Much like the “crude-by-rail” phenomenon, the burgeoning interest in transporting crude oil by tanker or tanker barge to U.S. refineries represents an innovative answer to a simple question: What is the best, most cost-effective way to move growing domestic and Canadian oil production from the wellhead to refineries? Using waterborne transportation to move crude to market requires a comprehensive understanding of the Merchant Marine Act of 1920—better known as the Jones Act—which regulates maritime commerce in U.S. waters and between U.S. ports. RBN’s latest Drill-Down Report provides a thorough review of the law and its impact on crude oil markets. In today’s blog we examine the highlights of – Rock the Boat, Don’t Rock the Boat— Impact of the Jones Act on U.S. Crude Oil Markets.
The report, which is available exclusively to RBN Backstage Pass subscribers, builds upon a series of blogs we have written in the past two years about the Jones Act itself and about increasing use of U.S.-flagged tankers and barges to move crude along inland waterways and along the nation’s three coasts for offloading at refineries. Over the past three years crude-by-water has emerged as an important transportation alternative for producers hampered by pipeline bottlenecks and enticed by the higher price they can receive if their products are deliverable to certain locations. The use of Jones Act vessels (which under that law must be built in the U.S., and be owned and crewed by U.S. citizens) often occurs in tandem with railroads—another pipeline alternative, which have been instrumental in delivering Bakken, Niobrara, and other crude to market.
A RBN Backstage Pass subscription gives you full access to RBN’s Drill-Down Reports, Blog Archive Access, Spotcheck Indicators, Market Fundamentals Webcasts, and Get-Togethers. Our newest RBN Drill Down report titled Rock the Boat, Don’t Rock the Boat— Impact of the Jones Act on U.S. Crude Oil Markets examines the growing use of US flagged tankers and barges to transport crude oil. More information on Backstage Pass here.
The requirements the Jones Act places on ships operating between U.S. ports add significant costs, including those that are associated with less-favorable economies of scale at U.S. shipyards, a lower level of competition among U.S. ship builders, and higher wages and insurance costs for Jones Act workers. Those higher costs have reduced the number of ships built for “coastwise” and inland movement of crude oil, and the relatively small size of the U.S.-flagged fleet and increased competition for Jones Act vessels has resulted in sharply higher charter costs and shipping fees. And charter costs and shipping fees, of course, are key factors in determining whether transporting crude on a Jones Act vessel makes economic sense in a particular situation.
Source: Crowley Maritime (Click to Enlarge)
In some cases, such as transporting Alaska North Slope (ANS) crude to West Coast refineries, a combination of pipeline and Jones Act tankers is the only viable transportation alternative. In many other situations, however, moving crude by tanker or barge has become an alternative worth considering for flexibility and potential for better economics that the option provides. Two primary examples of the crude-by-water boom are the Bakken shale play in North Dakota and the Eagle Ford play in South Texas. In the Bakken, crude price discounting due to a lack of pipeline capacity to transport surging production to market initially led to producers adopting crude-by-rail alternatives to by-pass congestion and reach higher priced markets for crude at the East, West and Gulf coasts in 2012. Although rail offers great flexibility of destination via an existing railroad network, rail-only transportation requires crude unloading terminals at each refinery in order to complete the journey by rail. Where no such rail facility exists, in many cases there is simply not enough available land near the refinery to build a rail terminal.
Since most U.S. refineries are in coastal locations or adjacent to inland waterways, it frequently makes more sense to transfer crude from rail to barges for the final leg of the journey to refineries because one barge terminal can serve multiple refineries. Shippers therefore have developed rail-and-barge journey combinations, such as moving Bakken crude by rail to ports along the Upper Mississippi or Illinois rivers, where it can be barged downriver to refineries at the Gulf Coast. Bakken crude also is being railed to the Port of Albany in upstate New York, where it is barged down the Hudson River and along the East Coast to refineries in Pennsylvania and New Jersey.
Another example is the Eagle Ford. In that shale play, there was adequate pipeline capacity to meet surging crude production in 2012, but much of that capacity shipped crude east to Houston, where pipeline congestion and inadequate storage provided an inflexible solution to get barrels to market. As a result, shippers preferred to use pipelines running south to Corpus Christi terminals at the Gulf Coast. From there crude is loaded onto barges and tankers for the final leg of its journey to Texas and Louisiana Gulf Coast refineries or points as far east as the Atlantic Seaboard.
Our Rock the Boat, Don’t Rock the Boat report details the primary types of Jones Act vessels--self-propelled tankers, articulated tug barges (ATBs), and tank barges--as well as the key inland and coastal routes (see map below) that crude-carrying vessels commonly ply (plus a few routes that may become popular soon). The drivers behind the use of major routes, such as from Corpus Christi to Gulf Coast refineries, the Louisiana Offshore Oil Port (LOOP), and refineries along the Eastern Seaboard are explained in detail.
Source: RBN Energy (Click to Enlarge)
The degree to which Jones Act tankers and barges are used to move crude oil through U.S. inland waterways and along the nation’s coasts is based upon a mix of economic, logistic and other factors. Just as with any other mode of transportation however, the general rule is that a producer or shipper will look to ship crude to the destination with the lowest transport cost and the highest crude price--a calculation known as a crude netback. These considerations help determine whether it makes sense at any given time to move crude via Jones Act vessels.
The crude-by-water phenomenon faces several challenges that are explored in the report. For instance, the increased use of coastwise and inland vessels to move crude depends not only on the availability of tankers and barges but on a cost-effective rate for chartering them; that is, the value gained by using waterborne transportation to move crude needs to outweigh the cost of doing so. With the supply of Jones Act vessel so tight—utilization rates have risen to 90%, and in some cases approach 95%--access to tankers and barges is not a given, leasing rates are rising past $70,000/day, and at least a few tankers are said to be leasing for $100,000/day or more. Another challenge to the increased use of Jones Act vessels is that competing pipeline capacity is continually being expanded to ease bottlenecks and provide the simplest, least expensive paths to market.
As the recent boom in U.S. crude oil production has shown, however, pipelines are limited by their very fixed nature—that is, they go from Point A to Point B; they have established capacities; and while they can be expanded and extended, that work takes time. Crude-by-rail offers more flexibility than pipelines, but rail transportation of crude is considerably more expensive on a cost/Bbl basis than moving crude by pipeline and is generally more costly than moving crude by tanker or barge. For one thing, coastwise and inland vessels can move significantly larger volumes than rail tank cars can. Waterborne deliveries also provide flexibility. Most refineries on or near U.S. coasts—and many of those along inland waterways--have barge access because the U.S. for decades imported most of its crude. In contrast, many refineries would need to build unloading facilities to receive crude by rail. So, given the choice and a suitable waterborne route, shippers use barges to move crude longer distances as well as for the final leg from rail destination terminal to refinery.
As we noted above, the demand for Jones Act vessels is at or near an all-time high, mostly due to the boom in crude-by-water. As noted above, the utilization rate for inland tank barges currently is between 90% and 95%, and the utilization rate for coastwise tankers and barges is at about 90%; 95% utilization is considered to be the maximum achievable rate.
New Jones Act tankers and barges are being built to address that shortfall in capacity. For example, SeaRiver Maritime, a wholly owned subsidiary of ExxonMobil, is awaiting delivery later this year of two crude tankers. And State Class Tankers, which is being acquired by Kinder Morgan Energy Partners, has commissioned the construction of four Medium Range (MR) Jones Act tankers, each with a capacity of 330 MBbl, that will be delivered over the next two years. But some new vessels being built are replacing older tankers and barges being retired, and the potential for more additions to the Jones Act fleet is limited by the capacity of U.S. shipyards to build them.
Finally, the report provides an extensive listing of leading Jones Act vessel owners—and, in an appendix, a list of the 42 U.S.-flagged coastal tankers and a list of 49 articulated tug barges (ATBs) with capacities of 140 MBbl or more. The owners list includes companies such as Crowley Maritime and Kirby Corp. that focus on shipping, as well as producers (ExxonMobil and ConocoPhillips, among others) and midstream companies with Jones Act vessel fleets. The list details the companies’ vessel assets, and publically announced plans to acquire additional tankers and barges.
The Jones Act trade will continue to evolve, of course, as oil price differentials change, new pipeline capacity becomes available, and the costs associated with Jones Act shipping rise and fall. But our Crude-by-Water and the Jones Act report provides a detailed perspective on the subject, and important, up-to-date information for crude oil producers and marketers angling to maximize their crude oil netbacks.
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