Time Will Tell - Sagging Supply and Rising Demand for Jones Act Ships to Send Rates Higher

Back in 2013-14, a run-up in demand for Jones Act tankers and large articulated tug barges –– and a spike in time charter rates — spurred orders for a flotilla of new vessels. By the time the new tankers and ATBs were built and launched, however, demand for them had fallen off. That decline was mostly due to the mid-decade slump in U.S. crude oil production and, with the lifting of the ban on most U.S. crude exports, the drop in crude shipments from one U.S. port to another. Term charter rates plummeted and ship owners stopped ordering new tankers and large ATBs. Now, for the first time in more than five years, there are barely enough Jones Act vessels to go around, and charter rates are on the rise. Today, we discuss recent trends and how they’re impacting crude oil and refined products transportation costs.

This year marks the 100th anniversary of the Merchant Marine Act of 1920, a federal law whose section 27 is better known as the Jones Act for its author, Senator Wesley Jones of Washington state. As we said in The Sea and Mr. Jones, the Jones Act requires that all goods transported by water between U.S. ports be carried in U.S.-flagged ships constructed in the U.S., owned by U.S. citizens, crewed by U.S. citizens, and registered in the U.S. As it applies to the energy sector, the Jones Act fleet consists of five main categories of vessels: smaller inland barges that typically carry either 10 Mbbl or 30 Mbbl of crude or refined products and operate on inland waterways as well as coastal canals; regional offshore tank barges (e.g. New York Harbor) with capacities of 50 MMbbl to 135 Mbbl; coastal barges, including larger articulated tug barges (ATBs) with capacities of 142 Mbbl to over 320 Mbbl; tankers that operate in both coastal and international waters and generally carry ~330 Mbbl of crude oil or refined products; and large crude oil tankers in the Alaskan trade.

RBN Studio Sessions

In Flirtin’ With Disaster, we explained that the maritime industry is well known for its boom-and-bust shipping cycles, when periods of strong charter rates lead to overbuilding and subsequent rate collapses. A boom in charter rates for ATBs and tankers last occurred in 2013-14, when sharp increases in U.S. crude and condensate production spurred extraordinary demand for Jones Act vessels. The “shot heard ‘round the world” for those in the Jones Act trade was Koch Industries’ re-letting (or sub-chartering) of the Jones Act product tanker American Phoenix for $120,000/day in the spring of 2014; there were also several other charters of $100,000/day or more that same year. The combination of high demand for Jones Act vessels and soaring charter rates prompted a flood of orders at U.S. shipyards. The capacity of U.S. shipbuilders to construct new vessels is limited, though. There are only two U.S. shipyards currently able to build Jones Act tankers: General Dynamic’s NASSCO in San Diego, CA, and the Philly Shipyard in the City of Brotherly Love. In addition, ATBs for the Jones Act fleet can be built at VT Halter along the U.S. Gulf Coast; DonJon and Fincantieri Bay along the Great Lakes; Greenbrier Marine in Portland, OR; and Senesco in North Kingstown, RI. It now takes about three years for new-order product tankers and large ATBs to be contracted, built and delivered. And, as everyone in the energy and shipping businesses knows, a lot can happen in three years.

To access the remainder of Time Will Tell - Sagging Supply and Rising Demand for Jones Act Ships to Send Rates Higher you must be logged as a RBN Backstage Pass™ subscriber.

Full access to the RBN Energy blog archive which includes any posting more than 5 days old is available only to RBN Backstage Pass™ subscribers. In addition to blog archive access, RBN Backstage Pass™ resources include Drill-Down Reports, Spotlight Reports, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. If you have already purchased a subscription, be sure you are logged in For additional help or information, contact us at info@rbnenergy.com or 888-613-8874.