The Jones Act - legislative and regulatory influence on the offshore industry of America

Once more, The Jones Act proves to be a lively subject of debate.

In a document published by the Congressional Research Service, the author John Frittelli (a specialist in Transportation Policy), notes that the law’s effectiveness in achieving national security goals has also been the subject of attention in conjunction with a congressional directive that the Administration develop a national maritime strategy.

This includes strategies to increase the use of short sea shipping and enhance U.S. shipbuilding capability. Defence officials have stated that while the Jones Act helps preserve a baseline of shipyard capability, the dwindling size of the fleet indicates a need to reassess current policy.

While the act provides a significant degree of protection for U.S. shipyards, domestic carriers, and American merchant sailors, some experts argue that is also constrains the availability of a greater variety and number of ships, leads to high domestic ocean shipping costs and contributes to increased shipbuilding costs in requiring merchant vessels to be built in U.S. shipyards, rather than in shipyards abroad.

However, the U.S. Maritime Administrator has credited the law for ensuring the employment of the majority of U.S. merchant mariners. Ultimately, the act seeks to maintain “a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in times of war or national emergency” by supporting:

• a U.S.-controlled commercial fleet to supplement the military sealift fleet;
• a U.S. merchant marine workforce qualified to crew reserve military sealift vessels; and
• domestic shipbuilding and repair capacity.

By long-standing agreement, the military is to utilize U.S.-flag commercial ships for sealift before it utilizes government owned vessels in its reserve fleet. Under the Jones Act, mariners are expected to crew sealift ships when needed, and thus the decades long shrinkage of the oceangoing Jones Act fleet and mariner pool has been raised as a concern.

The Department of Defence plans to recapitalize the reserve fleet by building new vessels in domestic shipyards, repairing ships in the current fleet to extend their service life out to 60 years, and purchasing used, foreign-built ships. Cost and time considerations may influence the relative weight of each of these approaches.

Much of the commercial fleet is relatively old, raising safety concerns in certain cases. Defence and security aside, possibly the most important part of the act are the regulatory interpretations. These interpretations of the Jones Act have been significant in defining what constitutes a “U.S.-built” vessel, what constitutes “transportation” between two U.S. points, and what are “U.S. points.”

For example;

• The Coast Guard has determined that a U.S.-built vessel can be assembled with major foreign components such as engines, propellers, and stern and bow sections.
• Customs and Border Protection (CBP) has determined that cruise ship voyages that involve visits to foreign ports in addition to a domestic port are not domestic transportation and therefore not subject to the Jones Act.
• CBP’s interpretations of what constitutes domestic transportation and U.S. points are significant to the offshore oil industry, as some of the vessels supporting that industry must be Jones Act-compliant while others need not be.

It’s important to note that Congress has enacted numerous exemptions or exceptions to the Jones Act. In 1951, Congress exempted passenger travel between Puerto Rico and any other U.S. port if no Jones Act qualified operator can provide comparable service – more than likely due to no Jones Act-qualified carriers interested in serving a particular market.

Congress has also allowed waivers of the Jones Act for national defence reasons. For example, in 2005 a foreign-flag heavy-lift vessel was required to transport a radar system from Texas to Hawaii. Some commercially useful types of ships are missing from the Jones Act-qualified fleet, and, to some extent, the design needs for commercial ships have diverged from those for sealift vessels.

Both situations may appear inconsistent with policy goals established by Congress, which include having a merchant marine “sufficient to carry the waterborne domestic commerce” and “capable of serving as a naval and military auxiliary in time of war or national emergency.”

Charlie Papavizas, noted in a recent article that; “The Jones Act is a key driver in how offshore structures are constructed and dismantled and so its interpretation is critical to both operational planning and cost analyses.”

According to National Ocean Industries Association (NOIA), the American offshore industry contributed $115 billion in revenues to federal government from 2001-2018. Approximately 315,000 Americans are directly, or indirectly, employed by the industry today.

With that, the U.S. produces an estimated 600 million barrels of oil and 4.5 trillion cubic feet of natural gas annually from less than 3% of the Outer Continental Shelf.

The NOIA argues that, “Regulatory uncertainty stifles hiring and slows investments. Sensible and consistent offshore energy regulations would… accelerate U.S. economic growth tomorrow.” How would the right reforms, or a repeal of the Jones Act, influence the offshore industry in America?

Late in 2019, we caught up with Kirk Lyons, Partner at Lyons & Flood , to speak with him about The Jones Act. We asked him about reforms, repeal, and the CBP.

Read on below.

Iain Gomersall: In 1920 the U.S. needed a thriving maritime sector for both economic and military reasons. Enter the Jones Act. Today, there is a growing divide between the Jones Act and modern realities - particularly the increasing specialization within the commercial shipping and military requirements. Do you believe there is a happy, legal medium to be found?

Kirk Lyons: With the U.S.-flag fleet continuing to dwindle, the domestic shipping industry will fight for support of the Jones Act. I do not see an agreement being reached that would reform the Jones Act on any grand scale. Specific waivers, as the House bill mentioned below, would seem to be the more likely way forward, at the least for the immediate future.

Q: Proponents defend the Jones Act, saying it is vital for national, economic and homeland security. Others argue the act is a hinderance on the U.S. economy. In your opinion, are there reforms that would help lift the burden of the Jones Act on the U.S. economy, and still satisfy concerns on national and homeland security?

KL: This is somewhat of a loaded question because of the many debates on whether the Jones Act hinders the U.S. economy. Those working in the Jones Act industry argue that there is no hindrance on the U.S. economy and, in fact, benefits many U.S. workers and companies. Specific waivers are the much more likely “reforms” that will be seen, if necessary, in order to assist and promote the offshore industry.

Q: There is evidence suggesting a repeal of The Jones Act would be beneficial to the U.S. economy. If the evidence supporting repeal of the Jones Act is so compelling, can it simply be repealed?

KL: Repeal of a federal statute such as the Jones Act would require Congressional approval and signature of the President. With so much historical and current domestic support for the Jones Act, despite its reported effects on the U.S. economy, repeal is unlikely in the immediate future. (There are aspects of the Jones Act that do not relate to cabotage (e.g., permitting a seaman to sue his employer for personal injuries/wrongful death) so a complete repeal of the Act is unlikely.)

Any reforms to the Jones Act would also require Congressional approval and signature by the President and would require a public comment period before any changes are formally adopted.

Q: Where does the Jones Act stand today? Do you believe there will be reform, or a repeal?

KL: A full repeal of the Jones Act is unlikely for the reasons mentioned above. Piece meal reforms are more likely such as a waiver process in a House bill (Coast Guard Authorization Act of 2019) that, if passed into law, would permit use of heavy lift vessels if the Transportation Department determines that there are no qualified U.S.-flag vessels available.

Q: The President could waiver the Jones Act special circumstances. Are you aware of any occasion where there has been a waiver to the Jones Act? Have there been any occasions where a waiver has been lobbied, and been unsuccessful?

KL: There have been a number of waivers and exemptions from the Jones Act over the years; one recent example is the response to hurricanes Harvey, Irma, and Maria, for moving oil and for any products in the case of Puerto Rico in 2017. No doubt applications for waivers have been denied from time to time, but this would require additional research.

Q: Customs and Border Protection (CBP) has primary responsibility for enforcement and administration of the Jones Act. Are there other agencies or committees with The Jones Act enforcement and oversight authority?

KL: CBP and the USCG both have responsibility for enforcement and administration of the Jones Act. Generally speaking, the USCG is in charge of enforcing the U.S.-build requirements for vessels, U.S. ownership of the carriers, and U.S. crewing. CBP is primarily responsible for determining what maritime activity falls under the Jones Act, e.g., what constitutes “transportation,” what is “vessel equipment,” and whether the origin and destination for a voyage are “U.S. points.”

Q: To my understanding, current U.S. Customs law includes two key concepts: informed compliance and shared responsibility. Are there complexities which exist between these key concepts?

KL: CBP considers “informed compliance” as an “obligation on CBP to provide the public with information concerning the trade community’s responsibilities and rights under the customs and related laws.” The concept of “shared responsibility” is seen by the CBP as an obligation on “both the public and CBP” to share responsibility “in carrying out import requirements.” (See CBP’s October 23, 2019, notice of proposed modification and revocation of certain ruling letters dealing certain Jones Act issues.)

Given the various and sundry factual circumstances that are affected by CBP laws and regulations, complexities necessarily arise in interpreting them.

Hence, the existence of a procedure for the public to obtain guidance from the CBP through letter rulings addressing the interplay between a specific factual situation and Customs laws and regulations.

Q: How important is the Jones Act in the development of the maritime offshore industry?

KL: The Jones Act is here to stay in my view, at least in the near term, and therefore, will continue to be of paramount importance in the development of the maritime offshore wind industry, as it has been for the offshore oil and gas industry in the U.S. Compliance with the Jones Act has been and is critical.

Q: CBP recently proposed changes to the Jones Act, your thoughts?

KL: Charlie Papavizas has written a nice article on CBP’s October, 23, 2019, notice of proposed modifications and revocations of ruling letters dealing with certain Jones Act issues. I defer to Charlie’s comments on them. However, the CBP has been through this exercise before in 2009 and 2017, both of which ended without any modifications or revocations to my knowledge. Thus, whether the 2019 notice will result in any such modifications or revocations is an open question. I note that public comments to this notice were due by November 22, 2019.

On December 19, 2019, the CBP announced a change in its interpretation of section 27 of The Jones Act, which will affect U.S. offshore installations.

In the CBP’s new interpretation, “vessel equipment” is defined to include “all articles or physical resources serving to equip the vessel, including the implements used in the vessel’s operation or activity.”

Additionally, “[t]hese items may include those items that aid in the installation, inspection, repair, maintenance, surveying, positioning, modification, construction, decommissioning, drilling, completion, work-over, abandonment or other similar activities or operations of wells, seafloor or subsea infrastructure, flow lines, and surface production facilities.”

CBP also notes that “the fact that an item is returned to and departs with the vessel after an operation is completed, and is not left behind on the seabed, is a factor that weighs in favour of an item being classified as vessel equipment, but is not a sole determinative factor.”

This interpretation means that there is potentially for non-US-flagged vessels to deliver a greater variety of items to US offshore installations, and even an item that is permanently installed on the seabed may be "vessel equipment".

Hence, non-Jones Act vessels from a US port could transport items to offshore installations ranging from drilling platforms to wind farms.

While no specific examples are included with this new interpretation and effective for merchandise transported on or after February 17, 2020. Non-Jones Act vessel operators may apply for a ruling if they don’t want to violate the Jones Act.

Kirk M. Lyons and Charlie Papavizas join the speaker faculty at the 35th CMA Shipping event in Stamford, Connecticut.

Both Kirk and Charlie will be taking part in a debate on the Jones Act which is scheduled for April 1, 2020, in a panel discussion titled “The Jones Act - Joint Ventures for Offshore Wind?”

Read more on the agenda for CMA Shipping 2020 here.