A flurry of recent economic data and activity suggests that U.S. tanker markets, both Jones Act and international, are riding swift new market currents that were unforeseen just three years ago. On November 14, 2013, the White House announced that the U.S., for the first time in nearly two decades, is importing less foreign oil than we are producing domestically. By the end of FY2014, imported crude oil shipments are expected to fall below 7.0 million barrels per day (bbl/d). As recently as the summer of 2010, imports reached nearly 10.0 million bbl/d. Domestic production is up 39 percent since 2011 and now exceeds 8.0 million bbl/d. The U.S. Energy Information Agency estimates that in 2013, the U.S. became the world's top oil and natural gas producer, exceeding the production of both Russia and Saudi Arabia, and is poised to become the leading crude producer next year. The increase is largely due to the rapid development of advanced drilling techniques, including horizontal drilling and hydraulic fracturing (fracking) in Texas, North Dakota, and Pennsylvania.
In the process, domestic production has flipped the crude oil import market on its head and accelerated the construction of U.S. built tankers for the coastwise trade. The Jones Act mandates that only U.S.-owned, -built, and -flagged vessels carry cargo between points in the U.S. Approximately 42 tankers currently ply the Jones Act trade. At least eleven product tankers, with options for quite a few more, are currently under construction at the Aker Philadelphia and General Dynamics-NASSCO San Diego shipyards, though the first of these are not expected to come on line until 2015. As well, new domestically-built, crude-carrying integrated tugs and barges are under construction. Meanwhile, charter rates for domestic tankers are reaching market peaks.
Yet, while coastwise tanker owners demand ever higher freight rates with domestic production accelerating, charterers are not sitting idle as they consider alternative modes of transport. Unprecedented investments in rail, pipeline, and terminal capacity are underway, fueling growth in Gulf Coast refining capacity and bringing new life to East Coast refining centers, where many facilities are better suited to light-shale crudes. The Philadelphia area alone is seeing an unprecedented influx of hundreds of thousands of barrels of Bakken crude every day, bound for local refiners. In addition, although much is made of the U.S. becoming a net exporter of refined products, sourcing products from overseas via foreign vessels remains an important strategic option for charterers.
Looking ahead, the outlook for the U.S. tanker markets hinges not only on the continued domestic production boom, but also on regulatory and political developments in Washington, particularly with regard to the decades-old ban on exporting U.S. crude oil. The 1973 Arab Oil Embargo prompted Congress to pass legislation that bans the export of U.S. crude, except to Canada, with only narrow and largely untested exceptions. In an effort to lift the ban, certain oil industry proponents contend that it has outlived its usefulness, artificially depresses prices, discourages investment in new production, exacerbates the U.S. trade deficit, and violates World Trade Organization export restriction rules. Not all U.S. oil industry businesses support lifting the ban, however. Some domestic refiners urge keeping the ban in place, as domestic crude production has sparked a boom in refinery investment, and lifting the ban could see the spread between U.S. and global prices (the Brent-WTI gap) narrow or disappear. Their unease is understandable; all investors in this sector—shipowners, refiners, terminals, pipelines, and other infrastructure—are struggling to weigh the risks and uncertainty caused by the unpredictable long-term outlook for the U.S. crude export ban.
On January 31, 2014, Congress held the first hearing about the crude export ban in a quarter century. Alaska Republican Senator Lisa Murkowski, Ranking Member of the Senate Energy and Natural Resources Committee, is currently the most vocal proponent of lifting the ban arguing that it adversely affects U.S. productivity and contributes to supply disruptions. Proponents of lifting the ban received a boost in recent days, when Democratic leadership announced that Sen. Mary Landrieu, another supporter of crude exports, was tapped to take over as chair of the Senate Energy and Natural Resources Committee. She and Sen. Murkowski will provide powerful bipartisan Senate leadership on this issue. At the CERA Week Energy Conference in Houston on March 3, 2014, Sen. Murkowski proposed a three-part plan to gradually lift the ban through executive action. Several members of Congress, including Democratic Senators Ed Markey and Robert Menendez, oppose lifting the ban because of the gasoline price effect, and it appears unlikely that Congress will tackle this divisive issue head-on this election year.
The Obama Administration has gone to some lengths to avoid articulating a position, or even acknowledging that it is actively rethinking the ban. However, the Commerce Department and other officials have worked with individual companies to clarify and apply little-used exceptions to the crude ban. For example, as news outlets have noted in recent days, the Commerce Department appears to have begun licensing shipments of Canadian crude for shipment from U.S. ports, and much attention is being given to how the Administration will apply its "public interest" exception authority to provide for physical swaps of equivalent import and export volumes.
While the clamor for reforming the crude ban has escalated in recent months, calls for reexamining the Jones Act have been more muted. An unintended consequence of the Jones Act is that it costs more to transport crude from Texas to New York than it does from Texas to Canada because of the significant difference in freight rates between U.S. and foreign tankers. Refiners on the East Coast are paying far more to obtain domestic crude from the Gulf Coast than their Canadian counterparts. This has led groups such as the American Fuel and Petrochemical Refiners to call for changes to the coastwise laws; however, there appears to be little interest in Congress or the Administration at this point for such an initiative. While there is always talk about changes to the Jones Act, seeing is believing.
The exponential growth of domestic oil and gas production is also shifting the landscape of import and export tanker activity. During the past forty years, domestic refiners have imported a substantial amount of crude via tankers to provide feedstocks for their terminals. That demand increased the size of crude tankers and led to an offshore lightering trade in the Gulf of Mexico that employs smaller 70,000 deadweight ton (dwt) tankers to offload crude from 200,000 (and larger) dwt Very Large Crude Carriers ("VLCCs") and carry that imported crude to domestic refineries for conversion. With the advent of domestic fracking, it is conceivable within the next few years for many U.S. refineries to reverse that process in large measure such that they will be refining primarily domestic crude. In 2014, the U.S. is expected to import 3.6 million bbls/d less crude oil by sea than at the import apex in 2005. That equates to an astounding 1.3 billion barrels less per year, or, conservatively, enough crude oil to fill a 200,000 dwt VLCC more than a thousand times every year. This import decline is likely to continue until the U.S. reaches its maximum crude oil productivity.
The net effect is that crude imports will travel elsewhere, and domestically refined products will dominate the export market. Charter rates for foreign-flagged tankers carrying foreign crude sailed in the doldrums for much of last year with too many ships ordered before the recession hit, though a number of companies are investing in a crude market turnaround. Foreign crude carriers enjoyed a tremendous spike in rates at the end of last year, which allowed owners to breathe a sigh of relief; however, expectations in the charter trade are that rates will settle back down this year to levels more akin to 2013. Unless Congress lifts the ban on exporting domestic crude, rather than crude carriers, the U.S. market will demand even more tankers that can carry substantial quantities of refined product. The U.S. is currently exporting more than 3.5 million bbls/d of such products. Charter rates for these product tankers are increasing accordingly.
The rise of domestic crude production is literally changing the course of foreign crude carriers away from North America, while promoting a surge in domestic crude tanker capacity and boosting the export of refined products. In just a few short years, domestic fracking has fundamentally altered the tanker trade to this continent and the shoreside infrastructure that serves it— and it would seem there are more changes to come.
Sources: Roll Call – Oil Export Debate Renews Fight Over Protections for U.S. Shipping (4 Feb. 2014); E&E Daily, Energy Policy: White House leaves door open to revising crude export limits (31 Jan 2014); MARAD statistics, United States Flag Privately-Owned Merchant Fleet, 2000-1014; Bloomberg, Oil-Tanker Recovery Trails Market With U.S. Export Ban: Freight by Isaac Arnsdorf (9 Jan. 2014); Tradewinds article, Valero Defends Ban (8 Jan. 2014); Bloomberg, Unforeseen U.S. Oil Boom Upends Markets as Drilling Spreads by Asjylyn Loder (8 Jan. 2014); Oil & Gas Journal, Murkowski: Ban on US crude oil exports should end soon by Nick Snow (8 Jan. 2014); Reuters, Lisa Murkowski Urges Review of Oil Exports Ban by Valerie Volcovici (7 Jan 2104); Law 360, US Trade Gap Narrows as Exports Hit $195B, Oil Imports Drop edited by Philip Shea (7 Jan. 2014); U.S. Energy Information Administration (EIA), U.S. crude oil production on track to surpass imports for first time since 1995 (26 Dec. 2013); Bloomberg, Oil Industry May Invoke Trade law to Challenge Export Ban (5 Nov. 2013); Journal of Commerce, Could Crude Oil Put the Jones Act into Play? By Peter Tirschwell (30 Oct. 2013); EIA, U.S. expected to be largest producer of petroleum and natural gas hydrocarbons in 2013 (4 Oct. 2013); EIA, Oil and gas industry employment growing much faster than total private sector employment (8 Aug. 2013); Reuters, Analysis: Shale oil storm blows U.S. tanker trade out of doldrums by Anna Louie Sussman (1 Jul. 2012); EIA, A number of western states increased oil production since 2010 (21 May 2013); EIA, Abundant U.S. Supply, low demand could cut dependence on liquid fuel imports (17 Apr. 2013); Reuters, Analysis – Texas oil sails to Canada, refiners fume over tanker law by Jonathan Leff and David Shepard (1 May 2013).
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