A temporary shake-up of Gulf of Mexico shipping patterns, drawing on a fleet of 43 giant oceangoing tug-propelled barges, could meet the shortage of gasoline and ultra low sulfur diesel expected in the US Northeast if a third Philadelphia-area refinery closes this summer, according to shipping sources.
Until a planned expansion of the North Carolina-to-New Jersey Colonial Pipeline is complete in 2013, the industry and the US Energy Information Administration expect waterborne shipments from Gulf Coast refineries to Philadelphia and New York to plug some of the gap.
EIA said the Northeast might need to find alternate sources for 240,000 b/d of gasoline and 180,000 b/d of ULSD by 2013 if Sunoco closes its 330,000 b/d Philadelphia refinery. The company said it would shut the facility if it cannot find a buyer by July.
Many market observers, including EIA, have concluded that ships would nevertheless provide limited relief because of a shortage of US-flagged vessels that qualify for hauling cargo between two US ports under the Jones Act, a federal maritime law.
So petroleum marketers have added to their spring lobbying list a request that Congress start pushing the Obama administration for Jones Act waivers to ward off price spikes in the Northeast.
But barge owners say the oil industry and EIA have overlooked a major option that does not require a skirting of the Jones Act.
The American Waterways Operators and executives of four tank vessel companies met with EIA earlier in March to argue that analysts should have included "articulated tug barges," known as ATBs, in their count of US vessels available to make up for the lost Northeast supply.
The tugs lock into giant barges with special hinges that allow them to move through choppy waters, unlike integrated tugs that have rigid connections with barges.
Morten Arntzen, CEO of crude and products tanker owner Overseas Shipholding Group, said 43 articulated tug barges with capacities of between 140,000 barrels and 330,000 barrels meet the Jones Act requirements, with another two under construction. OSG owns nine of the vessels.
"When you add that up, there's more than adequate lift to pick up the incremental barrels of gasoline that would have to get moved from the Gulf up to the East Coast," he said Friday.
While the vessels could travel the entire length of the coast, Arntzen said a more likely scenario would be for oil companies to use them to free up their oil tankers for the longer trips. The tug systems would take over the tankers' regular trips between Houston refineries and Tampa, Florida, allowing the tankers to deliver Gulf Coast products up the coast to Philadelphia or New York.
"So it's just repositioning," Arntzen said. "This is something the oil companies do every day all over the world for a living. They're fantastic at this."
EIA Acting Administrator Howard Gruenspecht told a congressional panel looking into the refinery closures this week that his department has heard from the barge industry and is looking into the option for later analyses.
Dan Gilligan, president of the Petroleum Marketers Association of America, said he has not considered barges filling in. Members of the trade group plan to ask lawmakers when they head to Washington in May to start thinking about lifting the maritime law on a case-by-case basis, as the government did last summer when it sold crude from the Strategic Petroleum Reserve.
"We're going to ask Congress and the Obama administration to be prepared to waive the Jones Act if we get into a real crisis situation," Gilligan said. "We don't want our political leaders saying, 'Gosh we haven't thought about this.' We want them to be prepared so that if the shortages develop as they might, they can be prepared."
MAJOR REFINER CALLS JONES ACT SHIPS TOO EXPENSIVE
Valero spokesman Bill Day also said the Jones Act remains a major limiting factor to relieving the East Coast supply shortage by water. He said shipping rates to the UK and elsewhere in Europe are lower than the Jones Act freight on Gulf Coast deliveries.
"It's actually cheaper to send products all the way over the Atlantic than it is to send them up by ship from the Gulf Coast," Day said. "The lack of capacity makes the cost go up, because there's so few ships that qualify under the Jones Act. They can pretty much set their own price."
Day said he was not familiar with articulated tug barges.
Arntzen said major refineries, including Valero, know about the fleet, but would prefer to shave off delivery costs by seeking Jones Act waivers.
"The oil companies and oil traders are very good at finding pennies everywhere to capture," he said. "And where they can do it, they'll do it. I'm sure Valero is fully aware of ATBs. They're not a big user of our ATBs, but anybody operating in the US market knows ATBs because they've been part of the trade for decades."
Arntzen estimated per-gallon shipping costs to the East Coast at about 5 cents to 6 cents from Europe, 6 cents to 7 cents on Jones Act vessels from the Gulf Coast, and 10 cents to 11 cents from India.
"Doing a Jones Act waiver for clean products when there's clearly enough capacity, all you're really doing is going to destroy a whole lot of US maritime jobs," he said. "It wouldn't be saving people at the gas pump."
Bruce Richards, vice president of transportation for Moran Towing, said a tanker broker recently told him the going rate for moving product from the Gulf Coast to the East Coast was about 8.5 cents/gal to 10 cents/gal on US-flagged vessels.
"So if we're five times more expensive, foreign-flagged vessels would be able to do it for one and a half or 2 cents a gallon," Richards said. "That, to me, is a small price to pay to protect the Jones Act, because I think the American flag does bring value. We play by the rules. The rules are that it's US workers going from one port to another. It's US-built, US sailors."
SHIPPERS SAY CURRENT JONES ACT CONCERNS UNLIKE THOSE FROM SPR SALE
Mark Ruge, a lawyer for American Maritime Partnership, a coalition that lobbies for enforcement of the Jones Act, said 2011's challenge of moving crude quickly from the government-owned oil reserve is a different situation than the Northeast refinery closures present. During the SPR auction, the government set a minimum lot size of 500,000 barrels, a decision the group opposed.
"That excluded all the barges, but we think that in this Northeast situation these vessels are totally appropriate," he said. "They're perfectly situated for what has to happen here."
Ruge, who pushed for the EIA meeting, said authors of the agency's report on the market impacts of plunging Northeast refining capacity concluded wrongly that only 56 available vessels satisfy the Jones Act.
"They hadn't even counted the tank barge capacity," he said. "This is half the Jones Act capacity."
Arntzen said Northeast refinery closures might lead to a repositioning of ships for a limited period, perhaps the second half of the year until Colonial is expanded and three new Jones Act tankers enter the market.
"I don't see it as being that big of deal going forward, it's just this year there is a bit of logistical thinking and changes that have to happen," he said. "But the lift and the capacity between pipelines, ATBs, tankers is there."
