Since 2012, the capacity of the Jones Act fleet of tankers and large articulated tug barges (ATBs) has increased by more than one-third, to 22.5 million barrels, and over the next 18 months, new-build tankers and more large ATBs will add another 4.5 million barrel –– or 20% –– to the capacity total. That’s raised a lot of concern among vessel owners about a capacity glut and the potential for bargain-basement charter rates. What’s important to factor in, though, is that a lot of older Jones Act vessels are getting close to retirement age, and their exit from the shipping “work force” will help to mitigate the effects of any over-build. Today, we continue our series on recent developments in the Jones Act fleet and how they affect crude oil and petroleum products shippers.
In the first episode of this series, Flirtin’ With Disaster –– The Coming Oversupply of Jones Act Tankers and ATBs, we noted that 17 Jones Act tankers and large, ocean-going ATBs (combined capacity of more than 4.5 million barrels, or MMbbl) will be delivered by the end of 2017, boosting the total fleet capacity of these types of vessels by one-fifth. These new-vessel orders were made a few years ago in response to increased shipments of crude oil within the U.S. that, at the time, had resulted in a shortage of Jones Act product tankers and large ATBs. This in turn led to higher charter rates and the resulting increased costs of shipping crude oil and petroleum products in the coastwise trade. Now though, the decline in U.S. crude oil production has upended those expectations.
First, a quick review of what the Jones Act mandates. Section 27 of the Merchant Marine Act of 1920, commonly referred to as “the Jones Act,” requires that all merchandise transported by water between U.S. ports be carried in U.S.-flagged vessels that are constructed in the U.S., owned by U.S. citizens, and crewed by U.S. citizens and/or U.S. permanent residents. The RBN blogosphere has provided considerable coverage of the role that Jones Act vessels have played in the U.S. crude oil and petroleum products distribution system over the past few years since shale production increased domestic output (see Rock the Boat and The Sea and Mr. Jones). RBN also issued a Drill Down Report on the topic a couple of years back.
Newly launched ships –– freshly painted, gleaming and majestic –– may seem invincible; but just like our cars, our appliances, and even our own bodies, they experience wear-and-tear, require maintenance (even replacement parts!), and eventually approach retirement age. Tankers and ATBs, especially those that carry hydrocarbon liquids in saltwater with waves, don’t last forever, and they need to comply with ever-tightening regulations. For example, the Oil Pollution Act of 1990 (OPA 90) cleared out all the single-hull tank vessels from the Jones Act trade between 1995 and 2015 (with a specific schedule based on vessel size, type of hull, and when it was built). Numerous operators–– including Maritrans Inc. (acquired by OSG), Bouchard Transportation, Seabulk Tankers (acquired by Seacor), Allied Towing and Penn Maritime (both acquired by Kirby Corp.), and others––converted single-hull tank vessels to double-hulls either by inserting new tanks inside the old cargo tanks (thereby creating a double hull), modifying double-bottom tanks, or replacing the entire cargo section (forebody). The Jones Act product tanker and large ATB market has 19 converted double-hull tank vessels still plying the seas today, including three product tankers and 16 large ATBs (large ATBs are those with capacities of at least 142 Mbbl) that were originally built between 1968 and 1982. These 19 tank vessels are listed in Figure 1.