Jones Act waiver in wake of Harvey?

There have been several developments in the wake of Hurricane Harvey that might lead to a Jones Act waiver for the movement of crude petroleum oil and petroleum products in the U.S. Gulf of Mexico (GoM) area.

This will be another test of the Trump Administration’s willingness to stand-up to the domestic maritime industry (also known as the Jones Act industry) and make rulings allowing foreign-flag vessels into domestic coastwise trades.

The first test was an Obama-era notice issued by the U.S. Customs and Border Protection (CPB) that would have reversed a series of rulings dating back to 1976 that allowed foreign-flag vessels to support oil and gas exploration on the outer continental shelf in the GoM. The Trump CPB withdrew that notice on May 10, 2017, greatly pleasing the energy industry and disappointing the Jones Act industry.

The Hill, a newspaper that covers Washington, D.C., politics, reported on Sept. 4, 2017, in the news article “Rising gas prices after Harvey threaten Trump economy,” on the impact of Harvey on petroleum production, refining, deliveries and prices of refined products:

The national average gasoline price on Friday was $2.45 per gallon, according to auto group AAA, about $0.12 more expensive than two weeks ago, as refineries in the Gulf remain offline or slow to resume operations. The Gulf Coast off Houston contains nearly half the country’s refining capacity. … At its peak, Harvey knocked out nearly a quarter of American refining capacity. … Traders reacted accordingly. Gasoline futures spiked 13.5 percent on Wall Street on Thursday. … Harvey also disrupted oil production and delivery. Gulf of Mexico oil drilling slipped during the storm.

From an interview, the Hill further reported on the national economic consequences of Harvey:

“The negative effect will be not pretty,” said Stephen Moore, a fellow at the Heritage Foundation and former Trump transition energy adviser. “We’re talking about maybe knocking half a percent, or 1 percent, off GDP for a quarter or two, higher gas prices for sure, because Houston is the energy capital of the country. … So all those things are negative. It’s a question of how much the prices are already starting to rise,” he said. “I don’t know how fast this industry can recover. … Could we see gas prices over $3? Potentially. That would be a big hit to consumer finances.”

The energy reporting service Argus Media, in the news article “Phillips 66 seeks Jones Act waiver for refinery,” reported on Sept. 1, 2017:

The US Energy Department yesterday (Aug. 31, 2017) authorized a loan of up to 1mn bl of sweet and sour crude from its Strategic Petroleum Reserve to supply Phillips 66’s 252,000 b/d Lake Charles refinery in Louisiana, after the company made two emergency exchange requests.

That is 1 million barrels of crude oil to supply 252,000 barrel per day to the Lake Charles Refinery, Westlake, La., handling mostly sour crudes.

Concurrently, the Phillips 66 Company (NTSE: PSX) also made a request with the Customs and Border Protection  for a Jones Act waiver, as first reported by Argus.

Phillips 66 says it is seeking a federal waiver from Jones Act shipping restrictions to supply crude to its 250,000 b/d Alliance refinery, the first such request in the wake of disruptions caused by Hurricane Harvey. Phillips 66 told Argus it requested the exemption to supply the Louisiana refinery but said it could provide no further details until the waiver is authorized. US Customs and Border Protection (CBP) had revealed that it was reviewing a waiver request but had declined to identify the requesting company. The agency could not say when a decision would be reached.

The Phillips 66 Alliance Refinery, Belle Chasse, La., is a 250,000-barrels-per-day crude-capacity facility handling sweet crudes. The Phillips 66 Jones Act waiver request appears similar to those granted after Hurricanes Katrina and Rita in 2005 as described by maritime attorney Jonathan K Waldron of Blank Rome LLP in a 2014 paper, “How difficult is it to obtain a Jones Act waiver?”, noting the involvement of the U.S. Department of Energy (DOE) with the U.S. Department of Homeland Security (DHS):

Following a DOE request, DHS granted a waiver after Hurricane Katrina in 2005. DHS stated that the catastrophic destruction brought about by Hurricane Katrina dramatically impeded the production and transportation of oil, gas, and other energy sources. Additionally, the administration decided to draw down the strategic petroleum reserve (“SPR”) and needed foreign-flag vessels to transport the supply. There was nationwide support, especially with a spike in gas prices following the catastrophe. Additionally, domestic maritime industry supported the waiver, acknowledging there was not capacity to handle the problem. After Hurricane Rita struck the Gulf Coast a few weeks later, DHS issued another waiver. However, this time the domestic industry protested, claiming that there were coastwise-qualified vessels ready and able to assist.

We will now have to see if CBP will issue a Jones Act waiver in response to the Phillips 66 request.

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