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Maritime Hotspot

Shale oil and the Jones Act have made the U.S. the worldâ??s hottest maritime market. And not just for Jones Act operators.

By Jack O'Connell 2014-10-29 16:03:00

(Article originally published in July/Aug 2014 edition.)

Feel the heat? It’s coming from places like Houston and Corpus Christi, where brokers can’t find a ship to transport Eagle Ford crude to refineries along the Gulf and East Coasts. 

Feel the heat? It’s coming from places like Anacortes and Vancouver, Washington, where brokers can’t find a ship to transport Bakken crude down the West Coast to refineries in Los Angeles and Long Beach. 

Feel the heat? It’s coming from the brokers themselves, sleeves all rolled up and on the phone, hoping for a miracle. But it won’t happen. All the vessels are taken. All fifty of them. Because that’s all there are. And the demand keeps growing.

There are new ships coming, fourteen at last count – a 28 percent increase. But it’ll take a while. Next year at the earliest for the first deliveries. U.S. shipyards are filled to capacity, especially the few that can build Jones Act tankers. Actually there are only two – Aker Philadelphia Shipyard and NASSCO in San Diego. The rest are busy building U.S. Navy and Coast Guard vessels, patrol boats, offshore workboats, tugs and towboats, inland and coastal tank barges, and ferries. If you need a job, stop by your local shipyard. Failing that, head for North Dakota or South Texas. 

Maritime Renaissance

The U.S. market is red hot, and it’s not going away any time soon. Rates for medium-range Jones Act product carriers (now carrying crude) have jumped past $100,000 per day. Compare that to the $20,000 or so per day for the same ship in international markets. 

Why the differential? Two reasons. The first and most important is the Jones Act: Only Jones Act-qualified ships (those that are U.S.-built, owned and crewed) can travel between points A and B in the U.S. So if you have a cargo of crude that needs to get from Corpus Christi, Texas to a refinery in Delaware, it can only travel on a U.S.-flag ship. And that brings us to the second reason: There aren’t enough U.S.-flag ships, whereas there’s a surfeit of vessels in the international market. 

But here’s the really good news. It’s not just for Jones Act operators anymore. There’s room for everyone. Why? Because the U.S. is now exporting an incredible four-and-a-half million barrels a day of refined products to countries in Europe and South America. You read that right. Four-and-a half million barrels a day of diesel, gasoline, jet fuel, propane, kerosene – anything that comes out of a refinery. And Jones Act ships can’t compete for that trade, and don’t want to. The rates to destinations outside the U.S. are too low. So it’s open season and “come one, come all” for our foreign-flag friends with ships to spare.

We can’t export crude, as all of you savvy MarEx readers know, but there’s no law against exporting refined products, and the U.S. currently enjoys a huge price advantage over the rest of the world when it comes to refined products. Why? Because the abundance of shale oil has driven domestic oil prices below the benchmark international crude price, meaning U.S. companies can produce and deliver refined products at a price competitive with overseas refiners. Plus there’s a shortage of refinery capacity in South America and Europe, so that helps too.

And now comes word that the Commerce Department has issued permits to two U.S. companies to export condensate, a form of light crude that has been minimally processed. Most of the 3.6 million barrels a day increase in U.S. oil production over the last three years is light shale oil, and much of that is what could be classified as condensate. But let’s not get ahead of ourselves. The immediate outlook is for roughly 250,000 barrels per day this year of condensate exports, with that number doubling next year. 

It’s an amazing turn of events, really, especially when you consider that the Jones Act market was all but given up for dead not too long ago. Domestic shipyards were starving for business. The Gulf of Mexico had tanked in the wake of Deepwater Horizon, and workboats and rigs were hurrying off to places like Brazil and the North Sea and West Africa. Rates for medium-range product tankers were hovering in the $15,000 to $20,000 per day range. And critics of the Jones Act were calling for its repeal. That’s the problem, they said, it’s all because of the Jones Act. 

The prestigious Heritage Foundation even came out with a report lamenting the untouchability of the Jones Act. And that was just two months ago – in the midst of the greatest boom in U.S. maritime history. What were they thinking? Whatever. But it didn’t take long for my colleague Tony Munoz to jump to the defense of the industry and point out that whatever success we are currently enjoying is due, if not entirely, then at least in large part to the prescience of Senator Wesley Livsey Jones nearly a century ago.

How to Play It

Is it any wonder, then, that companies like Crowley and Kirby and Kinder Morgan and SEACOR are jumping on the bandwagon? Crowley, a big player in the ATB market (coastal tug/barge units ranging in capacity from 155,000 to 330,000 barrels that can transport petroleum and petroleum products), saw the light early and grabbed up two product carriers being built on spec by Aker Philadelphia in 2012 and 2013, the Florida and Pennsylvania. When that wasn’t enough to satisfy growing customer demand, it ordered four more fuel-efficient, so-called Veteran Class tankers from Aker for delivery beginning next year with options for four more. 

The deal was so attractive that the shipyard wanted in, and it invested alongside Crowley in the first four. If all goes according to plan, Jacksonville-based Crowley will become the second biggest player in the coastal trade with 17 ATBs and 10 product carriers.

The biggest player is Kirby with about 30 percent of the coastal market. At last count it had 72 coastal tank barges and 76 tugs. Its acquisition of K-Sea Transportation four years ago, at a time of depressed market conditions, was one of many brilliant moves by then-CEO Joe Pyne and propelled Kirby to the forefront of the business. 

Of course, as regular readers of this column know, Kirby is a multifaceted play. It’s the leader in the inland tank barge market as well with close to 900 units (out of a total market of 3,350), ranging in capacity from 10,000 to 30,000 barrels, transporting both petroleum and chemical products (another beneficiary of the shale boom) up and down the Mississippi River and its major tributaries. Kirby also has a large diesel engine repair business and is a major supplier of oilfield service equipment used in hydraulic fracturing.

This past January one of the nation’s biggest pipeline operators, Kinder Morgan Energy Partners, completed the purchase of American Petroleum Tankers and State Class Tankers from private equity firms Blackstone and Cerberus Capital for a cool $962 million in cash. It was Kinder’s first venture into the Jones Act market, and it followed two failed attempts to build new pipelines to transport shale oil. The company cited growing demand for the waterborne carriage of crude and refined products as the reason for its investment. 

The acquisition included five 330,000-bbl MR (medium-range) tankers and four 330,000-bbl newbuilds on order from NASSCO in San Diego for delivery in 2015/2016 and immediately made Kinder a major player in the coastal movement of crude. In June it ordered a fifth LNG-conversion-ready newbuild from NASSCO for delivery in 2017. 

SEACOR Holdings has three MRs on order from NASSCO that are similar in size and design to the 330,000-barrel, ECO-design State Class newbuilds, and it has an option for a fourth. The company already operates seven 50,000 dwt carriers, four of which are on long-term bareboat charter. SEACOR also has an inland tank barge fleet that transports both clean (petrochemicals and chemicals) and dirty (black oil) products. In addition to having the inland and coastal markets covered, Seacor has terminal operations that transfer crude and other products from unit trains to barges, a growing business. 

LNG, LPG and NGLs

Can it get any better? Yes it can. That’s because LNG is on the horizon, with five export terminals already approved on the Texas and Louisiana coasts and at least 12 awaiting approval. First production is expected late next year from Cheniere Energy Holdings, and it can’t come soon enough for a world starving for new supply, particularly in Europe where Russian gas has a stranglehold on the market. The timing is propitious as well, given the anticipated opening of the expanded Panama Canal late next year or in early 2016 that will permit passage of large LNG carriers to markets in Japan, Korea and Asia.

Now here’s an interesting fact. Did you know that the U.S. has been exporting LNG to Japan for more than 40 years? Yes, from a plant in Alaska built in 1969 and owned by ConocoPhillips. It’s located on Cook Inlet in Nikiski. Production shut down last year due to the expiration of the original export license and a temporary shortage of gas. But those issues have been resolved, and the facility is expected to resume operation later this year.

Meanwhile, LPG – that’s Liquefied Petroleum Gas – and NGLs (natural gas liquids) are all the rage. They’re really the same thing and refer to products like propane (used for heating and cooking), butane (cooking), and ethane (a major petrochemical feedstock for the manufacture of ethylene, used to make plastics). They are a byproduct of shale oil production and, according to the Energy Information Administration, the U.S. is already exporting more than half a million barrels a day of NGLs and is well on its way to the becoming the global leader in NGL exports. The expanded Panama Canal will make sure of that. 

The big publicly-held players in the LPG space are Navigator Holdings, Avance Gas Holding, Dorian LPG (whose ticker symbol is, appropriately, “LPG”) and BW LPG. There are only 160 or so LPG carriers in the global fleet, and rates for the largest Panamax VLGCs are approaching $100,000/day. 

Good as It Gets

So shale is the gift that keeps on giving, and its benefits extend to U.S. and foreign-flag operators alike. Play it while you can. 

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.