Harvey's Impact on U.S. Fuel Supply Chains Triggers Jones Act Waiver Request

HIGHLIGHTS:

• A disruption of refinery operations and ocean shipping on the U.S. Gulf Coast in the wake of Hurricane Harvey has spurred oil industry requests for a waiver of the Jones Act to permit non-U.S. vessels to move crude oil and refined products to East Coast markets.
• Historically, federal agencies have sparingly granted waivers in the aftermath of severe storms, although waivers were granted after Hurricanes Katrina and Rita in 2005, as well as after Superstorm Sandy in 2012.
• Participants in the domestic shipping lanes and economic markets affected by fuel availability and prices after Harvey should monitor developments closely, as the process for granting such waivers is complex and often political.

The massive short-term disruption of refinery operations and ocean shipping on the U.S. Gulf Coast in the wake of Hurricane Harvey has now spurred at least one oil industry request for a waiver of the Jones Act to permit non-U.S. vessels to move crude oil and refined products to East Coast markets. Phillips 66 is seeking a waiver to facilitate resupply at its 260,000 barrel-per-day Alliance refinery at Belle Chasse, La. As Hurricane Irma gathers off Florida, the Jones Act waiver situation may intensify. Participants in these domestic shipping lanes and economic markets affected by fuel availability and prices should monitor developments closely, as the process for granting such waivers is complex and often political.

The Jones Act, 46 US Code §55102, limits water transport between points in the United States to U.S.-built, U.S.-flag vessels owned and operated by U.S. companies with at least 75 percent U.S. citizen equity ownership (i.e., "coastwise" vessels). If warranted by national defense considerations, the Secretary of Transportation may grant a Jones Act waiver under 46 US Code §501 to allow use of non-coastwise vessels for domestic cargo movements.

If the U.S. Department of Defense (DOD) requests a Jones Act waiver in the interest of national defense, it will be granted automatically under Section 501. Typically, DOD waivers are used for movement of specific military equipment and supplies, and not a general waiver in response to a storm or other natural disaster broadly affecting water transportation.

Alternatively, the Department of Homeland Security (DHS) may grant a Jones Act waiver on national defense grounds, but this is not automatic as it would be with DOD. DHS waiver requests are submitted to Customs and Border Protection (CBP), a DHS sub-agency. CBP notifies DOD, DHS, the Department of Energy (DOE) and the Maritime Administration (MarAd), a Department of Transportation (DOT) sub-agency. DHS may also consult with other agencies with jurisdiction in economic areas that might be affected by a waiver. DOD will give input on whether it concludes the waiver is in the interest of national security. A DHS waiver may not be granted unless MarAd first determines that coastwise vessels are not available to provide the proposed cargo movements to be covered by such waiver. To make this finding, MarAd contacts U.S. carriers to survey coastwise vessel availability for the period of the proposed waiver. Under Section 501, DHS must also notify the House Transportation and Infrastructure and House Armed Services Committees, as well as the Senate Commerce and Senate Armed Services Committees.

In addition to input from the foregoing federal agencies and congressional committees, DHS and MarAd are typically subject to pressure from U.S. cargo and shipping interests. In several prior waiver request situations, U.S. coastwise shipping interests have mounted substantial opposition campaigns, seeking to discourage MarAd from finding unavailability of adequate vessel tonnage or to influence the agencies to limit the period and scope of the waiver if one is granted.

Recent Waiver History

Historically, federal agencies have sparingly granted waivers in the aftermath of severe storms. After Hurricanes Katrina and Rita in 2005, DHS granted several waivers, including an 18-day waiver to allow the use of foreign vessels to move crude/product from the U.S. Strategic Petroleum Reserve (SPR) to replenish refinery inventories after Katrina and a 30-day SPR-related waiver after Rita, followed by some case-by-case waivers. There was significant opposition from coastwise ship operating companies in both situations. After Superstorm Sandy in October 2012, DHS granted a 12-day waiver for movement of refined product (but not crude feed stock or blendstocks) from the U.S. Gulf to Northeast refineries. The time period was sharply restricted, requiring that foreign vessels' discharge be complete by certain dates. Coastwise carrier opposition was more limited, apparently to avoid negative public relations impacts.

In other instances, requested waivers have been denied or restricted in scope. For example, after severe winter weather in 2014, the state of New Jersey requested waivers to use foreign vessels to transport highway road salt. The federal agencies decided this situation did not rise to a critical "national defense" level.

Considerations Regarding a Waiver for Harvey

In the case of Harvey, the extent to which refinery and distribution supply chains will be impacted remains to be seen. Vessel capacity could be tighter than during prior major storms, because there is significantly increased U.S. production of crude oil when compared with the Katrina/Rita and even Sandy eras. News reports suggest that more than one-third of U.S. refinery capacity and a substantial portion of the Gulf marine terminal capacity that serves refineries are out of service due to the storm and flooding, which indicates that there will be large shipping backlogs to restore inventories and move crude oil and product to East Coast markets. However the U.S. coastwise fleet has grown somewhat in recent years, and Jones Act shipping rates have been significantly lower, indicating increasing tonnage availability.

If the industry pursues a general waiver or extensive case-by-case waivers, such as the pending Phillips 66 request and others that may follow, it is increasingly likely but not yet certain that the Trump Administration will grant them. It is also not certain how soon the government may act. MarAd will have to complete its survey of coastwise carriers and all the political inputs will be weighed. The other concern is the form of the waiver. For Sandy, DOT's general waiver was very short in duration and required that vessels utilizing the waiver complete discharge by the end date, rather than just arriving at their destinations. Given the tight period, this raised significant problems. Most likely, a ship could be fixed for transport, load and bring a cargo from the Gulf to a Northeast refinery terminal in a 12-day period, but ship operators do not control berth availability and there was uncertainty whether vessels could get alongside and discharge within the allowed waiver period. Later MarAd and DHS clarifications were helpful on that issue.  

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.