Jones Act and Energy Markets

1. WHAT THE HERITAGE FOUNDATION GOT WRONG ABOUT THE JONES
ACT
The Merchant Marine Act of 1920 (P.L. 66-261), also known as
the Jones Act (JA) requires all vessels shipping cargo between two US
locations to be US built, majority US-owned and at least 75% of the
crew to be US citizens. There is indeed a conventional wisdom about
the Jones Act (which is very located in the heart of the O&G industry
saying that the Jones Act is a form of protectionism harming U.S
refining margins.
U.S refiners have acknowledged that repealing the JA is nearly
impossible, now the strategy is to push to get waivers on the Jones
Act.
However waiving the Jones Act could add uncertainty in the U.S
Shipping industry thus slowing capital investments in the U.S fleet with
the unintended consequence of pushing-up rates higher.
One of the best-known and one most influential think tank, the
Heritage Foundation, has written a piece entitled The Jones
Act’s Costly Impact. The fact is that almost nobody including the
Heritage Foundation, has ever provided substantive and solid
benchmarking on the Jones Act.
One hint is that beyond this political debate, there’s always a complex
market-driven process.

2. What is driving up the Jones ACT numbers?
The Economics.
Demand
The U.S is producing Crude Oil at level unseen since 1986
Supply

3. The U.S Flag Fleet tonnage is at an all-time Low
The market situation for Jones Act is (high demand/tight supply).
Meanwhile the exact reverse prevails in the International Seaborne
Freight Market (excess-capacity). The Jones ACT tanker market should
not be regarded as different as any other markets; it’s the Supply and
the demands that are moving charter rates up and down.
Oftentimes, a lot of folks talk about trade regulations but at the end
it’s always policies within the economics context that drives up all
those numbers in the real world.
During a recent panel discussion on oil exports, Graeme Burnett,
senior VP for fuel optimization with Delta Air Lines estimated that
oil shipping costsfrom the US Gulf Coast to Rotterdam would be $2/bbl
versus $6/bbl from the Gulf Coast to Philadelphia.
Backtesting
To bring more clarity about the Jones Act Shipping Cost, we have
decided to backtest the two following routes.

4.  For Corpus-Christi/Rotterdam, cargo is 330,000 bbls on a LR1
Foreign Flag Vessel.
 For Corpus-Christi/Marcus Hook (Delta’s Trainer, PA Refinery), the
cargo is also 330,000 bbls,but the vessel is the M/V Pennsylvania
U.S Flag Tanker.
During October, USG/Europe was traded @ $12,558/day giving an
estimate for this route @ $4.15/bbl. According to Burnett, the estimate
for this route is $6/bbl.
We have backtested Burnett’s numbers and we only get $6/bbl if the
vessel was chartered at $84,000/day at the top of the range.
Size does Matter
While The Marcus Hook Industrial Complex, PA can technically berth
Suezmax and VLCC size vessels, the maximum draught on the
Delaware River is 40 FT.
It means that a VLCC unit laden with North-Sea can’t be laden down to
its load lines (full capacity) if the final destination is Trainer refinery
and we can’t get 2$/bbl on a fully laden VLCC (70 FT).
Corpus-Christi/Rotterdam
LR1 FFV Voy. Corpus-Christi/Marcus Hook, PA
U.S Flag Voy.
$/bbl $/bbl
Oct 2013 4.15 (SJ) 4.25 (SJ)
Oct 2014
4.15 (SJ)
6 (B)
(J) Simon Jacques
(B) Burnett
On an Apple-to-Apple basis comparison, the conventional wisdom
about the Jones Act can’t be proven. Freight costs/barrel estimates on
the two routes aren’t significantly different.

5. Timing element
Timing of investment is a key to success in both U.S Flag and
International shipping. This is because freight rates are sometimes
very high for long enough periods of time to make a ship look more
like a money machine than a normal production unit.
This timing element is within both Jones Act and FFV transportations
costs. The estimate for the voyage was $4.25/bbl when Jones ACT
rates were assessed in the $50,000/day.
Financial and Balance Sheet Matters
Because Jones Act is thinly trade it is difficult to draw the frontier
between operational and capital costs on a balance sheet thus getting
a precise $/bbl estimate per voyage.
Because Jones Act charters signed between parties have very long
terms, they are susceptible to be capitalized by an accountant pen at
an Oil Refiner. If the charter is capitalized, the charter liability will be
treated as an asset on the balance sheet.
3.48$ is the implied transportation cost/bbl for a Jones ACT MR-Size
Tanker under these assumptions:
 Jones Act Charter (the C/P is capitalized on the B/S)
 Term= 10 years
 2 USGC/Marcus Hook, PA trip/ month
The asset value of this charter will be determined at the delivery of the
vessel. PV Charter = Sum Monthly Rate/ (1+i)n
Example:
 i= 4.5%
 Charter Term = 10 years
 PV = $197,428,227.31

6. Using the straight-line depreciation = $19,742,822.73 /year
 Monthly depreciation $1,645,235.23
 2 trips/ month equates to 2.49 $/barrel Capitalized lease cost
We can add the voyages expenses per month to the capitalized lease
cost per barrel to obtain a total cost per barrel.
 325,000 voyage ex. Houston/ Marcus Hook
 650,000 voyage expenses/ Month
(Capitalized lease cost ($/per bbl/Month) + Voyage expenses
$/Month) / barrels. We get $3.48/bbl
The Suezmax Case
So far we have compared the 45,800 DWT M/T Pennsylvania with a
FFV unit of a similar size.
Now we would like to compare a bigger size: the Suezmax (150,000
DWT).

7. Cost JA Suezmax
$/bbl 1.28*
$/bbl 2.11**
$/bbl 4.22***
*2 RV/month on a JA newbuilt Suezmax 10 years charter= $1.28/bbl (assuming API
40, 991,000 bbls cargo, 15/13kts, 6d laden, 6 days ballast, 2 days loading, 1 day
disch., +5% sea/weather margin)
**1 RV/month on a JA newbuilt Suezmax 10 years charter= $2.11/bbl (assuming
API 40, 991,000 bbls cargo, 15/13kts, 6d laden, 6 days ballast, 2 days loading, 1
day disch., +5% sea/weather margin)
***.5 RV/monthon a JA newbuilt Suezmax 10 years charter=$4.22/bbl (1 RV/2
months , (because of unfavorable oil markets conditions or because the unit is used
for storage).
FFV Suezmax TD5 Bonny - USEC
TD5 is the Baltic assessment for the Suezmax route TD5, 130,000 mt
W Africa to US Atlantic coast, 130,000 mt.
As you can see the Suezmax market is red-hot right now, we are well-
above the 2$/bbl assumed by Burnett. The Suezmax markets have
climbed to their highest levels in over six years.
 TD5 spot voyage= $4.29/bbl****
 TD5 15’= $2.89/bbl ****

8. ****Marex Spectron Tanker curve spreadsheet 2014-11-19 , we have used their
$/MT with a API for bonny @ 35.3 degree to get $/bbl.
Jones Act Tanker, TTT (trader trading tool)
Shipping markets are recognized today as a key component of
commodity trading. For those actors who own vessels readily
available for various destinations, “geographical arbitrage” may be
achieved when the IFS is > than Cost shipping.
The Jones Act tanker unit in the spot voyage basis USGC/USEC is
traded ≤ the marginal light crude oil price differential between the
USEC and the Gulf Coast. This Implied Freight spread is tying up cash
prices between the U.S Atlantic Coast and the U.S Gulf cost.
We have also demonstrated that spot rate are persistently priced
above the long-term implied $/bbl. The $5 to $6 cost/bbl from
Houston to USEC in the spot market reflects;

9.  the prompt Brent CIF USEC- USGC FOB light crude oil spread
 a certain convenience yield or benefit of owning a unit for a voyage
in the spot market
A certain convenience yield or benefit of owning a unit for a
voyage in the spot market?
No-Arbitrages Cash and Carry Formula. [1.1]
 F0 = The forward market is not active in the U.S Flag Tanker
market. However, in the long run, freight rates should gravitate
towards the long-term marginal production cost per unit, this value
based on 10 year c/p, new Suezmax Construction is the implied
Forward in $/bbl.
 So = spot in $/bbl
 i= interest rates
 y= convenience yield
 t= time to the expiration of the charter.
$2.11 = $5 e (0.045–y )10
Solving y:
2.11=5e( 0.045-y)10
ln(2.11/5)=( 0.045-y)*10

10. ln(2.11/5)=( 0.45 -10y)
[ln(2.11/5)-0.45]/10 = y
y= 0.13127
The high convenience yield, could be explained by the relative scarcity
of the Jones Act fleet ((current utilization for the coastal fleet is in the
90% to 95% range and the listing is limited.
Finding the theoretical forward value by interpolation.
F0= Soe(c-y)t [1.1]
So= $6
$2.11 = 6e(0.045–0.13127)*10
$2.11< 2.53213
It suggests selling spot voyages and buying a long forward position on
Jones Act.
Brent CIF USEC – USGC FOB light crude oil spread
It is not certain that crude pricing will be favorable for Jones Act on
average in the future because past relationships aren’t always
indicative of future in the energy markets.
For the next decade, if on average, Brent-priced foreign oil is at +2
over the ICE Brent crude futures delivered to the USEC and U.S crude
oil in the USGC is averaging between 0 and -3 under the ICE Brent;
Brent USEC +2
Minus
JA freight +2.11*
USGC -3
———————————–
$2.89/bbl

11. PV Savings $ 221,294,233
PV 10 yrs C/P
$ 197,428,227
NPV $ 23,866,006
*The Conservative assumption is: (1 voy/month x $2.11/bbl x
12months x 10 years)/ (1+i)10 = $221,294,233.
While the PV for the 10 years Suezmax charter was
$197,428,227 NPV= $23,866,066 in Shareholders’ pockets. There is a
world of possibilities to use this Jones Act Tanker.
By chartering a Jones Act Suezmaz, Atlantic Coast refiners, banks and
traders can effectively lock the U.S crude oil economics in their favor
for the next decade. It’s a gamble on the U.S energy renaissance.
We hope that this article has aroused the curiosity of our readers and
will provoke waves because on an Apple-to-Apple basis comparison
right now, we can’t prove the myth about Jones Act harming U.S East
Coast refiners’ transportation costs.
In the paper we have underscored that timing , not just policies are
determining winners and losers in this energy and shipping trade (both
international and U.S Flagged).
Oftentimes, a lot of folks talk about trade regulations but at the end
it’s always policies within the economics context that drives up all
those numbers in the real world.
Finally, we are pointing out the capitalization of a long-term Jones Act
charter can yield an even lower transportation cost/bbl that may be
used to bet on the crude oil markets conjecture.

12. All conversions and rates ($/bbl, $/day, other estimates) and opinions provided are made in
good faith. A courtesy of