By Darrell Conner and Nickolas Milonas
It was not too long ago that the focus of energy debates in the United States was on importation of liquefied natural gas (LNG) and crude oil. The price of bunker fuels was dramatically increasing, cutting into corporate profitability. Orders for foreign flag tankers were skyrocketing, while the numbers of domestic US-flag tankers was flat or declining.
What a difference a few years can make. Today, discussions about those issues have dramatically shifted, changing the landscape of shipping around the globe.
We are seeing LNG exports increasingly approved. We are talking about using LNG as a fuel for ships. We are debating whether to overturn a decades old ban on the exports of crude oil. And we are seeing a surge in domestic shipbuilding.
Let us review how we got to this point. It all revolves around technological advances in oil and gas production in the United States–hydraulic fracturing. While hydraulic fracturing has been around for decades, recent advancements have enabled the technology to dramatically increase amounts of domestically produced oil and gas. To show how dramatic the changes have been, consider these statistics:
• In 2008, the United States produced 5 million barrels per day (MMb/d) of crude. Last year, it produced about 7.5 MMb/d. And by the end of 2015, the United States is expected to produce 9.5 MMb/d, nearly doubling 2008 production levels.
• US imports of crude oil have dropped from 11.1 MMb/d in 2008 to 6.3 MMb/d in 2013 (through November).
• Natural gas production in the United States has grown from 25.6 million cubic feet (MMcf) in 2008 to 29.5 MMcf in 2012 (latest available data).
What has this meant for global shipping? The implications there have been equally intense.
Consider first the global shipping markets, where the plunge in US oil imports has reduced demand for tankers. The global financial crisis may have masked the reasons for decreased demand, but a key reason for the reduction is now clear. A surge in US crude oil production has supplanted the need for foreign crude oil imports. Moreover, new regulations governing corporate average fuel economy standards in US automobiles have reduced crude demand in the United States. Thus, while there are some routes that remain robust, such as the Arabian Gulf to the US Gulf of Mexico (because US-bound crude oil is priced at a discount compared to prices posted to Asia), fewer ships overall are carrying foreign crude oil to US markets. That trend is not expected to reverse for the foreseeable future.
For international markets, the news is not so good. But for domestic US trades – so-called Jones Act trades – a boom is occurring. American vessel operators in those trades are enjoying higher demand and higher rates. They are also investing hundreds of millions of dollars in new tonnage to handle increased movements of crude oil and refined petroleum products between US ports. There are approximately 16 vessels, representing more than 4 million barrels of capacity, on the orderbooks of US shipyards for delivery by 2016 – a dynamic number that could increase as options are exercised and additional orders placed. There are also hundreds more state-of-the-art offshore supply vessels being constructed to assist in crude production on the US continental shelf.
These US ship orders are also seeing major new technologies incorporated into vessel designs as a result of America’s energy revolution, namely the use of LNG as a propulsion fuel. The abundance of relatively inexpensive natural gas in the United States, combined with more stringent air quality requirements for vessels operating within the North American emission control areas, has made the use of LNG fuel viable. Operators in virtually every US domestic trade are moving towards LNG fuel for their vessels, including bulkers on the Great Lakes, containership operators in the non-contiguous trades, offshore supply ships in the Gulf of Mexico, and tankers in the coastal trades. It has been the topic of many conferences in recent years, including a successful event held by Philips Publishing in conjunction with the US Coast Guard in January.
Oil and gas are so abundant in the US that predictions are the US will become energy independent before 2025. Those predictions are driving debates about the exportation of America’s newfound energy resources, which will affect shipping markets. The debate about exporting domestically produced natural gas has been ongoing for several years, and the US has approved some exports of LNG. It is expected that more exports of LNG will be permitted, which will mean more LNG tankers serving US ports in the coming years. Hawaii and Puerto Rico are also discussing the possibility of importing LNG in an effort to change their energy economies, which could stimulate new investments in US-flag LNG vessels. But before those new shipping opportunities can become a reality, the shore-side infrastructure must be put into place to handle those imports and exports, and the earliest that is likely to occur is 2017.
There is also the possibility that, in the coming years, America will approve the exportation of domestically produced crude oil. That debate began in earnest in December, and Congress has already held two hearings on the topic since the issue rose to national prominence. Exportation of crude oil is likely to be more political than LNG. The current crude oil export ban is rooted in the 1970s oil embargo and is more directly tied to national security concerns, as fighter jets, tanks, and ships still rely on the petroleum products as fuel. If there is a decision to permit some exports of crude oil, shipping markets will likely shift again. But that is likely still years away from becoming a reality.
It is clear that America’s energy renaissance is having a major impact on domestic and international shipping markets. From changing shipping trades to triggering new US ship orders to redefining propulsion fuels, the significant growth in oil and gas production in the United States is creating a new world order of shipping.
Being involved in all of these issues for many clients makes me respect the dynamic nature of global oil and gas markets, as well as the potential implications for the maritime sector. It also makes it an incredibly exciting time for the maritime industry.
Darrell Conner, Government Affairs Counselor, is the co-chair of the Public Policy & Law Practice Group at the law and lobbying firm of K&L Gates, which for 40 years has represented maritime clients on legal, legislative, regulatory, and policy matters. Darrell can be reached at darrell.conner@klgates.com. Nickolas Milonas is an associate at K&L Gates, whose practice focuses on transportation policy, with an emphasis on issues affecting the US domestic maritime industry. Nickolas can be reached at nickolas.milonas@klgates.com.
Friday, March 21, 2014
