Colonial Pipeline reopens while shortages continue and Jones Act is waived
by Michael Hansen Hawaii Shippers Council, May 13, 2021
The Colonial Pipeline Company began reopening its pipeline system Wednesday evening, May 12, 2021, with widespread fuel shortages in the Mid-Atlantic and Southeast states.
To alleviate the shortage, the U.S. Department of Homeland Security (DHS) issued the first Jones Act waiver to a U.S. oil company to charter a foreign flag tanker to transport a domestic petroleum products cargo from the U.S. Gulf to the East Coast.
In a somewhat surprising development, Bloomberg, in a news article, “Colonial Pipeline Paid Hackers Nearly $5 Million in Ransom” published May 13, 2021, reported, “Colonial Pipeline Co. paid nearly $5 million to Eastern European hackers on Friday . . . The company paid the hefty ransom in difficult-to-trace cryptocurrency within hours after the attack . . . Once they received the payment, the hackers provided the operator with a decrypting tool to restore its disabled computer network. The tool was so slow that the company continued using its own backups to help restore the system . . .”
USA Today in a news article, “Colonial Pipeline shutdown: Expect gas shortages to go away by Memorial Day, expert says,” published May 13, 2021, reported, “Colonial Pipeline reopens pipeline amid surge in gas shortages, higher gas prices and panic buying.” And, “People will likely see the gas outage numbers peak 48 hours for now as the pipeline resumes over the next couple of days, Patrick De Haan, head of petroleum analysis at GasBuddy, told USA TODAY on Wednesday.”
Bloomberg in a news article, “Department of Homeland Security Issues Limited Jones Act Waiver to Foreign Shipping Company,” published May 13, 2021, reported, “The move [to grant Jones Act waivers] is designed to address fuel shortages spurred by the cyberattack on the Colonial Pipeline, which shut down a major artery for gasoline, diesel and jet fuel across the U.S. East Coast. Even with fuel shipments resuming from around 5 p.m. New York time Wednesday, it’s unclear how long it will take for the network to return to normal.”
(Note: Contrary to the Bloomberg article title, the DHS actually issues Jones Act waivers to domestic shippers i.e., cargo owners, not foreign ship owners.)
Bloomberg further reported, “Waiving the requirements allows foreign-flagged tankers to fill the supply gap left by the interruption to the pipeline. It would take an estimated six to seven days for a tanker to carry fuel from the Gulf Coast to New York Harbor. A single cargo delivery into the East Coast is usually about 300,000 barrels.” And, noted, “ ‘We believe widespread panic buying, coupled with the one- to two-week time frame for fuel to reach delivery points along the pipeline created an opening for a non-U.S. tanker,’ Height Capital Markets analyst Josh Price said in a research note for clients.”
DHS issued a press release, “Statement by Secretary Mayorkas on the Approval of a Jones Act Waiver in Response to Eastern Seaboard Oil Supply Constraints,” late on May 12, 2021, stipulating:
Today, Secretary of Homeland Security Alejandro N. Mayorkas released the following statement on the announcement that the Department of Homeland Security will approve a temporary and targeted Jones Act Waiver in response to eastern seaboard oil supply constraints.
“In the interest of national defense, I have approved a temporary and targeted waiver request to an individual company. This waiver will help provide for the transport of oil products between the Gulf Coast and East Coast ports to ease oil supply constraints as a result of the interruptions in the operations of the Colonial Pipeline. The decision to approve the waiver was made after careful consideration and consultation with interagency partners across the federal government. The Departments of Transportation, Energy, and Defense were consulted in order to assess the justification for the waiver request and ensure the approval of the waiver is in the interest of national defense.”
The Jones Act is vital to maintaining the strength of the American shipbuilding and maritime industries by requiring all maritime cargo transport between U.S. ports to occur on U.S. flagged vessels. When U.S. flagged vessels are not available to meet national defense requirements, the Department of Homeland Security may grant a waiver to the Jones Act only if the proposed shipments are in the interest of national defense and after careful evaluation of the issue.
Despite DHS not identifying to which company they issued a waiver, Reuters in a news article, “U.S. refiner Valero granted Jones Act waiver after Colonial outage -sources,” published late morning on May 13, 2021, reported, “U.S. refiner Valero Energy Corp (NYSE: VLO) was granted a Jones Act waiver . . . Jones Act waivers are a key way to ensure fuel supplies reach some of the hardest hit areas as pump prices continue to surge while Colonial begins to ramp up flows on its pipeline network . . . Shipbroking sources say the vessel loaded fuel from St. Charles, Louisiana yesterday and has since been routed to the U.S. East Coast.” They further reported, “Refiners Marathon Petroleum (NYSE: MPC) and Citgo also requested waivers, the sources said on Thursday.”
It appears the Biden-Harris administration has the full support of the domestic maritime industry and the Jones Act lobby in making these coastwise waivers. Presumably the industry believed it was in their best political interest to support the waivers and alleviate the economic suffering in reciprocity for the Administration’s strong support of the Jones Act protections.
The pro-Jones Act maritime news internet site, gCaptain in an article, “Maritime Unions Address Jones Act Waiver: ‘Could Have Been Worse’,“ published on May 13, 2021, reported, that two important maritime unions, the Seafarers International Union (SIU) and the American Maritime Officers (AMO) have issued press releases supporting the Administration’s Jones Act waivers in the current instance.
In addition, gCaptain reported that the leading Jones Act industry trade association and lobbying organization, the American Maritime Partnership (AMP) formerly the Maritime Cabotage Task Force (NMCTF), also supported the waivers.
The “American Maritime Partnership Statement on Issuance of Jones Act Waiver,” press release issued May 13, 2021, “The American Maritime Partnership (AMP), the voice of the domestic maritime industry, today released the following statement regarding the Biden Administration’s issuance of a targeted Jones Act waiver in response to the Colonial Pipeline shutdown, which has disrupted the nation’s energy supply. Any waiver of U.S. law, including the Jones Act, should be done with precision and demand transparency and accountability of those who seek to benefit from such waiver. The American Maritime Partnership does not object to the targeted approach of the Administration, but strenuously encourages all policymakers to hold accountable those who seek to benefit from any waiver to avoid undermining American jobs and consumers. Mike Roberts, President of the American Maritime Partnership.”
The Wall Street Journal in an editorial, “The Jones Act Strikes Again; Biden considers another waiver, but the real answer is to sink it,” published May 12, 2021, stated:
The Jones Act is a protectionist’s dream, requiring that any vessel transporting goods between U.S. ports must be American-built, manned and owned. The result is higher costs for everyone, and perverse inefficiencies such as making it cheaper for New England to import liquefied natural gas from places such as Trinidad and Tobago rather than from the Gulf Coast.
That’s why in a crisis Presidents rely on waivers. George W. Bush granted a waiver after Hurricanes Katrina and Rita. Barack Obama did it after Hurricane Sandy. Donald Trump did it after Hurricanes Harvey and Irma.
The obvious question is why the U.S. keeps the law if it has to be suspended so often. The higher costs and inefficiencies don’t go away when the crisis does. The answer is that, like most protectionist legislation, the few who benefit want to keep it this way.
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U.S. will accept Jones Act waiver applications while Colonial Pipeline begins slow reopening
by Michael Hanen, Hawaii Shippers’ Council, May 12, 2021
On the sixth day of the Colonial Pipeline shutdown the motor gasoline shortage along the U.S. East Coast and especially in the Southeastern states worsened with many gas stations reporting they are completely out of fuel.
Meanwhile future relief appears to be developing today. The Biden-Harris Administration announced today the U.S. Department of Homeland security (DHS) would begin accepting Jones Act waiver applications from shippers (i.e., cargo owners). And, the Colonial Pipeline Company announced it began reopening procedures at 5:00 p.m. Eastern Standard Time (EST) for its pipeline system that stretches 5,500 miles from Texas to New Jersey.
CNN in a print news article, “Gas shortage fears lead to station outages in the Southeast as pipeline shutdown continues,” published at 5:48 p.m., May 12, 2021, EST, reported, “As of 4 pm ET Wednesday, 68% of all gas stations in North Carolina, 45% in Georgia, 49% in Virginia and 45% in South Carolina were without gasoline, according to GasBuddy, an app that tracks fuel demand, prices and outages. That's substantially higher than early Wednesday morning. Outages were also reported in Tennessee (18%), Florida (14%), Maryland (13%), and Washington DC (12%).”
The White House released a “Statement from Press Secretary Jen Psaki,” May 12, 2021, that in part said, “DOT’s Maritime Administration concluded their assessment of what assets are available in the Jones Act fleet to carry petroleum products within the Gulf, and from the Gulf up the Eastern Seaboard. The Department of Homeland Security stands ready to review any temporary Jones Act waiver requests from companies that demonstrate there is not sufficient capacity on Jones Act-qualified vessels to carry fuel to the affected region."
The Colonial Pipeline Company, issued a press release, “Media Statement Update: Colonial Pipeline System Disruption; System Restart and Operational Update,” at 5:15 p.m., Wednesday, May 12, 2021 EST, stating, “Colonial Pipeline initiated the restart of pipeline operations today at approximately 5 p.m. ET. Following this restart, it will take several days for the product delivery supply chain to return to normal. Some markets served by Colonial Pipeline may experience, or continue to experience, intermittent service interruptions during the start-up period. Colonial will move as much gasoline, diesel, and jet fuel as is safely possible and will continue to do so until markets return to normal.”
As Bloomberg reported yesterday, it will take 14 to 16 days for motor gasoline and 19 days for diesel and jet fuel to transit the pipeline system from the U.S. Gulf Coast to New Jersey. These transit times combined with the necessity of a gradual and careful restart operation of the Colonial Pipeline mean the fuel shortages will persist for at least a couple of weeks.
CNN further reported, “[Petroleum] Industry leaders call for waiver of Jones Act,” and noted, “During a press call organized by the API [American Petroleum Institute], oil executives called on Biden to consider waiving the Jones Act, which requires ships sailing between US ports to be American flagged and built in the United States. Susan Grissom, chief industry analyst at the American Fuel & Petrochemical Manufacturers [AFPM], said that granting temporary Jones Act waivers is ‘where President Biden's team can make a big difference.’ And, “ ‘While it may feel like a shortage, the United States isn't running out of gasoline,’ Grissom said.”
As reported yesterday, there are a limited number of self-propelled oceangoing Jones Act eligible clean products tanker ships that would be available to transport the needed petroleum products from the U.S. Gulf to various points along the Eastern Seaboard. Of the 44 such ships on the Atlantic side of the U.S., many are contractually committed to their current employment and others are laid-up due to the COVID pandemic lockdowns requiring time to activate. This should allow the shippers of petroleum products including the oil majors to successfully apply for Jones Act waivers.
The issues associated with the laid-up tanker ships were outlined in a Reuters news article, “U.S. fuel supply response slowed by mothballed oil tankers,“ published on May 12, 2021, reporting:
Several of the roughly 60 vessels in the U.S.-flagged tanker fleet [meaning the Jones Act eligible fleet], which mostly include tankers and barges, have been taken out of service because of slow demand before the Colonial Pipeline shutdown, according to company executives and market sources.
Idled tankers would take a minimum of 10 days to be restarted, said a spokesperson for Jones Act shipping company Overseas Shipholding Group Inc .
"We certainly could reactivate some tankers fairly quickly if the pipeline is down for an extended period," she told Reuters. OSG idled six Jones Act tankers during the first quarter, the company told investors late last week.
Some shipowners, however, have been asking would-be charterers seeking a Jones Act vessel to sign up for long-term contracts, making a quick response to the crisis difficult, two sources familiar with the matter said.
Refiners and wholesalers have provisionally secured at least three foreign flagged vessels in the event a Jones Act waiver is issued by the U.S. government, according to three sources familiar with the matter. "Nothing is moving yet it's all just in case," said one shipbroker.
As previously mentioned there is a political calculation for the Biden Administration in regards to issuing Jones Act waivers.
S&P Global Platts published a news article, “US 'stands ready' for shippers' Jones Act waiver requests to meet Southeast fuel shortages,” May 12, 2021, reporting on among other things, the “Political Cost” facing the Biden-Harris Administration.
They reported, “ClearView Energy Partners predicted Jones Act waivers could have a more significant effect on markets than EPA waivers [for motor gasoline blends], but they ‘come at greater political cost’ in coastal areas that are home to maritime industries.”
S&P Global Platts also noted, “The American Waterways Operators, a trade group whose top issue is defending Jones Act enforcement, urged the Biden administration not to grant any waivers. ‘Our data indicates that there is significant vessel capacity available, and we have received no information to indicate that a Jones Act waiver is necessary to address a specific supply situation,’ AWO CEO Jennifer Carpenter said. ‘We, therefore, continue to oppose unwarranted Jones Act waivers.’ "
It will be interesting to see what decisions the Biden-Harris Administration will do in respect of issuing Jones Act waivers to alleviate the fuel shortages brought about by the shutdown of the Colonial Pipeline.
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Biden-Harris Administration faces Jones Act conundrum
by Michael Hansen, Hawaii Shippers’ Council, May 11, 2021
The Colonial Pipeline system remains shutdown for the fifth day in a row after the Russian cybercrime gang DarkSide unleashed a ransomware cyberattack on Friday, May 7, 2021.
The five day shutdown of the largest petroleum products pipeline in the U.S. is having severe ramifications on the supply and price of clean petroleum products across the Southeast and Mid-Atlantic states and posing a political problem for the Biden-Harris Administration.
Bloomberg reporting in a news article, ”Colonial Faces Day of Reckoning Amid Expanding Gasoline Crisis,” published May 11, 2021, leaves no doubt about how serious is the situation. They state, “Fuel shortages that first emerged in South Carolina have metastasized across a wide swath of the South and East, shutting pumps at convenience stores and truck stops from Tennessee to Tallahassee.”
Bloomberg further reported, as a result of the pipeline shutdown, “Virginia and North Carolina are under states of emergency.” While, “The situation across the southeastern states is 'rapidly deteriorating,' Brad Jenkins, a senior vice president at truck-stop owner Pilot, said in an email.” And, “In Atlanta, 20% of filling stations were dry by Tuesday afternoon, according to retail-fuel tracker GasBuddy.”
The same Bloomberg article reports that there is some uncertainty with regards to when the Colonial Pipeline might become operational again. They reported, “Colonial Pipeline Co. told federal officials it will know by late Wednesday whether it’s safe to restart gasoline and diesel shipments that have been on hold since criminal hackers targeted the company last week. Beyond that deadline . . . details about when the biggest North American fuel pipeline will recover have been scant. It’s been more than 24 hours since Colonial issued a statement pledging to be back online by the weekend, and the growing frustration among political leaders is palpable as gas stations across the East and South run dry.”
Another Bloomberg article, “Gas Flowing 5 MPH Will Take Two Weeks to Reach New York Once Pipeline Is Reopened,” also published on May 11, 2021, reports, “Once Colonial Pipeline’s sprawling system is back in full operation, it will take nearly 15 days to move gasoline sitting in the Houston refining hub to the fuel-starved U.S. East Coast. Transit times for gasoline to pass through Colonial’s network . . . to New York Harbor, is 14 days and 16 hours, at a speed of about 5 miles per hour . . . Diesel and jet fuel, heavier and more dense products, need about 19 days to
make the same trip . . .”
Self-propelled oceangoing tanker ships can expedite the movement of these products more efficiently and rapidly than the pipeline.
The Biden-Harris Administration has tentatively begun to work on the only practical solution available to deal with petroleum product shortages in the Southeast and middle Atlantic states, namely, a Jones Act Waiver to permit medium range foreign-flag product tankers to transport the fuels in short supply from the U.S. Gulf Coast to deep-water East Coast ports.
The U.S. Department of Transportation (USDOT) issued a press release, “USDOT Details Ongoing Efforts to Help Mitigate Potential Impacts of the Colonial Pipeline Disruption,” on Tuesday morning, May 11, 2021, which has been widely reported.
The USDOT press release outlines five steps the Biden-Harris Administration directed the Department to take: (i) the Maritime Administration (MARAD) to begin the administrative process necessary to be able to issue a Jones Act waiver should that become necessary; (ii) Federal Motor Carrier Safety Administration (FMCSA) extended allowed driving hours for truckers hauling petroleum fuels in 18 states and the District of Columbia; (3) Federal Railroad Administration (FRA) is determining the availability of tank cars to transport fuel; (4) Federal Highway Administration (FHWA) working with affected states to issue weight waivers to truckers hauling fuel; and, (5) Pipeline and Hazardous Materials Safety Administration (PHMSA) working with the Colonial Pipeline Company to bring their system back to operation.
The UK-based international commodity price information service, Argus Media Ltd., published the news article, “US considers waiving Jones Act for fuel tankers,” on May 11, 2021, reporting on the day’s statements by Secretary Alejandro Mayorkas of the US Department of Homeland Security (DHS) regarding the Colonial Pipeline situation. As the DHS secretary plays a key role in the Jones Act waiver administrative approval process, Secy. Mayorkas’ views are germane.
Argus reported, “President Joe Biden's administration is considering a temporary waiver of domestic shipping restrictions in the Jones Act to mitigate fuel supply disruptions in the eastern US caused by the shutdown of the Colonial Pipeline fuel system. But the administration said it has not decided if waiving the Jones Act is necessary.”
Argus noted with respect to a Jones Act waiver, Secy. Mayorkas said on May 11th, “That need [for a Jones Act waiver] is not necessarily yet confirmed, but we wanted to be poised at the president's direction to be ready and to be able to act immediately.” And, “Mayorkas said the administration would move at ‘lightning speed’ to finish the analysis of the Jones Act fleet.”
Argus reported further that the MARAD process in part would determine the Jones Act eligible tanker ships available for the transportation of petroleum products from the U.S. Gulf to the East Coast. However, they noted, “But every available Jones Act vessel in the US Gulf coast that can carry refined products has already been booked since the pipeline shut down on 7 May, according to one shipbroker.”
In addition, Argus noted, “US shipping operators have also laid up nearly third of the Jones Act fleet because of pandemic-related weak demand to cut costs. Shipping sources estimate that it could take weeks to get the ships ready to carry cargoes, limiting their usefulness in alleviating the supply shortages in the US east coast.”
Argus also mentioned the President’s position on the Jones Act, stating, “Biden has said he supports the Jones Act. Biden signed a ‘Buy American" executive order on 25 January where he reiterated his "strong support for the Jones Act and its mandate that only US-flag vessels carry cargo between US ports,’ according to a summary from the White House at the time.”
It would seem the Biden-Harris Administration will have to take action to alleviate the worsening petroleum product shortages in the Southeast and Mid-Atlantic states that will harm consumers and stall the economy.
As the fleet of Jones Act compliant oceangoing product tankers is insufficient to accomplish the required transportation and even if the Colonial Pipeline is operating by the end of the week it will be two weeks before the fuel reaches the East Coast markets. As such, the only apparent action available to the Administration will be to issue a Jones Act waiver, which will displease their Jones Act lobby supporters.