Bloomberg News

U.S.-Flag LNG Ships Gain Support as Export Costs Seen Rising (4)

March 07, 2014

U.S. lawmakers are making a fresh push to require exports of natural gas to be carried on American ships.

Proposals from Representative John Garamendi, a Democrat from California, and the Department of Transportation’s Maritime Administration would require exports of liquefied natural gas to use U.S.-made and -crewed ships. The shipping industry expects the moves to gather bipartisan support, said Clay Maitland, chairman of the Merchant Marine Policy Coalition, an industry group.

While the changes would make LNG exports more expensive than using foreign tankers because no such U.S.-flagged vessels currently exist, supporters of the effort say that the U.S. merchant fleet is vital to national security. The proposals are gaining attention amid calls to ship gas to Europe to offset possible reductions in supply from Russia.

“If you’re going to export it, let’s do that in a way that further strengthens the American economy by exporting that gas on American-made ships with American crews,” Garamendi, 69, who sponsored the proposal as an amendment to the Coast Guard Reauthorization Bill, said in a phone interview.

“I’m not here to make the gas industry happy -- I’m interested in building the American economy and the manufacturing sector, of which the shipbuilding industry, for strategic defense purposes, has to remain strong,” he said.

In effect the moves would put exports of the fuel -- and later, possibly crude oil -- under the same rules that restrict domestic cargoes to U.S. ships.

Shrunken Fleet

The fleet of ocean-going cargo ships flying the U.S. flag has shrunk to 179 from more than 1,000 in the 1950s, according to the Maritime Administration, part of the U.S. Department of Transportation. The industry’s supporters say the U.S. needs American-owned and -crewed ships available in the event of war or national emergencies.

U.S. ships cost more to operate because of environmental and labor rules. Most of the world’s vessels are registered in countries such as Panama, Liberia and the Marshall Islands, known as flags of convenience.

The government is spending $186 million a year through 2015 to support 60 U.S. ships in international trade (including the Maersk Alabama, the container ship helmed by Tom Hanks in last year’s movie “Captain Phillips”), according to the Maritime Administration’s website. That amounts to a subsidy of about $8,500 a day.

Reserved Cargoes

Another way the U.S. keeps merchant ships under its flag is by reserving certain cargoes for them. Since 1920, a law known as the Jones Act has required all cargoes between domestic ports to travel on U.S.-flagged, -owned and -crewed vessels. Now, with exports of LNG and possibly crude oil poised to increase, some of those cargoes could be set aside for U.S. ships as well.

“New cargoes for U.S. flag ships are the key, and the sector ripest for that is energy exports, specifically LNG, even if it is just a small percentage that is required to be carried aboard a U.S.-flag vessel,” Paul “Chip” Jaenichen, acting maritime administrator, said at a symposium in Washington on Jan. 16. The Maritime Administration will develop a national maritime strategy by early next year, spokesman Michael Novak said.

Garamendi’s amendment would phase in a requirement that all LNG exports from the U.S. would be on U.S.-built and U.S.- flagged ships with American crews. While he withdrew it anticipating defeat, Garamendi said he is committed to reintroducing the proposal on the House floor after garnering more support.

‘Great Time’

Representative Duncan Hunter, 37, the California Republican who chairs the House Subcommittee on Coast Guard and Maritime Transportation, wants to examine all opportunities to expand the U.S. fleet, including LNG tankers, spokesman Joe Kasper said in a statement.

“This is going to be a great 50 years with the energy that we have in this country,” Hunter said Jan. 14 at the Maritime Administration’s symposium. “If we harness that, this could be a great time for the maritime industry. We’re saying, hey, if you’re going to get it out of U.S. soil and you’re going to export energy out of the U.S., maybe it ought to be on U.S. ships with U.S. mariners.”

There are fewer than 14,000 American mariners in the oceangoing U.S. fleet, “below the bare minimum,” according to Don Marcus, president of the International Organization of Masters, Mates & Pilots. The 4,500-member union supports reserving LNG exports for U.S. ships to expand the pool of qualified crew, he said in a telephone interview.

Small Increase

A U.S.-crewed and -flagged oil tanker costs about $21,000 a day to operate, compared with $9,500 for a comparable international ship, estimates Navigistics Consulting. Accounting for fuel and financing costs, a U.S. ship is about 25 percent more expensive, said David St. Amand, president of the Boxborough, Massachusetts-based research company.

That still only increases the cost of an LNG tanker’s voyage from the U.S. Gulf to Japan by about 5 percent, according to Pat Calahan, a broker and project consultant at MJLF & Associates in Stamford, Connecticut. The effect on profits from the trade would be even smaller.

U.S. exports of LNG are appealing because the fuel costs about three times less than in Japan, the biggest importer. Japan paid $16.80 per million British thermal units in January, compared with $4.94 on the U.S. Gulf Coast, according to data from Poten & Partners Inc., a New York-based shipbroker.

Cheniere Energy

Exporters need government approval to sell LNG to countries that lack free-trade agreements with the U.S. The Energy Department has approved six permits so far. The first is for Cheniere Energy Inc. at Sabine Pass, Louisiana, scheduled to start shipping 9 million metric tons a year in late 2015. U.S. export capacity will rise to 62 million tons by 2020, according to Morgan Stanley.

Cheniere shares fell 2.4 percent today, the biggest decline since Feb. 5. Katie Pipkin, the Houston-based company’s senior vice president for business development, communications and investor relations, did not respond to phone messages seeking comment.

Lawmakers are calling on the Obama administration to accelerate approvals to help European allies cope with the possible loss of Russian supplies amid tensions in Ukraine. “Now is the time to send the signal to our global allies that U.S. natural gas will be an available and viable alternative to their energy needs,” House Energy and Commerce Committee Chairman Fred Upton, a Michigan Republican, said in a statement.

Crude Exports

Exports of crude oil have been restricted since 1975. Last year, the American Petroleum Institute, which represents the oil industry in Washington, began preparing to challenge the ban. Exxon Mobil Corp. and Senator Lisa Murkowski of Alaska, the senior Republican on the Energy and Natural Resources Committee, support changing the rules.

As Congress debates the issue, requiring the cargoes to move on U.S. tankers could emerge as a condition, according to Winston & Strawn LLP, a law firm specializing in shipping.

The cost of using U.S. ships would effectively stop any exports of LNG or crude, said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, an industry group whose members include Exxon Mobil and Chevron (CVX:US) Corp. The 94-year-old law that makes American consumers pay more for domestic shipping should be loosened, not extended to exports, he said.

“The Jones Act needs modifying, and it certainly does not need modifying to make it more restrictive,” Drevna said in a phone interview. “We’re in a global market and we have to compete globally.”

Debating the Jones Act shouldn’t interfere with realizing the benefits of LNG exports now, said Robert Sumner, a spokesman for America’s Natural Gas Alliance, an industry group in Washington.

‘Don Quixote’

Garamendi’s amendment shows the amount of debate on Capitol Hill over every aspect of LNG exports, William Frohnhoefer, an analyst at BTIG LLC in New York, said by phone today. The proposed rule won’t pass because it lacks political support, contradicts existing approvals for LNG exports and undermines U.S. free-trade commitments, he said.

“This is not going to restart the shipbuilding industry in the U.S.,” Frohnhoefer said. “I think he’s kind of like Don Quixote tilting at windmills here.”

U.S. shipyards haven’t built an LNG tanker since 1980. Ten carriers built by General Dynamics (GD:US) Corp. and Newport News Shipbuilding between 1977 and 1980 were registered under other flags such as the Marshall Islands, according to Clarkson Plc, the world’s largest shipbroker.

Job Done

South Korean shipyards charge more than $200 million to build a new LNG carrier in about three years, Clarkson data show. U.S.-built oil tankers cost about five times as much as Asian counterparts, according to Drewry Maritime Research, an industry consultant. Garamendi said shipyards told him they could get the job done.

The Shipbuilders Council of America, an industry group in Washington, has no position on the proposal, it said in an e-mailed statement today.

General Dynamics’ NASSCO shipyard in San Diego could build LNG carriers, said Peter Brown, manager of commercial development. He declined to discuss costs. The yard’s backlog of nine commercial vessels is full through 2016, he said.

American shipyards are already building more U.S. oil tankers to keep up with surging domestic output. Jones Act-qualifying tankers command record rates close to $100,000 a day, according to MJLF. There are about 45 Jones Act tankers and 11 more on order, Calahan said.

Bottlenecks

The shortage of tankers creates bottlenecks, contributing as much as 15 cents a gallon to gasoline prices, estimates Fadel Gheit, an analyst at Oppenheimer & Co. in New York. Last month the East Coast had to pay more than $100 a ton extra to buy propane from Europe because there aren’t any Jones Act tankers that could deliver domestic supplies from Texas.

The Jones Act is critical to American jobs and national defense, according to the American Maritime Partnership, an industry group in Washington. The organization doesn’t have a position on the exports requirement, it said in a statement.

“That is the idea of the moment,” said Maitland of the Merchant Marine Policy Coalition. The U.S. fleet “is withering on the vine, and the public perception is something has to be done.”

To contact the reporter on this story: Isaac Arnsdorf in New York at iarnsdorf@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Philip Revzin, Steve Stroth


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