Path to Jones Act change faces political balancing act: Fuel for Thought

On January 18, less than two days before Donald Trump's inauguration, the US Customs and Border Protection released a 30-page general notice which could eliminate exemptions to the Jones Act and mark one of the most significant changes to domestic maritime law in decades.

The Jones Act requires all vessels transporting goods between US ports to be US-flagged, US-built and majority US-owned.

Since the mid-1970s, the federal government has granted so-called "ruling letters" which allow foreign-built vessels to transport certain equipment, such as repair pipe, between coastal points.

The argument for these exemptions to the Jones Act has always been that there were not enough US-flagged ships to service offshore drilling operations in the Gulf of Mexico. Without letters exempting them from the Jones Act, offshore operators may face safety risks since they would not have access to heavy lift cranes, for example.

The looming policy change could create a vessel supply crunch in the US Gulf, according to Jack Gerard, CEO of the American Petroleum Institute. In a recent press call, Gerard said his trade association was not pushing for a repeal of the Jones Act, but said the exemptions were necessary since there were not enough US-flagged vessels needed to meet demand from US Gulf operations.

In early April, an API-funded study was released claiming that the reversal of Jones Act exemptions could reduce oil and natural gas production in the US Gulf by about 500,000 b/d over the next 13 years while spending on offshore projects would decrease by about $5.4 billion over that time. Those claims are fiercely disputed by the maritime industry.

"The only relevant economic impact is the adverse impact that CBP's erroneous rulings have had for decades on US shipowners, mariners and shipyards," said Aaron Smith, president and CEO of the Offshore Marine Service Association. "CBP's course correction ensures that more ships will be built in US shipyards employing US citizens."

HAIRY POLITICAL ROAD TO CHANGE

By pushing the order to its final hours, the Obama administration has thrust the Trump administration into a fight between the domestic maritime industry, Congress, offshore contractors and the API, arguably the world's most influential oil and gas lobbying group.

Lifting the exemptions would have lasting ramifications for the US offshore oil and gas industry at a time when the administration is pushing forward a broad agenda aimed at bolstering domestic oil and gas production.

The change, which is expected to be finalized around mid-May, could also present the first note of discord between the Trump administration and the domestic oil and gas industry, which has been generally supportive of Trump's efforts to rollback Obama's policy efforts to combat climate change.

Since it became law in 1920, the Jones Act has enjoyed wide-ranging support among Democrats and Republicans and efforts to weaken it or waive its requirements have previously been met by immediate and bipartisan opposition.

Senator John McCain, an Arizona Republican, once called his efforts to repeal the Jones Act the most difficult work of his more than three decades in Congress, due to the power of the domestic maritime lobby.

The Obama administration had pitched a similar change back in 2009, but following opposition from both the maritime industry and from within the administration, they delayed it for years.

CBP, under the Trump administration, declined for months to comment on the proposed change, but in an emailed statement to S&P Global Platts on April 10, the agency indicated that it was moving forward with the proposal.

Rather than simply scrap the Obama administration's proposal and start over, Katrina Skinner, a CBP spokeswoman, said the agency would accept comments on the proposed change through April 18 and then would likely issue a decision on it by mid-May.

At the same time, Skinner said the agency was not considering loosening its criteria for Jones Act waivers, stating that they "may only be granted if necessary in the interest of national defense," as they traditionally have been.

Lobbyists for the maritime industry point to early statements by Trump cabinet officials, including Treasury Secretary Elaine Chao, in support of strengthening the Jones Act.

But it remains unclear if the administration is willing to push forward a change opposed by API and others in the oil and gas sector.

As Obama administration officials chose to do in 2009, the Trump administration may also wish to leave the question for the next administration.