Live Mint US seeks to use own ships in the carriage of energy exports

Live Mint US seeks to use own ships in the carriage of energy exports

A potentially protectionist approach being taken by the US with respect to the future transport of energy exports is at variance with its intention to approve free trade deals with Asia, Europe

P Manoj

After disrupting the world oil supply and price equation with shale discoveries, the US is now seeking to set the agenda in the way crude and gas exports are transported out of the country.

A potentially protectionist approach being taken by the US with respect to the future transport of energy exports is at variance with its firm intention, signalled last week by the Congress, to approve major free trade deals with Asia and Europe.

US energy exports by sea are forecast to expand significantly as a consequence of the shale revolution.

Global fleet owners are worried that a regime currently being developed to promote the carriage of liquefied natural gas (LNG) exports on US flag ships may set an undesirable precedent if the US decides to lift a ban on crude oil exports, something that’s being considered by Congress at the moment.

The question being asked is how the US can seek protectionism when it stands for open market access and free trade practices elsewhere.

In December 2014, President Barack Obama approved the Howard Coble Maritime Transportation Act of 2014, Section 307 of which introduced amendments to the US Deepwater Port Act of 1974 and the US Coast Guard and Maritime Transportation Act of 2006. The amendments tasked the secretary of transportation with the development of a general programme to promote the export of LNG on US flag ships, and with the prioritization of export licences for facilities using US flag vessels.

In May 2015, a new legislation was introduced to the Senate which proposes to lift the 50-year-old ban on crude oil exports. The proposed Energy Supply and Distribution Act of 2015 has been referred to the Senate committee on energy and natural resources for further discussion.

Last week, the Senate approved a Trade Promote Authority Bill, which will allow Congress to vote only for or against finalized trade agreements negotiated by the US Trade Representative (USTR), rather than allowing Congress to amend these agreements. This important decision increases the likelihood of the US ratifying both the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), once these ground-breaking regional agreements have been fully negotiated, perhaps within the next 12 months.

The December 2014 law seeking to promote the use of US flag gas carriers for exports is not in keeping with the spirit of the free trade commitments that the US has already accepted with respect to maritime services at the World Trade Organization (WTO) and has implications bilaterally, for example, with respect to TTIP.

The European Commission, which represents the European Union in trade negotiations, and governments of other countries with large LNG tanker fleets, such as Japan and Norway, have voiced concern over the US move.

Any protectionist approach towards shipping being pursued by the US might also be emulated by other energy exporters such as Russia, Iran and Saudi Arabia. This could seriously undermine the framework of open market access and free trade principles in shipping that have facilitated the efficient transport of energy worldwide since the 1980s, according to the International Chamber of Shipping (ICS), a global trade body for merchant ship operators.

The US is well known for restricting foreign carrier access to maritime trade between US ports (under a law known as the ‘Jones Act’, which has existed for almost 100 years). But this new and potentially protectionist US approach is different because it applies to the carriage of energy exports in international trades.

Gas carriers are highly sophisticated vessels that typically cost over $100 million each to build. In reality, the US has virtually no LNG carriers capable of operating in global export markets and is likely to find them uneconomical to build. Most gas carriers today are built in Japan, South Korea and China. In practice, therefore, it is possible that the initial US programme will lead to foreign LNG shipowners being discriminated against in other ways, such as being required to employ US seafarers. They are far more expensive to employ than their non-US counterparts, despite the officers on LNG carriers being among the very highest paid category of seafarers, regardless of their nationality.

However, the US does possess a domestic oil tanker fleet. If a similar protectionist approach is to be applied to the carriage of crude oil exports, the global shipping industry fears it could be completely shut out of what is expected to be a major shipping trade worth billions of dollars a year.

Any requirement or pressure to use US flag tankers would undoubtedly raise the costs of exporting US energy. Unless the USTR or other supporters of free trade intervene, energy firms might see this as a price worth paying in order to be permitted to export US crude, says ICS.

From an Indian context, it is not clear whether the new law will cover LNG deals finalized before it was signed off by President Obama. If it does, thenGAIL (India) Ltd, India’s state-owned natural gas firm, may have to rework its LNG purchase deals signed with US firms.

GAIL has signed an LNG sale and purchase deal with Cheniere Energy Partners LP to buy 3.5 million metric tonnes per annum (mmtpa) of LNG from the latter’s Sabine Pass Terminal in Louisiana for 20 years.

It has also signed a terminal service agreement with Dominion Resources Inc. through GAIL Global (USA) LNG LLC for booking 2.3 mmtpa liquefaction capacity in the Cove Point LNG liquefaction terminal project located at Lusby in Maryland. The agreements are on free-on-board basis, whereby GAIL is required to make its own arrangements for transporting LNG from these terminals. The shipments are expected to begin by December 2017.

GAIL will require at least nine LNG ships to import the commodity from the US. However, a GAIL stipulation that three of these nine LNG tankers should be built at an Indian yard to promote the local shipbuilding industry has created a stir among global fleet owners. They say locally-built LNG carriers will cost more, and have raised doubts over their quality and ability to meet delivery schedules.

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