U.S. Renewable Diesel Rail Shipments Up Nearly 50% Over Past Two Years

The cost to charter U.S. Flag Jones Act tankers that are used to transport crude and refined products along U.S. coastal waters is still as high as $75,000/day for medium-range 330 MBbl vessels. That’s four times what it costs for an equivalent foreign flag tanker. Higher charter rates – caused by tight vessel supply in a regulated market – have attracted investment from Kinder Morgan and other midstream companies and the tanker fleet will expand by 40% in the next 3 years. Today we discuss the market potential.

The Jones Act (see The Sea and Mr. Jones) is a federal statute requiring that all goods transported by water between U.S. ports be carried in U.S. Flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and/or U.S. permanent residents. Because of the regulations, operating expenses are higher for Jones Act vessels (as much as 2.7 times non-flag alternatives according to a U.S. Maritime Administration (MORAD) study in 2011). We have provided considerable coverage of the role that Jones Act vessels have played in the U.S. crude oil distribution system over the past 4 years since shale production increased domestic output including our Rock The Boat series in the spring of 2014. Subscribers to RBN’s Backstage Pass service can download a copy of the comprehensive “Rock The Boat” Drill Down Report that accompanied that series and contained a detailed inventory of the larger vessels and their owners.

In December 2013 US Midstream giant Kinder Morgan agreed to spend nearly $1 Billion to get into the oil tanker business by buying two companies that own 5 US registered “Jones Act” vessels and are in the process of building 4 more. These tankers are part of an exclusive fleet of just 42 self propelled ocean going vessels that deliver oil or refined products between US ports. Booming US crude production along with constrained onshore delivery infrastructure have increased demand for tankers that can ship oil along coastal waters. Long-term charter rates for these tankers jumped to over $100,000/day in 2013 compared to an average of $56,000/day in 2012.  Today we begin a blog series looking at the US flagged tanker fleet and plans to expand it by 35 percent in the next 2 years.

They’re generally small in size, but renewable diesel refineries are popping up in many parts of the U.S., incentivized by government programs aimed at reducing carbon emissions and very gradually weaning Americans — and Canadians — from crude oil-based diesel fuel. Recently, HollyFrontier Corp. announced that it will be converting its decades-old Cheyenne, WY, refinery into a renewable diesel facility. While the news of another entrant into the renewable diesel market is not surprising, the complete shutdown and transformation of an existing refinery for this purpose marks only the second time this has occurred in the U.S. Today, we discuss HollyFrontier’s plans and provide an update on renewable diesel supply and demand dynamics.