A newly published report I’ve obtained from the International Marine Contractors Association (IMCA) isn’t likely to be pleasant reading for vessel owners in the Gulf of Mexico who hope to see international vessels banned from the region.
As OSJ has reported on a number of occasions, Customs & Border Patrol (CBP) has proposed reinterpreting the Jones Act in a way that would ban international vessels from the Gulf of Mexico. We’ve presented the arguments on both sides of the issue, but the IMCA report is pretty damning.
Going all the way back to 1989, the Office of Technology Assessment expressed strong reservations about further expanding cabotage restrictions on the outer continental shelf, and its reservations remain valid today.
IMCA says the report readily acknowledges that the coastwise qualified fleet is capable of supporting offshore activities in shallow water in the Gulf of Mexico, but for deepwater construction activity, beyond 1,000m, the coastwise qualified fleet is almost non-existent.
Worldwide, says IMCA, there are around 528 vessels technically capable of addressing the deepwater market, of which 33 are coastwise qualified. There are no coastwise qualified pipelay vessels, no coastwise qualified heavy lift vessels, and only one coastwise qualified well servicing vessel. There are nine light construction vessels and 23 survey vessels which are coastwise qualified. Even when some planned new vessels are delivered, the coastwise fleet will not meet the capability or capacity gaps.
“Despite plenty of opportunity, the coastwise sector has not shown intent or appetite to invest in the larger, higher value assets for the deepwater construction market,” says IMCA. “Nor have they shown the ambition to vertically integrate from vessel owners and marine service companies to marine contractors."
With the exception of the light construction vessel segment, US marine service providers have clearly not invested in the deepwater construction market, primarily because there are several barriers to entry. These include the fact that deepwater construction is a high risk business where work is conducted on a fixed price basis, and totally unlike the commodity markets which are day-rate businesses.
In addition to specialised ships, contractors need advanced engineering, project management and procurement skills to manage large sophisticated projects on a fixed price basis. This is a market for marine contractors not marine service companies.
The very specialised ships required for the deepwater construction market represent very high levels of unit investment, often incorporating the contractor’s intellectual property in the form of equipment design and layout. Unit investments can range from a lower end of US$200 million to an upper end of US$1-2 billion.
“Should the proposed CBP modifications and revocations take place the impact on business in the Gulf of Mexico could be catastrophic, simply because there would be no capacity to install the production facilities offshore,” IMCA says.
It notes that the big dollar investments in the Gulf of Mexico are targeted at the deepwater plays, as these represent the largest and most prolific oil and gas reservoirs. Should these be blocked by banning non-coastwise vessels, or costs increase, making them uneconomic, it is likely that these projects will not happen and the impact on the supply chain in the US could be disastrous.
The collateral effects of such a market collapse could be dire, says IMCA. “Onshore, subsea production hardware facilities, umbilical manufacturing plants, and fabrication yards could be empty, as could spoolbases. While some capacity may be used for exports to international markets, the longer-term response from those markets could well turn negative and protectionist.
“Offshore, the routine operations of existing facilities may be able to continue unaffected, but the CBP modifications and revocations could make the US activity uneconomical for marine contractors. It could take years for the coastwise sector to invest in deepwater assets to the necessary level, if ever, which could have dire consequences for any ambitions of growing Gulf of Mexico production.”
The potential impact and risks to industry look grossly out of all proportion to the intended consequences of the CBP’s modification and revocation strategy. A strategy intended to support a limited number of vessel owners, who are not contractors, could well have enormous unintended consequences for the whole US offshore oil and gas industry.