Gulf of Mexico is Ground Zero for the Jones Act

 

A change proposed by the US Customs and Border Protection (CBP) in its Customs Bulletin & Decision newsletter promises reversal of a 40-year practice that, until now, allowed the use of non-coastwise-qualified vessels in the transportation of pipeline repair material; anodes; pipeline connectors; wellhead equipment; valves and valve guards; damaged pipelines; platform repair material; and similar cargo from one domestic point to another. The proposed change gave all interested parties until April 18th to make comment, a deadline which has now come and gone.

 

The CBP action has roiled the muddy Gulf of Mexico waters, pitting the International Marine Contractors Association (IMCA), an international association representing offshore, marine and underwater engineering companies against its domestic counterpart, the Offshore Marine Service Association (OMSA). OMSA describes itself as the voice for the offshore marine transportation service industry in the United States. The stakes are high as thousands of jobs and work for dozens of high tech vessels hang in the balance. And, the most important Jones Act discussion in recent history comes at a time when the domestic offshore support industry is on life support, awaiting the uptick of oil prices that would spark the renewal of offshore exploration and drilling.

 

IMCA’s Chief Executive, Allen Leatt said in a prepared statement, “We understand the drive to protect US tonnage given the difficulties in the PSV market today, but the deep-water construction market represents a very different sector with very different vessels and technologies. It is a truly international market, as no single domestic market can support the heavy investments of these assets. Consequently, there is a real risk to damaging the whole Gulf of Mexico market as the unintended consequences do not seem to have been thought through.”

 

IMCA grimly predicts the collapse of the Gulf of Mexico oil and gas sector if the CBP proposal is allowed to become law. OMSA naturally disagrees. “… since CBP signaled in 2009 that this ruling would be forthcoming, the U.S. offshore marine sector has invested more than $2 billion to ensure that offshore oil and gas exploration and production would not be affected. The 31 vessels constructed and retrofitted to meet this need are U.S. built, owned and crewed, and are subject to some of the most stringent safety standards in the world,” insists Aaron Smith, OMSA President and CEO.

 

As Marine News went to press, the fate of CBP order was still unknown, but moving forward. OMSA’s Smith summed up the situation in Washington, explaining, “Statutorily, Congress has already done their part. They passed into law 19 USC 1625, the process they directed Customs to use to revoke letter rulings. Thus, CBP is the final arbiter if the Jones Act is enforced as written. That said; we have garnered fantastic support from Congress with at least 33 Representatives and seven Senators publically supporting revocation.” 

 

The American Maritime Partnership (AMP), a U.S.-based maritime advocacy group, quantifies the number of American jobs that could be saved by the CBP ruling at 3,200. OMSA puts the number of mariners impacted at about 1,000. Whatever the number, IMCA says the proposed rule change would have grievous and wide-ranging implications.

 

“Industry has relied on this precedent for 40 years and the CBP proposal creates great uncertainty. But if all non-coastwise approved vessels are banned from the GoM, then they would need to be redeployed elsewhere with the corresponding impact in those markets. Importantly, deepwater development in the GoM would be stopped in its tracks, with huge financial implications,” Allen Leatt told Marine News in April.

 

Not so, says OMSA’s Aaron Smith. “Unfortunately, due to the downturn in the price of oil, there are few boats working anywhere. So while the Jones Act should have been properly enforced all along, there is no better time than now to start. The data we at OMSA compiled found that there were eight foreign flagged IMR vessels in the Gulf in February, two of which were cold stacked,” he said, adding quickly, “Meanwhile, Jones Act operators have constructed more than 30 IMR vessels.” 

 

Even Leatt concedes that the CBP proposal, if it takes effect, doesn’t involve a significant number of vessels. But, he insists, these are high-tech, specially designed vessels that cannot be replaced with lower end, generic U.S. hulls. “We are talking about a relatively small number of vessels, but vessels that are highly specialized and critical to offshore construction in deep and ultra-deepwater for which in many cases there are no Jones Act qualified vessels to perform this work. It needs to be recognized that GoM market is dominated by coastwise approved vessels and represent 90 percent of marine activity. The foreign flagged vessels occupy a small number of narrow niches in the market.”

 

OMSA and two of its most prominent U.S. flag operator members say that the U.S. fleet is more than ready to respond to any type of work in the Gulf of Mexico, with adequate numbers of high tech tonnage. IMCA’s Allen Leatt says that’s just not true. “Not at all,” he told Marine News, adding “We are talking about a completely different asset class of vessel for deepwater construction operations, for which there is no available or capable coastwise approved alternative. If there were, they would be competing in the market today. The massive US fleet is simply not present in key specialist areas of deepwater construction, such as pipelay, heavy lift, and well intervention.”

 

If U.S. operators weren’t ready eight years ago to perform this type of work, they claim to be now. Harvey Gulf International Marine President Shane Guidry explains, “After Customs put out their first notice in 2009, Harvey Gulf invested heavily in subsea construction vessels building the Harvey Deep-Sea, Harvey Blue-Sea, and Harvey Sub-Sea and Harvey Intervention, all of which are best-in-class multipurpose support vessels capable of doing any IMR work in the Gulf of Mexico.” 

 

U.S. operators, shut out of the game then, did not sit on their hands, says Otto Candies, III, the Vice Chairman of the Board at Otto Candies LLC. In response to Marine News queries in April, he replied, “We recently launched the Paul Candies which will be our fifth IMR vessel. The Paul Candies joins the Chloe Candies, Ross Candies, Grant Candies and the Ocean Alliance (formerly the Cade Candies) to form our fleet of vessels with cranes of at least 100 ton capacity. Four of these five vessels were built subsequent to the 2009 Customs notice. This notice clearly signaled CBP’s intent to properly enforce the Jones Act, and we invested in state of the art equipment to ensure that we could meet the market demand and accomplish the required work.”

 

U.S. flag operators aren’t done. Harvey Gulf will soon take delivery of two 340-foot MPSVs with 250-ton cranes from Eastern Shipbuilding. “These vessels will be newer and more advanced than any foreign vessel that is currently in the Gulf of Mexico,” says Guidry. Otto Candies is on a similar path, with the delivery of the Paul Candies – a 101.25 x 20.6 meter, DP II subsea construction vessel that is built to modern and proven designs and capable of housing 90 people – also looming close on the horizon. Otto Candies adds, “The vessel will be outfitted with a 250 Ton Active Heave Compensation (AHC) crane capable of operating to a depth of 3,000 meters. We are proud of the fact that this vessel was constructed in our own shipyard, Candies Shipbuilders, LLC in Louisiana and that she will be capable of performing in a safe and cost effective manner for many years to come.”

 

Nevertheless, an IMCA report released in April claims that “the coastwise fleet cannot meet the needs of the GoM for deepwater construction activities beyond 1,000 meters (3,280 feet). There are no coastwise qualified pipelay vessels, no coastwise qualified heavy lift vessels, and only one coastwise qualified well servicing vessel. Despite plenty of opportunity, historically the coastwise sector has not invested in larger, higher value deepwater capable construction and IRM assets outside of the LCV segment.”

 

OMSA, of course, did its own research. The U.S.-based voice of the domestic offshore sector reports 31 vessels that had been newly constructed or retrofitted to provide the full spectrum of subsea services foreshadowed by CBP in the 2009 Notice. Table 1 shows Jones Act Qualified, Subsea Construction/IRM, DP2 qualified vessels.

 

We asked IMCA’s Allen Leatt to consider the possibility that the CBP proposal would go forward and ultimately be enforced, to which he replied, “Clearly we would need to understand and evaluate the decisions, and our next moves would be based upon the best interests of the industry. But make no mistake, this is a serious subject and we trust that the new Trump Administration will undertake a full review and assessment of the potential adverse impacts of the CBP proposal in the overall interests of the US before taking any action.”

 

Separately, Jones Act operators say that they are ready for any eventuality. Shane Guidry put it bluntly, saying, “Every operation covered by the CBP notice can be accomplished by Jones Act qualified vessels.” OMSA’s chief executive, Aaron Smith offered another view, with a clarification of what the rule says, and what it does not. “The CBP notice most directly impacts the work completed by subsea construction/IMR vessels; that is known and understood by all parties. As we have previously proven, there are more than 30 Jones Act IMR vessels available,” he told Marine News, adding for emphasis, “It seems OMSA is the only ones talking about what the notice says. Interestingly, others are talking about pipelay and heavy-lift operations. The notice does not cover pipelay operations, and transportation of merchandise by foreign flag vessels during heavy lift operations is prohibited by the Jones Act and previous letter rulings not covered by revocation. OMSA has offered a legislative solution based upon a time-tested program to ensure heavy lift operations can continue. We are waiting to hear if that legislative solution will be accepted.”

 

With the comment period now in the rearview mirror and the final notice date of May 18 looming large in the proverbial porthole, the matter could quickly be settled before summer. If settled in favor of Jones Act operators, Allen Leatt warns, “Industry just doesn’t know the answer to this important question, which raises considerable uncertainty in many sectors of the oil and gas industry. Projects may simply have to stop – with all the practical, financial, and legal mess that would be created.” 

 

Otto Candies III disagrees. It’s much simpler than that, he says, explaining, “IMCA wants people to think that the notice will kick all foreign vessels out of the Gulf, it won’t. The notice doesn’t deal at all with drilling so foreign flag drillships and MODUs will still operate here and the notice specifically states that installation and repair activities are not covered by the Jones Act, so foreign vessels can do those operations as well. All the notice says, is what the law says, foreign vessels cannot transport merchandise between two U.S. points.” 

 

Echoing those sentiments, Shane Guidry had the last word on the matter. “CBP’s action is meant to correct inconsistencies between letter rulings and U.S. law. Additionally, this action is fully consistent with President Trump’s ‘Buy American, Hire American’ initiative. Put simply, CBP is acknowledging that their letter rulings were wrong and allowed foreign vessels to transport merchandise from one point to another point, that’s a violation of the Jones Act. We applaud CBP for getting it right and righting their previous wrong.”

 

The most significant Jones Act battle in recent memory is still being played out in the Gulf of Mexico. What happens next is anyone’s guess. The only thing certain is that both sides are “in it to win it.”

 

 

(As published in the May 2017 edition of Marine News)