Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Congressional research reportJul 21, 2014

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Shipping U.S. Crude Oil by Water: Vessel Flag

Requirements and Safety Issues

-name redactedSpecialist in Transportation Policy

July 21, 2014

Congressional Research Service

7-....

www.crs.gov

R43653

Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Summary

New sources of crude oil from North Dakota, Texas, and western Canada have induced new

routes for shipping crude oil to U.S. and Canadian refineries. While pipelines have traditionally

been the preferred method of moving crude overland, they either are not available or have

insufficient capacity to move all the crude from these locations. While rail has picked up some of

this cargo, barges, and to a lesser extent tankers, also are moving increasing amounts of crude in

domestic trade.

The rather sudden shift in transportation patterns raises concerns about the safety and efficiency

of oil tankers and barges. The United States now imports less oil than five years ago by

oceangoing tankers, while more oil is moving domestically by river and coastal barges. However,

the Coast Guard still lacks a safety inspection regime for barges similar to that which has long

existed for ships. The possibility of imposing an hours-of-service limit for barge crews as part of

this regime is controversial. Congress called for a barge safety inspection regime a decade ago,

but the related rulemaking is not complete. The Coast Guard’s progress in revamping its Marine

Safety Office is a related issue that Congress has examined in the past.

The majority of U.S. refineries are located near navigable waters to take advantage of economical

waterborne transport for both import and export. However, for refineries switching from imported

to domestic crude oil, the advantage diminishes considerably. This is because the Jones Act, a

1920 law that seeks to protect U.S. shipyards and U.S. merchant sailors in the interest of national

defense, restricts domestic waterborne transport to U.S.-built and -crewed vessels. The purchase

price of U.S.-built tankers is about four times the price of foreign-built tankers, and U.S. crewing

costs are several times those of foreign-flag ships. The small number of U.S.-built tankers makes

it difficult for shippers to charter tankers for a short period or even a single voyage, highly

desirable in an oil market with shifting supply patterns. The unavailability of U.S.-built tankers

may result in more oil moving by costlier, and possibly less safe, rail transport than otherwise

would be the case. Some Texas oil is moving to refineries in eastern Canada, bypassing refineries

in the northeastern United States, because shipping to Canada on foreign-flag vessels is much

cheaper than shipping domestically on Jones Act-eligible ships.

Some of these issues may be addressed in the Coast Guard and Maritime Transportation Act of

2014 (H.R. 4005), which has passed the House, and the Coast Guard Authorization Act for Fiscal

Years 2015 and 2016 (S. 2444), introduced in the Senate. The House bill requests federal agency

studies and recommendations towards improving the competitiveness of the U.S.-flag industry

while the Senate bill contains provisions related to oil spill response.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Contents

Introduction...................................................................................................................................... 1

New Shipping Routes ...................................................................................................................... 2

Vessel Types and Capacities ............................................................................................................ 3

Vessel Size Relates to Voyage Distance .................................................................................... 5

Maritime Safety Issues..................................................................................................................... 6

New Barge Safety Regime ........................................................................................................ 6

Crewing Requirements of ATBs vs. Tankers ............................................................................. 7

Pace of Rulemaking an Issue for Congress ......................................................................... 7

Performance of the Coast Guard’s Marine Safety Office .......................................................... 8

The Jones Act ................................................................................................................................... 9

Jones Act Shipping Rates .......................................................................................................... 9

Domestic Tanker Construction Costs ...................................................................................... 11

U.S.-Flag Vessel Operating Costs............................................................................................ 13

The Missing Triangle Trade .............................................................................................. 13

Chartering and the Jones Act ............................................................................................. 14

Waterborne vs. Pipeline ........................................................................................................... 14

Economies of Scale Diverge ............................................................................................. 15

Waterborne vs. Railroad Options............................................................................................. 16

Waterborne Transport and Concerns about Rail Safety .................................................... 19

Impact on Other Rail Users ............................................................................................... 20

Jones Act Waivers .................................................................................................................... 21

Recent U.S. Shipbuilding Activity ................................................................................................. 22

Foreign Components ............................................................................................................... 22

Shipbuilding Loans, Grants, and Tax Deferrals....................................................................... 23

U.S.-flag Reservation for Export of Oil and Natural Gas? ............................................................ 24

Current Legislation ........................................................................................................................ 26

Figures

Figure 1. Waterborne Crude Oil Movements between Selected Regions ........................................ 1

Figure 2. U.S.-Flag Privately-Owned Tanker Fleet ....................................................................... 11

Figure 3. Selected Water and Rail Crude Oil Supply Routes ........................................................ 18

Tables

Table 1. U.S. Crude Oil Conveyances ............................................................................................. 4

Table 2. Ocean Shipping Rates to U.S. Northeast Refineries ........................................................ 10

Table 3. U.S. and World Prices for Tanker Vessels ........................................................................ 12

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Contacts

Author Contact Information........................................................................................................... 26

Acknowledgments ......................................................................................................................... 26

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Introduction

New sources of crude oil from the Bakken region of North Dakota, the Eagle Ford and Permian

basins in Texas, and western Canada have induced new routes for shipping crude oil to U.S. and

Canadian refineries.1 While pipelines have traditionally been the preferred method of moving

crude overland, especially to or from landlocked locations, they either are not available or have

insufficient capacity to move all the crude from these new sources of production.2 Although much

of this oil is now moving to refineries by rail,3 waterborne transportation is playing an increasing

role in moving crude oil within North America.4 The quantity of oil moving by barge on the

Mississippi River and its tributaries increased ten-fold from 2009 to 2013, and tanker shipments

between the Gulf Coast and Atlantic Canada have grown at an even faster rate (Figure 1). There

are no current data on the amount of domestic crude oil moving by barge or tanker to refineries

along the Gulf Coast, but it is believed to have increased significantly since 2012.

Figure 1. Waterborne Crude Oil Movements between Selected Regions

Barrels (millions)

Midwest to Gulf Coast (river barge)

Gulf Coast to U.S. Northeast (tanker or seagoing barge)

Gulf Coast to Canada (tanker)

2009

2010

2011

2012

2013

2014 (Q1)

Source: U.S. Energy Information Administration,

Two aspects of the oil industry critically influence shipping patterns: (1) not all crude oil is the

same and (2) each refinery is currently equipped to refine a certain blend of crude oils. Refineries

in the Northeast are predominantly configured to handle crudes from the Bakken, Eagle Ford, and

For further information on “unconventional” crude oil, see CRS Report R43148, An Overview of Unconventional Oil

and Natural Gas: Resources and Federal Actions, by (name redacted) and (name redacted), and CRS Report R42032,

The Bakken Formation: Leading Unconventional Oil Development, by (name redacted) et al.

For further analysis on the role of pipelines in moving crude oil, see CRS Report R41668, Keystone XL Pipeline

Project: Key Issues, by (name redacted) et al.

See CRS Report R43390, U.S. Rail Transportation of Crude Oil: Background and Issues for Congress, by (name

redacted) et al.

In this report, barge refers to both a river and a seagoing barge; tanker refers to a deep-draft, self-propelled oceangoing ship; and “tank vessel” refers to both a barge and a tanker.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Permian regions, but cannot efficiently refine oil sands crude from western Canada. There is

greater variety in the capabilities of refineries on the Gulf and West Coasts. Reconfiguring a

refinery to handle a different type of crude is possible but may be costly. The feasibility of doing

so depends on the relative costs of various types of crude, the projected availability of the various

crude oils, and the price spread between crude oil and refined petroleum products such as

gasoline and diesel fuel.5

The sudden shift toward domestic sourcing of crude oil raises issues regarding the safety and

efficiency of the maritime component of this new supply chain. These fall into two main

categories. One concerns the Coast Guard’s role in preventing oil spills by regulating the safety of

vessels and the training and working conditions of crews.6 The other has to do with the impact of

the Jones Act, a 1920 law that restricts domestic waterborne transport to vessels built in the

United States and crewed by U.S. citizens, which may now be affecting U.S. producers’ decisions

about how to ship crude oil and whether to send it to refineries in the United States or in Canada.

New Shipping Routes

The vast majority of U.S. refineries are located along the coast (including the Great Lakes) or an

inland waterway. Most coastal refineries traditionally have been supplied by imported crude, and

some lack pipeline connections and may not be equipped or have the space to receive crude by

rail. For this reason, large amounts of oil are being moved out of production areas by truck or rail,

but are being transferred to barges or tanker ships for the last leg of the trip to a refinery.

Crude oil produced at Eagle Ford, TX, is conveniently located for waterborne transport due to its

proximity to the coast. Some of it moves through the port of Corpus Christi, where outbound

crude oil shipments nearly trebled from 2012 to 2013.7 The nearby port of Victoria, TX, has also

experienced a dramatic increase in crude oil barge traffic. It appears that most of the Texas crude

moving by vessel goes to coastal refineries in Texas and Louisiana or to the Louisiana Offshore

Oil Port (LOOP), an offshore ship-to-pipeline transfer facility. A comparatively small amount of

Eagle Ford crude oil moves by water to refineries in proximity to New York Harbor and the

Delaware River, but much larger quantities seem to be going to refiners in Canada’s Atlantic

provinces.

While much of the oil coming from the Bakken region moves to refineries by rail, there are now

several well-established intermodal routes involving water transport. These include:8

•

rail to barge at St. Louis and Hayti, MO, and Osceola, AR, on the Mississippi

River, to Gulf refineries;

•

rail to barge at Hennepin, IL, on the Illinois Waterway, to Gulf refineries;

These factors are discussed in CRS Report R41478, The U.S. Oil Refining Industry: Background in Changing Markets

and Fuel Policies, by (name redacted) et al.

This report focuses on the Coast Guard’s role in oil spill prevention. Regarding the agency’s role in oil spill response,

see CRS Report RL33705, Oil Spills in U.S. Coastal Waters: Background and Governance, by (name redacted).

http://www.portofcorpuschristi.com/index.php/general-information-155/statistics/monthly-reports.

For further information on these and other routes, see BB&T Capital Markets, “Examining the Crude by Barge

Opportunity,” June 10, 2013.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

•

rail to vessel at Albany, NY, on the Hudson River, to East Coast refineries;

•

rail to Yorktown, VA, for coastal transport to East Coast refineries;

•

rail to vessel at Anacortes and Vancouver, WA, for coastal transport to West

Coast refineries.

Pipeline to barge transfer is occurring at Cushing, OK, from where barges move the oil

down the Arkansas and Mississippi Rivers to Gulf Coast refineries.

Vessel Types and Capacities

New waterborne services moving crude oil from the Bakken or Texas generally do so with

smaller vessels than the trans-oceanic tankers used to carry Alaskan and imported oil. The fleet

can be divided into two broad categories: “brownwater” vessels operating on inland and nearshore waters and “bluewater” vessels operating in the open ocean.

A river barge can hold 10,000 to 30,000 barrels of oil.9 Two to three river barges are typically tied

together in a single tow, and thus a river tow of tank barges could carry 20,000 to 90,000 barrels.

In addition to inland rivers, this type of barge configuration is used on the intracoastal waterway

(an inland canal) along the coasts of Texas and Louisiana. River barges have speeds of about 4 to

5 miles per hour (mph).

A coastal tank barge designed for open seas (an articulated tug-barge, or ATB)10 can hold 50,000

to 185,000 barrels. However, newer ATBs can carry 240,000 to 340,000 barrels, a capacity

comparable to that of coastal tankers. Seagoing barges have speeds of about 10 knots (12 mph).

In contrast to coastal tank barges, a river barge can be used in “drop and swap” operation—that is,

the tugboat can drop a loaded barge at a facility where it can be used for storing product while the

tugboat is free to make other barge movements—so that the relatively expensive self-propelled

portion of the vessel is not tied up while unloading, as a tank ship would be. The tugs designed

for ATBs sail poorly without the barge, so they seldom perform drop and swap operations.11

A coastal tank ship can hold 300,000 to 650,000 barrels. The coastal tankers that are being

deployed to move Texas crude carry 330,000 barrels and are referred to as “handysize” or

“medium range” tankers. Coastal tankers have speeds of about 12-15 knots.

For comparison, tankers moving Alaska oil to the West Coast carry between 800,000 and 1.3

million barrels of oil and fall into the “Aframax” or “Suezmax” size categories. Very large or

ultra-large crude carriers (VLCCs and ULCCs) that carry imported oil from overseas hold 2 to 3

million barrels. A crude oil pipeline moves between 400,000 and 800,000 barrels per day, enough

to service the largest U.S. refineries. The unit trains12 that move Bakken and Texas crude oil can

carry 70,000 to 80,000 barrels. Table 1 summarizes conveyances for moving domestic crude oil.

A barrel of oil is equal to 42 gallons.

The bow of the tug fits into a notch in the stern of the barge and the tug is hinged to the barge on both sides of its

hull, allowing fore and aft (pitch) movement, such as over sea swells.

George H. Reid, Primer of Towing, 3rd ed. (Centreville, MD: Cornell Maritime Press, 2004), p. 22.

A unit train consists of only a single type of car, in this case crude oil tank cars, and is not broken up or reconfigured

(continued...)

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Table 1. U.S. Crude Oil Conveyances

Conveyance

Capacity (000

barrels)

Cruising

Speed

River barge

20-90

4-5 mph

4-10

3,500-4,000*

inland rivers,

intracoastal

waterway

Seagoing barge

(ATB)

50-300

10 knots (12

mph)

6-12

86*

coastal U.S.

Handysize

product tanker

300

12-15 knots (1418 mph)

21-28

31*

coastal U.S.

Aframax or

Suezmax crude

oil tanker

800-1,300

12-15 knots (1418 mph)

21-28

11*

1,400 (foreignflag)

Alaska to Puget

Sound and

California, U.S.

Gulf Coast to

Eastern Canada

100-car unit

train

70-80

40-50 mph

45,000 crude oil

tank cars/450

unit trains**

continental U.S.,

predominantly

west-east

Crude oil

pipeline

400-800

3-8 mph

1-2 (remote

monitors)

57,500 miles

predominantly

midcontinent,

south-north,

Alaska

Crew Size

Inventory

Operating

Geography

Source: U.S. Department of Transportation; Army Corps of Engineers; Clarkson Research Services Ltd. Tanker

Notes: *For domestic service, vessels must be U.S. built and U.S. flagged. **Tank car inventory increasing

rapidly.

As Table 1 indicates, the Jones Act-eligible fleet of crude oil tankers consists of 11 ships, all

employed in moving Alaska crude oil to the U.S. West Coast or to a refinery in Alaska. Of the 86

seagoing barges, 42 can carry more than 130,000 barrels. While a tanker’s capacity is better

matched to the daily consumption rates of a single refinery than the capacity of a unit train or

most barges, the limited fleet of Jones Act-eligible tankers has required some refineries with

direct ocean access to ship domestic oil by barge or train or to continue to rely on foreign sources.

Jones Act-qualified ATBs and product tankers are also used to lighter ocean-going crude oil

tankers.13 Although it is technically feasible to do so, tank vessels do not readily alternate between

carrying dirty oil (crude oil, residual fuel oil, asphalt) and refined (clean) petroleum products

because the tanks would have to be extensively washed after carrying dirty product, a timeconsuming and costly process. However, due to the recent increase in domestic crude oil

production, particularly at Eagle Ford, some tonnage has shifted from the “clean” products trade

to the crude oil trade.14 Tankers that used to carry refined product from the Gulf Coast to Florida

(...continued)

between origin and destination.

Lightering is the process of unloading a portion of an ocean-going tanker’s load offshore, or at a harbor’s entrance, to

reduce the draft of the ship.

Product tankers that carry chemicals are called parcel tankers, and since they have many more and smaller individual

holding tanks than petroleum tankers, they would not be practicable for carrying petroleum.

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(via the Port of Tampa) are now carrying crude oil because they can earn higher returns.15 Barges

are replacing them to move refined products to Florida, a development that has been blamed for

higher gasoline prices in Florida.16

The decline of oil imports from overseas may free up some of the lightering fleet for the domestic

crude trade. If West Coast refineries source more crude from the Bakken or Canada rather than

Alaska, this could also free up Jones Act tankers. One such tanker is believed to have been

redeployed to move crude oil from the Gulf of Mexico to the West Coast via the Panama Canal.17

However, there is a limit to how many clean product tankers will switch to carrying crude oil. The

crude oil boom has also led to a boom in U.S. refinery output, so there is also strong demand for

clean product tankers.

Vessel Size Relates to Voyage Distance

The most economic tank vessel size to deploy depends largely on voyage distance. The longer the

voyage, the more incentive there is to use a larger vessel because of economies of scale at sea.

The first VLCCs were built when the Suez Canal was closed in the late 1960s and tankers headed

from the Persian Gulf to Europe and North America had to sail longer routes around South Africa.

Larger tankers face diseconomies of scale in port: they take longer to load and unload than

smaller ships, and some port charges are based on vessel size. Thus, smaller vessels are used for

shorter voyages, on which a tanker will spend a greater portion of its total time in port. Aframax

and Suezmax tankers, considered of medium size, are being used to ship Alaska oil from Valdez

to Seattle, a distance of 1,200 nautical miles, and to Los Angeles, a distance of 2,000 nautical

miles. Similar tankers carry Texas oil to eastern Canadian refineries with sailing distances ranging

from 2,300 to 3,000 nautical miles.18

Evidence from these other trades suggests that Aframax or Suezmax tankers would be the

preferred vessels for shipments from Texas ports to Delaware River and New York Harbor oil

terminals, a distance of 1,900 to 2,000 nautical miles, if such tankers were available in the Jones

Act-eligible fleet. The handysize tankers that are now used for this purpose may be smaller than

the preferred size. Prior to carrying crude oil, these handysize tankers were moving refined

product on much shorter intracoastal voyages, such as from Houston to Tampa. From 2001 to

2011 (before the Texas and Bakken oil boom began) the average haul of Jones Act handysize

product tankers was roughly 1,000 nautical miles while the average haul for the larger Jones Act

Aframax and Suezmax crude oil tankers was roughly 1,700 nautical miles.19

ATBs are used on much shorter coastal voyages. From 2001 to 2011, their average haul was about

420 nautical miles (the approximate sailing distance between Norfolk, VA, and Charleston, SC).

Since they are somewhat slower than tankers, on longer voyages they could require an additional

“Shale Oil Has Revolutionized U.S. flagged Oil Tanker Fleet,” Petroleumworld.com, July 1, 2013.

The News Press, “Supply Shortage Fuels Gas Price Jump,” November 21, 2013. According to the article, 97% of

Florida’s fuel is transported by vessel. The EIA also discusses the tight supply of vessels for transporting Florida’s fuel;

see, “The Spring Break Travel Rush and Changes in Florida’s Gasoline Supply,” This Week in Petroleum, March 26,

2014.

Washington Analysis, LLC, Energy Update: Alaska Oil Exports and Jones Act Tankers, February 27, 2014.

Tankers were identified with assistance from the U.S. Maritime Administration.

U.S. Maritime Administration, Coastal Tank Vessel Market Snapshot, 2011, June 2012, p. 2.

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day or two to reach destination. However, newer ATBs, which can be larger and faster, tend to be

deployed on longer voyages. In 2010, coastal tank barges that were less than 10 years old

accounted for 63% of overall coastal barge shipments less than 500 miles but 70% of the

shipments 500 miles or more.20

Maritime Safety Issues

The large increase in domestic waterborne shipment of crude oil and refined products comes at a

time when the Coast Guard is reevaluating its regulations and industry oversight. Several new

regulations are pending.

New Barge Safety Regime

Barges are the workhorses in moving Bakken and Texas oil by water. However, the Coast Guard

has just begun establishing a safety inspection regime for barges.

In the Coast Guard and Maritime Transportation Act of 2004 (P.L. 108-293, §415), Congress

directed the Coast Guard to establish a barge safety inspection and certification regime similar to

that which exists for ships. This includes establishing structural standards for vessels as well as

standards for the crew. This new inspection regime will be more significant for tank barges used

on rivers than for seagoing barges, because seagoing barges moving oil or other hazardous

material are already inspected.21 However, one pending rule would also apply to seagoing barges.

Section 409 of the 2004 act authorized the Coast Guard to evaluate an hours-of-service limit for

crews on towing vessels. This was in line with a 1999 National Transportation Safety Board

(NTSB) recommendation that the Coast Guard establish scientifically based hours-of-service

regulations for domestic vessel operators.22

On August 11, 2011, the Coast Guard issued a notice of proposed rulemaking on barge

inspections and work hours.23 In the notice, the Coast Guard states that on a schedule providing

six hours of work followed by six hours of rest, as is typical on barges engaged in multi-day

voyages, sleep debt accumulates and gradually increases crew members’ fatigue levels.24 ATB

operators have filed comments opposed to addressing hours of service as part of this rulemaking,

while maritime unions have filed comments in favor of a mandatory eight-hour rest period.25 The

NTSB filed comments reiterating its support of an eight-hour rest period. The Coast Guard has

not issued final regulations.

Ibid., p. 6.

As per 46 U.S.C. subchapter I. River tows are subject to other regulations in Titles 33 and 46, C.F.R.

NTSB, Recommendation M-99-1. The NTSB is an independent federal agency that investigates accidents in all

modes of transportation and makes recommendations on how to improve safety.

76 Federal Register 49976-50050.

See 76 Federal Register 49991-49997, August 11, 2011. Crews of towing vessels on the Great Lakes presently use a

three-watch system as per 46 U.S.C. §8104(c).

See http://www.regulations.gov, docket no. USCG-2006-24412.

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Crewing Requirements of ATBs vs. Tankers

According to an original designer of the ATB, “The American coastwise shipping business has

grown in a way that differs from many other nations. The high cost of manning and building ships

has led over the years to a coastwise transportation network dominated by tugs and barges.”26

ATBs are sometimes referred to as “rule breakers” within the maritime industry because they

operate with smaller crews.27 The Coast Guard determines crewing requirements based on the

registered tonnage of a vessel, which for barges includes only the tug, not the barges the tug may

be pushing. As a result, the crew required aboard an ATB is one-third to one-half the number

required aboard a tank ship; an ATB typically has a crew of 6 to 12, versus 21 to 28 for a tank

ship. (The precise number for each vessel type depends on the amount of automation.)

The Coast Guard’s pending decision on hours of service could force ATBs to carry larger crews,

possibly negating their economic advantage compared to tankers. This occurred previously with a

precursor to the ATB called the integrated tug barge: when the Coast Guard increased their

manning requirements in 1981, integrated tug barges lost their economic advantage, and none

have been built since.28 The Coast Guard increased manning requirements because integrated tug

barges operated essentially as ships since the tug and barge seldom separated. While ATBs are

designed for easier separation of tug and barge, as noted earlier, they also seldom separate.

The distinction in crewing requirements between ships and ATBs has been criticized for distorting

the domestic shipping market by encouraging the use of otherwise less efficient (and perhaps less

militarily useful) barges instead of ships.29 A counterargument is that the problem is not the small

crew size on ATBs but the excessive manning requirements for coastal tankers.

Pace of Rulemaking an Issue for Congress

Congress has been concerned with the pace at which the Coast Guard is issuing barge safety

regulations under the 2004 law. In the Coast Guard Authorization Act of 2010 (P.L. 111-281,

§701), Congress requested that all rulemakings related to oil pollution prevention, including barge

inspection, be finalized within 18 months of enactment (i.e., by April 15, 2012). The 2010 act

(§702) also required the Coast Guard to promulgate additional regulations to reduce the risk of oil

spills in operations involving the transfer of oil from or to a tank vessel. The Coast Guard has

issued a request for public comments, but has not yet proposed regulations.30

Robert P. Hill, Ocean Tug & Barge Engineering, “The Articulated Tug/Barge – ATB: The History and State of the

Art,” http://www.oceantugbarge.com/PDF/history.pdf.

See, Jeff Cowan, “The Articulated Tug Barge (ATB) Quandary,” February 13, 2013; Robert P. Hill, “Responding to

“The Articulated Tug Barge Quandary,” April 5, 2013; and Tom Allegretti, “Safe Operation, Proven Results,” April 17,

2013, all at http://www.MarineLink.com.

Navigation Vessel Inspection Circular (NVIC)-2-81, February 25, 1981.

IHS Global Insight, An Evaluation of Maritime Policy in Meeting the Commercial and Security Needs of the United

States, January 7, 2009, p. 37.

See 78 Federal Register 63235, October 23, 2013.

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Performance of the Coast Guard’s Marine Safety Office

The Coast Guard’s ability to provide effective safety oversight of certain maritime operations has

been a long-standing concern. In response to questions raised by Congress in 2007,31 the Coast

Guard acknowledged that its practice of regularly rotating staff geographically or by activity, as

military organizations typically do, was hindering its ability to develop a cadre of staff with

sufficient technical expertise in marine safety.32 In response, the agency created additional civilian

safety positions, converted military positions into civilian ones, and developed a long-term career

path for civilian safety inspectors and investigators.33 Despite these changes, at an October 2011

meeting to discuss inspection regulations towing operators complained about having to rehash the

same issues with a “revolving door” of Coast Guard officials.34 They also asserted that the Coast

Guard was placing too much emphasis on a one-day-per-year inspection of vessels and equipment

and not enough emphasis on human factors, the leading cause of marine accidents.

The number and quality of the Coast Guard’s investigations and reports of marine accidents, as

well as the lack of a “near-miss” reporting system, have been noted by the Department of

Homeland Security Inspector General (IG) and other observers as missed opportunities to learn

from past incidents. A May 2013 IG audit concluded:35

The USCG does not have adequate processes to investigate, take corrective actions, and

enforce Federal regulations related to the reporting of marine accidents. These conditions

exist because the USCG has not developed and retained sufficient personnel, established a

complete process with dedicated resources to address corrective actions, and provided

adequate training to personnel on enforcement of marine accident reporting. As a result, the

USCG may be delayed in identifying the causes of accidents; initiating corrective actions;

and providing the findings and lessons learned to mariners, the public, and other government

entities. These conditions may also delay the development of new standards, which could

prevent future accidents.

The IG found that at the 11 sites it visited, two-thirds of accident inspectors and investigators did

not meet the Coast Guard’s own qualification standards. The IG noted that the shortage of

qualified personnel would be further compounded by the new towing vessel safety regime, which

would expand the inspections workload. In response to this audit, the Coast Guard stated it was

developing a “Maritime Prevention Enhancement Plan” that it hoped to complete in FY2014. In

the Coast Guard Authorization Act of 2010 (P.L. 111-281, §521), Congress requested an annual

report from the Coast Guard assessing the adequacy of its marine safety workforce.36

House Committee on Transportation and Infrastructure, Subcommittee on Coast Guard and Maritime Transportation,

Hearing on Challenges Facing the Coast Guard’s Marine Safety Program, July 27, 2007.

See the 2007 report on the Coast Guard’s marine safety mission by a retired Coast Guard vice admiral at

http://www.uscg.mil/hq/cg5/cg54/docs/VADM%20Card%20Report.pdf.

U.S. Coast Guard, “Enhancing the Coast Guard’s Marine Safety Program,” September 25, 2007;

http://www.uscg.mil/marinesafetyprogram/. See also Coast Guard Proceedings, Summer 2008, pp. 20-28, available at

http://www.uscg.mil/proceedings.

http://www.regulations.gov/#!documentDetail;D=USCG-2006-24412-0095.

DHS, Office of Inspector General, “Marine Accident Reporting, Investigations, and Enforcement in the U.S. Coast

Guard,” OIG-13-92, May 2013; http://www.oig.dhs.gov/assets/Mgmt/2013/OIG_13-92_May13.pdf.

This report has been delivered to Congress; http://www.uscg.mil/hq/cg8/cg82/.

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The Jones Act

The Jones Act requires that vessels transporting cargo between two U.S. points be built in the

United States, crewed by U.S. citizens, and at least 75% owned by U.S. citizens.37 The law was

enacted in 1920 (Merchant Marine Act of 1920, §27, P.L. 66-261).38 One of the motivations for

the U.S.-build requirement was to facilitate the disposal of cargo ships constructed during World

War I by the U.S. Shipping Board, a government agency set up in 1916 to purchase, construct,

and operate merchant ships during the war. The Jones Act authorized the sale of these vessels to

the private sector.39

The Jones Act stated an explicit national policy of supporting a U.S. merchant marine and a U.S.

shipbuilding industry in the interest of national defense. That policy remains in the law today:40

It is necessary for the national defense and the development of the domestic and foreign

commerce of the United States that the United States have a merchant marine (1) sufficient

to carry the waterborne domestic commerce and a substantial part of the waterborne export

and import foreign commerce of the United States and to provide shipping service essential

for maintaining the flow of waterborne domestic and foreign commerce at all times; (2)

capable of serving as a naval and military auxiliary in time of war or national emergency; (3)

owned and operated as vessels of the United States by citizens of the United States; (4)

composed of the best-equipped, safest, and most suitable types of vessels constructed in the

United States and manned with a trained and efficient citizen personnel; and (5)

supplemented by efficient facilities for building and repairing vessels.

Because of the restrictions on shipbuilding and crewing, Jones Act ships tend to be more costly to

build and operate than vessels used by foreign-flag ocean carriers, which can order vessels from

whichever shipyards offer the lowest bids and typically hire most of their crew members from

countries where seafarers’ wages are much lower than in the United States.

Jones Act Shipping Rates

According to oil shippers, the price for moving crude oil from the Gulf Coast to the U.S.

Northeast on Jones Act tankers is $5 to $6 per barrel, while moving it to eastern Canada on

foreign-flag tankers is $2.41 For a Texas oil producer using a tanker with capacity of 300,000

barrels, this rate difference amounts to receiving $1 million less for a shipment of oil to a U.S.

refinery than for a shipment to a more distant Canadian refinery. In consequence, from January

The law is codified at Title 46 U.S.C. Chapter 121, Documentation of Vessels (46 U.S.C. §§12101-12152) and Title

46 U.S.C. Chapter 551, Coastwise Trade (46 U.S.C. §§55101-55121).

The Act was named after Senator Wesley L. Jones, Washington State, Chairman of the Senate Interstate and Foreign

Commerce Committee, who also included a provision to ensure that trade between Alaska and the lower 48 states not

be shipped through Vancouver, Canada (to the benefit of Seattle).

The ships were sold for about one-tenth the cost of construction. They had high-speed engines and other features that

were useful for military operation, but that made them relatively costly to operate in commercial service.

46 U.S.C. §50101.

Bloomberg Businessweek, “U.S. Law Restricting Foreign Ships Leads to Higher Gas Prices,” December 12, 2013;

Platts Oilgram News, “Regulation and Environment,” September 9, 2013. See also Senate Committee on Energy and

Natural Resources, Testimony of Faisel Khan, Managing Director, Integrated Oil and Gas Research, Citigroup. Hearing

to Explore the Effects of Ongoing Changes in Domestic Oil Production, Refining and Distribution on U.S. Gasoline

and Fuel Prices, July 16, 2013.

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2013 through March 2014, more than twice as much Gulf Coast crude oil was shipped by water to

Canada as was shipped to U.S. Northeast refineries.

Refineries in the U.S. Northeast consumed about 12 times as much crude oil from fields offshore

of eastern Canada as oil shipped from the Gulf Coast in all of 2013. They also consumed imports

from Nigeria, Saudi Arabia, and other countries. Shipping rates for these imports, regardless of

country of origin, are much lower than domestic shipping rates for Gulf Coast oil (Table 2).42

(Shipping oil from the Gulf Coast to eastern Canada costs more than shipping it from Africa to

the U.S. Northeast because ice-class tankers must be used to serve Canadian refineries for a

portion of the year.)

Table 2. Ocean Shipping Rates to U.S. Northeast Refineries

Dollars per barrel

Origin

Estimated Rate

U.S. Gulf Coast

$5.00-$6.00

Eastern Canada

$1.20

Nigeria

Saudi Arabia

$1.45-$1.70

$1.90

Source: Platts Oilgram News, “Regulation and Environment,” September 9, 2013; Platts OilGram Price Report,

McGraw Hill Financial, January-April, 2014.

Although there is currently no Bakken oil moving from Washington or Oregon ports to California

refineries, the cost aboard a Jones Act tanker is estimated to be $4 to $5 per barrel; as the oil

would have to move from the Bakken region to the ports by rail at a cost of about $9 per barrel,

the total shipping cost would be $13 to $14 per barrel. The cost of shipping Eagle Ford oil

through the Panama Canal to these refineries is estimated to be $10 per barrel.43 By comparison,

shipping oil from Ecuador to West Coast refineries costs around $3.25 per barrel, and Iraqi oil

about $2.30 per barrel.44

Jones Act rates for shipping Alaska oil to West Coast refineries are not available, but Bakken oil

shipped by rail to Pacific Northwest refineries is beginning to displace Alaskan oil. Alaska oil

producers could look to resume exports to Asia to replace lost shipments to the U.S. West Coast.

However, as specified by Congress when it lifted the export ban on Alaska North Slope oil in

1995 (P.L. 104-58), the oil must be exported on U.S.-crewed and -flagged tankers, although the

tankers do not need to be U.S. built. After the Alaska export ban was lifted, roughly 5%-7% of

Alaskan oil was exported, mostly to South Korea, Japan, and China, but exports ceased in 2000.45

In the case of crude oil, the price coastal refineries are willing to pay is based on the international

price of oil, as a refinery has no way to raise the prices of gasoline and other refined products if

OilGram Price Report, McGraw Hill Financial, January-April, 2014.

En*Vantage, Inc., “The Surge in US Crude Oil Production,” Presentation to PFAA 20th Annual Conference, October

24, 2013; http://www.pfaa-online.com/docs/2013/AC/8EnVantage-PFAA-Oil-Presentation-102413.pdf.; Bloomberg,

“Texas Vies with Saudi Arabian Oil in California Shipments,” January 29, 2014.

OilGram Price Report, McGraw Hill Financial, January-April 2014 reports.

U.S. Energy Information Administration, Petroleum and Other Liquids, Imports/Exports and Movements,

http://www.eia.gov/petroleum/data.cfm#imports.

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its transportation costs are higher than those of its competitors. In order to minimize

transportation costs, U.S. oil shippers have favored barges over ships for coastwise transport, but

this may have reduced the shipment distances over which domestic waterborne oil is price

competitive. The long-term decline in the amount of petroleum carried domestically by tankers is

reflected in the diminished capacity of the privately owned Jones Act-eligible tanker fleet (see

Figure 2). Following World War II, the relatively small U.S.-flag tankers in international service

were gradually replaced by much larger foreign-built tankers. Many of the Jones Act-eligible

tankers in domestic service were replaced by tank barges following enactment of a double-hull

requirement for tank vessels in the Oil Pollution Act of 1990. The decline of oil production in

Alaska, which has fallen by about 46% over the last decade, also contributed to reduced demand

for Jones Act-eligible crude oil tankers, causing some to be scrapped.

Figure 2. U.S.-Flag Privately-Owned Tanker Fleet

Source: CRS modification of figure from U.S. Maritime Administration.

Notes: GT= gross tonnage, an indication of the cargo capacity of a ship. Figures pertain to both Jones Act

(domestic) and international tankers.

Domestic Tanker Construction Costs

According to data from the U.S. Maritime Administration (MARAD), an agency of the U.S.

Department of Transportation, and from industry sources, the cost of domestically built tankers is

approximately four times the cost of tankers of similar size built in foreign shipyards (Table 3).

Almost all oceangoing tankers are built in Asia; in 2012, Korean shipyards received 60% of

worldwide orders for new tankers, Chinese yards 30%, and Japanese yards 8% (measured by ship

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

capacity). U.S. shipyards’ prices are higher even though major ship components, like the engines,

are built in foreign yards. The purchase price of new river tugs and barges in the United States is

not considered to be as great a deterrent to river transport, perhaps because barges are simpler to

build and are ordered in sufficient quantities that shipyards can achieve some economies of

scale.46

As Table 3 indicates, tank ships are more expensive to build than ATBs. They require more

scantling (interior framing) and more freeboard (the height of the hull from the water to the deck)

than barges. However, tank ships have significant advantages over barges. They can operate in

more adverse weather conditions than ATBs, are faster, and have superior fuel economy. The U.S.

Energy Information Administration estimated in 2012 that the cost of moving crude oil from the

Gulf Coast to Northeast refineries by tanker would be about half the cost of moving it by barge—

not counting the cost of construction.47 This suggests that tankers could have a competitive

advantage over barges on longer coastal voyages if domestic shipbuilding costs were lower or if

foreign-built tankers could be employed.

Table 3. U.S. and World Prices for Tanker Vessels

(Cost of a newbuild, based on recent deliveries or construction contract announcements)

Vessel Type

Capacity

U.S. Price

World Price

Handysize product tanker

40,000-50,000 dwt

$100-$135 million

$30-$35 million

(aka medium-range tanker)

330,000 bbl

Ocean-going ATB (smaller)

27,000 dwt

$60-$85 million

not available

$100-$130 million

not available

$200 million

$45-$55 million

No recent builds

$55-$65 million

No recent builds

$90-$100 million

185,000 bbl

Ocean-going ATB (larger)

45,000 dwt

250,000-300,000 bbl

Aframax tanker

80,000-120,000 dwt

650,000-800,000 bbl

Suezmax tanker

130,000-160,000 dwt

1 million bbl

Very Large Crude Carrier

(VLCC)

200,000-320,000 dwt

2 million bbl

Source: U.S. Maritime Administration, Title XI Ship Financing Guarantees, Pending and Approved Loan Applications;

American Petroleum Tankers S-1 SEC Filing; RBN Energy LLC; RS Platou Economic Research, annual and monthly

reports; press releases from Kinder Morgan, Teekay Tankers, Scorpio Tankers, Euronav; Poten and Partners, Weekly

Tanker Opinion.

The Tariff Act of 1930 (19 U.S.C. §1466), requires that U.S.-flag ships pay a 50% ad valorem

duty on any non-emergency repairs conducted in foreign shipyards. A 2011 MARAD study48 of

U.S. shipyards have recently been able to export offshore supply vessels (servicing offshore oil platforms), indicating

more competitiveness in this category of vessels as well.

U.S. Energy Information Administration, “Additional Information on Jones Act Vessels’ Potential Role in Northeast

Refinery Closures,” May 11, 2012.

U.S. Maritime Administration, Comparison of U.S. and Foreign-Flag Operating Costs, September 2011.

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ships operating in international trade found that ship repair costs for U.S.-flag ships are 1.3 times

those of foreign-flag ships. The MARAD study found that many U.S. ships have repairs

performed in foreign yards because, even with the 50% duty, the total cost is less than if the

repairs were performed in a U.S. domestic shipyard.

U.S.-Flag Vessel Operating Costs

A 2011 MARAD study comparing U.S.-flag versus foreign-flag operating costs in international

trade found that U.S.-flag vessels’ operating costs were substantially higher—2.7 times higher.

(This higher operating cost does not reflect higher domestic construction costs, because U.S.-flag

ships engaging in international trade do not have to be built in the United States.) The study

estimated the average daily operating cost of a foreign-flag ship to be under $6,000.49 A separate

MARAD study in June 2012 estimated the daily operating cost of a Jones Act tanker to be

$22,000, which would be about 3.7 times the operating cost of a foreign-flag tanker. A major

reason U.S.-flag vessels cost more to operate is that they are crewed by U.S. citizens. The crews

on most foreign-flag ships are drawn mainly from poor countries and are paid significantly less

than U.S. merchant seafarers.

According to MARAD, the daily operating cost of an ATB ($13,000) is almost half that of a U.S.flag tanker ($22,000).50 Since an ATB might travel two to three knots slower than a tanker, it

might require additional sailing time. On a voyage from Texas to New York, an ATB would

require two additional sailing days, reducing the ATB’s cost savings over a tanker to about onequarter, assuming that the vessels carry similar amounts of oil. However, only five ATBs in the

Jones Act fleet match the capacity of a handysize tanker (330,000 barrels). Most ATBs now in use

carry half as much oil as a tanker, thus requiring two voyages to match the capacity of a tanker;

their operating cost per barrel of oil on this comparatively long voyage is likely to be higher than

that of a tanker. A large tanker carrying oil from Nigeria to the U.S. East Coast, requiring two

weeks sailing time, would be expected to have lower overall operating costs and lower operating

costs per barrel than a U.S.-flag tanker ship or ATB making the much shorter domestic voyage.

The Missing Triangle Trade

One consequence of the relatively high cost of building and operating Jones Act tankers is that

they cannot compete effectively for international cargo. This results in Jones Act tankers sailing

empty much of the time, further raising shipowners’ costs.

A key aspect to improving the economic competitiveness of freight carriers is reducing empty

travel miles. If Jones Act product tankers were price competitive in the international market, they

could triangulate their trade routes, perhaps moving diesel fuel from Gulf Coast refineries to

Europe, then carrying European gasoline to the U.S. Atlantic Coast before sailing in ballast

(carrying only ballast water for stability) to the Gulf Coast to repeat.51 In this triangular route, two

out of three voyages would generate revenue and the ballast sailing distance would amount to

18% of the total sailing distance. With their costs rendering them uncompetitive on international

routes, however, Jones Act product tankers typically sail “piston” routes, carrying crude oil or

U.S. Maritime Administration, Comparison of U.S. and Foreign-Flag Operating Costs, September 2011.

U.S. Maritime Administration, Coastal Tank Vessel Market Snapshot, 2011, June 2012, p. 6.

Michael D. Tusiani, The Petroleum Shipping Industry (Tulsa, OK: PennWell, 1996).

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refined products from the Gulf Coast to the East Coast and then returning in ballast, thus earning

revenue on only half the trip.

A peculiar triangular trade has developed to circumvent the Jones Act requirements. This involves

Gulf Coast refineries shipping gasoline to the Bahamas, where additives are mixed in before the

product is moved to the U.S. Northeast. So long as the product is processed in the Bahamas, both

water movements can be made in foreign-flag tankers.52 The savings from using foreign-flag

shipping are apparently greater than the cost of an additional tanker unloading and loading

operation.

Chartering and the Jones Act

Because of the Jones Act, U.S. oil shippers also cannot take advantage of the current surplus in

the world tanker fleet, caused in part by the drop-off in crude oil shipments to the United States.

If it were accessible, chartering could be done on a spot basis (for a single voyage) or on a time

basis (for six months to two years). Given the rapid changes in the U.S. oil market, some shippers

might prefer the flexibility of chartering to the long-term financial commitment required to build

a pipeline or a rail terminal. However, the number of Jones Act-qualified tankers is small, and

most appear to be tied up in charters lasting several years. Current Jones Act charter rates are

$75,000 to $100,000 per day, up from about $50,000 per day in the 2010 through 2012 period.53

In the world market, charter rates for tankers of similar size (“medium range”) have fluctuated

around $10,000 per day for spot charters and $15,000 per day for 12-month time charters.54

A spot market is also valuable because it lowers the overall cost of moving oil for everyone by

adding fluidity to tanker supply. For instance, the sailing times of tankers cannot always be

synchronized exactly with loading schedules. If an oil company’s tanker is two weeks early for a

shipment, rather than idling its tanker for that time, the company can re-let the tanker in the spot

market for someone else’s use. The oil company could then charter someone else’s tanker for its

intended shipment. In other words, by pooling the tanker supply in the spot market, the fleet is

used more efficiently. By segregating the domestic shipping market from the international market,

the Jones Act undermines a competitive advantage of tankers against pipelines, namely their

status as mobile assets that can be redeployed in response to market changes.

Waterborne vs. Pipeline

Before the advent of oil produced from shale deposits and its movement by rail, tank vessels and

pipelines were the primary options for moving oil. Both modes can move crude oil to refineries in

lot sizes of hundreds of thousands of barrels, fitting a large refinery’s daily intake needs.

Economies of scale are important to both, but installing a larger pipe reduces the transportation

cost per barrel more rapidly for pipelines than building a larger vessel does for ship lines. For this

reason, oil companies typically share use of a large pipeline rather than building smaller

individual pipelines. Pipelines face a disadvantage in that they must acquire, build, maintain, and

pay property taxes on their rights of way, not only for the pipe but also for the pumping stations,

whereas navigation infrastructure in harbors (shipping channels) and on inland waterways (locks

Reuters, “Customs About-face Could Make Bahamas Key Source For U.S. Gasoline,” April 23, 2014.

RBN Energy LLC, “Rock The Boat – Don’t Rock The Boat – The Jones Act Coastal Trade,” January 12, 2014.

RS Platou Economic Research, Monthly Report – May 2014; http://www.platou.com/dnn_site/Default.aspx

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and dams) is largely provided by the federal government. As indicated in Table 1, pipelines move

product between 3 and 8 mph, so tankers have a speed advantage. This can be important when oil

prices are volatile. On the other hand, pipelines are extremely dependable in delivering product

on time, so little safety stock is needed.

Economies of Scale Diverge

Over recent decades, pipeline operators have managed to ship more oil with less pipe. Pipeline

mileage leveled off in the 1980s. Since then, miles of trunk line have actually decreased but

capacity has increased because the pipes are larger in diameter.55 The amount of oil carried per

mile of trunk line pipe is about 37% higher today than it was in the 1980s.

In contrast, Jones Act carriers are utilizing smaller, rather than larger, vessels to transport oil, a

result of increasingly relying on barges rather than tankers in coastwise transport. In 1980, barges

represented 39% of the total cargo capacity of the tank vessel fleet (barges and tankers).56 In

2012, barges accounted for 82% of the total cargo capacity and carried about 65% of the

coastwise refined product tonnage. The shift from tankers to barges is significant, because what

should be the least-cost method for transporting crude oil and petroleum products is being utilized

less than it might be in favor of a method that is cost-competitive due only to regulation.

The divergence in economies of scale between the pipeline and waterborne modes parallels a

trend in their respective modal shares. In 1979, pipelines handled 58% of crude oil shipments

(measured in ton-miles)57 and waterborne carriers 41%. For refined products, 44% moved by

pipeline and 48% by water. By 2009, pipelines were carrying 80% of crude oil shipments to 19%

for ships and barges, and 63% of refined products movements went by pipeline as opposed to

26% by water.58 Part of the reason for the change in modal share in refined product was a sharp

decline in use of residual fuel oil for heat and power, which affected waterborne market share.59

Today, tanker ships are used in domestic trade primarily where there is no pipeline service, as

with crude oil shipments from Alaska to the lower 48 states and gasoline shipments from the Gulf

Coast to Florida.

Pipelines appear to be preferred over river transport as well. Pipelines are used heavily to move

Gulf Coast crude oil north to the Upper Midwest, carrying about 30 million barrels a month,

whereas barges do not carry any crude oil upriver on the Mississippi waterway system. Barges

have less than 10% of the market for refined products moving between the Gulf Coast and the

Upper Midwest.

Pipeline statistics are available from Oil and Gas Journal.

U.S. Army Corps of Engineers, Navigation Data Center; http://www.navigationdatacenter.us/.

A ton-mile is one ton of freight moved one mile.

Association of Oil Pipelines, Shifts in Petroleum Transportation, data reproduced by the Bureau of Transportation

Statistics, National Transportation Statistics, Table 1-61;

http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_61.h

tml.

Federal Trade Commission, Bureau of Economics, The Petroleum Industry: Mergers, Structural Change, and

Antitrust Enforcement, August 2004, p. 210. A potential decline in the use of heating oil in New England, in favor of

natural gas, similarly might affect waterborne and pipeline share in the future because much of the heating oil is carried

by barge from New York Harbor.

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Waterborne vs. Pipeline for Coastal Transport of Refined Products

Since production of refined products is more geographically dispersed than it is for crude oil, the competition

between tanker and pipeline for moving refined products is more prevalent. A shift in relative costs between the two

modes can change modal shares significantly, as happened in the early 1960s when the Colonial Pipeline was built.

By far the highest volume domestic route for shipping U.S. petroleum liquids is from the Gulf Coast to the Northeast.

The U.S. government built two pipelines along the East Coast during World War II after German submarines sank 48

U.S. coastal tankers in four months. After the war, the pipelines were sold to private interests, and one was

converted to natural gas. Despite the pipeline, the route continued to be the most important for U.S.-flag product

tankers.

In the summer of 1961, U.S. seafarers staged an 18-day strike which idled 114 ships on the Gulf to East Coast run. It

ended with a federal injunction, but with issues mostly unsettled. U.S. seafarers achieved higher wages but no success

against using foreign-flag tankers to import oil. In 1962, nine oil companies announced plans to build a 22” to 36”

pipeline from Houston to New York Harbor to move 600,000 barrels a day of refined product. The oil companies

cited maritime strike disruptions and higher seafarer wages, along with new pipeline technology allowing for largerdiameter pipe, as reasons why the pipeline would be more economical than ships. The maritime industry estimated

the pipeline would take one-third of its cargo and reduce fleet size by 50 tankers. The need for the pipeline depended

upon continuation of federal restrictions on the amount of oil that could be imported. It was believed that if the

import restrictions were lifted, the pipeline might not be built because the foreign-flag supertankers then coming into

use could deliver foreign oil and refined products to the U.S. Northeast more cheaply than the pipeline could bring

refined products from Texas. The Colonial Pipeline was completed in 1963. Automation was then increased aboard

Jones Act tankers to reduce crew sizes and improve ships’ competitiveness against the pipeline. At about the same

time, three maritime strikes on the West Coast induced plans for a West Coast refined products pipeline. In 1965, a

pipeline was completed from Puget Sound refineries to Portland, OR.

Today, the Gulf Coast ships approximately 75 million barrels per month of refined products to East Coast states by

pipeline. About 15 million barrels per month move to East Coast states by tanker or barge, mostly to Florida, which

receives no pipeline service. The East Coast imports about 30 million barrels per month of refined products, about a

third from Canada and the rest from Europe, Nigeria, and Venezuela. Meanwhile, the Gulf Coast exports 75 million

to 100 million barrels per month of refined products.

On the West Coast, Oregon receives 90% of its refined product from refineries in Puget Sound via pipeline and some

from California by vessel. The Gulf Coast ships less than 5 million barrels per month of refined products to California

by pipeline and nothing by vessel (via the Panama Canal). Although California is the third-largest state in terms of

refining capacity, it also imports a substantial portion of its refined product needs, mostly from the Pacific Rim,

Mexico, and Africa.

Waterborne vs. Railroad Options

For the many refineries located on the coasts, the cost of rail versus vessel transport is particularly

relevant. Phillips 66 has chartered two Jones Act product tankers to move crude oil from Eagle

Ford, TX, to its Bayway refinery in Linden, NJ (in proximity to New York harbor). The company

also supplies that refinery with Bakken oil via railroad (or rail to barge via the Port of Albany), as

well as with imported oil from West Africa.60 The refinery has a capacity of 238,000 barrels per

day.

Rail and coastal transport are competitors in supplying crude oil to the coastal refineries that

process similar types of crude. Vessels, especially tankers, have superior economics in moving

crude, which is why so many refineries are located on the water. A 330,000-barrel tank ship can

move the equivalent of four to five unit trains of oil. A larger tanker, of the size used in the Alaska

Phillips 66, Earnings Conference Call, October 30, 2013, Q&A.

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trade, can move the equivalent of 15 unit trains. With the median capacity for U.S. refineries of

about 160,000 barrels per day, even the smallest tankers can carry a two-day supply of oil. Rail

loading and unloading terminals are being built to accommodate four to five trains per day to

match a refinery’s delivery needs; the challenge has been developing high-speed pumping

equipment that can load/unload an entire train (100 to 120 tank cars) in sufficient time to avoid

train backups at terminals (a unit train is over a mile long). On the other hand, coastal refineries

already have docks and pumping facilities to receive vessels. Moreover, railroads must build and

maintain track and pay property taxes on their rights of way, whereas the cost of building and

maintaining navigation channels in harbors is largely born by the federal government. For these

reasons, tanker should be significantly cheaper than rail for transport of crude oil, even when the

water route is much longer.

A round-trip voyage from the Gulf to the Northeast might take two weeks. Thus, to sustain a

supply chain for one refinery, a fleet of several tankers would be needed. As Jones Act-eligible

tankers are in very short supply, however, refineries such as Bayway utilize waterborne transport

as a supplement to the more expensive rail option from the Bakken. Phillips 66 has stated that if

Jones Act eligible tankers were available, it would run 100,000 barrels a day of Gulf Coast oil to

this refinery.61 In 2013, an average of 22,000 barrels a day of Gulf Coast oil was shipped to all

seven U.S. Northeast refineries.62 By rail, Bayway alone receives 50,000 barrels per day and is

completing a rail terminal with capacity to unload 75,000 barrels a day.

Eagle Ford crude oil is not currently shipped to California refineries, but such shipments are

estimated to cost $14.50 per barrel.63 The estimated cost of shipping Eagle Ford oil in Jones Act

tankers to California through the Panama Canal is $10 per barrel. Again, the water route is

cheaper than rail even though the railroad route is only one-fourth the length of the water route.

The Panama Canal route would also be cheaper than moving Bakken oil to California refineries

via rail to the Pacific Northwest followed by coastwise vessel transport to California, with a total

cost of $13 to $14 per barrel.64 When the Panama Canal’s expansion project is completed in 2015,

tankers with capacity of 600,000 barrels will be able to pass through, twice the size of the largest

tankers using the canal today. This would further increase the cost advantage of ocean transport, if

Jones Act-eligible vessels of that size are available.65

Phillips 66 presentation at Bank of America Merrill Lynch Refining Conference, March 6, 2014.

According to EIA, Crude Oil Movements by Tanker and Barge between PADD Districts;

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRMTP1P31&f=M.

En*Vantage, Inc., “The Surge in US Crude Oil Production,” Presentation to PFAA 20th Annual Conference, October

24, 2013; http://www.pfaa-online.com/docs/2013/AC/8EnVantage-PFAA-Oil-Presentation-102413.pdf

En*Vantage, Inc., “The Surge in US Crude Oil Production,” Presentation to PFAA 20th Annual Conference, October

24, 2013; http://www.pfaa-online.com/docs/2013/AC/8EnVantage-PFAA-Oil-Presentation-102413.pdf.

When Alaskan oil began flowing in 1977, West Coast refineries could not handle all the oil. The excess was shipped

from Valdez, AK, to Panama on supertankers and transferred there to smaller tankers that could fit through the canal’s

locks en route to Gulf and East Coast. The high cost of this shipping route ($4 to $5.25 per barrel) led to calls for

allowing exports of Alaskan oil to Japan and Korea (with shipping costs of $0.60 per barrel). Later, a pipeline was built

across Panama to replace the vessel transit through the Canal.

Congressional Research Service

Figure 3. Selected Water and Rail Crude Oil Supply Routes

(Freight rates per barrel)

Source: Graphic created by CRS. Map boundaries and information generated using HSIP Gold 2013 – For Official Use Only (Platts); Esri Data & Maps (2013); U.S.

Census (2013). Shipping rates approximated from those reported by Turner, Mason & Co. in Platts Oilgram Price Report, January-April 2014 issues, and as footnoted in

text.

CRS-18

Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

It is not inconceivable that tankers could also play a role in moving Bakken oil to East or West

Coast refineries, although the route would be circuitous compared to rail. Significant amounts of

Bakken oil are moved to Gulf Coast terminals by a combination of pipeline, railroad, and barge

for refining within that region. From a Gulf Coast port, tankers could transport the oil either to

East or West Coast refineries. Existing rail and pipeline connections serve Great Lakes ports,

from which tankers could move Bakken oil to Northeast refineries. The experience of agricultural

producers in the upper Midwest, however, suggests that these two routing options are not

economically feasible because of the Jones Act.66

Notwithstanding the U.S.-flag requirement for Alaska oil exports, the situation is somewhat

similar to that of Texas oil in that higher domestic shipping rates encourage sales to foreign

buyers. This shipping pattern is not unique to oil. In the 1960s and 1970s, the U.S. lumber

industry in Washington and Oregon asserted that the Jones Act hindered its ability to compete

with western Canadian lumber that could be shipped at cheaper international freight rates to the

U.S. east coast. Today, Oregon and Washington are still large waterborne shippers of forest

products, but all their products shipped by water are exported while all the forest products the

East Coast receives by vessel are imported.67 Other bulk shippers have made similar assertions.68

Waterborne Transport and Concerns about Rail Safety

If Eagle Ford, and possibly Bakken oil producers were able to access foreign-flag tankers at

international rates of around $2 or perhaps less per barrel, some of their domestic oil shipments

would likely shift from rail to water.69 That shift could be beneficial in terms of the safety of oil

transport, although the allowance of foreign-flag tankers could potentially displace U.S. seafarer

jobs.

Congress is greatly concerned about the safety of shipping crude oil by rail. Existing railroad tank

cars are inadequately designed to prevent release of product during derailment, and the

transportation of crude oil in unit trains, a new development, has meant that a single incident can

involve a large quantity of flammable and explosive material. Incidents involving unit trains of

crude oil have caused numerous fires and explosions, requiring evacuations and in one case

resulting in 47 fatalities.70 Railroads have increased track and equipment inspections on oil routes,

and have reduced the speeds of unit trains of crude oil through populated areas. However, recent

incidents have shown that a high proportion of derailed tank cars will puncture and release

Grain and feed producers in the upper Midwest contend that while they can move product economically by barge to

New Orleans or by rail to a Great Lakes port, from there, because of the Jones Act, they have no economical access to

dry bulk ships that could deliver the feed to eastern North Carolina hog and poultry farms. These farms import their

feed from Canada and South America, See, for instance, “Can Soybeans Compete?” Top Producer, Spring 2005.

U.S. Army Corps of Engineers, Navigation Data Center, http://www.navigationdatacenter.us/wcsc/wcsc.htm.

These include grain and feed, scrap metal, and road salt producers. See U.S. Congress, House Committee on

Transportation and Infrastructure, Subcommittee on Coast Guard and Maritime Transportation, The Impact of U.S.

Coastwise Trade Laws on the Transportation System in the United States, 104th Cong., 2nd sess., 1996, 104-66.

See, for example, the comments of the CEO of Phillips 66 during the company’s earnings conference call, July 31,

2013.

For details, see CRS Report R43390, U.S. Rail Transportation of Crude Oil: Background and Issues for Congress,

by (name redacted) et al.

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product even at much lower speeds. The capability and resources of local responders to crude-byrail incidents are ongoing concerns.71

In contrast, tankers are not a new method for moving oil. Vessels have double hulls and vessel

operators are required to have emergency response equipment and resources in place in case of a

spill. The Coast Guard has a regulatory regime in place to safeguard tanker transits through

harbors. Where allowed, states have imposed additional safeguards on tankers transiting their

harbors. Environmental damage from an oil spill remains a grave concern, but tanker incidents

generally do not require evacuations of towns and cities.

Impact on Other Rail Users

The heavy reliance on railroads to move crude oil has interfered with the smooth functioning of

the rail system. This has had negative consequences for other rail users, including passengers as

well as freight shippers.

From 2008 to 2013, annual rail car loadings of crude oil increased from 9,500 to over 400,000. In

2014, railroads are expected to move 650,000 tank cars of crude oil, the equivalent of 18 unit

trains of 100 cars per day.72 Many of these shipments move out of the Bakken region of North

Dakota, and grain, sugar beet, potato, and coal shippers have complained of serious delays in rail

service in the Upper Midwest.73 Amtrak cancelled several trains across North Dakota because the

freight railroad that owns the track could not accommodate them, and on other occasions it has

had to substitute bus service between points in North Dakota for rail service.74 Based on past

experience, local rail backups can have ramifications for service nationwide.

Some railroads are installing new track to handle the growing demand to ship oil by rail. If

tankers were available and their operating costs more competitive with rail costs, it is possible

that increased use of waterborne transport could relieve some of the pressure on rail service.75

U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Railroads, Pipelines, and

Hazardous Materials, Oversight of Passenger and Freight Rail Safety, 113th Cong., 2nd sess., February 26, 2014; U.S.

Congress, Senate Committee on Commerce, Science, and Transportation, Subcommittee on Surface Transportation and

Merchant Marine Infrastructure, Safety, and Security, Enhancing Our Rail Safety: Current Challenges for Passenger

and Freight Rail, 113th Cong., 2nd sess., March 6, 2014; U.S. Congress, Senate Committee on Appropriations,

Subcommittee on Transportation and Housing and Urban Development, and Related Agencies, Rail Safety, 113th

Cong., 2nd sess., April 9, 2014.

Platts, OilGram Price Report, March 26, 2014, p.1.

“Surge in Rail Shipments of Oil Sidetracks Other Industries; Pileups at BNSF Railway Is Causing Delays for

Shippers of Goods Ranging From Coal to Sugar,” The Wall Street Journal, March 13, 2014.

“Warning: Amtrak Trains Will Not Arrive on Schedule,” Great Falls Tribune, February 16, 2014.

See, for example, the comments of the CEO of Phillips 66 during the company’s earnings conference call, July 31,

2013.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

The U.S. Non-contiguous Oil and Gas Trade

The Jones Act is particularly consequential for Puerto Rico, Hawaii, and Alaska. Puerto Rico has no operating

refineries. It imports all of its petroleum products. Island countries surrounding Puerto Rico have become major

consumers of gasoline and other products refined on the U.S. Gulf Coast, as has the U.S. Virgin Islands, which is not

subject to the Jones Act. However, Puerto Rico does not consume any petroleum products of U.S. origin.76

Two refineries located near Honolulu supply about 90% of Hawaii’s demand for refined products. Most of the crude

oil processed in these refineries comes from Indonesia or other Pacific Rim countries; none comes from other parts

of the United States.77 Any oil or refined products shipped from U.S. ports to Hawaii would have to move on Jones

Act ships, putting U.S. production at a cost disadvantage against imports from more distant locations.

New drilling technology has also led to a boom in domestic natural gas production. The gas is cooled to minus 260

degrees Fahrenheit for shipment as liquefied natural gas (LNG) aboard special tankers with insulated tanks. There are

no Jones Act-qualified LNG tankers available to carry U.S. natural gas to Hawaii and Puerto Rico; the United States

has not built an LNG tanker since 1980. In 2011 (P.L. 112-61), Congress allowed three U.S.-built but foreign-flagged

LNG tankers to enter the U.S. domestic trade under U.S. flag, but they have not done so; in any event, these vessels

were built in the late 1970s and are over 35 years in age. In 1996 (P.L. 104-324), Congress also allowed any foreignbuilt or foreign-flagged LNG tankers then operating to re-flag under the United States if they would provide service

between a U.S. state and Puerto Rico, but none has entered this service. (These vessels would now be at least 18

years old.) Several LNG export terminals are under development in the continental United States, and these could

potentially also handle LNG for Puerto Rico and Hawaii. Puerto Rico has an LNG terminal that receives imported gas,

mostly from Trinidad and Tobago, and the potential competitiveness of U.S. LNG shipped in Jones Act vessels is

uncertain. Hawaii does not have an LNG terminal.

While Alaskan crude oil exports would be required to move in U.S.-flag tankers, the flag requirement does not apply

to LNG. Alaska shipped LNG to Japan in foreign-flag tankers until 2012, and such shipments may resume in the future.

Alaska gas could be shipped to the U.S. West Coast if Jones Act-qualified LNG tankers were available.78

The U.S. Virgin Islands is exempt from the Jones Act.79 In the 1960s, Hess built what would become the largest

refinery in North America (700,000 barrels per day) at St. Croix. The refinery shipped residual fuel oil to the U.S.

East Coast (on foreign-flag tankers). It imported crude oil from foreign sources but also received Alaska oil that sailed

around Cape Horn in foreign-flag tankers. In 1976, legislation (S. 2422) was introduced to repeal the Jones Act

exemption for crude oil and petroleum products, but no action was taken.80 The refinery closed in February 2012 and

is now used as a storage facility while a buyer is being sought.

Jones Act Waivers

The executive branch has statutory authority to waive the Jones Act “in the interest of national

defense.”81 During the summer of 2011, when President Obama released oil from the nation’s

Strategic Petroleum Reserve (SPR) due to unrest in Libya, the Administration waived the Jones

Act and about 25 million barrels of SPR crude oil was moved on foreign-flag tankers to Gulf

Coast, East Coast, West Coast, and Hawaii refineries. Each foreign-flag tanker carried 500,000

For further information on the Jones Act specific to Puerto Rico, see U.S. Government Accountability Office (GAO),

Puerto Rico: Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act, GAO13-260, March 2013.

U.S. Energy Information Administration, Geography, U.S. States; http://www.eia.gov/state/?sid=HI.

Alaska Business Monthly, “U.S. Cabotage Laws and Alaska’s LNG Trade,” February 2014.

46 U.S.C. §55101(b)(4).

U.S. Congress, Senate Committee on Commerce, Subcommittee on Merchant Marine, Amend the Merchant Marine

Act of 1920, S. 2422, 94th Cong., 2nd sess., February 25, 1976, Serial No. 94-75.

46 U.S.C. §501.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

barrels or more in a total of 44 shipments. One delivery was made in a Jones Act vessel, a barge

carrying 150,000 barrels.82

The Jones Act has also been waived temporarily after disruptions to normal oil supply routes, in

the Gulf after Hurricanes Katrina and Rita in 2005, and in the Northeast after superstorm Sandy

in 2012. During the 12-day waiver for superstorm Sandy, 12 foreign-flagged tankers transported

more than 3 million barrels of refined product from the Gulf Coast to the Northeast.

Recent U.S. Shipbuilding Activity

Over the past decade, one tank ship and about 125 tank barges have been built in the United

States each year, on average. Limited capacity exists in U.S. shipyards to build tankers. As of

February 2014, there were 11 petroleum tankers on order for delivery before 2016 and three ATBs

on order.83 Two of these tankers are definitely being built for crude oil, and are planned to replace

two Alaska tankers ready for scrapping. The intended use of the other nine ships has not been

announced; they could carry either crude or refined products. If they are intended to carry refined

products, the shipyard will install coatings on tank walls and more specialized pumping

equipment than needed on crude oil tankers, so that the ship can carry a variety of refined

products without cross-contamination.

The tanker ships are being built by the General Dynamics NASSCO Shipyard in San Diego and

the Aker Philadelphia Shipyard. One industry analysis estimates that NASSCO has the capability

of building four large vessels per year and that Aker has the capability of building three, and that

these two yards are essentially booked through at least 2016.84 Recent ATBs have been built by

shipyards in Mississippi, Washington, Oregon, and Pennsylvania.

Foreign Components

NASSCO has partnered with Daewoo Shipbuilding and Aker with Hyundai Mipo Dockyards,

both Korean shipbuilders, for ship design, engineering, and procurement support. In the past,

shipyard unions have opposed such agreements with Korean shipbuilders because the engines,

piping, crew quarters, and portions of the bow and stern were imported from overseas and only

assembled in the United States. NASSCO has explained that since Korean yards “build a hundred

times more ships, they learn at a rate a hundred times faster, so you learn from the best.”85

Shipyard unions refer to ships built in this manner as “kit ships.”86

Staff memorandum to Members, House Committee on Transportation and Infrastructure, Subcommittee on Coast

Guard and Maritime Transportation, regarding hearing, “Review of Vessels Used to Carry Strategic Petroleum Reserve

Drawdowns,” June 22, 2012.

RBN Energy, LLC, “Rock the Boat Don’t Rock the Boat – The Jones Act Articulated Barge Fleet,” February 11,

2014.

American Petroleum Tanker Partners LP, Form S-1 Registration Statement, October 22, 2013, p. 114.

Tom Wetherald, General Dynamics NASSCO, panel discussion on U.S. shipbuilding at the Second National

Maritime Strategy Symposium, hosted by the Maritime Administration, May 6, 2014;

http://www.marad.dot.gov/mariners_landing_page/national_strategy_symposium/National_Maritime_Strategy_Sympo

sium.htm.

Journal of Commerce, “Unions Sue Over ‘Kit’ Ships,” January 15, 2007; PR Newswire, “Metal Trades Department

(AFL-CIO) Sues Coast Guard to Block Kit Ships,” January 12, 2007.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

Coast Guard regulations deem a vessel to be U.S. built if (1) all major components of its hull and

superstructure are fabricated in the United States, and (2) the vessel is assembled in the United

States.87 The Coast Guard holds that propulsion machinery, other machinery, small engine room

equipment modules, consoles, wiring, certain mechanical systems, and outfitting have no bearing

on a U.S. build determination.88

Shipbuilding Loans, Grants, and Tax Deferrals

The federal government has long provided financial assistance to domestic shipyards. The socalled “Title XI” program (46 U.S.C. §53702) provides government-backed loan guarantees (with

repayment over 25 years) for prospective buyers of U.S.-built vessels as well as to shipyards for

modernization of their facilities. The loan guarantee covers 87.5% of the cost of a ship. In

FY2014, Congress appropriated $38 million for the program, the first time it has provided funds

to expand the loan portfolio in several years. For FY2015, the House passed bill (H.R. 4745)

would rescind $29 million of this amount while the Senate reported bill (S. 2438) provides $7

million for the program. For each loan, a reserve amount must be held depending on the risk, but

typically 5% to 10% of the loan amount. As of April 2014, MARAD had $73 million available for

new guarantees, enough to cover approximately $735 million of loans and a current portfolio of

outstanding loan guarantees totaling $1.7 billion covering about 250 vessels.89

The Title XI program has been controversial in Congress when large loan recipients have

defaulted, like in October 2001, when American Classic Voyages defaulted on a loan for two

cruise ships intended for the Hawaii trade. Other borrowers have defaulted since.90 Foreign yards

are subsidized also, although the form of assistance is often not transparent. An international

agreement to reduce shipbuilding subsidies failed largely because the six largest U.S. shipyards

objected to reducing the Title XI program.91

In the National Defense Authorization Act for FY2006 (P.L. 109-163, §3506), Congress created a

grant program for small shipyards (currently defined as having no more than 1,200 employees).

The grant can cover up to 75% of the cost of improving their facilities. Since then, about $10-$15

million a year has been made available for this program, except that the American Recovery and

Reinvestment Act of 2009 provided $100 million and no funds were appropriated in FY2014.

49 C.F.R. §67.97.

The Philadelphia Metal Trades Council sued the Coast Guard, but a U.S. District Court sided with the Coast Guard.

See Philadelphia Metal Trades Council v. Allen, No. 07-145 (E.D. Pa. Jan. 12, 2007).

MARAD, FY2015 Budget Request.

Information on defaults is not available on MARAD’s Title XI homepage. On July 14, 2010, the Maritime

Administrator at the time testified that since 1993, there had been 13 defaults including two in FY2009 and two in

FY2010. Testimony of David Matsuda, House Armed Services Committee on Seapower and Expeditionary Forces,

Hearing on Activities of the Maritime Administration, July 14, 2010.

After nearly a decade of receiving no shipbuilding subsidies in the 1980s, U.S. shipyards urged the government to

negotiate an international agreement. In 1993, Congress resumed funding for Title XI. In 1994, after five years of

negotiations, the United States, the European Union, Norway, Japan, and South Korea reached an agreement through

the Organization for Economic Cooperation and Development to prohibit most shipbuilding subsidies. The United

States would have been required to reduce Title XI guarantees to 80% of the loan amount and to limit them to 12 years.

The so-called “big six” shipyards that do mostly Navy work, but some commercial work, objected to the agreement.

The U.S. yards that do mostly commercial work supported it. The United States was the only participant that did not

ratify the agreement.

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Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues

MARAD also administers the Capital Construction Fund (CCF) program, which allows U.S.-flag

operators to defer taxes on income placed in such a fund if used to purchase or reconstruct U.S.

built ships.92 The fund is established by the ship owner subject to MARAD regulations and

reporting requirements.93 The investment income in the CCF is also tax deferred. The tax deferral

is essentially indefinite as long as the program remains active.

U.S.-flag Reservation for Export of Oil and Natural

Gas?

Congress is debating whether to allow crude oil produced in the continental United States to be

exported to other countries, in addition to Canada.94 Domestic producers of natural gas are

seeking federal export permits.95 Current law would not require that such exports be carried in

U.S.-flagged ships.96 Many U.S.-based petroleum producers and refiners control foreign-flag

tankers, some of which deliver imported crude oil to the United States or export refined

petroleum products from U.S. refineries. U.S. merchant mariners are seeking additional U.S.-flag

voyages because the government-impelled cargos (military and food-aid cargos) they rely on are

in decline.

During markup of the Coast Guard and Maritime Transportation Act of 2014 (H.R. 4005) an

amendment to require that LNG exports move in U.S.-crewed and eventually in U.S.-built tankers

was withdrawn in favor of a Government Accountability Office study of maritime employment

related to this requirement.97 Also unsuccessful were two amendments to a House-passed energy

bill (H.R. 6, passed on June 25, 2014) which sought to require that LNG exports be carried in

U.S.-flag tankers and require that federal regulators give priority to export terminal projects that

would use U.S.-flag vessels.98 Amendments to the Energy and Water Appropriations Act of 2015

(H.R. 4923) would have tied federal approval of LNG export terminals to the use of U.S.-flag

tankers, but they were defeated on points of order.99

Whether the nation’s energy trade should be carried in U.S.-flag tankers is a long-standing debate

in Congress. In 2006, when the United States was still expected to be an importer rather than an

exporter of LNG, Congress specified that federal regulators give “top priority” to the processing

of licenses for offshore LNG import terminals if they would be supplied by U.S.-flag tankers, so

as to promote the security of the United States.100 LNG shippers contended that tying U.S. trade

46 U.S.C. §53501.

46 C.F.R. Parts 390 and 391.

CRS Report R43442, U.S. Crude Oil Export Policy: Background and Considerations, by (name redacted) et al.

CRS Report R42074, U.S. Natural Gas Exports: New Opportunities, Uncertain Outcomes, by (name redacted) et al.

U.S. law (The Cargo Preference Act) requires 50% of “U.S. government impelled” cargo, such as food-aid, to be

shipped in U.S.-flag ships, but these do not have to be U.S. built. Most of these ships also receive operating subsidies

because they are to be made available to the military as part of the Maritime Security Fleet program.

H.Rept. 113-384, Howard Coble Coast Guard and Maritime Transportation Act of 2014, p. 27.

Congressional Record, June 25, 2014, p. H5750.

H.Amdt. 1029 and H.Amdt. 1031 to H.R. 4923.

100

P.L. 109-241, §304.

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routes to certain flag vessels would hinder the ability to supply LNG under short-term contracts,

which was how LNG was increasingly traded as the global market matured.101

Security was the rationale put forth by proponents of requiring U.S. imported oil to be carried in

U.S.-flag tankers in the 1970s. In 1974, The Energy Transportation Security Act (ETSA, H.R.

8193, 93rd Congress) would have required that 30% of imported oil be carried in U.S.-flag and

U.S.-built tankers. The bill was pocket-vetoed by President Ford. In the 94th Congress (1975),

Congress created the Strategic Petroleum Reserve in response to the supply crisis in imported oil

(P.L. 94-163). Since the oil for the reserve is purchased by the federal government, half the oil

shipped by vessel must be transported by U.S.-flag tankers pursuant to the Cargo Preference Act

of 1954.102 In the 95th Congress (1977), the ETSA was reintroduced (H.R. 1037, S. 61) with

modifications. A version requiring that 9.5% of U.S. imported oil be carried in U.S.-flag tankers

passed the House by voice vote, but was then defeated in a recorded vote of 257 to 165. In the

House floor debate, supporters of the bill primarily cited national security and the importance of

boosting the domestic shipbuilding base.103 While opponents cited costs to consumers and

potential retaliation from trading partners, much of their argument reflected a Common Cause

report on political campaign contributions by the U.S.-flag industry, which had been released just

days before.104 That neither the Department of Defense nor Department of State had testified in

support of a national security rationale for the bill was also noted in the floor debate. The Senate

never took up the measure.

At a 2014 industry symposium organized by MARAD to solicit ideas for addressing the decline

in U.S.-flag cargoes, several participants advocated requiring a certain amount of LNG exports be

carried in U.S.-flag or U.S.-built ships.105 Much of the discussion concerned additional statutory

or regulatory requirements for staying the decline in cargoes. There was little or no discussion,

given the inverse relationship between price and quantity demanded, of efficiencies that could

lower the price of U.S.-flag shipping.106 The one commercial shipper making a presentation at the

symposium stated, “Today U.S. flag is seen as a group of carriers that we have to use. I think that

going forward, to be successful, you have to be seen as a group of carriers that we want to use.”107

101

See filings of Shell and the Center for LNG at http://www.regulations.gov under docket no. MARAD-2007-26841.

At the time, the GAO estimated that U.S.-flag shipping costs would be 2.3 to 2.8 times that of foreign-flag rates and

questioned whether there was an adequate supply of U.S.-flag tankers. GAO, Transportation Planning For The

Strategic Petroleum Reserve Should Be Improved, LCD-78-211, October 18, 1978.

103

Congressional Record – House, October 19, 1977, p. 34177 et seq.

104

“The Maritime Payoff,” Wall Street Journal, August 4, 1977; “The Great Ship Robbery,” New York Times, August

6, 1977; “How To Buy A Bill,” The Washington Post, September 1, 1977.

105

For webcasts, transcripts and presentations at the symposium, see

http://www.marad.dot.gov/mariners_landing_page/national_strategy_symposium/National_Maritime_Strategy_Sympo

sium.htm.

106

This focus is consistent with the observation of a former Maritime Administrator that the U.S. merchant marine has

“become accustomed to thinking that the government could never do enough for them.” Andrew Gibson and Arthur

Donovan, The Abandoned Ocean (Columbia, SC: Univ. of South Carolina Press, 2000), p. 175.

107

Scott Mogavero, Global Logistics and Planning Manager at GE Logistics, as quoted in Journal of Commerce,

“Shippers Cite U.S.-Flag Challenges,” January 15, 2014.

102

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Current Legislation

Several bills now pending in Congress address matters related to waterborne transportation of oil,

including many of the safety and commercial issues raised in this report:

The Coast Guard and Maritime Transportation Act of 2014 (H.R. 4005, passed by the House

April 1, 2014) directs the U.S. Department of Transportation to submit a national maritime

strategy that identifies federal regulations that reduce the competitiveness of U.S.-flag vessels in

international trade, submit recommendations to make U.S.-flag vessels more competitive and

enhance U.S. shipbuilding capability, and identify strategies to increase the use of U.S.-flag

vessels to carry imports and exports and domestic commerce. The Coast Guard is directed to

arrange with the National Academy of Sciences an assessment of laws that impact the ability of

U.S.-flag vessels to compete in international trade, while GAO is directed to study how U.S.

maritime employment would be affected by a requirement that LNG exports move in U.S.-flag

vessels.

S. 2444, the Coast Guard Authorization Act for Fiscal Years 2015 and 2016, would require the

Coast Guard to report marine casualties to state or tribal governments within 24 hours, publish on

a publicly accessible website its incident action plans in response to an oil spill, and modify oil

spill contingency plans to include advance planning for closing and reopening of fishing grounds.

H.R. 2838, sponsored by Resident Commissioner Pierluisi, would exempt liquefied natural gas

and propane tankers serving Puerto Rico from the Jones Act. S. 1483, sponsored by Senator

Cantwell, establishes a federal oil spill research committee and requires updates to vessel oil spill

response plans.

The National Defense Authorization Act for FY2015 (H.R. 4435), as passed by the House on May

22, 2014, declares the sense of Congress (§3503) that “the United States coastwise trade laws [the

Jones Act] promote a strong domestic trade maritime industry, which supports the national

security and economic vitality of the United States and the efficient operation of the United States

transportation system.”

Author Contact Information

(name redacted)

Specialist in Transportation Policy

[redacted]@crs.loc.gov, 7-....

Acknowledgments

James C. Uzel, GIS Analyst, and (name redacted), Graphics Specialist, contributed to the figures in

this report.

Congressional Research Service

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