14

Views

Surging U.S. Energy Production Revives Maritime Sector

Tony Munoz Published in EU's & The Pan-European Institute - Baltic Rim Economies Quarterly

By Tony Munoz 2013-11-13 12:19:00

The Pan-European Institute publishes a quarterly discussion forum, which focuses on the development of the Baltic Sea Region. In Baltic Rim Economies, high-level public and corporate decision makers, representatives of Academia and several other experts contribute to the discussion. 

This BRE Special Issue on the Maritime Sector Developments in Global Context was published 13 November, 2013. Read the full issue HERE.

Below, read the contribution from Tony Munoz, Publisher & Editor-in-Chief, The Maritime Executive titled "Surging U.S. energy production revives maritime sector."

---

Surging U.S. Energy Production Revives Maritime Sector

The sweeping economic transformation of the United States is being driven by surging production of shale oil and gas. The U.S. is expected to become energy independent by 2030, if not sooner, and, according to the Energy Information Administration and other experts, has already overtaken Saudi Arabia as the world’s largest supplier of hydrocarbons.

The new output is coming largely from the Bakken Formation in North Dakota and the Eagle Ford Formation in Texas.  But there are also large shale deposits in Ohio, Pennsylvania, New York and California that are fueling the U.S. economic boom and the renaissance of U.S. maritime.  And let’s not forget the Gulf of Mexico, where new deepwater plays are boosting production and the demand for offshore workboats and tankers.

As a result, the U.S. over the past five years has reduced imports of crude oil and natural gas by 15 and 30 percent, respectively. The ability to produce more energy domestically has not only narrowed the U.S. trade gap but transformed the politics of oil.  

It used to be that OPEC and, to a lesser extent, countries like Russia held all the cards. Following its formation in 1960, OPEC gave notice in 1973 of its ability to politicize crude, which resulted in recessions and unprecedented price swings in Western countries. OPEC member Venezuela’s former president, Hugo Chavez, relished in mocking the U.S. with his disdain for American presidents and their policies.

But even before his death last March, Venezuela’s crude production was falling; and the nation, which depends on oil for 95 percent of its exports and 45 percent of its annual budget, watched its crude exports drop by half. As the geopolitical wheel turns, Venezuela now relies on the U.S. more than the U.S. does on Venezuela.

Bottom line, the U.S. energy boom has reduced OPEC to a shadow of its former self and provided other benefits as well.

Record Investment

With the U.S. a hotbed of energy production, investments in domestic production are skyrocketing, and not just from U.S. companies. In January Sinochem bought a 40-percent stake in the Wolfcamp Shale in West Texas for $1.7 billion. Japanese conglomerates Mitsui and Mitsubishi and GDF of France each bought 16.6 percent of Sempra Energy’s planned LNG facility at Hackberry, Louisiana for an estimated $7 billion. And Mitsubishi invested about $6 billion in an Encana Corp. shale project.

Even OPEC has jumped on the bandwagon and – along with Statoil – made big investments in U.S. shale and LNG. The Energy Information Administration recently reported that more than twenty percent of the $134 billion in U.S. gas investment between 2008 and 2012 came from joint ventures with foreign companies, who see the potential in U.S. exports of LNG.

The Department of Energy has approved 16 applications for LNG export licenses to countries with Free Trade Agreements. In September, it approved its fourth conditional license for LNG exports to non-FTA countries – this one for Dominion Resources’ proposed Cove Point Terminal in Maryland.

Future exports of U.S. LNG are attractive due to the huge disparity in natural gas prices in global markets – from $1 per mcf in Russia and $3.50 in the U.S. to $8-$10 in Europe and $16 in Asia. With the U.S. entering the gas export market in 2015 or so, prices are expected to stabilize at around $8 per mcf within a couple of years and remain there for the foreseeable future.

Reviving the Maritime Sector

No one was more surprised by the sudden boom in energy production than the U.S. maritime industry, which had been struggling under decades of decline and neglect. There was a glimmer of hope in 2010, when President Obama announced a bold new initiative to boost energy exploration in the Gulf of Mexico, but a few weeks later the Deepwater Horizon rig exploded and so did the prospects for shipyard orders and new jobs.

The fact is the U.S. has not had a maritime policy since before the Reagan Administration despite the fact that the Jones Act -- the U.S. cabotage law which was passed by Congress as the Merchant Marine Act of 1920 – contributes about $36 billion each year to the economy.

The federal shipbuilding program known as Title XI is a loan guarantee program legislated in the Merchant Marine Act of 1936 and designed to promote vessel construction in U.S. shipyards. The current program was restructured by the Nixon Administration as part of the Federal Ship Financing Act of 1972. But it has suffered from a lack of funding over the years.

While Title XI was revived by President Clinton with new guarantees of nearly $1 billion, it struggled under the Bush Administration and has failed to receive additional appropriations from the Office of Management and Budget, which consistently eliminates what it considers corporate subsidies. Meantime, the wars in Iraq and Afghanistan were overwhelming federal budgets, and the funding dried up.

As a result, since the late 1990s U.S. shipowners have had to self-fund projects based on customer demand. Consequently, shipyards – particularly those medium and small yards that make up the majority and do not benefit from military contracts – have received only sporadic orders.  

So the last twenty-four months have been filled with hope and excitement about new jobs and tonnage for U.S. maritime.  One of the main beneficiaries to date has been Crowley Maritime Corporation, which earlier this year completed a 10-year program of building 17 new articulated tug-barges, adding more than three million barrels of capacity to its fleet just in time for the boom in shale oil production.  Crowley has since ordered eight new product tankers from Aker Philadelphia, the first four of which will be delivered between 2015 and 2016.

After several lean years, Aker Philadelphia had been struggling to stay in business due to the dismal state of shipbuilding in the U.S. In 2011 it received $42 million from Pennsylvania taxpayers and, along with private financing, built two 330,000-barrel tankers solely on speculation. In 2012 Crowley stepped in to buy the two tankers, the M/V Pennsylvania and M/V Florida, to replace the Coast Range and Blue Ridge, single-hull tankers which were being phased out due to OPA 90.

General Dynamics NASSCO in San Diego had also been shedding jobs and in 2012 reached its lowest level of employment in more than 25 years. The U.S. drawdown in the Middle East put a big question mark in NASSCO’s future as well because of the yard’s heavy dependence on the U.S. Navy for business.

So it came as a huge and welcome surprise when, last December, TOTE, Inc. announced it had contracted NASSCO to build two 3,100-TEU, LNG-powered container ships, the first of their kind in the world. Even more amazing, there had not been a container ship constructed for the Jones Act trade since the 1970s.

This past May NASSCO got another pleasant surprise – a contract to build four product tankers for an affiliate of American Petroleum Tankers, a company majority-owned by the private equity firm Blackstone. The contract will add more than 800 jobs to NASSCO and more than 165 seagoing union jobs. The yard had previously built five product tankers for APT.  And just last month Seabulk Tankers announced it would build two new Jones Act product tankers at NASSCO.

Boom Times in the Gulf

The energy boom has also launched a new wave of shipbuilding for Jones Act operators in the U.S. Gulf of Mexico, where freight rates for Jones Act tankers have topped $100,000 per day and the demand for offshore workboats has never been greater. Privately held Edison Chouest, the biggest operator in the Gulf, announced in July that it would build 40 new offshore support vessels to meet growing demand in the Gulf and U.S. Arctic.

Harvey Gulf, another operator of offshore workboats aimed at the burgeoning deepwater market, announced an additional investment of $540 million in new offshore vessels, raising its total capital spending to $1.7 billon. The newbuildings will include the first LNG-powered workboats in the world. And Hornbeck Offshore is building 24 new deepwater vessels at a cost of more than $1 billion.

As the U.S. once again becomes the world’s biggest energy producer, the maritime sector will continue to benefit. The boom is stimulating investment both onshore and off, and U.S. maritime is embracing its newfound opportunities with open arms.  

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.