Category Archives: Jones Act Market

US Oil Embargo?

In Wednesday’s editorial article in the Financial Times, the point is made that prohibition of US crude oil exports, coming into effect forty years ago at the peak of the Arab oil embargo, is an antiquated strategy, quite against the spirit of free markets, and in effect, another ‘pork barrel’ policy treating favorably certain industries in the name of consumer protection and national interest. The fact that US crude oil cannot be exported but refined petroleum products can, it means that US based refineries can have a competitive advantage bequeathed to them favorably not from market forces.  Landlocked but high quality US crude oil West Texas Intermediate (WTI) has historically has been priced, based on market forces, higher to Brent oil and other international blends, which are usually of lower quality but more easily trade-able on the international markets; however, in the last several years, since shale oil came to production in the US, WTI is casually priced at discount (sometimes heavy discount of more than 20%) to Brent and other easily trade-able blends.  As a result, US refineries have been getting access to cheap oil, and particularly refineries in the continental / Midwest of the country have been making money ‘hand over fist’ given that they get access to heavily discounted, landlocked oil.  Since it is legal for refined oil products to be exported, the refiners’ access to cheap oil does not necessarily translate to cheap gas for the US driver and consumer. A US refiner could as easily sell their product to the international market if that would maximize their profit. The fact that an international business newspaper like the Financial Times makes the argument in favor of letting the free markets operate by allowing exports of US-produced crude oil is not shocking. It’s a fair call about free markets and leveled competition, including fair trade practices (anyone remembers the US taking China to the WTO in reference to rare earth metals last year?) In the domestic oil business, besides the recent editorial, there have been a few more but never frequent or loud enough ‘voice(s) shouting in the wilderness’ about the same effect.  However, it’s fairly hard envisioning the US Congress acting in favor of such law. There could be some political cost, of course, and some activists would play the ‘national interest’ card for absolutely its maximum value.  Besides, there are several well-established interests that would lobby very hard to maintain the status quo.  Logically, the refinery industry would be at the front of the line protecting their shale oil ‘moat’; however, oil companies, to the extent involved in shale oil, would love to have the ability to sell internationally. In repealing the US crude oil ‘embargo’ most likely will be a killer for the Keystone XL pipeline as the most highly promoted argument in favor of its construction is the assumption that refineries along the US Gulf will have access to more oil, especially heavier and sour-er Canadian sands oil as compared to WTI, which is more profitable to the US refineries that were built and geared toward lower quality imported oil (from Venezuela for instance, and to a lesser degree from Middle East); the point is that US refineries working on cheaper heavy and sour imported crude likely could be more profitable, while foreign refineries (that are mostly geared for light and sweet blends) would be willing to pay a higher price than presently to acquire US blends like WTI and Louisiana Light Sweet (LLS) and other high quality crude. In the following two graphs prepared by Karatzas Marine Advisors & Co. on data sourced from the U.S. Energy Information Administration (EIA), despite the fact that US crude oil production increased from about 160 thousand barrels per diem in January 2008 to approximately 230 thousand barrels at present (up about 43%), the average price of retail gasoline has not declined overall, but it has rather shown a small increase. At least on this benchmark, it doesn’t seem that the US driver has seen much of benefit from increased US oil production and it’s mandatory refining in the US.

US Crude Oil Production vs US Gasoline Retail Prices

US Crude Oil Production vs US Gasoline Retail Prices

On the other hand, while overall production of gasoline by US refineries has remained constant more or less since January 2008, from the following graph it’s clear that total refined petroleum products have been a growth export market, showing an approximate 176% increase since January 2008.

US Weekly Gasoline Production & Total Refined Petroleum Product Exports

US Weekly Gasoline Production & Total Refined Petroleum Product Exports

Taking a look closer at home, any action by Congress to repeal Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979 would have a tremendous impact on shipping, both for the domestic, cabotage Jones Act tanker market but also for the international tanker market.  The shale oil boom had been a tremendous blessing for the usually ‘sleepy’ Jones Act tanker market (as compared to the international trade) with both activity and rates in the segment shown signs of vivid life, on the back of the need to transport domestically (at any price) oil along the US Gulf Coast or up the Atlantic and East Coasts. On the other hand, the shale oil boom (among other factors such as higher fuel efficiency standards in the US) has been the death knell for the international crude oil tanker market (recently, the US has lost its long-held biggest oil importer in the world, a ‘privilege’ that was passed on to China (in September, China imported 6.47 million barrels per diem of crude and refined petroleum products vs 6.2 million barrels per diem for the US.)  However, the shale oil has been also a blessing to the international product tanker market as refined petroleum products can be exported from the US refiners on foreign-flagged and owned vessels. A casual perusal of the shipping stock tables could not be more clear with well-established and respected companies like Frontline (ticker: FRO) are struggling for survival while product tanker upstarts like Scorpio Tankers (ticker: STNG) have been having the time of their lives. The odds for now are still significantly in favor that the US will maintain the ban on crude oil exports. Should there have been a change to implement free market practices, there will be another major inflection point for shipping: down with the Jones Act tanker market and the international products tanker market, and hoorah for the crude oil tankers.  As proud as shipping wants to be about its international pedigree and an industry mostly related to ‘perfect competition’, government policy can always make or break a fortune.  But again, it seems that often in free-market societies all the more often fortunes are made based on some preferential treatment not associated with market forces. © 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

The ‘Joneses’ and the Keystone Pipeline: Not so Strange Bedfellows

The Keystone XL pipeline, bringing primarily Canadian heavy crude from the oil sands of Alberta and West Canada to the US Gulf, celebrated recently its fifth anniversary in the … planning stage.  Like anything energy-related, it’s an expensive (estimated construction cost of more than $7 billion), big scale project (2,100 miles of pipeline with eventual daily capacity of 830,000 barrels of oil or about 10% of the present import oil needs of the US) that would slice through the middle of the US (environmental concerns to be addressed) and potentially serious geo-political implications (between the cheap, plentiful and politically-stable production from Canada and the so-called ‘oil glut’ of domestic production, the ‘Saudi America’ could afford in the future to be more self-centered geo-politically.)

Expected approval for the construction of the pipeline has recently faced renewed, strong opposition, and president Obama – the ultimate decision maker in this case – has set a high hurdle for the approval: it has to be proven that the pipeline will be emissions-neutral in order to get approval; a fairly high order for an energy project, since by definition energy projects suppose to create energy and (most unfortunately emissions; that’s how humans have learned to make energy.)   For now, any decision has been pushed back for the spring next year, but some smart money has started hedging their bets.

The Keystone XL pipeline, whether it gets built or not, whether sooner or later or maybe never, can have implications in the shipping industry, whether for the international flag or Jones Act tanker markets.

Canadian and U.S. Crude Oil Pipelines and Proposal (Source: Courtesy of Canadian Association of Petroleum Producers)

Canadian and U.S. Crude Oil Pipelines and Proposal (Source: Courtesy of Canadian Association of Petroleum Producers)

In a previous post, we discussed the possibility that the Canadians may augment and add new mileage to the pipeline system from West Canada / Alberta heading west to the open sea in an effort to sell their oil to the international market (read China). Kinder Morgan has been working on the TM Expansion to Burnaby (BC) / Anacontes, but the new pipeline project of Enbridge Gateway seems to be running against its own wave of (environmental concerns and) opposition.  The proposed TransCanada Energy East pipeline project (mostly based on converting natural gas pipelines to crude oil pipelines, about 2,800 miles of pipeline, and 1.1 million b/d) could bring Canadian oil eastward and along the border with the US to Québec City and St John, for local processing partially, but mostly for international exports. The TransCanada project could be technically more challenging going through harsh terrain and given the length of the project, the cost of building up the pipeline can be very expensive.  There have been rail routes with substantial spare capacity going both west and east of Alberta, that can theoretically substitute for the pipelines, and they have been doing terrifically in the short term, in terms of capacity and also allowing rail companies to show superb earnings reports.  Canadian oil heading west or east, whether through a pipeline or in rail cars, it will be a positive development of the international tanker industry, as such oil could be loaded on international flag tankers to head west (China and the Pacific Rim, possibly benefiting VLCC and Suezmax tankers), and possibly in smaller quantities moving south onto the few refineries on the US West Coast (USWC), likely benefiting aframax sized tankers.  Crude oil from East Canada, most likely would – given its heavy nature – find buyers in the refineries of the US Gulf Coast (USGC) and international flagged aframax tankers likely would be the main beneficiaries.

Construction of the Keystone XL pipeline likely will be a great benefactor of the Jones Act tanker and the international flag product tankers.  Unlike crude oil produced in the US that cannot be exported according to US law, Canadian oil reaching the USGC through the Keystone XL pipeline can be exported (of course, depriving the US of the benefit of accessing plentiful oil.)  However, based on the economics of the business, given that Canadian oil is heavy and refineries along the USGC are geared toward processing heavy oils (and that’s how they achieve superior margins), Canadian oil coming out of the Keystone pipeline most likely will end getting processed domestically, depriving international flagged crude oil tankers of the potentially new trade.   However, the Jones Act trade, whether for crude oil or refined products would benefit having to move bigger volumes along the Gulf Coast, around Florida, and the Atlantic and East Coasts.  Also, international flagged product tankers would be the other beneficiary of the pipeline based on additional refined product exports.  However, for international product tankers, this may be a mixed blessing and minor negative trade-off from their currently great state where USGC refineries process more West Texas Intermediate (WTI), Louisiana Light Sweet (LLS) and other top quality grades, resulting in higher production of diesel and a better (triangulating) export trade with Europe, as discussed in previous post.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Shale Oil: Think Globally, Buy Locally!

Fresh on the heels of a recent marketing campaign of the most ‘forward thinking’ i-concept yet, some may wonder whether the Jones Act tanker market in the US is exhibiting one of its best ever performances yet based on the dislocations caused by the status quo and possibly hard-to-substantiate assumptions.  Although in the summer Reuters first reported that the MT „AMERICAN PHOENIX” Jones Act product tanker was sub-leased to ExxonMobil by Koch Industries for one year at a rate of $100,000 pd, a recent article in a shipping trade publication erroneously stretched that charter to a grand total of five years, still at $100,000 per diem.  (We happened to know the true charterers and rates, and it’s not what it has been reported beyond what it was written in the Reuters article). Basing investment calculations on rates similar to $100,000 pd for 5 years as exciting and attractive as they may be, they can only lead to mis-calculations, disappointment and undue attention.

Shale oil discoveries and production oil and natural gas liquids (NGLs) in the US and overseas are definitely a game changer for world geo-economics, and such development will definitely provide a strong competitive advantage to the US versus other industrially developed / developing countries.  The shortest and best telling exhibit of such an advantage can be seen in the price differential of natural gas between approximately $3.5 / MMBtu at Henry Hub (Louisiana) and about $15 / MMBTU at DES Japan / Korea Marker (JKM) with an approximate $4.5 / MMBtu freight cost differential between the two markets; in other words, the base cost of energy input in the industrial value chain is one-fourth in the US than in Japan; although slightly better in Europe, still it’s three times as high than in the US.

Jones Act Tanker MT „FLORIDA" (Image Source: Courtesy of Crowley Maritime Corporation)

Jones Act Tanker MT „FLORIDA” (Image Source: Courtesy of Crowley Maritime Corporation)

Oil produced in the US is illegal to be exported (on a commercial, sustainable basis), based on laws enacted primarily in the aftermath of the 1970 oil shocks (Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979, and the so-called short supply controls in the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS) where the restrictions are duly defined.)  Therefore, based on the status quo, oil produced in the US has somehow to slosh in the US and that can only be done by rail cars, pipelines and tankers, Jones Act tankers that is. Ergo, the exuberance on the Jones Act tanker market. Since our last posting on the Jones Act market, there have been a firm order for an additional two tankers by clients of Seabulk Tankers at NASSCO, and a reported Letter of Intent (LOI) for additional four tankers by an institutional investor at the ailing Avondale  Shipyard (part of Huntington Ingalls Industries ) based in Louisiana. For those in the knowing, an LOI sometimes is worth as much as the paper it’s written on, but so far, the orderbook of firm orders for Jones Act tankers stands at fourteen vessels with production solidly filled till late 2016, with four more options plus the potentially four at Avondale.

Transporting Oil in the US (Source: Valero)

Transporting Oil in the US (Source: Valero Energy Corporation)

Domestic US oil production has increased from 5 million bpd in 2008 to 7.4 million bpd in 2012, while at the same time US imports of crude oil have dropped from 9.2 to 8.4 million bpd. All along, US oil consumption has dropped by 10% or 2 million bpd from 2008 till now. Major shale oil production came from the Bakken fields in North Dakota and the Permian Basin and Eagle Ford fields in west and southwest Texas, while the primary US ‘refinery corridor’ is lined up along the east part of the US Gulf Coast (USGC) and the US East Coast (USEC). According to a recent investment presentation by the world’s largest independent refiner Valero Energy (ticker: VLO), it costs about $15-17 /bbl to transport oil by rail from Bakken to USEC which is less or tantamount to the cost by rail / pipeline from Bakken to USGC and then by (Jones Act) tanker to USEC. All along, Valero estimates their cost of supplying oil from Eagle Ford to their Quebec refinery on foreign-flag vessels at $2 / bbl (crude oil exports to Mexico and Canada are allowed, and thus Valero’s ability to by-pass the Jones Act tonnage in this instance.)

The economics of transporting oil within the US whether by rail, pipeline or by sea (barges or tankers) are tight, and for now, the bottleneck / dislocation has caught many people by surprise.  However, there are strong efforts for the building of the TransCanada Keystone XL pipeline and expanding the railroad capacity from North Dakota (Bakken) to USEC (and elsewhere.) Given that US refineries are oriented for sour and heavy crudes, the economic argument has been made, some times vocally and sometimes discreetly but always against great criticism from many fronts, that in today’s economic world it would make more economic sense for the US to export its domestically produced high quality oil and logically highly priced (West Texas Intermediary (WTI) and Louisiana Light Sweet (LLS)) and import cheaper, lower quality crudes. Since the shale oil boom, the spread between WTI and Brent has been as wide as -$25 / bbl, meaning the better quality WTI is lower priced than lower quality Brent (compared to WTI.) While recently the gap has narrowed significantly and almost a month ago their pricing approached parity momentarily, the gap has widened again to -$6 /bbl.

Oh, the economics and the logic behind the world’s energy needs…but again, if there were no inefficiencies, there would be no opportunities for exorbitant profit whether in the international tanker markets in the past or the Jones Act tanker market at present… and again, we were told in Econ 101 that capitalism is about exploiting needs and efficiencies…just don’t make a bet that the market will be inefficient forever or before the payback period of a highly priced Jones Act product tanker newbuilding order…

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Jones Act ‘Product Tanker’ Market: The Contagion Effect?

The Jones Act Market is characterized by its high barriers to entry in terms of capital requirements, citizenship qualifications, high operational costs and related concerns, etc. As such, the majority of the market has been mostly focused on the inland, the offshore trade in the US Gulf (read oil drilling and offshore platforms), the coastal trade of petroleum products and chemicals from the US Gulf Coast to Florida, along the Atlantic Coast / East Coast, and to the West Coast via the Panama Canal. There is of course the crude oil trade from Alaska’s North Slope to the West Coast of the USA, run by the Alaska Tanker Company (ATC.)

Last time the Jones Act tanker market made front-page news was when ExxonMobil ordered in 2011 two 115,000 dwt aframax tankers at Aker Philadelphia at the announced price of US$ 200 million each.   It has been reported that the vessels are ‘full redundancy’ specification with two (fuel efficient) engines, two propellers and two rudders, and of course equipped to the latest standards of technology and navigation; the transaction had ma news for the high construction cost of the vessels, when mainstream tankers from top-quality foreign shipbuilders could be had at the time at US$ 50 million per vessel;  for ExxonMobil’s high standards for vessels trading in the particularly sensitive Prince Williams to California route, we surmise the cost to had been below US$ 100 million per copy from high quality international builders.

The previous time in recent memory the Jones Act tanker market had been in the news was in 2006, when the now troubled Overseas Shipholding Group (OSG) contracted in 2006 to take on bareboat charter ten product tankers built at Aker Philadelphia, to crew and manage them and to offer them on timecharter to strategic clients like refineries, traders, and oil companies. The transaction was newsworthy for its size (ten-tanker-newbuilding order is a wave-making deal in the Jones Act market; also, the total cost of the transaction was newsworthy as well at about US$ 930 million.)

However, ever since the introduction of hydraulic fracturing technology (‘fracking’) and the  discoveries of huge deposits of shale oil in the US in the last four years, the Jones Act tanker market has been a major beneficiary of the structural changes for the crude oil and petroleum products trade. The market was caught off-guard and undersupplied, with reports that at least in one instance, a Jones Act product tanker trading crude oil managed to get a one-year fixture at US$ 100,000 per diem by a major oil company.

According to data tabulated by Karatzas Marine Advisors & Co. (as per table herebelow), there are presently 34 ‘MR sized’ Jones Act tankers, two of which are shuttle tankers and four are US-flagged only;  30 of these tankers may be considered ‘modern’ with an average age of the fleet of less than seven years.

American MR-tanker Fleet (© Karatzas Marine Advisors & Co.)

American MR-tanker Fleet (© Karatzas Marine Advisors & Co.)

No doubt that the economics of the Jones Act tanker market seem fabulous at present (US$ 100,000 pd gross freight revenue, less approximately US$ 22,000 pd vessel operating expenses, on US$ 120 million cost basis but with overall cost of capital well into single-digit territory and long asset economic life); but 50% outstanding orderbook of the existing fleet doesn’t seem like moving into ‘dangerous’ (oversupplied) territory? After all, we all in shipping know what happened when the orderbook for foreign-flag vessels reached historically high levels…  unless of course it turns out that we are experiencing an once-in-a-lifetime ‘game changer’ event with the discovery of shale oil, that political risk is low (of allowing crude oil to be exported overseas) and the Jones Act tankers market turns out to be fully insulated from international shipping economics.

© 2013 Basil M Karatzas  All right reserved

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