Marine Act of 1920, local politicians insist that the Jones Act (if applied to export energy) could become an impediment to (1.) access in Puerto Rico to natural gas and other energy supplies produced in the U.S. mainland; and (2.) the establishment of Puerto Rico as a transshipment hub for the distribution of U.S.-produced natural gas and other energy supplies to U.S. trading partners in the Western Hemisphere. For once, and as it refers only to this narrow aspect of proposed rules, they are probably right. And, they are asking Congress to investigate the situation. Hence, the (proposed) U.S. Flag requirement for energy export only gives (unwelcome) weight to their collective voice.

The Jones Act has its rightful place in the security, economy and well-being of this island nation. That can be said for many other countries with similar rules. Extending that premise to export commerce, especially where it applies to LNG, will accomplish little and ultimately, will likely kill any possibility of U.S. output from becoming part of the global energy picture. For my part, I wonder if the (proposed) U.S. flag requirements were thrown in as a Red Herring, for that very purpose. Either way, it is like comparing Apples and Oranges. A long time ago, probably while still in Kindergarten, most of us learned that this was a bad, if not impractical thing to do. It still is. – MarPro


Read the GAO Report HERE.

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Joseph Keefe is the lead commentator of MaritimeProfessional.com. Additionally, he is Editor of both Maritime Professional and MarineNews print magazines. He can be reached at jkeefe@maritimeprofessional.com or at Keefe@marinelink.com. MaritimeProfessional.com is the largest business networking site devoted to the marine industry. Each day thousands of industry professionals around the world log on to network, connect, and communicate.