U.S. Shipbuilding 2003: A Congested Attempt to Fund
Meeting national transportation needs during the current decade should involve a surfeit of new contracts for our domestic shipbuilders. The Oil Pollution Act of 1990 (OPA 90) mandates double hulls for all vessels engaged in U.S. petroleum carriage. In our non-contiguous trades, renewal programs are needed for the replacement aging container and RoRo fleets. Moving freight containers and trailers on RoRo barges and vessels, and moving people on passenger and passenger-vehicle high speed ferries, provide the obvious solutions to traffic congestion in the population corridors served by at least two of our Interstate highways.
Some of these vessel needs are now immediate because of private sector decisions to postpone projects. For others, the immediacy is the result of Washington policies which have rejected the maritime sector's importance in providing transportation to support our commerce in time of peace, and transportation to support our uniformed personnel in time of war.
Last year I stated that while the nation's vessel needs were clear, the means for financing these needs remained uncertain. I assigned as the primary cause, the current Administration's Office of Management and Budget (OMB) hostility to any form of maritime sector support. As I write this article today, this OMB hostility has in no respect lessened.
Over the past 12 months, OMB has blocked Congressional consideration of Maritime Administration (MarAd) plans to employ its Title VI capital construction fund (CCF) program in our Coastwise services.1 And, OMB has continued its efforts to entirely terminate MarAd's Title XI financing guarantees program, zeroing out Title XI authorizations in the Administration's budget requests for FY 2003 and 2004.
Most recently, and as further measure of this Administration's lack of appreciation for the maritime sector and its transportation potential, neither the SAFETEA Reauthorization drafted by the U.S. Department of Transportation (DOT) and approved by OMB, nor the DOT "Draft Strategic Plan for FY 2003-2008," address any role for DOT in providing assistance in financing private sector maritiem projects, or in examining maritime sector solutions for our increasingly intractable problems of highway traffic congestion.
At mid-2003, rather than being able to describe Administration moves to embrace water transportation as a means of meeting national transportation needs, and to provide assistance in its financing, I must report that the maritime sector financing situation remains unchanged.
Commercial Vessel Needs
The once proud U.S. owned, U.S.- flag, foreign commerce fleet is no more, a victim of Administrations which have determined that maintaining such a U.S. flag fleet was no longer a matter of national interest. With its passage, the U.S. shipbuilders' principal market for commercial blue water tonnage was eliminated. Still, the Jones Act and the Passenger Vessel Services Act remain to reserve the carriage of cargo and passengers between U.S. ports to vessels built in the United States. While U.S. shipbuilding opportunities are limited to these U.S. domestic trades, there are existing and near-term transportation needs which should provide significant opportunities for our U.S. shipbuilders.
1. The OPA 1990: Crude Carriers & Product Tankers and Barges.
OPA 90 requires single-hull tank vessels to be phased out by January 1, 2015. Most large single hull vessels must be replaced by 2005. Today, the U.S. domestic product tanker fleet has only 21 out of a total of 48 tankers which are double hulled. Ten of these double hull tankers were built or rebuilt in the last seven years, and are OPA 90 compliant. Five of the remaining tankers are 17 years old, and the remaining six are 25 years old or older. These latter vessels will reach the end their useful lives before the 2015 deadline. The replacement of Alaska crude carrier tonnage by the major energy companies involved in North Slope production is underway. The replacement of product carriers, the greater number of which are owned by independent operators, has hardly begun.
2. Alaska Crude Tankers.
General Dynamics, National Steel & Ship Building Company (NASSCO) now has orders for four double hull 185,000-dwt tankers for British Petroleum's Alaska crude oil service. Capacity will be approximately 1.3 million barrels at the design draft of 61.5 ft. Construction on the first ship has begun, with deliveries scheduled for 2004 through 2006. The BP holds options for two additional vessels. NASSCO has been selected by Exxon's Sea River Maritime to develop a new design for Exxon's Alaska crude oil service. Northrop Grumman, Avondale Shipyards (Avondale) is midway through a five-vessel series of Millennium Class, double hull 125,000-dwt tankers for use Conoco Phillips. These vessels were originally contracted by Atlantic Richfield and have a capacity of approximately 1 million barrels at design draft. These vessels were the first crude carriers built for the Alaska trade in compliance with OPA 90 standards. Deliveries are scheduled to run through 2007.
Taken together, these OPA 90 vessel contracts are likely to provide crude carrier tonnage sufficient to meet Alaska crude transportation needs for this decade, and thereafter for the balance of these vessels' useful lives.
3. Petroleum Product Tankers.
Apart from an initial four vessel group of OPA 90 product carrier rebuilds by AHL Shipping Company at Avondale, and a six-vessel series of vessels built by Newport News Shipbuilding & Dry Dock Company, no OPA 90 product vessel construction has been placed under contract. The Jones Act product carrier fleet is currently fully employed. OPA 90 requirements will remove four vessels from service in 2003, two vessels in 2004, two vessels in 2006, one vessel in 2009 and three vessels in 2008. By the end of 2005, OPA 90 will have reduced the carrying capacity of oceangoing U.S. product tankers by almost 25 percent.
There are no OPA 90 product carriers under contract for construction, and no new orders have been placed since 1997. Product tanker construction is not proceeding at a pace which will be sufficient to meet OPA 90 replacement requirements.
Some of these transportation needs will be met by double hull tank barge units. Articulated tug barge units have increasingly become the medium of choice for movements of up to 500 miles, a market which they now dominate. At least 40 oceangoing single hull tank barges in operation today will require double hull additions, or they will have to be replaced or retired by 2005. Contracting for these barge vessels is also lagging.
Most current estimates arrive at figures of 12 to14 new product tankers as necessary to meet OPA 90 needs by 2010. However, these tanker construction figures are based upon the assumption that U.S. products needs will be met with U.S. refinery products. These tanker needs will be reduced to the extent that these domestic product needs are met with imported products. This problem is addressed at a later section of this article under the heading "12. Import Substitution."
4. Oil Product Carriers for the U.S. Navy.
The U.S. Navy and its Military Sealift Command (MSC) need petroleum product tankers for use as fuel supply vessels, to both deliver products to foreign terminals and to provide at sea refueling. A 2002 paper authored by the Shipbuilders Council of America (SCA) states that the Military Sealift Committee of the National Defense Transportation Association has determined that a minimum of 45 product tankers are needed to meet core commercial demands and military sealift requirements. SCA figures show tanker availability falling below this minimum by the end of 2003, with the fleet five short by the end of 2005 and nine short by 2008. So, there is no capacity to meet unexpected Navy needs which might result from any of a number of causes as our international commitments expand. And, there is no plan for vessel replacement.
The existing fuel supply fleet was created under "build and charter" programs which involved private sector financing using the MarAd Title XI program. This exact financing structure is no longer possible because of congressionally imposed contracting restrictions, but it might be possible to make use of a similar financing structure. One commentator has suggested a joint MarAd/Department of Defense "National Defense Carrier" program to build a series of standard product carriers that can provide line service and vessel refueling. These vessels would be sold to private sector owner-operators, with their employment assured through a law that would require U.S.- flag carriage of a portion of U.S. product imports. The vessels would be available to the government under employment agreements triggered by national emergencies.
In mid-May the House Armed Service Committee authorized the construction of up to five product tankers as a part of the Maritime Security Program (MSP) renewal. The MSP tanker plan provides for federal construction assistance of up to 75 percent of shipyard cost, subject to a $50 million per vessel cap. The tankers will be expected to trade in U.S. foreign commerce and will receive the yearly payment available to MSP participants.
This MSP five tanker program may or may not prove successful. However, MSC will need a much more robust tanker fleet than this to meet our nation's expanding overseas commitments quite apart from "war emergency" situations. Perhaps 16 to 20 military suitable product tankers are needed.
5. Shuttle Tankers & Oil Supply and Infrastructure Support Vessels.
Projected deep water drilling for oil and gas in the Gulf of Mexico is already supporting substantial new contracting. As exploration proceeds and production is achieved larger and faster support vessels will be needed. Where deep water petroleum production cannot be integrated into existing petroleum gathering pipelines, some number of floating petroleum production and storage vessels (MOPS) and shuttle tankers will be required.
The perceived need for the larger and faster service and supply vessels necessary to support these deep water drilling efforts has already resulted in record numbers of shipyard contracts. There were more than 50 vessels contracted in 2002, and contracting appears to be continuing at least this rate during 2003. Some number of MOPS, and some number of associated shuttle tankers or articulated tug barge units (to transport the petroleum from the MOPS to shore-side refineries) will be required. While the MOPS may be of foreign construction, the shuttle tankers must be constructed in U.S. shipyards. There is talk of four or five MOPS, with perhaps two to four shuttle vessels for each MOPS. The timing for the environmental approvals and shipyard work necessary to put the MOPS and shuttle tankers in place remains partially uncertain. However, it seems clear that a substantial number of these shuttle tanker vessels will be built in U.S. shipyards during the current decade.
This could produce orders for as many as 16 to 20 shuttle vessels, perhaps more.
6. Tonnage for the Non-Contiguous Liner Trades.
The container and RoRo fleets of the established carriers serving Alaska, Hawaii and Puerto Rico are aged. While none of these trades is experiencing rapid growth, the involved vessels are expensive to operate and increasingly expensive to maintain. Replacement plans are well underway by one of the major carrier for Alaska. Saltchuck Resources (Saltchuck formerly TOTE) is replacing three Sun Shipbuilding & Dry Dock Company (SUN) built RoRos vessels with two newly commissioned (600 trailers plus 220 auto) Orca-class RoRo's designed and built at NASSCO. The vessels have a service speed in excess of 24 knots, and can be discharged and loaded in nine hours. The first of these vessels, the MV Midnight Sun, was the fist commercial dry cargo to be built in the U.S. in10 years. The vessel was delivered last month, in April 2003. The second vessel, the MV North Star, is to be christened on June 14, and will be delivered later this year.
Matson Navigation Company (Matson) is the predominant carrier in the Hawaiian trade. Some years ago it adopted a maintenance program designed to prolong the service lives of its vessels and so to postpone new construction. Five of the Matson container ships are now at least 30 years old. As the Hawaiian economy appeared to be returning to health in 2000, fleet replacements became a subject matter of discussion, only to be postponed by the damage to the Hawaiian tourism economy following September 11th. Matson is moving forward with Kvaerner Philadelphia Shipyard to take delivery on two new container vessels of a Kvaerner design. Kvaerner is obligated to build four vessels in the shipyard. One year ago there was talk that the Matson transaction would be a fleet replacement taking all four vessels (with two vessels firm and two under option). But this seems less certain now and might depend upon what Matson may expect from competing Hawaiian services.
The fleet serving Puerto Rico has been truly "antique." Two of the five Lancer class container vessels which were being used by Navieras de Puerto Rico (Navieras) were commissioned 1968, the others in 1969, 1970 and 1971. The two SUN-built RoRos used by Sea Star Line (Sea Star) first entered service in 1974. The "numbers" for new vessel tonnage have appeared substantial. But, overtonnaging in this trade (less than break-even rates and the resulting financial problems) have caused the operators to postpone replacements. The Navieras bankruptcy has been accompanied by a significant reduction in the overtonnaging. Once the Saltchuck and Matson vessels are placed in service, there might be three SUN-built RoRo vessels, and two SUN-built RoRo combination vessels, surplus to these carriers' needs. Might these be a satisfactory fit with the two SUN-built RoRos which Sea Star currently operates? Or perhaps they will find a home in a new U.S. East Coast "Short Sea" service designed to remove 53-ft. trailers from I-95 for transportation on a new "W-95"?
One year ago, the CSX Lines LLC rumored sale offered the most promising potential for vessel newbuildings open to speculation. What if an ambitious, well financed purchaser were to come forward? This might signal a program of replacements in all three of the noncontagious trades. Today the Carlyle Group acquisition has been completed. The Saltchuck replacement program will be complete later this year. One year ago it appeared that Matson would complete its fleet replacement program by purchasing two more container vessels, probably sister ships from Kvaerner. And, it appeared that competing U.S. carriers would be compelled to contract for new tonnage for the Alaska and Hawaii services. Today, the addition of at least some of this new tonnage appears much less certain.
7. Coastwise "Short Sea" Trades.
Highway congestion on major sections of our Interstate Highway system, coupled with projections for the growth of U.S. commerce over the next decade and beyond seems finally to have brought some Washington attention to water alternatives for existing and projected highway and rail facilities.
Perhaps it is Interstate 95, which provides the critical highway infrastructure for the East Coast's megalopolis, and its population center "bypass" routes such as I-495, that present the most serious congestion problems. To date most of the attention to I-95 has focused on the sea containers coming into the U.S. at a location like Port Newark, and their movements up or down the Atlantic Coast by truck. However, the more important problem is with the purely domestic moves in 53-ft. trailers. It is the removal of these 53-ft. trailers which would do the most to alleviate congestion. These movements could initially be by RoRo barges or existing self propelled RoRo vessels on water routes roughly parallel to I - 95, a new "W-95." Either class of vessel should be able to make use of existing infrastructure and roadstead sites. New and more expensive RoRo designs would come later. But, moving these trailers by water is really the only financially viable solution.
In November 2002, MarAd sponsored a "Short Sea Shipping Conference" in New York City. There were presentations on congestion, and on the needed services and equipment. But, and it surprised no one, MarAd financing issues were not addressed. Title XI was clearly "off limits" by OMB order, and Administrator Schubert's CCF proposals which were an intended source of capital for these Short Sea projects were barely mentioned.
But "How are these projects to be funded?" Where is the equity to be found, or how is it to be accumulated? Will debt financing matched to vessel useful lives be available? Or will the debt be subject to repayment over some shorter period such as one-half of a vessel's life? Significant developments will depend upon MarAd financing assistance, and MarAd financing assistance will require OMB and DOT approval and support. But, as I have already noted, OMB has continued to oppose the use of these MarAd programs, and Coastwise shipping is not even mentioned in the DOT Draft Strategic Plan for FY2003-2008.
This should be a source of significant shipbuilding opportunities by mid-decade and thereafter. However, it is difficult to assign any newbuildings figures for these Coastwise trades in the face of OMB opposition and DOT indifference.
8. Passenger and RoRo/Passenger Ferries.
While ferry transport was largely abandoned after WWII, selected urban locations like New York and Boston have seen new ferry services successfully introduced. In New York City non-subsidized ferry operators are providing more than 60,000 passenger trips per day between multiple locations in northen New Jersey and Manhattan. And, New York City has announced plans for the development of a regional passenger ferry transportation plan and the construction of what The New York Times has described as a "fleet" of new ferry terminals.
Ferry services provide significant contributions to regional and local transportation networks across the entire country. The Washington State Ferry System, the largest volume passenger and vehicle system in the nation, meets essential transportation needs and provides complementary services which have themselves become a major tourist attraction. Ferries have been in operation on San Francisco Bay for more than 150 years, with more than 30 major ferry routes in service at one time or another. The past three decades have seen the expansion of various cross Bay services to provide commuting alternatives to the bridges and the Bay Area Rapid Transit (BART) system. A San Francisco Bay Area Water Transportation Authority has been established to plan and manage an ambitious expansion of high speed ferry service for the entire Bay Area.
New ventures are underway for Alaska, for the Seattle region, and for various Coastal and U.S. Great Lakes routes. U.S. shipyards are now proven builders of stable catamaran platforms with vessel speeds which range between 35 and 50 knots, and sizes appropriate to the services in which the vessels are to be employed. New, low wake designs are being proven effective. These and other developments open new opportunities for ferry transportation. From every standpoint, from out-of-pocket costs to the taxpayer, to protection of the environment, the logic favoring the addition of water transportation resources is compelling.
Two years ago, one West Coast commentator estimated that "USA annual fast ferry newbuild contracted production volume by 2004 should be around the $250 million level and . . . is likely to grow by $50 million or so annually thereafter." Current contracting falls very far short of this. Major questions remains as to capacity needs and as to how are these projects are to be funded.
For a number of shipyard transactions which are under contract or under discussion with private sector purchasers, the availability of MARAD Title XI financing guarantees appear to be an essential element.
9. Import Substitution.
In my discussion above in 3. Petroleum Product Tankers, I noted that these newbuilding requirements might be reduced to the extent that U.S. product needs are met by imports of refined products on foreign built, non-U.S. flag vessels.
The risks of this "import substitution" are substantial. Current product tanker costs (shipyard prices plus the costs of financing) are sufficiently high that the cost of domestic petroleum products delivered to the New England states (cost of product plus cost of transportation) may exceed the cost of imported petroleum product. See, Interview with Maritime Administrator William G. Schubert, "U.S. Market: Foundation for the Future," Maritime Reporter & Engineering News, September 2002.
On this point, vessel financing costs can become of critical importance. During the early years of a tanker's employment, commercial financing will result in a tanker daily rate capital component more than twice that of the same tanker financed with MARAD guarantees and capital construction fund assistance. Currently quoted shipyard product tanker pricing is in the $80 million to $90 million range. Given these shipyard prices, there is the likelihood of significant import substitution unless the MARAD financing programs are available.
The substitution of foreign built for U.S. built vessels would result in lost profits and wages across significant sectors of the U.S. economy. On average, every $1 million paid for commercial ship construction in a U.S. yard, results in an additional $ 2.8 million of economic activity outside the yard. A $100 million tanker contract will generate a total of approximately $380 million in additional taxable domestic gross national product. So this is more than just a shipbuilder problem.
Part III. Financing Problems & Solutions.
Over the course of the entire 20th Century, our maritime sector has only infrequently been successful in attracting sufficient private sector financing to meet national needs without some form of federal program assistance. History confirms that standing alone, maritime transportation projects have generally not provided returns which have been adequate to attract these investments from private sector U.S. capital sources.
The Merchant Marine Acts of 1920, 1936 and 1970, all bear witness to this history.
The MarAd programs available under the Merchant Marine Act of 1970 and the Federal Ship Financing Act of 1972 were intended to address this problem. These programs enable qualified U.S. citizen operators: (i) to accumulate the equity for fleet replacement on a tax deferred basis over a period of up to 25 years, and (ii) to access private sector commercial vessel financing with terms of up to 25 years, matched to vessel service lives.
Commercial asset-based vessel financing, when available, will generally be limited to no more 80 percent of vessel cost, with a term of no more than 10 to12 years, or less than one-half the life of most of these vessel assets, with interest rates at best in the 6 percent to 6.5 percent range.
Title XI guarantees allow 87.5 percent of vessel cost to be financed over 25 years with current rates in the 4.5 percent range. Commercial financing can be expected to more than double annual debt service requirements in the early transaction years. This will increase the cost for the transportation service being provided - be it a time charter rate to an energy company, or a ferry fare for a work-bound commuter - by the same multiple.
Access to these programs is currently being discouraged by an OMB that: (1) refuses to allow Congressional consideration of a change in the CCF program that would allow these U. S. operators to use the $1.4 billion of their own already set aside monies to contract for the OPA 90 tankers, passenger ferries and other vessels to be engaged in Coastwise services; and (2) is acting to discontinue the financing guarantee "public-private partnership" program for accessing long term private sector financing matched to vessel lives, because this will involve an alleged example of "corporate welfare."
Acting in the context of this rather grim background, and in the face of OMB's expressed opposition, the Shipbuilder's Council of America (SCA) has recently lead two successful Title XI industry efforts. First, it gained Congressional and Administration approval for a $25 million Title XI appropriation for FY 2003 as a part of the Iraq war supplemental appropriation. Second, it obtained House Armed Services Committee approval for $30 million of Title XI authorization for FY 2004. One respected maritime commentator has described the first SCA success as a "miracle" for the shipbuilding industry. But, whether of not a "miracle," this was by any standard an important Title XI program rescue, benefitting MARAD as well as the shipbuilding and ship operating communities.
These SCA lead successes demonstrate both the Congressional support for the Title XI program, and what a determined private sector effort can sometimes accomplish. However, we should not only be applauding these SCA lead successes. We should be working with SCA and with one another to pursue this and other maritime sector goals. Perhaps an SCA led effort can achieve a rescue for Maritime Administrator Schubert's now beleaguered CCF proposals for financing vessels in U.S. Coastwise trades?
Part IV. Concluding Thoughts.
There are current domestic shipbuilding opportunities for fleet replacement and expanded needs for our OPA 90 and other coastwise and Gulf of Mexico energy related services; fleet replacements for the noncontagious services; and vessels for expanding ferry needs in passenger and passenger/vehicle services in coastwise, Great Lakes and inland trades. These opportunities will continue and expand as they become more clearly defined during the course of the decade. What does this mean for U.S. shipbuilding? In reviewing the domestic transportation scene we can probably agree upon the areas of need, and upon the vessel design and shipyard construction solutions. The problem that remains is that of attracting the equity capital and long term debt financing necessary to fund these projects on a basis which is sufficiently economical to allow project success. In the end, U. S. shipbuilding opportunities during the current decade will be constrained, not by transportation needs, or vessel design or shipyard capacity, but by the lack of reasonably priced capital which is likely to be dedicated to meeting national waterborne transportation needs.
Footnotes
1 These proposals were put forward by Maritime Administrator William G. Schubert in testimony before the House Armed Services Committee in March 2002, and would make over $1.4 billion already set aside for shipbuilding immediately available for Coastwise vessel construction, as well as providing a sound basis for future Coastwise vessel project funding.
2 The texts of the SAFETEA Reauthorization and the DOT Draft Plan can be accessed at the DOT home page at http://www.dot.gov by clicking on "SAFETEA Reauthorization" and "Comments Requested on FY 03-08 Strategic Plan." Maritime Reporter readers should respond to this invitation by providing email comments which will question and comment upon the absence of any reference in these documents to the maritime sector's potential role in resolving our national transportation problems.
3 See, "OPA 90 Phase Out of Environmentally Risky Vessels -- Much to be Done," Shipbuilders Council of America (June 2002) (hereafter "SCA 90 Memo").
4 See, generally, SCA 90 Memo (which contains a detailed discussion and includes tables showing tank vessel and tank barge phase outs year-by-year from 2002 through 2015).
5 SCA 90 Memo.
6 Leback, "We need ships for commercial, military use," The Journal of Commerce (February 24 - March 2, 2003). Captain Warren Leback is a former Maritime Administrator. The product tanker plan which he proposes is similar to a MARAD tanker construction program which was implemented shortly prior to World War II.
7 Pearson, "Major Operators Adding OSVs at Record Pace," MarineNews (April 28, 2002).
8 "The Economic Contribution of the U.S. Commercial Shipbuilding Industry," LECG LLC ( April 2002).