As the export ban on crude eases, concern grows that the demand for Jones Act vessels will decrease, affecting the investments in new tankers that have been multiplying in recent years. As reported in Reuters last week, U.S. shipbuilders have begun construction on many new tankers without having signed contracts with customers to lease them.
Philly Tankers, as an example, is currently building four vessels on spec, and Seabulk Tankers, Inc. is building two. These ships cost approximately $125 million per vessel and have a capacity of 330,000 barrels. The vessels conform to the Jones Act, meaning that they are U.S.-built, -crewed, and –flagged, making them nearly three times as expensive to build and operate than foreign-flagged vessels.
Crude Oil Ban Eases
Builders have been counting on the fact that they’ll recoup investments by establishing contracts with big oil companies, who could lease the vessels for as much as $80,000 per day to travel between United States ports.
That seems like a safe bet, with the exception of the increased levels of crude being produced in the U.S. that have prompted lawmakers to ease the rules prohibiting oil exports. Reuters’ analysis estimates that such relaxation of the crude oil ban could take as much as 200,000 bpd out of the United States market, reducing the need for shippers to use Jones Act vessels at all.
As an example, just last week, the Bureau of Industry and Security informed Pioneer Natural Resources Co. that putting condensate through a stabilizer was enough processing to qualify the light oil as a refined product – eligible for export with no license.
Says Brian Ladin, Jones Act vessel investor, “I think maybe the reason you haven’t seen some of these open ships taken is because everyone’s saying, ‘Hey, what if the export ban gets lifted?'”
Day Rates and Increased Demand
Day rates for Jones Act vessels have skyrocketed recently, filling shipyards’ order books. In fact, the American Phoenix, a vessel relet to Exxon by Koch Shipping and Supply, brought in the price of $120,000 per day, which broke the previous day rate record of $100,000. It’s orders like these that have led to construction contracts for 17 tankers and at least eight barges.
Crude oil production in the U.S. rose to 8.2 million barrels per day this past March, and is estimated to increase to 9.3 million next year, according to figures from the U.S. Energy Information Administration.
According to an assessment by HIS, a consultancy based in Cambridge, MA, if the ban on crude oil exports is lifted, it would lead to an increase in production to as much as 11.2 million bpd by 2022. And there is also the question of whether some tonnage will be scrapped at the end of the year, possibly increasing the demand for new vessels. Two barges with a total capacity of 560,000 barrels will turn 40 years old next January, which makes them too old for some traders with strict rules about the seaworthiness and age of vessels.
A few shipping industry sources think that the recent jump in spot rates triggered charterers like Shell, Trafigura, and Conoco to sit by and wait until the market cools down, the owners holding out for more lucrative deals.
For the time being, both sides – the charterers and the shipbuilders are in a holding pattern – waiting to see what happens.