US Energy Markets: Transforming the Shipping Industry

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.

Trucker Files Class-Action Suits Against Drayage Companies

By Mark Edward Nero

A truck driver has filed separate class action lawsuits against two Los Angeles-area drayage companies that haul containers to and from the Los Angeles and Long Beach ports, alleging that they misclassify drivers as independent owner-operators instead of employees.

The twin suits were filed in Los Angeles Superior Court by the LA-based law firm of Kabateck Brown Kellner on behalf of Victor Castro, a driver who has worked for both trucking companies.

The legal actions, which were filed in late February, allege that Compton, California-based Coast Bridge Logistics and Carson, California-based Pacific 9 Transportation have failed to pay wages and overtime that he would be entitled to as an employees, and that neither company provided meal and rest breaks for its drivers.

According to Kabateck Brown Kellner, Pacific 9 pays its drivers a fixed price per delivery, but doesn’t provide any employee benefits. Castro has said he filed the lawsuits “to recover lost wages as a result of this wrongful practice.”

Both legal complaints state that the companies employed Castro and other drivers as independent contractors although they drove company-owned trucks and met all the conditions of being classified as employees. The company “directs and controls the way the drivers perform their work, including controlling their schedule, where they deliver product and how they work,” according to the legal actions.

Both of Castro’s lawsuits seek to include others, including current and former port drivers of both companies, going back four years prior to the filing of the legal complaints.

Long Beach Monthly Cargo Volume Dips

By Mark Edward Nero

Overall cargo volume at the Port of Long Beach dipped 2.6 percent last month due to an 8.3 percent decline in empty containers, according to newly released data.

The data show that total import volume was down 2.7 percent at the port in February, while exports were up 2.1 percent compared to the same month last year.

A total of 517,173 TEUs moved through port terminals during February. Imports numbered 271,671 TEUs, down 2.7 percent from 2013. However, exports rose 2.1 percent to 143,572 containers. Empty containers were down 8.3 percent to 101,930 TEUs.

The port partially attributes the decline in cargo numbers to the Lunar New Year, a holiday celebrated in China and other countries in East Asia.

The holiday fell on Jan. 31 this year, and it started a two-week period during which many businesses in Asia close their doors to allow employees to be with their families; production is minimal and business is slow. Because of the time for vessels to cross the Pacific, the port was affected from mid-February to early March.

Volumes at the adjoining Port of Los Angeles were also affected by the holiday, which is also known as Chinese New Year. Earlier this week, the POLA reported its total cargo volumes for February 2013 were off nine percent compared to the same month last year.

For the calendar year to date, Long Beach has moved a little more than one million TEUs, a drop of two percent from the same two months in 2013. For the fiscal year however, Long Beach terminals have shipped 2.77 million TEUs, a rise of 2.3 percent from the 2.71 million during FY 2013. The Port of Long Beach’s fiscal year runs Oct. 1 through Sept. 30.

More details on the port’s cargo numbers can be found at www.polb.com/stats.

Tacoma Container Volumes Down, Break Bulk Up

By Mark Edward Nero

Break bulk cargo and auto import volumes posted gains through February 2013 at the Port of Tacoma, but container volumes continued to lag.

Strong machinery and construction equipment imports propelled break bulk cargo volumes up 33 percent year to date to 32,304 short tons, according to data provided by the port. Auto imports moderated in February but are still up nearly 15 percent on the year to 29,878 units, boosted by the year-end surge in January from Korean automakers.

However, container volumes fell five percent year-to-date, dragged down by a 28 percent drop in international empty containers. Through the first two months of the year, shipping lines relied primarily on repositioning empty equipment domestically by rail, particularly during the Lunar New Year holiday when many factories in China closed for up to two weeks. The holiday fell on Jan. 31 this year. Full containerized imports improved one percent year to date to 115,283 TEUs, and exports remained flat at 81,490 TEUs. Domestic volumes declined nearly 10 percent in February as regularly scheduled vessel maintenance resulted in fewer sailings to Alaska.

For the calendar year to date, Tacoma has moved a total of 282,373 TEUs, a drop of about 5.3 percent from over 298,000 that shipped during the same two months in 2013. Of the 282,373 TEUs, 224,647 were foreign containers and 57,727 were domestic, which were drops of 4.1 percent and 9.5 percent, respectively, from the same two-month period last year.

POLB to Host Peak Season Forecast

By Mark Edward Nero

The economic news has been up and down over the past year, so what can you expect from this year’s peak shipping season in Southern California and along the West Coast? Those questions are due to be answered during the 10th annual Pulse of the Ports Peak Season Forecast Breakfast. The free event’s scheduled for 7 to 10 a.m. Wed., April 2 in the Grand Ballroom of the Long Beach Convention Center, 300 E. Ocean Blvd.

Parking at the convention center is complimentary, and breakfast is also free.

This year’s trade flows have been complicated by mixed economic news from day to day, and the outlook for this year’s peak shipping season – August through October -- is believed to be complicated by upcoming coast-wide labor negotiations. Experts from throughout the supply chain are expected to present the outlook from various viewpoints, including that of an economist, an importer, exporter, ocean carrier, trucking company executive, a railroad and more.

Reservations can be made online at www.polb.com/pulsersvp, or by contacting Kathleen Charchenko at charchenko@polb.com or (562) 283-7755 with the attendee’s name, company, job title and contact information.

Sound Off!

By Marilyn Raia

Who doesn’t like to walk by a harbor and listen to the cacophony of sounds coming from the vessels passing by? Like the lights on a vessel, the various sounds coming from a vessel’s bell, whistle, and gong give information to others about the vessel’s size, course, and operations. Federal law dictates what type of bell, whistle, and gong should be on a vessel as well as when, where, and how they should be used. This article provides some sound signal basics.

Where the Sound Signal Rules are Found
Like the rules for vessel lighting (see Pacific Maritime Magazine, January 2013), the rules for sound signals are found in two places: the International Regulations for Preventing Collisions at Sea 1972 (known as the “Colregs” or “International Rules”) and the Inland Navigational Rules Act of 1980 (known as the “Inland Rules”). The former is an international treaty adopted in 1972 and entered into force in 1977. The latter is a federal statute enacted by Congress in 1980. Rules 32-37 in both sets pertain to sound signals. They are similar, but have significant differences.

Particulars of Sound Signal Devices
The sound signal rules involve the use of three different types of signaling devices: a whistle, a bell, and a gong. The sounds of the bell and gong must be different from each other so as not to be confused. Contrary to common belief, the sound signal rules do not provide for the use of a foghorn except as a distress signal. The types of signaling devices that must be used on a vessel are dependent on the vessel’s type, size, and operations. A vessel under 12 meters in length is not required to have a whistle, bell or gong. If it does not have these signaling devices, it still must have some way to give an effective signal.

The sound signal rules require a “short blast” and a “prolonged blast” of a whistle under certain circumstances. The former is defined as “about one second’s duration.” The latter is defined as “four to six seconds’ duration.”

Regulations applicable to the sound signal rules address the audibility distance of whistles and require large vessels to have a whistle audible at a greater distance than the whistle on a smaller vessel. The regulations specify the placement of the whistle on a vessel, i.e. at the highest practical point. They dictate the materials to be used in the construction of the bell and gong, as well as the bell’s maximum diameter and the mass of the striker. A power-driven bell and gong are recommended but manual operation of the bell and gong’s striker must be possible in an emergency.

Maneuvering and Warning Signals
A vessel’s sound signals are a way the vessel can communicate navigation information to another vessel. Because the sound signal rules usually apply only when vessels are in sight of each other, a proper lookout should always be maintained.

Rule 34 sets forth the signals required for vessel maneuvering in various situations such as passing, overtaking, nearing a bend or an area where other vessels may be obscured, or leaving a dock or berth. In some respects, International and Inland Rule 34 are the same. However, in others, they are quite different. The differences should not be overlooked by mariners who have occasion to travel where each applies.

For example, under International Rule 34(a), when vessels are in sight of each other, a power-driven vessel signals an intended course change with its whistle. One short blast means a turn to starboard; two short blasts mean a turn to port. Nothing more is required. Under Inland Rule 34(a), the whistle signals are the same for a course change to starboard and port but are limited in use to when two power-driven vessels are within sight and “meeting or crossing at a distance within one half mile of each other.” Moreover, under the Inland Rules a vessel hearing the one or two blast whistle signal of another vessel must sound the same whistle signal if agreeable to the course change.

The International and Inland versions of Rule 34(c) pertain to overtaking situations and differ remarkably in their situational application, signals, and responses. For example, under International Rule 34(c), a vessel intending to overtake another vessel on its starboard side must sound two prolonged blasts followed by a short blast of the whistle. If the overtaken vessel is in agreement, it must respond with one prolonged blast, one short blast, one prolonged blast, and one short blast in that order on its whistle. Inland Rule 34(c) is totally different. Under that rule, a power-driven vessel intending to overtake another power-driven vessel must sound one short blast on the whistle. If in agreement, the overtaken power-driven vessel sounds the same signal, that is, one short blast on the whistle.

If there is any question about the safety of a maneuver, Rule 34(d) of both versions requires the sounding of the same danger signal, at least five short and rapid blasts on the whistle.

Under Inland Rule 34(g), a power-driven vessel is required to sound one prolonged blast when leaving a dock or berth. The International Rules do not have this requirement.

When vessels exchange signals, they must proceed promptly according to the signal given. A vessel responding to the signal of another is entitled to assume the other will act according to the signal given, unless it is clear the other cannot or does not intend to so proceed. Cross signals, such as a vessel responding to a single short blast with two short blasts, are not lawful. The lack of an answer to a signal should be assumed to be a disagreement with the intended course. When not receiving a response to a sound signal, the signaling vessel should proceed with extreme caution.

Signals in Restricted Visibility Conditions
Rule 35 pertains to the sound signals a vessel must give both during the day and at night when in or near an area of restricted visibility. The required signals vary depending on the type, size, and activity of the vessel. For example, a power-driven vessel making way through the water must sound one prolonged blast on the whistle at intervals of not more than two minutes. A vessel at anchor must ring its bell rapidly for five seconds at intervals of not more than one minute. And, if the anchored vessel is 100 meters or more in length, it must ring its bell in the forward part of the vessel and immediately after ringing its bell, it must sound its gong rapidly for five seconds in the after part of the vessel. An anchored vessel may also sound a short, a prolonged, and a short blast of the whistle to warn of its position. Rule 35 requires different signals for, among others, vessels that are towing another vessel, vessels being towed, vessels engaged in fishing, vessels engaged in pilotage, and vessels that are aground.

Other Sound Signals
Rule 36 allows a vessel needing to attract another vessel’s attention to make any sound signal that cannot be mistaken for the sound signals required by the other rules. Rule 37 provides a variety of sound and other signals a vessel may use when in distress. The distress sound signals include a continuously sounding foghorn, a gun fired at one minute intervals, and red star shells.

Failure to Give or Answer the Proper Signal
As with other violations of the navigation rules, the failure to give the proper sound signal, and the failure to answer a signal when required, triggers the Pennsylvania Rule, derived from an 1873 United State Supreme Court case. Under the Pennsylvania rule, if at the time of a collision, a vessel is in violation of a statutory rule, that vessel is presumed to be at fault unless the violator can prove the violation did not and could not have played a role in the collision. It is a difficult burden but can be sustained.

In Orlando v. Puget Sound Tug & Barge Co, 519 F.Supp. 19 (W.D. Wash. 1980), Orlando’s vessel, F/V Lynn Dee, became disabled around midnight and a large portion of its gillnet was set out within the outbound Puget Sound VTS lane. The gillnet could not be retracted because of the engine failure. Another fishing vessel made fast alongside while attempts were made to start the Lynn Dee’s engine. A dense fog then set in. At 0300, the tug Jodi R, owned by the defendant, was towing an oil barge at dead slow speed in the outbound Puget Sound VTS lane and struck the Lynn Dee’s gillnet. At the time of the collision, the Jodi R had been sounding the appropriate restricted visibility signal under the Inland Rules (one prolonged blast followed by two short blasts of the whistle). However, the district court found the Jodi R had violated a Puget Sound Gillnet Rule, which required it to give a certain signal (one prolonged blast followed by one short blast of the whistle) as well as shine a searchlight beam on the vessel’s intended course. Because of the statutory violation, the district court applied the Pennsylvania rule. It did not impose any fault on the Jodi R however, because it held the rule violation was not, and could not have been, a cause of Orlando’s damages.

An understanding of the sound signals required by the Inland and International Navigation Rules as well as by local rules is crucial for mariners. The sound signals convey important information about a vessel’s course and operations and serve as a means of avoiding vessel collisions.

Marilyn Raia is of counsel in the San Francisco office of Bullivant Houser Bailey. She has been certified by the State Bar of California as a specialist in admiralty-maritime law and can be contacted at marilyn.raia@bullivant.com.

Metro Vancouver Threatens to Terminate Striking Truckers’ Permits

By Mark Edward Nero

Port Metro Vancouver, which has dealt with a strike by hundreds of drayage truck drivers for over a week now, is threatening to revoke truckers’ permits to operate at the port if they don’t return to work.

In a March 16 statement, port President and CEO Robin Silvester urged the truckers to immediately get back to the job, and touted a plan the port facilitated by both Transport Canada and British Columbia’s Ministry of Transportation and Infrastructure that was released last week. The plan addressed pay rates and wait times, two of the issues that caused the striking truckers to walk off the job.

“We are ready to move ahead with the 14-point joint action plan released on Thursday, March 13,” Silvester said. “It addresses concerns raised by truckers in areas such as compensation and wait times and is a means to get port operations back to normal.”

However, the Unifor-Vancouver Container Truckers’ Association, the union representing the striking drivers, says the joint action plan, which includes such broadly-worded provisions as assessing wage and fuel surcharge rates by mid-2015 and restructuring the trucking licensing system and the additional rolling out of GPS technology for trucks, does not meet the truckers’ concerns.

In the port’s statement, Silvester warned that truckers not returning to work within an unspecified time would be at risk of losing their licenses to operate at the port.

“The efficient movement of marine containers through Port Metro Vancouver is critical to Canada’s Asia Pacific Gateway and Canada’s economy,” Silvester said. “Truckers have Port Metro Vancouver-issued permits that allow them, through trucking companies, to provide service to terminals at the port. A continued refusal by some truckers to provide such service is likely to result in suspension or termination of their permits by Port Metro Vancouver.”

Picket lines were set up at nine locations around the port on March 10 as a result of a vote earlier in the month by Unifor to authorize a strike. The roughly 400 union truckers joined with several hundred members of the non-union United Truckers Association of British Columbia, which began a work stoppage and set up a blockade at Port Metro Vancouver on Feb. 26 in protest of long wait times at port terminals.

Vince Ready, a mediator appointed by Canadian Transport Minister Lisa Raitt, has thus far been unable to hammer out an agreement between the various parties.

An estimated 90 percent of truck traffic has been halted, according to the port. The economic impact of truckers walking off the job, Silvester said, is about $885 million per week.

POLA Cargo Volumes Fall Nearly 9 Percent

By Mark Edward Nero

The Port of Los Angeles released its February 2014 cargo volumes on March 14, and according to the data, overall volumes were down 8.9 percent compared to February 2013.

The port attributes the decrease in part to the Chinese New Year, which closed many factories in Asia for two to three weeks in February. In 2013, the holiday had a negative impact on March container volumes.

Container imports decreased 10.6 percent, from 318,547 TEUs in February 2013 to 284,812 TEUs last month, according to the data. Additionally, exports dropped 6.2 percent, from 156,690 TEUs in February 2013 to 146,925 TEUs in February 2014.

Combined, total loaded imports and exports for February were down 9.1 percent, falling from 475,237 TEUs in February 2013 to 431,738 TEUs last month. Factoring in empties, which decreased 8.3 percent year over year, overall February 2014 volumes (559,786 TEUs) fell 8.9 percent compared to February 2013 (614,948 TEUs).

For the calendar year to date, the LA port has seen 1.24 million containers move through its terminals, which is a three percent drop from the 1.28 million TEUs that were moved during the same three months in 2013. However, for the fiscal year, container movement is actually up slightly, rising from 5.35 million containers during FY 2013 to 5.4 million this fiscal year, an increase of about one percent. LA’s fiscal year runs from July 1 through June 30.

Current and past data container counts for the Port of Los Angeles may be found at: http://www.portoflosangeles.org/maritime/stats.asp.

Foss Building New Barge

By Mark Edward Nero

Foss Maritime is building a new ocean-going barge that is expected to give the company an additional asset to transport large modules both domestically and internationally.

Construction of a Jones Act-qualified, 360-foot long by 120-foot wide by 20-foot deep barge is expected to begin soon in the Portland, Oregon shipyard of Gunderson Marine, Foss said March 17.

“This barge will further connect us to the shallow draft regions of the Arctic,” Foss’ president of global services, Gary Faber, said. “It allows us to move modules and cargo, more safely, almost anywhere in the world; which adds tremendous value to our existing fleet.”

Foss says the barge will likely be towed from South Korea by the first of three Arctic-class tugs being constructed at the company’s Rainier, Oregon shipyard.

Delivery is expected in late 2014, and the vessel’s anticipated maiden voyage from South Korea to Alaska’s North Slope is planned to take place in early 2015, when the company performs a second sealift of oil and gas infrastructure to the North Slope’s Point Thomson.

“With increased activity on the North Slope we continue to add to our Alaska capabilities,” Faber said. “Along with our new Arctic-class tugs, this barge will add yet another valuable asset.” 

Puget Sound Maritime Achievement Award

The 2014 Puget Sound Maritime Achievement Award Selection Committee is accepting nominations for this year’s award to be announced at the Seattle Propeller Club’s May Seattle Maritime luncheon. The Puget Sound Maritime Man of the Year award began in 1951 when the newly formed Puget Sound Maritime Press Association decided to honor maritime leaders deserving special recognition. The association started the Maritime luncheon as a venue for presenting the award, which was renamed the Puget Sound Maritime Achievement Award in 1993, in recognition of the increasingly important role of women throughout the maritime industry.

Nominations must be received by April 14, 2014 and may be e-mailed to Rich Berkowitz at rberkowitz@trans-inst.org. Nominations should include specific achievements of the candidate, particularly those impacting the Puget Sound maritime community, and a brief biography of the nominee. Industry segments represented by past recipients include steamship lines and agents, tug and barge operators, marine architects, passenger and fishing vessel operators, port authorities, stevedores, and labor. Several paragraphs about the nominee are sufficient.

You may also send your nominations for the recipient of the Public Official of the Year Award recipient. Each year the Seattle Propeller Club recognizes a local elected or public official whose outstanding work or service has made a significant contribution to maritime commerce in the Pacific Northwest. A brief summary of the nominee’s qualifications for the award is welcome.

Contact Rich Berkowitz at (206) 443-1738 with any questions about either award nomination.