Competition in Coastal Seas: An Evaluation

of Foreign Maritime Activities in the

200-Mile EEZ

July 1989

NTIS order #PB89-224653
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Competition in Coastal Seas: An

Evaluation of Foreign Maritime Activities in the 200-Mile EEZ-Background Paper,

OTA-BP-O-55 (Washington, DC: U.S. Government Printing Office, July 1989).

Library of Congress Catalog Card Number 89-600720

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
Foreword

In recent years, the U.S. maritime industry has had increasing difficulty with foreign

competition for shipping and other services performed in coastal and offshore waters. Some

segments of the industry have been protected from such competition by “cabotage” laws that

require ships engaged in coastal trade to be domestically built and operated, but others have

not. The current variety and complexity of maritime activities in U.S. offshore waters has led

to a greater participation by foreign firms and a consequent weakening of certain U.S.

maritime firms.

The House Committee on Merchant Marine and Fisheries requested the Office of

Technology Assessment to evaluate the costs and benefits of extending cabotage laws to a

range of other maritime activities in the newly established 200-mile Exclusive Economic Zone

(EEZ). The objective was to determine whether such legislation could help the domestic

industry without causing other economic distortions.

This background paper reviews the status of the major sectors of the maritime industry

engaged in EEZ activities and notes the significant trends. Basic data on the major sectors were

first prepared for OTA by the Maritime Administration. OTA then conducted a survey of

industry and other interested parties and prepared the analyses in the paper. The analysis

indicates that extensions of cabotage laws would more likely result in shifts among industrial

sectors than to significant growth in U.S. maritime business overall. OTA appreciates the

valuable assistance in the preparation of this paper from numerous organizations and

individuals listed in Appendix A. However, OTA is solely responsible for the results of this

study.

..< Ill
OTA Project Staff: Competition in Coastal Seas

John Andelin, Assistant Director, OTA

Science, Information, and Natural Resources Division

Robert W. Niblock, Oceans and Environment Program Manager

Peter A. Johnson, Project Director

Administrative Staff

Kathleen A. Beil

Sally Van Aller

iv
Contents

Page

Chapter 1. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2. The Policy Setting . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. ... ... . . . . . . . . . 7

Current Sabotage Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Proposals To Change Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Chapter 3. Maritime Activities in the EEZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter 4. Analysis of Four Maritime Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Virgin Islands Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Offshore Lightening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Oil and Gas Exploration and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Commercial Cruise Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Chapter 5. Summary of Impacts From Extending Sabotage Policies. . . . . . . . . . . . . . . . . . . . . . . 29

Appendix A List of Respondents to OTA Request for Data and Comments Re:

Extending Cabotage Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Appendix B. The Effects of Sabotage Policy Changes on Other Maritime Sectors . . . . . . . . . . . 32

Figures

Figure Page

l. U.S. Oil Imports, 1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. Percent of U.S. Oil Imports From the Middle and Far East..... . . . . . . . . . . . . . . . . . . . . . . . . . 17

Tables

Table Page

l. EEZ Maritime Activities Selected for Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2. Virgin Islands Maritime Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3. Summary of Ship Voyages in the Virgin Islands/U.S. Refined Petroleum Product Trade,

Calendar Years 1977-87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4. Vessels Engaged in U.S. Offshore Lightening, 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

5. New Cruise Ships Entering The Market, 1988-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

6. Additional New Cruise Ships Entering The Market, 1990-92 . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

7. Scenario Projections .. .. .. .. .. .. .. .. .. .. ... .. .$....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

8, Potential Increases in Seafaring Jobs With Extensions of Cabotage Laws . . . . . . . . . . . . . . . . 29

9. Potential for U.S. Shipbuilding With Extensions of Sabotage Laws . . . . . . . . . . . . . . . . . . . . 29

10. Potential of National Security Enhancements With Extensions of Cabotage Laws . . . . . . . . 29

11. Potential Negative Impacts With Extensions of Cabotage Laws . . . . . . . . . . . . . . . . . . . . . . . . . 29
Photo credit: W of h#ami

The Port of Miami, shown here, is the base of operations for a fleet of the largest cruise vessels in the world, all operating under

foreign flags. The vessels generally operate from the United States to Caribbean ports and are not subject to laws governing

domestic, coastal shipping (sabotage”).
Chapter 1

Summary

Major maritime nations worldwide have a

long history of devising laws and regulations to

promote and protect their own merchant marine.

In decades, and even centuries, past, a strong

maritime industry has been a nation’s foundation for both military and economic security.

Even in the modem, high-tech world, ships

carry over 90 percent of international trade, and

the merchant marine remains an important

national resource for the transportation of cargo

and personnel for defense purposes.

One common approach to promote and protect the maritime industry has been to prohibit

foreign vessels from participating in domestic,

coastal (or ‘‘cabotage”) shipping. Most, if not

all, nations with a seafaring history have socalled cabotage laws that require ships engaged

in coastal trade to be domestically built, owned,

and operated. The United States is no exception.

U.S. laws define coastal trade, in general, as the

transportation of either passengers or cargo

between two points within the United States. In

general, no foreign vessels may engage in such

trades.

In recent times, the variety and complexity of

shipping and other maritime activities along our

coasts and in the nearby ocean have multiplied.

Past policies and definitions no longer apply

unambiguous y to many of these offshore operations. New laws, regulations, and interpretations

are in place that include some specific activities

and exclude others from the concept of cabotage

law. Some new policies have extended U.S.

jurisdiction over ocean zones adjacent to our

coasts. The United States now claims jurisdiction over all fisheries (except highly migratory

species like tuna) resources within a 200-mile

conservation zone, and all seabed mineral resources on the continental shelf off our coasts

and beyond to any point where extraction is

feasible. In 1983 a Presidential proclamation

created a 200-mile Exclusive Economic Zone

(EEZ) consistent with that established by many

other countries who are parties to the international Law of the Sea Convention (the United

States is not a signatory). In 1988, the President

issued a proclamation that extended our territorial sea from 3 miles to 12 miles. According to

an interpretation by the U.S. Customs Service,

this proclamation was for international purposes

only and does not affect the definition in

cabotage laws of a 3-mile territorial sea.

Within this framework of change, advocates

of the U.S. maritime industry have made proposals to expand the concepts of cabotage law or

to more carefully define the coverage of existing

laws in order to limit ‘unfair” foreign competition that has inevitably expanded its presence.

These proposals are subject to considerable

debate because a number of industry sectors

could experience economic effects from policies

that restrict international competition. In order

to better understand the costs and benefits from

several proposed policy changes, the House

Committee on Merchant Marine and Fisheries

asked the Office of Technology Assessment

(OTA) to study “the economic and national

security impacts of extending the cabotage

policy to all forms of commercial maritime

activities conducted within the Exclusive Economic Zone. ” In addition, they asked OTA to

‘‘assess the economic and national security

impact of extending the existing cabotage laws

to the Virgin Islands. ” This background paper

is the result of that requested study.

In its analysis, OTA found that foreign

competition has indeed become a factor in a

number of maritime activities within the EEZ.

This competition, however, has also been limited, both by traditional U.S. coast-wise shipping laws as well as several specific, newer

applications of those laws.

For example, while U.S. builders of offshore

oil platforms must compete with those of Korea

- 3 -
4 ● competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

and Singapore in the EEZ, the transportation

associated with the offshore oil industry is

protected from foreign competition by U.S.

Customs Service rulings, based on the Outer

Continental Shelf (OCS) Lands Act, that make

such transportation, in effect, coast-wise trade.

Also, while foreign competition for some shipping services within the EEZ is now allowed in

offshore lighteringl of foreign-flag tankers and

in trade with certain U.S. territories, these

activities have not represented major areas of

business growth. In addition, some newer laws

have restricted foreign competition in such

maritime activities as fish processing, offshore

dredging, waste disposal, and marine mining in

the EEZ.

Given this mixed situation, OTA reviewed

the status of foreign competition for all significant maritime activities in the EEZ and selected

four of these for further analysis of costs and

benefits that might occur if cabotage laws were

extended to them. OTA concluded that these

four sectors—the Virgin Islands trade, offshore

lightening, offshore oil and gas operations, and

commercial cruises are both commercially significant and possibly subject to substantial

impacts from cabotage laws. OTA also concluded that all other sectors had either minor

commercial significance or were already generally subject to cabotage law.

In its four-sector evaluation, OTA found that

very little hard data exist to project accurate,

specific impacts from several possible changes

to cabotage law that would tighten control over

foreign participation in trade activities. However, OTA has taken the limited data as well as

a variety of discussions and observations that

were offered by industry representatives and

produced the analyses in this report. In general,

the analyses show that only a few specific

benefits would result from the proposed

changes. The following summarizes OTA’s key

findings:

Of all the sectors evaluated, the commercial cruise industry-and especially the

subsector of one-day cruises to nowhere—

appears to have the most potential for

significant benefits for U.S. interests if

cabotage laws were applied. The business

consequences of such an action are uncertain, but the added costs, if the action were

successful, appear to be directed toward a

generally healthy industry.

Most industry respondents to OTA’s inquiries believe that the consequences of

extending cabotage laws will take the form

of an industry shift to alternatives that just

further avoid a commitment to U.S.-built

and U.S.-operated vessels. The results,

therefore, could lead to a decrease rather

than an increase in opportunities for the

U.S. maritime industry.

National security enhancements from extending cabotage laws could take the form

of possible additions to strategic sea-lift

capability and increases in seafaring employment that would result. If the most

favorable outcomes are assumed, the results could be U.S.-flag fleet additions of

up to 20 shuttle tankers and 10 passenger

ships. Both of these ship types are considered militarily useful. The Shipbuilding

Industrial Base could also benefit if these

vessels were built in U.S. yards.

There are some obvious direct costs to

other affected industries and to certain

consumers if cabotage laws were extended.

There are also some costs that are neither

obvious nor certain. All of these must be

carefully evaluated in each specific case in

order to arrive at a sound policy choice.

I~c Prw[ice of un]oading c~go from vety large ships into smaller vessels outside of a harbor, usually because the harbor or harbor entrance k

too shallow for the larger ships.
\
Chapter 2

The Policy Setting

CURRENT CABOTAGE POLICIES

Current U.S. cabotage and related laws apply to

water transportation between points in the United

States, including certain points on the Outer Continental Shelf (OCS), and to certain other marine

activities conducted within U.S. territorial waters or

the Exclusive Economic Zone (EEZ).l 2 The term

“cabotage,” when used with regard to vessels, is

usually defined to mean “coastal navigation and

trade, especially between ports of a country. ” In the

context of this report, however, ‘‘cabotage” is

defined to mean the set of national policies or

regulations that seek to reserve U.S. coast-wise

navigation and trade solely to vessels that are U.S.

built and operated.

The Customs Service enforces cabotage laws with

authority from section 27 of the Merchant Marine

Act of 1920 (the Jones Act), the Passenger Ship Act

of 1886, and the Towing Act of 1940. The inclusion

of certain points on the OCS within the realm of

coast-wise trade is codified in the 1978 Amendments to the OCS Lands Act of 1953, and the

inclusion of certain fishing vessels within the

definition of “cabotage” policies is covered under

Chapter 121 of Title 46, United States Code (46

U.S.C. ch. 121) and the Fisheries Conservation and

Management Act of 1976.3

In addition to the above, a 1983 Presidential

proclamation created a 200-mile EEZ that assured

U.S. jurisdiction over the resources contained within

waters of the zone as well as the seabed and subsoil

beneath them.4 A number of proposals since then

have sought to include this EEZ within the various

definitions of coast-wise trade and domestic maritime activities that could be subject to cabotage

policies. This report examines the effects of such

proposals to extend traditional cabotage policies by

reviewing the status and trends of several important

maritime activities and projecting the impacts that

may occur should policy changes be made.

The scope of current U.S. cabotage policy is

almost entirely based on the concept of transportation (of both cargo and passengers). Proposals to

extend this policy have taken two general forms.

One is to define more broadly, or more specifically,

certain transportation routes (or points of origin and

destination) so as to include trades previously

excluded. This is known as a zonal approach. It

could be considered an attempt to close ‘‘loopholes” in current policy. The second form is to

include other, nontransportation activities under the

concept of cabotage so as to require the use of U.S.

built and operated vessels. This is usually known as

a “functional approach. ” Such an approach has

already been taken in the case of commercial fishing

vessels. Both of these forms are examined in this

report. An example of the first may be to extend

cabotage to “cruises to nowhere” that begin and end

in U.S. ports and stay within the EEZ. An example

of the second may be to include certain oil-field

service vessels that operate within the EEZ under

cabotage policies.

PROPOSALS TO CHANGE

POLICIES

In a December 1987 report, and again in September 1988, the Commission on Merchant Marine and

Defense recommended the preservation, enforcement, and strengthening of current cabotage laws.5 6

The 1987 report further recommended that a study

be done of the costs and benefits of extending the

I “Extension of Cabotage to All Commercial Activities in the Exclusive Economic ZOIW,” report prepared for OTA by the U.S. Maritime

Administration, August 1988.

2Rev1ew of M~time ~lfi~ratlon rep~ contfied in letter to Pekr Johnson, OTA, from B. James Fritz, Chief, Canier Rulings Branch, U.S.

Customs Service, Nov. 14, 1988.

sM~k Aspin@I ‘‘The Coastwise Trade Meels the Exclusive fionomic zone.” winter 1988-89, vol. 31, No. 4, pp. 83-88.

qE~~~tive proclamation No. 5030 (1983).

5

4

‘s~ond Re@~ of tie Comlsslon on Mer~h~t M~ine ~d &fen~: R~ommendations, ” prepwed for the President ~d the Congress, Dw. 30,

1987, Washington, DC.

6“1’’h1rd Re~~ of tie Commission on Merch~t M~ne ad &fense: Findings of Fact md Conclusions, ” prepared for the Presldcm ~d lhC

Congress, Sept. 30, 1988, Washington, DC.

-7-
8 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

Jones Act to the Virgin Islands trade and to

commercial maritime activities within the 200-mile

EEZ. The Commission has suggested that if prospective results from these actions are seen to be

beneficial, Congress should pass appropriate legislation. The Commission’s 1987 report pointed to

loopholes and inconsistencies that allow profitable

foreign-vessel operations within our EEZ. In its

1988 report, the Commission stated it was skeptical

that many significant benefits would accrue from

extending cabotage coverage. Reports from domestic operators to the Commission reinforced this

conclusion.

In any case, proposals to strengthen and expand

U.S. cabotage laws are supported mainly by the

Commission’s work. In addition, OTA has received

a number of comments from industry supporters of

these proposals.7 Supporters argue that it is both

appropriate and beneficial (to U.S. operators) to

extend cabotagea laws. Most would limit the law’s

application to transportation of cargo and passengers, presumably because of historical precedent.

Several proponents also note benefits to the U.S.

shipbuilding industry from building more Jones Act

vessels. The severe downturn of commercial shipbuilding in recent years not only affects the U.S.

shipyard defense mobilization base but makes it

more difficult for those remaining U.S.-flag operators to get reliable and cost-effective construction

and repair work done. The common rationale for

policies to assist and strengthen the U.S. merchant

marine (U.S.-flag ship operators) and the U.S.

shipbuilding base is that of national security. The

Commission stresses the current shortfall in sea-lift

capacity to respond to a national emergency. The

most serious deficiency appears to be in seagoing

manpower, but projections for the year 2000 show a

substantial inability to meet defense requirements in

manpower, shipbuilding, and operational vessels as

well.

There is also substantial opposition to the notion

of expanding U.S. cabotage laws—usually expressed by those concerned about either the direct

effect upon other industries or the consumer, or the

negative impact on principles of free trade and open

competition. 8 In general, some direct effects upon

other industries or consumers can be estimated if it

is determined which path operators would take if

cabotage policies change. The effects could be in the

form of increased cost of services or a loss of one

service sector in favor of another. It is very difficult,

however, to trace the complete range of possible

effects when many options are available to react to

policy changes, and this is usually the case in coastal

or EEZ maritime services. For example, an increase

in costs for services to offshore oil operations could

just add to the normal cost of producing oil (and be

passed to consumers) or, if the costs are significant,

they could affect decisions about future investments

in offshore projects.

OTA has not analyzed the above wide range of

possible economic effects, Instead, we have chosen

some specific sectors and specific direct effects of

changes to cabotage that can be readily anticipated.

In addition, the question of how policies to

expand cabotage may be detrimental to notions of

free and open trade is obvious. If one accepts the

free-trade approach without qualification, then the

consequences of foreign competition must be accepted. Some U.S. industry sectors, thus, may not

survive. To assure their survival usually requires

some compromise in free trade principles.

Finally, the need for a strong maritime industry as

an arm of U.S. forces for defense can only be

questioned by taking a view of defense strategy

different from the current convention. OTA has not

analyzed defense strategies. If one accepts current

strategy, it is obvious that future military sea-lift

requirements require a national shipping and shipbuilding capability. At present that capability is

being met by an increase in the military support fleet

and reserve fleets rather than a substantial reliance

on U.S. commercial maritime capabilities. Those

that support policies to strengthen the U.S. merchant

marine-such as expanding cabotage--claim that

military needs can be more effectively and efficiently served this way. OTA has not analyzed the

relative costs and benefits of this approach. But, it is

clear that the added cost of any extension of

cabotage by government fiat will be borne by the

private sector even if the policy would be more

— efficient for the Nation as a whole. .

7S= ]Ist of ~sp~en~ (app, A of this report) to OTA’S inquiry about data and comments On Cahaw policl=.

‘Ibid.
Chapter 2—The Policy Setting ● 9

In sum, the basic policy debate about whether

expansion of certain cabotage laws would enhance

national security in the most efficient way hinges on

military strategy concepts that are beyond the scope

of this study. OTA will address, however, when

discussing specific maritime activities, what national security capabilities may be enhanced if the

U.S. Merchant Marine benefits from such support. In

addition, OTA will not evaluate pros and cons of

free-trade policies but will discuss the direct consequences of expanding cabotage coverage in certain

sectors, to the extent that analysis can clearly

identify them. This report, then, will focus on

clarifying those aspects of this complex debate that

are subject to analytical treatment. Other arguments

can be found in numerous past studies on the subject

and in the several reports of the Commission on

Merchant Maritime and Defense, itself.

Chapter 3

Maritime Activities in the EEZ

For the purposes of this study, OTA has selected

a number of important maritime industry sectors to

review and to investigate what, if any, impacts may

result from changes in current cabotage policies.

These sectors were selected because they represent

either a significant marine activity now in the EEZ

or a significant potential activity because these

sectors could be affected by and some proposed

changes in existing cabotage policies. Table 1 lists

the sectors.

OTA submitted its original list of EEZ activities

to the Maritime Administration and requested its

analysis and comments on the potential for U.S.

industry and for the application of cabotage policies

to those activities. The Maritime Administration

Table 1—EEZ Maritime Activities Selected

for Analysis

Commercial fisheries (selected activities)

Oil & gas exploration/development

Mobile drilling rigs

Service vessels/supply boats

Anchor handling boats

Launch barges/crane barges

Production platforms

Seismic survey boats

Commercial cruise vessels

Marine mining vessels

Dredging vessels

Waste disposal vessels

icebreaking vessels

Offshore Iightering

Vessels used in the Virgin Islands trade

Tankers/general cargo vessels

Passenger vessels/ferryboats

Trade in U.S. Pacific territories

SOURCE: office of Technology Assessment, 1989.

(MARAD) prepared a paper discussing each sector

and some of the specific cabotage applications and

loopholes.l OTA asked the U.S. Customs Service to

review the MARAD paper and received comments

and suggested additions.2 OTA also circulated the

MARAD paper and list of activities to a broad group

of industry representatives for comments. Both

industry and government respondents agreed that

the sectors in table 1, selected by OTA, were the

proper ones for analysis.

The activities selected range from offshore oil and

gas operations-a dominant industry in the EEZ

with substantial investment in offshore facilities-to

marine mining, a currently insignificant EEZ activity with uncertain potential. Also included is commercial fishing, with a long history of significant

EEZ activity from Alaska to the Gulf of Mexico to

Georges Banks, and waste disposal-a small activity at present with obvious growth potential. All of

the selected activities could be affected by certain

changes in cabotage policy, but OTA’s analysis

shows that some activities are already covered to a

large extent by cabotage laws, and others represent

only minor commercial potential.

These conclusions led OTA to divide the sectors

into two groups. The first group contains four

sectors—the Virgin Islands trade, offshore lightering, offshore oil and gas, and commercial cruise

vessels. OTA concluded that these would be most

vulnerable to changes in cabotage law. The four

sectors are discussed and analyzed in the following

section of this report. The remaining sectors would

not be so affected and are thus just briefly discussed

in the appendix to this report.

1“Extension of Cabotage to All Commercial Activities in the Exclusive Economic Zone,” report prepared for OTA by the U.S. Maritime

Ministration, August 1988.

2Rcv1ew of M~ltime A&ninis(ralion rew~ contained in letter to peter J~nson, OTA, from B. James Flitz, Chief, Carrier Rulings Branch, U.S.

Customs Service, Nov. 14, 1988.

-11-
Photto credit: Tr~”cal S- Co

Since the U.S. Virgin Islands trade is exempt from cabotage laws, this foreign-flag operator can compete for the business.
Chapter 4

Analysis of Four Maritime Sectors

VIRGIN ISLANDS TRADE

Current Activities and Trends

All trade with the U.S. Virgin Islands is exempt

from cabotage laws until declared otherwise by

Presidential proclamation (46 app. U.S.C. 877).1

This has led a number of ship operators and others

to employ foreign-flag vessels in trades there when

it made economic sense

For example, about 8 percent of Alaskan North

Slope crude oil is transported in noncoast-wisequalified (foreign-flag) vessels to the Virgin Islands

where it is refined and then the refined products are

shipped onward to the U.S. mainland. An oil refinery

on St. Croix receives crude oil shipments from both

Alaska and overseas and produces oil products

mainly for shipment to the U.S. east coast. As the

Jones Act has been interpreted, both legs of the

Alaska to Virgin Islands to U.S. east coast voyage

are exempt from cabotage and maybe accomplished

with foreign-flag vessels because crude oil is considered to be manufactured or processed into a new and

different product in the Virgin Islands.2 If the

coast-wise laws were changed and made applicable

to the Virgin Islands, then both legs of this voyage

would have to be in coast-wise-qualified vessels.

Because of the above possible effect on the

petroleum trade in the Virgin Islands and because a

number of other trades would be affected by changes

in cabotage policies in this instance, OTA investigated some of the costs and benefits of such changes.

In addition to the petroleum trade, two other

trades are a significant factor in the Virgin Islands—

general cargo (mostly imports), and cruise (and

passenger) shipping. The economy of the Virgin

Islands is closely tied to these maritime activities.

The major industry there is tourism and a large

portion of tourists (about two-thirds in 1987) arrive

via cruise ships. In addition, a whole range of general

cargo and consumer goods must be brought to the

Virgin Islands to support other sectors of the

economy. Also, inter-island passenger movements

are recently being served more and more by a fleet

of high-speed ferries.3

As noted above, the Virgin Islands economy has

benefited from having its maritime sector exempt

from cabotage laws. The exemption allows the

inter-island ferries to be foreign-built. It allows

foreign-flag cargo ships to carry consumer goods

from the U.S. mainland. And, it was a major factor

in the decision by Hess Oil to build a large oil

refinery there.4

Table 2 illustrates the current situation regarding

the three major maritime trades. For the general

cargo trade, it can be seen that part is shipped via

Puerto Rico (where cabotage laws are applied)--

usually aboard U.S. flag ships or tug-barge units;

part is carried aboard foreign-flag vessels direct with

mainland U.S. ports. One foreign-flag operator

began offering direct service to the U.S. mainland in

1976 with a fleet of small, shallow-draft, roll-on/rolloff (Ro/Ro) vessels as well as some larger, heavy-lift

ships uniquely suited to the Caribbean trade. This

operation has grown and is considered highly

efficient.

With regard to cruise shipping, all the major

cruise ships calling at the Virgin Islands are foreignflag and the 1.2 million cruise ship passenger

arrivals in 1987 and 1988 is almost twice the number

of arrivals in 1985. These passengers account for a

major portion of the over $600 million in annual

visitor expenditures estimated by the Virgin Islands

port Authority.

The petroleum trade shown in table 2 is also

economically significant for the Virgin Islands.

Table 3 shows the past 10-year trends in the refined

product portion of this trade and the participation by

U.S. and foreign-flag operators. In 1987 the petroleum product trade was about 60 percent of the

tonnage shipped in 1977, and U.S.-flag vessels

IJ~es B. Friti, ~ef,Ctier Rulings Br~ch, U.S. Customs Semice, Review of Maritime Administration report WIttintd in ktter tO peter

Johnson, OTA, NOV. 14, 1988.

2SW A~ric~ M~it~e Associarwn v, Bhunenrhal, 592 F. 2d 1156 (DC Cir. 1978), cert. den. 441 U.S. 943 (19’79).

J“ lqjg v@n ]S]ands Port Authority Directory, ” Virgin Islands, 1988.

4FriU, Op. cit., fOOmOte 1.

–13–
14 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

Table 2—Virgin Islands Maritime Trade

Freight (general cargo) services:

● All regular services: fully trailerized/containerized

. Part of service: is transshipped through Puerto Rico to U.S.

mainland

—two vessel sailings per week

—three trailer barge sailings per week

. Part of service: direct to ports in Florida

—six weekly sailings by roll-on/roll-off or lift-on/lift-off vessels

. In 1987: 1.1 million tons of general cargo was handled through

Virgin Island ports

Passenger services:

● In 1987: 1.2 million cruise ship passenger arrivals (two-thirds of

total tourists to Virgin Islands) on 1,300 cruise ship port calls

Petroleum trade:

● Principal trade is crude oil to the Hess Oil Refinery in St. Croix

and oil products from it to the U.S. mainland.

. In 1988: Approximately 25 to 30 million barrels of oil were

shipped in and out.

SOURCES: 1988 Virgin Islands Port Authority Diractw; U.S. Track With P.R. and U.S.

Possassiorrs, Buraau of Census, FTSOWMay 1988.

carried about 44 percent of the tons shipped. The

U.S.-flag participation in this trade has varied

between 20 and 50 percent over the past 10 years.

The crude oil shipments to the Virgin Islands is

currently about 5.7 million tons per year and moves

exclusively in large, foreign-flag tankers (21 to 28

voyages per year).

Impacts

If cabotage laws are applied to maritime trade

with the Virgin Islands, there will obviously be

impacts on both the island’s economy and on ship

operators either engaged in that trade or suddenly in

a position to participate. The data available to OTA

are not complete enough to make precise estimates

of these impacts but can be used to make general

conclusions.

Changes in any of the maritime sectors discussed

above would affect the island’s economy. Responding to an OTA inquiry, the Executive Director of the

Virgin Islands Port Authority said “the loss of said

[cabotage] exemption would have a devastatingly

negative effect on the economy of the territory-we

are totally opposed to such a concept. ”5 Presumably

the negative effects could include: increased costs of

imported consumer goods, consequent increase in

costs of tourist services, reduction in tourist arrivals

from cruise ships, increase in cost of other passengervessel services, and increased costs of certain major

industries such as the Hess Oil Refinery. If these cost

increases are substantial, they could affect commercial decisions to locate in the Virgin Islands or to

invest in future enterprises.

One U.S.-based ship operator who has benefited

from foreign-flag vessels between the U.S. mainland

and the Virgin Islands now employs over 250 people

in the United States mainland and 110 in the Virgin

Islands. This operator uses the Virgin Islands as a

base for his network of Caribbean shipping service,

which has seen substantial recent growth. Such an

operation is a typical example of seafaring jobs

apparently lost to foreign competition in exchange

for benefits to a domestically owned firm who would

usually employ U.S. citizens in most of the management and shore-based positions. This operator believes that he can offer a more efficient service in this

way and, at the same time, contribute effectively to

what he considers the U.S. maritime industry.6

Other firms, also engaged in the same type of

trade with the Virgin Islands, take the opposite stand

and would advocate changes in cabotage laws to

include coverage of the Virgin Islands because they

believe it to be in the best interests of the United

States. They believe that such a change would put all

ship operators serving the Virgin Islands on an equal

competitive footing and that resulting economic

impacts on the Virgin Islands would be minimal.7

A very rough estimate of seagoing jobs involved

with two of the Virgin Islands trades-petroleum

products and general cargo service-can be made

with available data. For the petroleum products

trade, the Maritime Administration estimates that

existing U.S.-flag operators employ about 1(K) in

seafaring jobs and that these firms carry just under

one half of the trade.8 Therefore, if all trade was in

U.S.-flag vessels, 100+ new jobs would be created

for U.S. seamen. There is also a possibility of

5John E, H~ding, Ex~utive Director, Virgin Islands Port Authority, letter to Peter Johnson, OTA, ~L 19, 1988.

6E”genc A Yourch, Ex~utive s~ret~, Federation of American Controlled Shipping, to peter Johnson, OTA, ~t. M 1988.

7Jack M. pwk, vice Resident, Gowley Maritime Corp., to Peter Johnson, OTA, Dec. 29, 19*8.

Ilu.s Mwltime ~mlnls~atlon, “E~[enSion of cabotagc to AII Cornrnercia] ~tivitics in ~ Exclusive EcortOrnkc Zone,”’ report prepared fw OTA,

August 1988.
Chapter 4--Analysis of Four Maritime Sectors ● 15

Table Summary of Ship Voyages in the Virgin lslands/U.S. Refined Petroleum Product Trade,

Calendar Years 1977-87

Number of vessels

Tonnage Tonnage by flag (percent) in trade (voyages)

Year index a Us . Foreign flag Us . Foreign flag

1977 . . . . . . . . . . . . . . . . . . . . , . .. ...... 1.00 (26) (74) 53 (180) 154 (534)

1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.99 (20) (80) 50 (200) 127 (598)

1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.94 (41) (59) 71 (277) 112 (419)

1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.80 (48) (52) 59 (222) 64 (373)

1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.77 (31) (69) 46(150) 139(431)

1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.68 (29) (71) 24(124) 126(323)

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.62 (43) (57) 17(159) 89(228)

1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.63 (51) (49) 27(154) 58(207)

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.58 (47) (53) 34(175) 80(191)

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49 (48) (52) 21 (140) 76(168)

1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.60 (44) (56) 27(165) 88(220)

alW7tonnagausedfi6basa.

NOTE: TNstabladoasnotkIcluds crudaolf sh@ner’U6f romAJaska totha Vlrginlslands, aUofwhich mkasplace infofeign-flagvassals.

SOURCE: Oapamnentoftfw Traasuv, U.S. Customs Sewica, Bdls*f-bdngs bwri~SNpenW.

additional U.S. seafaring jobs if crude oil shipments

from Alaska to the Virgin Islands were subject to

cabotage laws. For the general cargo trade, the

current operators of foreign-flag vessels with a total

of about six weekly sailings would probably require

somewhat less than 100 seafaring jobs, and these

may be translated, under the right circumstances, to

new jobs for U.S. seamen. The data for cruise vessel

operations are not sufficient to make similar partial

conclusions.

OTA concludes that relative costs and benefits to

different sectors of the economy due to changes in

the Virgin Islands cabotage laws would not lead to

clear support for any one position. It is not even clear

that extension of cabotage to the Virgin Islands

would result in a substitution of U.S. flag-ship

operations for current foreign-flag operations—the

economics could force other options (such as merely

a reduction in refinery throughput). If the results

were the employment of U.S.-flag substitute vessels,

these vessels would be a militarily useful type (e.g.,

product tankers and heavy lift or roll-on/roll-off

cargo ships) and could benefit national security.

However, at least one foreign-flag operator points

out that, as a U.S. based and owned company, his

vessels could also be enlisted to meet defense sea-lift

requirements.

OFFSHORE LIGHTENING

Current Activities and Trends

The United States imports over 7 million barrels

per day of crude oil and petroleum products to serve

the Nation’s energy demand.9 Many of these imports

come from countries in the Middle East or Africa

where long transport distances favor the use of very

large tankers that, because of their deep draft, cannot

enter U.S. ports. It has become common practice to

transfer the oil from the large tankers to smaller ones

offshore and then bring the oil in these smaller

tankers to ports on the U.S. gulf or Atlantic coasts

where major refineries or terminals are located. This

type of operation is known as ‘lightening. ” In recent

years, about 100 foreign-flag shuttle tankers have

been engaged in these lightening operations in U.S.

offshore waters.10 Other kinds of offshore lightening

operations have also been done with foreign-flag

vessels on a much smaller scale. Some in the U.S.

maritime industry have argued that vessels engaged

in lightening within the EEZ should be subject to

cabotage laws.

Under present law, if the above lightening of

imports is done within U.S. territorial waters (now a

3-mile zone), the shuttle tankers must be coast-wisequalified (U.S. flag). However, if the lightering takes

9u.s. ~p~ent of Energy, Energy Information Office, “Annuai Energy Outlook 1989, Wifh Projections to 2CKXI,” Washington, DC, 1989.

1~.s, M~tjme Administration, op. cit., footnote 8.
16 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

mom Uvdt: CM hml~ cap.

An offshore Iightering operation using foreign-flag shuttle

tankers to unload larger vessels in the EEZ and transport

oil to U.S. ports. Cabotage laws do not apply to these

vessels.

place outside territorial waters, they may be foreignflag. Crude oil importers and others have found it

economically beneficial to employ foreign-flag lightering vessels and conduct the lightening outside U.S.

territorial waters. If cabotage laws were extended to

cover these operations within the EEZ, it could have

the effect of requiring the use of U.S.-flag vessels or

force the operators to alter their practices to avoid

such restrictions.

Oil imports to the United States peaked in 1977

and then decreased until 1983 when they began to

grow again. As shown in figure 1, 1988 imports

averaged 7.1 million barrels per day and by 1990

projections indicate imports to be about 8.3 million

barrels per day—approaching the record highs of the

late 1970s. The Department of Energy’s most recent

forecast is for imports to grow to 11 million barrels

per day by 2000.

U.S. imports are from a variety of foreign sources.

Those that influence offshore lightening activity are

generally from the Middle East and Far East, where

voyage distances make it most economical to use

very large crude carriers (VLCCs) and ultra large

Figure 1—U.S. Oil Imports, 197040

SOURCE: Offke of T$dvdogy Assessment Energy Informstbn OfIke, Dqmmwntof

Erqy, 1989.

crude carriers (ULCCs). Figure 2 shows that, in

1980, over 35 percent of imports were in that

category, while the 1985 percentage had decreased

to 20 percent but is rising again. Generally, as total

imports grow, so will the share of imports from the

Middle East because that region has, by far, the

greatest capacity for production growth.

These factors point toward current and future

growth in offshore lightering as a likely trend.

Fearnleys indicates that, in 1987, 20 percent of oil

imports to the United States were in vessels over

200,000 deadweight tons (dwt).ll These vessels

would have to be lightered unless they used an

offshore port to unload. If imports actually grow to

11 million barrels per day by 2000, and assuming 20

to 30 percent of these imports are in VLCCs or

ULCCs, the market for offshore lightening could

double by 2000--from about 1 million barrels per

day in 1988.

The American Institute of Merchant Shipping

reported to OTA that approximately 80 to 90

foreign-flag tankers in the 80,000 dwt range periodically engage in offshore lightening.12 These vessels

lighter crude oil from VLCCs and ULCCs, carrying

crude from the Persian Gulf and West Africa to the

U.S. east and gulf coasts. The lightening is generally

done 60 miles or more offshore. Most of the

llwOr/d BUU Tr~eS, 1987 (OS1O, Norway: Fearrdeys, November 1988).

IZEme~~ J. Comtio, ~e~ident, Amcfic~ institute of Merch~t shipping, w~ilin~on, ~, letter to Peter Johnson, OTA, (h. 31, 1988.
Chapter 4--Analysis of Four Maritime Sectors ● 17

Figure 2—Percent of U.S. Oil Imports From

the Middle and Far East

40

30

20

10

0

1970 1975 1980 1985 1990

Year (est.)

SOURCE: Energy information Offka, Oapartment of Enargy, 1989.

foreign-flag tankers used in the lightening service are

chartered in the spot market after delivering a

long-haul cargo to a U.S. port. Many of the vessels

are secured for only one lightening operation of 3 to

4 days, or until they can contract another long-haul

cargo. Although several lightening vessels are maintained by some companies on long-term contract,

there is generally insufficient lightening business to

support their operation full time. Consequently,

while waiting for lightening business, the vessels

undertake short voyages, typically delivering crude

oil from Mexico to the U.S. gulf coast.

This estimate is supported by data collected and

analyzed by the Maritime Administration (MARAD)

who reported that in 1987, 110 tankships, ranging

from 4,900 to 136,800 dwt, were engaged in offshore

lightening. MARAD’s Office of Trade Analysis and

Insurance, Division of Statistics, receives computer

tapes from the Bureau of the Census which it uses to

generate reports of individual landings by each

shuttle vessel. Table 4 summarizes these data for

1987. It shows the total number of foreign-flag

tankers, by registry, area of operation, and number of

lightening voyages for 1987.

The focus of this lightering activity is in the gulf

coast. The North Atlantic and Pacific coasts are a

distant second and third. The industry has reported

to OTA that lightening appears to be a good business

Table 4--Vessels Engaged in U.S. Offshore

Lightening, 1987

Area of Number of Number of

operation registry vessels voyages

North Atlantic coast:

Liberia . . . . . . . . . . . . . . . . . . . . . 7 11

Panama . . . . . . . . . . . . . . . . . . . 2 5

Bahamas . . . . . . . . . . . . . . . . . . 2 4

Greece . . . . . . . . . . . . . . . . . . . . 1 2

Singapore . . . . . . . . . . . . . . . . . 1 1

Subtotals . . . . . . . . . . . . . . . . . 13 23

Gulf coast:

Liberia ... , . . . . . . . . . . . . . . . . . 41

United States . . . . . . . . . . . . . . . 19a

Panama . . . . . . . . . . . . . . . . . . . 15

Bahamas . . . . . . . . . . . . . . . . . . 10

Japan . . . . . . . . . . . . . . . . . . . . . 5

Greece . . . . . . . . . . . . . . . . . . . . 5

United Kingdom . . . . . . . . . . . . . 3

Singapore . . . . . . . . . . . . . . . . . 3

Cyprus ... ... ... ... ... ... .$ . 2

France . . . . . . . . . . . . . . . . . . . . . 2

Subtotals . . . . . . . . . . . . . . . . . 105

534

55b

51

185

31

13

5

4

15

3

896

Pacific coast:

Panama . . . . . . . . . . . . . . . . . . . 1 1

South Korea . . . . . . . . . . . . . . . . 1 1

Japan . . . . . . . . . . . . . . . . . . . . . 1 1

Bahamas . . . . . . . . . . . . . . . . . . 1 1

Poland . . . . . . . . . . . . . . . . . . . . 1 1

Subtotals . . . . . . . . . . . . . . . . . 5 5

Totals ., ., . . . . . . . . . . . . . 123 924

al~~s 9 bfWYS.

%dJdas 16 barns.

SWRCE: Marittme Administration, 1986.

opportunity in the gulf coast. One west coast

operator, however, did not see lightering as a

profitable opportunity .13

One of the major lightening firms in the gulf

repot-ted the following to OTA:

The Persian Gulf Oil share of imports has been

increasing. It generally arrives in very large crude

carriers (VLCCs) and ultra large crude carriers

(ULCCs), from 250,000 deadweight tons to 500,000

deadweight tons. These vessels draw from 70 to 90

feet of draft when fully laden and cannot approach

closer to the U.S. gulf coastline than about 50 to 60

miles because of the shallow water along the coast.

Most U.S. gulf ports cannot accommodate vessels

drawing more than 40 feet fresh water, except for

— — Corpus Christi, Texas, which can take 45 feet fresh

13yoWch, op. cit., footnok 6.
18 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

water. However, most VLCCs and ULCCs are too

large to enter port, regardless of draft considerations.

These vessels are lightered by a series of smaller

ships of about 80,000 deadweight tons each. The

VLCC is lightered of its cargo after which it proceeds

back to load another cargo. It does not enter a U.S.

port.

West African oil typically arrives in vessels of

about 140,000 deadweight tons capacity. These

vessels will lighter off only enough cargo to enable

them to reach 40 feet draft, after which they enter

port to pump off their remaining cargo.

Most of the lightening vessels used in the Gulf of

Mexico are chartered in the spot market. These ships

have usually just delivered a cargo to a U.S. Port and

accept lightening business only until they can fix

another long haul cargo. Typically, lightening vessels are fixed for a period of from 3 days upwards to

a term commitment of 30 or 60 days. Many vessels

are fixed for only one lightening operation or about

3 to 4 days.

The availability of numerous foreign ships that

have completed their voyages in the U.S. gulf coast

ports helps to make lightening economically viable.

Although we maintain one or two vessels on long

term contract, there is often insufficient lightering

business to support their operation so that suitable

short distance voyages must be found to fill the

gap.

14

The Cost of Lightening

It is difficult to determine the cost of these

lightening operations because detailed and comprehensive industry data are not available and MARAD

has not prepared independent estimates. From discussions with industry representatives, OTA believes that about two-thirds of offshore lightening is

done by independent operators (contractors) and

one-third is done by major oil companies for their

own account. One independent operator reported to

OTA that current lightening costs were about $0.17

to $0.22 per barrel including vessels and equipment.

Another reported that the added costs of moving a

lightening operation from (about) 50 miles offshore

to 200 miles offshore would be about $0.07 per

barrel, but the added cost of lightening (at 50 miles)

using U.S.-flag vessels as opposed to foreign-flag

vessels would be about $0.16 per barrel.

Seafaring Jobs

The number of seafaring jobs associated with

foreign vessels in lightening operations can only be

roughly estimated from the limited data available.

Table 4 shows about 100 foreign-flag vessels

engaged in lightening in 1987 and over 900 voyages.

If you assume 5 to 7 days per voyage, including

down time and an average of 20-person crews for

each vessel, then about 250 to 350 seafaring jobs

would be involved. Another way to estimate seafaring jobs associated with lightening, confining the

above, is as follows: One lightening operator reported to OTA that 3 of their vessels would transport

somewhat over 100 million barrels per year. At

current lightening rates and 20-person crews, this

translates into about 200 seafaring jobs.15

Other Lightening

While not on the same scale a.. oil imports

lightening, other lightening of vessels too large to

enter U.S. ports also takes place. Many of these

operations involve exports of bulk cargo. Large bulk

carriers used in the U.S. export of grain and coal

from east coast and Gulf of Mexico ports often

cannot be fully loaded at dock and are fully loaded

offshore using lightening barges or vessels. In

addition, when developed harbors are not available,

such as in the case of a new mining operation in

northern Alaska, the product is “transferred from

shallow-draft barges to deep-draft bulk carriers

offshore. OTA has no data on the extent of foreign

operators in these trades, but it is considered minor

at present.

Impacts

The extension of cabotage laws to any offshore

lightening activity within the 200 EEZ would

undoubtedly have a major impact on the petroleum

lightening industry. If these operators switched to the

use of (coast-wise-qualified) U.S.-flag vessels, the

demand for U.S.-built tankers and U.S. operators

would increase. Considering the above estimates of

lightening volume, the resulting demand would be

approximately the equivalent of eighteen 80,000 dwt

14Ro&~ CWWn, OMI petro]j~ Corp., Houston, TX, letter to Peter Johnson, OTA, Feb. 8, 1989.

15]bid0
Chapter 4--Analysis of Four Maritime Sectors ● 19

shuttle tankers and 200 to 350 seagoing jobs. In

comparison to the existing Jones Act fleet, this is

over 18 percent of the tanker tonnage and about 9

percent of the jobs.

In reality, however, more numbers of tankers and

personnel are used in current operations than are

needed because operators follow the practice of

“voyaging out” to short Mexican or Caribbean

trades to fill the time lost waiting for lightening trips.

It is difficult to envision higher cost U.S.-flag

vessels finding employment in short foreign trades

and, therefore, U.S.-flag lightening operations may

experience large amounts of down time.

The most likely consequence of extending cabotage laws to lightening in the EEZ, however, would

be a move by shippers to another alternative-not

employing U.S. vessels. Several, in the industry,

reported to OTA that there are a number of

alternatives much more attractive, economically,

than using U.S.-flag vessels for lightening.

Even the American Institute of Merchant Shipping (AIMS), one of the foremost proponents of the

Jones Act, made the following statement:

Rather than investing in new U.S.-flag tankers if

the Jones Act were extended to the EEZ to cover

lightering, numerous alternatives could be used.

First, and most probable, the lightering operations

would move beyond the EEZ. It is simply more

economical to continue lightening further offshore

than to invest in new Jones Act qualified tankers,

Second, crude oil could be imported in smaller crude

carriers that do not require lightening. Third, deepwater ports such as the Louisiana Offshore Oil

Platform (LOOP) could be built to accommodate the

larger crude carriers without lightening. Fourth,

transshipment terminals in the Caribbean area could

be used in lieu of lightening. Therefore, although

AIMS is one of the foremost proponents of the Jones

Act, we do not favor its extension to cover lightering

activities within the EEZ because no new trades for

U.S. flag vessels would be created and the cost of oil

to U.S. consumers would be increased.16

OTA concludes that an extension of cabotage

law to include lightening operations within the

EEZ would not result in substantial incentives to

build and operate U.S.-flag shuttle tankers for

this trade. A more likely result would be changes

that would be less costly (such as lightering

beyond 200 miles) and would still employ foreign

vessels. These changes would extract a cost—

increases in lightening costs may range from 25 to 50

percent (or from $0.05 to $0.10 per barrel). And,

these costs would normally be passed to the consumer.

OIL AND GAS EXPLORATION AND

DEVELOPMENT

Current Activities and Trends

The offshore oil and gas industry has become a

significant marine activity in U.S. offshore waters

over the past 25 years. While oil and gas exploration

has taken place in all regions of the EEZ, the most

significant regions today (and the only EEZ regions

with petroleum production) are the Gulf of Mexico

and offshore California.

A variety of types and sizes of vessels are engaged

in offshore oil and gas activities. These include:

mobile drilling rigs; production platforms and facilities; supply vessels; tugs and other support vessels;

seismic vessels and various barges for pipe laying;

launching structures; and other work. During 1988,

about 250 mobile drilling rigs were located in U.S.

offshore waters. In addition, over 900 U.S. flag

supply vessels and other support craft were available

in 1988, and most of them were in U.S. waters, Over

3,500 oil and gas production platforms are installed

in the Gulf of Mexico and 20 large platforms are

operating in the Pacific EEZ.17

Only the transportation aspect of this industry is

covered under current cabotage laws that require

U.S. built and operated vessels. However, the Outer

Continental Shelf Lands Act (OCSLA) extends the

laws of the United States to the subsoil and seabed

of the OCS and to all installations and other devices

permanently or temporarily attached to the seabed

for the purposes of exploring for, developing, or

producing resources of the seabed.18 The effect of that

i~om~o, op. cit., footnote 12.

17u.s, Congress, office of Technology As=ments ‘‘An Analysis of Buy-America Proposals for Offshore Drilling Rigs and Production Facilities,”

OTA staff paper, Washington, DC, June 1988.

lgThe outer continen~] Shelf Lands Act of 1953, a. amended (43 U.S.C. ls3J(a)l.
20 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

production platform may be transported from a U.S.

port to a “pristine site” on the OCS and the

transportation vessel would not be subject to cabotage laws.19

All transportation of merchandise or passengers

between OCS sites considered to be “points in the

U. S.” as defined in the OCSLA, or between these

points and any other U.S. points, must take place in

U.S. built, owned, and coast-wise-documented vessels. Of the various types of vessels employed in

offshore oil activities, the ones most commonly

involved in the coast-wise trade as defined above are

tugs, supply boats, crew boats, and most launch

barges. Exceptions to this policy for certain launch

barges, however, have been enacted into law.

In contrast to the above, vessels engaged in

nontransportation activities in the offshore oil industry (drilling rigs, seismic vessels, anchor handling

vessels, crane barges, production platforms, etc.) are

not subject to cabotage if they do not engage in

transportation.

If cabotage policies were extended to cover all

transportation activities within the EEZ, the effect

on the offshore oil and gas industry would be

minimal except for the case where movements of

rigs, equipment, or platforms to ‘‘pristine sites” are

concerned. As stated above, U.S. Customs Service

interpretations of the OCSLA excludes “pristine

sites” from its definition of ‘points in the U. S.” The

same would hold true for points on the high seas not

presently considered “points in the U. S.” It should

also be noted that, if cabotage laws are amended,

consideration should be given to also amending the

OCSLA because there is a difference in the definitions of coast-wise locations between the concept of

the OCS and that of the 200-mile EEZ.

There could be a substantial impact on the

offshore oil and gas industry, however, if cabotage

policies were extended to cover all activities in this

sector, not just those involving transportation. The

fleets of vessels possibly affected could include

offshore platforms, mobile drilling rigs, seismic

vessels, anchor handling vessels, and others. While

many of these are now U.S. owned and operated,

there is no requirement for them to be. Many U.S.

vessels of these types also operate around the world

19Fri~, op. cit., fOOtllOlc 1.
Chapter 4--Analysis of Four Maritime Sectors ● 21

and in the coastal waters of other nations. The

ownership and registry mix of such vessels operating in the U.S. EEZ, as well as the EEZ of other

nations, can vary substantially over time, and it is

difficult to make an accurate projection of this mix.

To a large extent, the questions of cabotage law

extension to include the two principal offshore oil

and gas sectors not engaged in transportation are

addressed in a recent OTA staff paper, An Analysis

of Buy-America Proposals for Offshore Drilling

Rigs and Production Facilities, published in June

1988.20 That report also included a review and

outlook of the U.S. offshore oil industry. Some

pertinent findings from that OTA report are:

●

●

●

●

Trends--U.S. rig and platform builders have

experienced serious reductions in their business over the past 5 years caused mainly by a

major slump in offshore oil and gas exploration

and development work, though overseas competition for the construction of rigs and platforms has continued to grow. Substantial foreign content is now evident in some of the

largest and most technically advanced equipment.

Outlook--There is a reasonable indication of a

gradual upturn in U.S. offshore oil and gas

exploration and development activities over the

next few years and of a recovery from the

extremely low levels of 1987. The Gulf of

Mexico is the region with the greatest near-term

potential for increased OCS activity.

Mobile Drilling Rigs—At the present time, no

mobile drilling rigs are being constructed in the

United States, and only a few are being built

overseas (Far East shipyards). The oversupply

of mobile drilling rigs in the world fleet makes

it unlikely that new rig construction activity

will soon revive. Near-term rig construction

potential in the United States appears to be

focused on upgrading or modifying existing

rigs and in building a few specialized designs

for deepwater or harsh environment applications.

Production Platforms and Facilities—Using a

number of assumptions about future OCS

development investment, OTA projected that

between $130 million and $650 million per

year will be invested in OCS platform and

facility fabrication over the next decade. The

possibility of foreign construction of those

platforms could have the effect of putting at risk

several thousand direct labor jobs in the U.S.

fabrication industry-one of a number of important industry sectors engaged in OCS development. A significant number of indirect and

induced jobs would also be affected. The jobs

most at risk appear to be those associated with

construction of deepwater production systems--

employing the more advanced technologies

and representing about one-half of the future

market.

Geophysical Survey Vessels

Considering the above observations and the

present status of cabotage coverage in offshore oil

and gas activities, one other sector could be subject

to analysis-geophysical survey vessels.

In reply to an OTA inquiry, the International

Association of Geophysical Contractors (IAGC)

conducted a survey of its members and compiled the

following information on current activities and

trends in the industry. In general, members consider

the condition of the industry operating in U.S.

offshore waters to be poor and the outlook to be for

no growth until oil prices rise significantly .21

About 30 geophysical survey vessels are now

operating in U.S. waters and the operators employ

approximately 600 persons in seagoing positions

aboard those vessels. This is an international industry and those same companies operate over 40

vessels in foreign waters and employ over 2,700

persons in both merchant marine and scientific

positions aboard a total of 71 vessels, The IAGC

survey indicated that 82 percent of the persons

employed aboard seismic vessels in the EEZ in

November 1988 were U.S. nationals.

The vessels currently operating have been built in

both the United States and abroad-60 percent of

those in U.S. operations have been built in the

United States. A considerable amount of U. S.-

manufactured scientific equipment is used aboard

these survey vessels, even if built abroad. The range

200TA, op, cit., footnote 17.

21Na~m s, Berger~.~t, COMW] t. [he ]ntcmatlona] As~lal]on of Geophysical contractors, letter to Peter JOhIWXI, OTA, &c. 19, 1988.
22 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

of replacement costs for these vessels, including

scientific gear, is from $7 million to $14 million

each.

A specific exclusion from cabotage laws

geophysical survey vessels is provided under

Oceanographic Research Vessel Act (ORVAU.S.C. app. 441-445, see sec. 443).

Impacts

for

the

46

The direct effects of extending cabotage law to the

U.S. offshore oil and gas activities not now covered

would vary depending on the specific activity.

Drilling Rigs and Platforms

Many proponents of extending cabotage to offshore oil and gas activities do not include drilling

rigs and platforms in the same category because they

have historically been considered outside of the

traditional maritime industry. If they were included,

however, the impacts would most likely be the same

as those considered in the OTA “Buy America”

study.22 In that study OTA found strong disagreements about the effects of implementing “Buy

America” legislative proposals for OCS vessels,

platforms, and facilities but reasonable agreement

about industry trends without such legislation.

Existing U.S. platform fabricators-the one industry

segment that OTA investigated in detail-remain

viable and competitive in the Gulf of Mexico region

but face an uncertain future in the face of low-cost,

Far East competition. Current trends “indicate a

growing international participation in all aspects of

OCS development activities that probably can only

be deterred by some form of government intervention. The remaining question is the general policy

question about the nature and extent of government

intervention that can be justified by a threatened

direct loss of jobs in one industry sector compared to

a range of less quantifiable but possibly significant

negative effects in other sectors of the economy.

Restrictions on low-cost foreign construction for

OCS development projects, as “Buy America”

proposals suggest, could have both positive and

negative effects on different sectors of the industry.

Platform fabricators believe it would result in saving

U.S. jobs. Major oil companies believe it would

result in discouraging investment in some major

projects because of unreasonably high development

costs. OTA’s analysis indicates that in some cases,

the cost of the platform could make the difference

between a profitable project and an unprofitable one.

In other cases a higher cost platform would reduce

but not eliminate profitability and in still others even

a lower cost platform would not make a project

profitable. If OCS projects are discouraged it could

have a negative impact on many other sectors of the

offshore industry.

There is also a more general and philosophical

controversy about “Buy America” legislation. Opponents contend that any restraint of free trade has

disadvantages to the United States--especially to

consumers. They also point out that domestic

content regulations invite retaliation by foreign

entities and could affect U.S. exports. Proponents

contend that U.S. firms have already lost significant

market shares and will not survive in direct competition with countries with very low wage rates and

subsidies. They also point out that many foreign

governments already protect their domestic industries with similar restrictive measures.

Geophysical Vessels

Operators of geophysical survey vessels have

problems and points of view similar to those of

mobile drilling rig operators. Since they are involved

in an international industry they too are concerned

with access to foreign waters and the possibility of

retaliation if the United States were to restrict

foreign access to our waters. There is also a general

downturn in the industry and an oversupply of

vessels. Any policy that would increase costs for

operators could affect their ability to obtain future

business. Operators also note their close association

with oceanographic research vessels and the need to

maintain an international understanding of freedom

for operations and access in the name of scientific

research.

The benefits of extending cabotage law to geophysical vessels, in the short term, would most likely

be some increase in seagoing jobs on those vessels

operating in the EEZ. According to IAGC data, only

20 percent of those positions (roughly 600 in all) are

occupied by non-U.S. nationals at present. It is

unclear how the industry might restructure to

22(-JTA, op. cit., foomolc 17,
Chapter 4--Analysis of Four Maritime Sectors ● 23

comply with cabotage laws because so many operators conduct worldwide operations with significant

flexibility of movement of vessels worldwide. Respondents to the IAGC survey indicated that some

may split their fleets between U.S. and foreign

operations and others might concentrate exclusively

on foreign operations.

The longer term question of new vessel construction in the United States, if cabotage laws were

applied, is very difficult to judge. Present demand

for geophysical survey work in U.S. offshore waters

is low and vessels are in oversupply. New buildings

would follow growth in the U.S. offshore industry,

but current prospects indicate that will be very slow.

Other Vessels

A number of special-purpose vessels are engaged

in support activities in the offshore oil and gas

industry. Those strictly engaged in transportation are

usually covered by U.S. Customs Service interpretation of ‘‘points in the United States’’—but there

have been exceptions. The exceptions stemming

from Customs Service rulings about pristine locations have been of concern to some in the maritime

industry. Other exceptions have been made (such as

in the case of launch barges) by special laws because

only a foreign vessel claimed to have the unique

capability required.

It may be possible to avoid some technical

exceptions if cabotage were extended to all transportation activities in the EEZ, but the unique capability

problem may still remain. The Customs Service

warns, however, that confusion may still prevail

because the EEZ, by definition, extends out 200

miles while the extent of the OCS could be more or

less in specific regions. The lawyers will have to

work on this one.

Finally, one operator, responding to the OTA

inquiry, advocates extending cabotage to icebreaking services in connection with OCS operations.23

The future need for commercial icebreaking services

will probably depend on the outlook for OCS

development in the Arctic. At present no economically significant oil field has been discovered here,

but exploration continues in some regions with

heavy ice cover, If a discovery is made, icebreaking

support will likely be part of a future development,

and cabotage coverage for these vessels could

benefit U.S. builders and operators. This is a very

specialized business sector and, while foreign builders and operators could likely compete very well, the

added costs of a U.S. requirement could only be

determined on a specific-case basis.

COMMERCIAL CRUISE VESSELS

One of the more healthy and growing segments of

the maritime industry is the commercial cruise

vessel industry. Small commercial cruise vessels,

ferryboats, and various other passenger craft now

operate in domestic U.S. voyages and under the

current policies of cabotage. However, major cruise

vessels operating in the Caribbean and from the U.S.

west coast to foreign ports are foreign built and

operated ships. This is a very large industry, and it

mainly seines the American tourist. Almost 3

million U.S. cruise vacationers depart from Florida

and other ports annually, and the major carriers are

in the process of building a significant number of

large and luxurious vessels for this market.

Under current Customs Service policy, foreignflag cruise vessels are permitted to embark passengers in a U.S. port, carry them on a cruise itinerary

that includes one or more U.S. ports and at least one

foreign port, and return them to the original port. If

the interim foreign port is what the Customs Service

has defined as a “distant foreign port” (i.e., outside

of North America, Central America, and the Caribbean), then the passengers may disembark at a U.S.

port other than the port of embarkation.24

Foreign-flag cruise vessels are also permitted to

operate on a short, closed-loop voyage from a U.S.

port and back to the same port with no intermediate

ports calls, if the vessel proceeds beyond U.S.

territorial waters (now a 3-mile zone). This type of

voyage is commonly known as a “cruise to nowhere” and is very popular in the cruise industry. In

many cases the vessels in this business also offer

gambling to the passengers as an added feature. A

“cruise to nowhere” entirely within U.S. territorial

waters is prohibited to a noncoast-wise-qualified

vessel.

23 Park, op. ci(., footmxc 7.

~~Fri~, op. cit., footnote 1.
24 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

Photo Cmdr: Atnanban Cafntdan Cadbbaan Lina, Inc.

This small U.S.-flag cruise ship is protected from foreign

competition under current cabotage laws when operating

between U.S. ports, but not when operating from a U.S. to

foreign port.

A variety of proposals could be made to extend

the concept of cabotage policy to cover certain

operations of this cruise shipping industry. One of

these could be to define the 200-mile EEZ as the

zone that a “cruise to nowhere” would need to

proceed beyond if it were made in a foreign-flag

vessel. This would have the practical effect of

requiring U.S. built and operated ships for this trade.

Other changes that could be made include: revoking

the current eligibility of foreign-flag vessels to carry

passengers between the U.S. mainland and Puerto

Rico in the absence of service by a qualified

U.S.-flag vessel; requiring a foreign port call in any

“cruise to nowhere”; not allowing the above

mentioned “distant foreign port” exception; and a

number of other possibilities. Because the cruise

industry is significant and growing, there have been

a number of proposals to extend cabotage policies to

certain segments of it.

Status and Trends

The North American cruise industry has been

defined to include vessels operating from North

American ports principally serving the U.S. market;

offering cruises ranging from 1-day round trips to

7-to 14-day Caribbean cruises, to transatlantic crossings on the Queen Elizabeth II. In a recent industry

publication, the business status and outlook was

described as follows:

By the end of 1988, there were 118 cruise vessels

sailing mainly from North American ports, offering

some 79,933 berths for sale in the American market.

Three million Americans are expected to cruise

during this year, with most sailing in the Caribbean

from ports in southern Florida.

Since its modem-day inception in the United

States some 20 years ago, the cruise industry has

grown to a $4-billion-a-year business, generating

significant revenue for local governments, and

employment and business opportunities for travel

agents, ports, airlines, and a vast array of service and

supply companies.

The cruise industry is also increasingly making its

presence known to the American public through

print and national network television advertising.

Industry forecasts promise an expansive future

with new ships on order or in the planning stages,

and port developments projecting strong growth in

the cruise berth capacity over the next 5 years.25

Of course, some analysts urge caution in accepting too rosy an outlook. Cruise operations are part of

the larger tourist industry where demand is affected

by consumer behavior as well as the general

economy. Cruising is not considered a mature

industry and some operators may overextend their

projections and create an oversupply of vessels. In

general, however, continued growth in cruising is

likely with some uncertainty about market and price

fluctuations. Recent analyses show the following:

. Growth Projections--Cruise market growth

projections vary. There is presently overcapacity and most cruise lines operate at less than

85 percent of capacity utilization. With 11

percent capacity growth in 1988, the gap

between supply and demand in the cruise

market can be expected to widen. However, as

25$’ The Noflh Americm Cmi.se Industry, 1988, ” Cruise /ndtayy News, New York, NY, May 198% p. 11.
Chapter 4--Analysis of Four Maritime Sectors ● 25

●

berth capacity growth is reduced to an average

of about 8 percent annually over the next 4 or

5 years, the gap may remain constant.

Market Concentration—The most popular sailing region is the Caribbean, with mainly 7-day

cruises originating from Miami, but also from

Fort Lauderdale, Tampa, and San Juan, as well

as from Cape Canaveral, New Orleans, Jamaica, and Barbados.

More than 30,000 berths, or 45 percent of the

total berth capacity in North America, are

offered year-round in the Caribbean. In the

winter season, more than 45,000 berths are

offered, or nearly 60 percent of the market.26

With the exception of U.S. coastal and inland

operations, the U.S.-flag sector of the cruise industry

is principally within Hawaii. The berth capacity for

this sector with one operator is about 1,600, or about

2 percent of the total. Another operator entered this

trade in 1988 with one ship and 600 berths, but early

in 1989 they filed for bankruptcy, This was the only

growth projected by the industry for the next 5 years.

The west coast to Alaska summertime cruise trade

has become a strong market sector in recent years

but, because of U.S. cabotage law restrictions,

almost all of the industry has chosen to use

foreign-flag vessels and operate out of the Canadian

port of Vancouver rather than be required to operate

U.S.-flag ships,

Tables 5, 6, and 7, taken from a current industry

evaluation, show the cruise vessels that may be

introduced to the North American market through

1992. All of these vessels are planned to be foreign

built and-with one exception—all will operate in

trades exempt from U.S. cabotage laws. If the

scenario in table 7 holds, the total growth in vessel

berths over the next 4 years would be over 50

percent.

Impacts

It is difficult to envision all of the possible forms

of cabotage extension to the cruise vessel industry

because the nature of the tourist business itself is so

directly integrated into the aspect of ship operations.

The fact that Miami is such a major airline traffic

hub, as well as a destination for millions of tourists

Table 5--New Cruise Ships Entering The Market,

1088-91 (Based on confirmed orders)

Total berths

Year No. ships Market confirmed

1988 (est.) . . . . . 12 5-Caribbean 7,560

4-World

2-Mexico

1-Hawaii

1989 (proj.) . . . . . 8 6-Caribbean 4,560

2-Unknown

1990 (proj.) . . . . . 10 7-Caribbean 8,470

2-Mexico

1-Unknown

1991 (proj) . . . . . 4 3-Caribbean 5,150

l-Unknown

SOURCE: Cruise In&stry News, 1988,

Table 6--Additional New Cruise Ships Entering

The Market, 1990-92 (Based on cruise

lines perceived needs)

Additional Additional

Year no. ships Market total berths

1990 . . . . . 5 3-Caribbean 2,800

1-World

1-Unknown

1991 . . . . . 6 5-Caribbean 8,500

1-World

1992 ., . . . 7 6-Caribbean 14,200

1 -World

SOURCE: Cruise Industry News, 1988.

Table 7-Scenario Projections

Confirmed Maximum Total

new berths Total scenario growth berths

1987: NA 72,365 NA 72,365

1 968: 7,568(1 0.5%) 79,933 7,568 (1 0.5°/0) 79,933

1989: 4,560 (5.5%) 84,493 4,560 (5.50/’) 84,493

1990: 8,470 (100/’) 92,963 11,270 (13°/0) 95,763

1991 : 5,150 (6%) 98,113 13,640 (14%) 109,403

1992: O (O%) NA 14,212 (13%) 123,615

NA= not apphcable.

NOTE: If tha maximum growth scenario should matenallze, It means that the projected

growth rata of the industry would vastly exceed fhat based on confirmed orders.

SOURCE: Ofka of Technology Assessment, 1989

in general, has contributed to the growth of the cruise

port there. If cruise vessel operators out of Miami

were faced with compliance with cabotage laws,

they would undoubtedly seek alternatives-perhaps

following the practice in the Pacific Northwest

261bld,
26 ● Competition in Coastal Seas: An Evacuation of Foreign Maritime Activities in the 200-Mile EEZ

where passengers are transferred from the airport in

Seattle to a cruise ship docked in Vancouver.

It may not be unreasonable, however, to consider

a segment of the cruise industry-the “cruise to

nowhere”- as a possible candidate for cabotage

extension. This small, but significant, market is

represented by several operators of 1-day cruises out

of Florida ports. A recent industry study shows that

2 firms now operate 5 vessels with 4,300 berths in

this segment. This represents about 5 percent of

current industry capacity .27

Assuming about five vessels and 5 percent of the

cruise market is represented by cruises to nowhere,

a scenario for U.S.-flag, U.S.-built vessels could be

postulated if cabotage laws covered these vessels.

In a 1987 study comparing U.S.-flag and foreignflag cruise vessels, an 800-passenger cruise vessel

was evaluated.28 This vessel had a crew of 259 and

would operate in the Caribbean cruise trade. The

analysis assumed U.S. construction and a partial

union crew for the U.S.-flag vessel. Construction

costs were $120 million in U.S. yards v. $100

million in foreign yards. The increased per diem

passenger costs calculated for the U.S.-flag vessel

was 35 percent above the foreign-flag vessel.

Thus, if cabotage laws were extended to cruises to

nowhere, a potential of over 1,000 seagoing positions could be postulated based on the current

market share for these operations, and some several

hundred million dollars of U.S. shipbuilding business would follow if operators built new U.S. vessels

to fill this market as it exists today. Whether the

increase of about one-third in per passenger cost

would be sustainable in this market is not clear. This

example is purely hypothetical and subject to much

uncertainty.

27j&)ida

~*John H. LeePer snd John W. Boylsmn, “The Emerging Domestic Cruise Industry,” Marine Technology, Januay 1987, pp. 2642.

Chapter 5

Summary of Impacts From Extending Cabotage Policies

The foregoing evaluation has shown that very Table 10-Potential of National Security

little hard data exists to project specific impacts from Enhancements With Extensions of

the several possible changes to cabotage law that Cabotage Laws

have been investigated. However, OTA has taken Potential change to rover Additions to strategic sea-lift . . . . .

the limited data, mixed it with some of the more

plausible observations that were reported to us, and

produced four summary tables. Table 8 shows the

potential that appears for increases in seafaring jobs,

table 9 the potential for shipbuilding business, and

table 10 the potential for some national security

enhancements—all from a possible extension of

cabotage to those sectors where some data was

available. Finally, table 11 shows some of the

negative impacts to be expected from these cabotage

extensions.

Table 8-Potential Increases in Seafaring Jobs

With Extensions of Cabotage Laws

Addition to seafaring jobs

Low High

Potential change to cover estimate estimate

Virgin [stands trade:

Petroleum products . . . . . . Nil 100 to 150

General cargo . . . . . . . . . . . 0 to 50 50 to 100

Cruise ships . . . . . . . . . . . . Nil ?

Offshore Iightering . . . . . . . . . . Nil 250 to 350

Geophysical vessels . . . . . . . . 0 to 50 100 to 150

Cruises to nowhere . . . . . . . . . Nil 1,000 to 1,250

SOURCE: Offb of Tachndogy Assessment, 1989.

Table 9-Potential for U.S. Shipbuilding

With Extensions of Cabotage Laws

Potential change to cover Shipbuilding potential

Virgin Islands trade:

Petroleum . . . . . . . . . . . . .Minimal because of existing supply

General cargo . . . . . . . . .Minimal because of existing supply

Cruise ships , . . . . . . . . . .?

Offshore Iightering . . . . .,. .From O to 20,80,000 dwta

Geophysical vessels . . . . . .Minimalb

Cruises to nowhere . . . . . . .From O to 10, 800 passenger shipsc

aEXb Shuti mn~rcdd represent about $.50 mdhon in new builckng costs. c+wt = dead

weight tons

blf ~o~y~~ VeSWIS we ~ilt, ead cmkj represent between $7 to $10 milllon in n~

budding costs.

cE~h crul% ship could represent about $12?0 mlhon in r’WW bwldmg ~sts.

SOURCE” office of T~hnology Assessment, 1989.

Virgin Islands trade:

Petroleum . . . . . . . . . . . .

General cargo . . . . . . . .

Cruise ships . . . . . . . . . .

Offshore Iightering . . . . . . .

Geophysical vessels . . . . .

Cruises to nowhere ., . . . .

ships with troup carrying capabilities

SOURCE: Ofka of Technology Assessment, 1989.

.Nil

,Nil

7

:From nil to a possibility of 20

tanker additions

,Nil

.Possibility of additions of passenger

Table 1 l—Potential Negative Impacts With

Extensions of Cabotage Laws

Potential change to cover Possible negative impacts

Virgin Islands trade:

Petroleum ., . . . . . . , . . . .Refinery cost increases could affect

Virgin lslands jobs and economy

General cargo . . . . . . . . .Increase costs of Virgin Islands

imports

Cruise ships . . . . . . . . . . .Loss of tourist volume

Offshore Iightering . . . . . . . .Increased cost of oil imports

Geophysical vessels . . . . . .Industry loss of foreign business

Cruises to nowhere . . . . . . .Increased costs to tourists could

shift business elsewhere

SOURCE: Office of Technology Assessment, 1989.

In general, only a few benefits would seem to stem

from the changes analyzed, but the investigations

point to some findings of interest:

1.

2.

Of all the sectors evaluated, the commercial

cruise industry-and especially the subsector

of 1-day cruises to nowhere—appears to contain some significant benefits for U.S. interests

if cabotage laws were applied. The business

consequences of such an action are uncertain,

but the added costs, if the action were successful, appear to be directed toward a generally

healthy industry.

Most industry respondents to OTA’s inquiries

believe that the consequences of extending

cabotage laws will take the form of an industry

shift to alternatives that just further avoid a

commitment to U.S.-built and U.S.-operated

-29–
30 ● Competition in Coastal Seas:An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

3.

vessels. The results, therefore, would tend to

be more self-defeating than enhancing for the

U.S. maritime industry.

National security enhancements from extend- 4.

ing cabotage laws would take the form of a few

possible additions to a strategic sea-lift capability and the resulting increase in seafaring

employment implied. If the most favorable

outcomes are assumed, the results could be

U.S.-flag fleet additions of up to 20 shuttle

tankers and 10 passenger ships. Both of these

ship types are considered militarily useful.

There are some obvious direct costs-to other

affected industries and to certain consumers--

of extending cabotage laws. There are also

some costs that are neither obvious nor certain.

All of these must be carefully evaluated in each

specific case in order to arrive at a sound policy

choice.
Appendix A

List of Respondents to OTA Request for

Data and Comments Re: Extending Cabotage Law

American Institute of Merchant Shipping

American Petroleum Institute Offshore Operators

Committee

Avondale Industries, Inc.

Brown and Root International, Inc.

Crowley Maritime Corp.

Department of the Treasury, U.S. Customs Service

Federation of American Controlled Shipping

International Association of Drilling Contractors

International Association of Geophysical Contractors

Leeper, Cambridge & Campbell, Inc.

Lawrence G. Mallon, Attorney-at-Law

Matson Navigation Co.

OMI Petrolink Corp.

The University of Michigan Transportation Research

Institute

U.S. Department of Transportation, Maritime Administration

Virgin Islands Port Authority

Other Comments Received From:

Cynthia Brown, Shipbuilders Council of America

Wayne Christensen, Consultant

Joseph Cox, American Institute of Merchant Shipping

Larry Evans, Transportation Institute

Joseph Farrell, American Waterways Operators

Tom Gillette, Exxon Shipping Co.

Michael Grable, National Marine Fisheries Service

Leslie Kanuk, Baruch College

Frank T. Manheim, State University of New York, Stony

Brook

Henry Marcus, Massachusetts Institute of Technology

John W. McConnell, Haight, Gardner, Poor& Havens

Robert Nevel, Commission on Merchant Marine and

Defense

John Reurs, International Commission of Passenger Lines

-31-
Appendix B

The Effects of Cabotage Policy Changes

on Other Maritime Sectors

For the purposes of this study, OTA selected four

important maritime industry sectors to review and to

investigate what, if any, impacts may result from changes

in current cabotage policies. The results of those investigations are covered in the main body of this report. The

following are brief discussions of each of the other sectors

identified. They contain a snapshot of each activity and

the current applicability of cabotage policies to that

sector. Brief comments are also included concerning the

effects of expanding cabotage policies within each sector.

The background for these comments were supplied to

OTA by the Maritime Administration and the U.S.

Customs Service and reviewed by a number of industry

representatives.

Commercial Fisheries

Commercial fishing has been and continues to be a

significant U.S. maritime activity within the 200-mile

Exclusive Economic Zone (EEZ). Commercial fishing

vessels operate in the ocean waters off all coasts, with

particular concentrations in the North Atlantic, the Gulf of

Mexico, and in Alaskan waters. A great variety of vessel

types and sizes are used. A total of about 38,000

commercial fishing vessels (over 5 net tons) were

engaged in fishing activities in the United States during

1987, with a total shipboard employment of almost

250,000. The size of the fleet and the number of fishermen

employed has increased gradually over the past 10 years,

and the percentage of the EEZ catch that is harvested by

domestic (versus foreign) vessels has increased dramatically, to about 95 percent today.

A key law governing the operation of fishing vessels

within the EEZ is 46 U.S.C. 12108. Under this law, only

a U.S. built, owned, and documented vessel may engage

in the fisheries in U.S. territorial waters or the EEZ, unless

the vessel is issued a permit under the Magnuson Fishery

Conservation and Management Act (FCMA) (16 U.S.C.

1801 et seq.). The definition of “fisheries” for purposes

of section 12108, in 46 U.S.C. 12101(a), was recently

amended by the Commercial Fishing Industry Vessel

Anti-Reflagging Act of 1987 (Public Law 100-239; 101

Stat. 1778). The current definition of “fisheries,” in the

law is: engaging in the processing, storing, transportation

(except in foreign commerce), planting, cultivating,

catching, taking, or harvesting of fish and related marine

species and vegetation in U.S. navigable waters and the

EEZ. The words “processing, storing, and transporting

(except in foreign commerce)” were added by Public Law

100-239. U. S.-flag vessels engaged in the fisheries must

be documented with a fishery license or a registry with a

fishery endorsement.

Foreign vessels may engage in fishing activities in the

EEZ if they have a permit issued by the National Marine

Fisheries Service pursuant to the FCMA. Unless permitted by treaty, foreign-flag vessels may not land, in the

United States, fish caught or received on the high seas,

whether inside or outside the EEZ (see 46 U.S.C. app.

251(a)).

Vessels constructed or reconstructed overseas may be

granted a license to fish in the territorial sea and the EEZ

adjacent to Guam, American Samoa, and the Northern

Mariana Islands. Such vessels must be less than 200 gross

tons and otherwise eligible for U.S. documentation and a

fisheries license or endorsement.

Since commercial fishing is already effectively restricted to U.S.-flag vessels documented for the fisheries,

any policy to extend cabotage laws to include fisheries

would have very little effect upon the actual practice even

though the requirement for U.S. citizen ownership or

control of vessels is somewhat less rigorous under FCMA

than under the Shipping Act of 1916. Of course, more

restrictive provisions limiting the role of foreign fishing

vessels in the U.S. EEZ could be proposed, but the

existing policy is based upon the goal of reserving for U.S.

fisheries all of the catch up to their capabilities and then

allowing foreign fisheries to harvest the surplus. Therefore, it would not be reasonable to expect further

economic benefit to U.S. operators if present laws were

more restrictive of foreign participation. For these reasons, OTA has concluded that it would not be productive

to analyze the costs and benefits of extending cabotage

policies to commercial fishing vessels.

Dredging Vessels

Dredging is a maritime activity that, in the past, has

been mostly confined to shallow waters within the

territorial sea but, when supporting some of the offshore

petroleum activities and other mineral recovery in the

EEZ, it has become necessary to think of dredging as an

activity that could and does take place far offshore. Most

of the harbor and channel dredging activities have been

accomplished by the U.S. Army Corps of Engineers,

either using Army vessels or vessels under contract to the

Army. In addition to an ongoing need for channel

dredging, some growth in dredging as support to other

offshore activities has taken place in recent years. One

-32–
App. B-The Effects of Cabotage Policy Changes on Other Maritime Sectors ● 33

example of this is the dredging needed to construct

offshore gravel islands in the Beaufort Sea that have been

used as oil production platforms there.

Dredges operating in the United States must be

U.S.-built, although foreign ownership and registry are

permitted (as provided in 46 app. U.S.C. 292). This policy

has been extended (pursuant to the OCSLA) to dredging

on the OCS for the purposes of exploring for, developing,

or producing resources from the OCS.

In addition to the above, a recent law (Public Law

100-329) amended section 27 of the Merchant Marine Act

of 1920 to require that any dredged material that is

transported:

. between points and places within U.S. territory;

Ž between points or places within the EEZ; or

. between points or places within U.S. territory and

points or places within the EEZ;

must be transported in a U.S. built, owned, and documented vessel. The combined effect of these provisions

reserves the dredging trade in U.S. territorial waters and

the EEZ to U.S.-built dredges and transport vessels only.

In addition, the transport vessels must also be U.S. owned

and documented.

It appears that any changes in cabotage policies to

extend coverage to dredging vessels would have little or

no effect on the current industry practices. It could be

possible to amend 46 app. U.S.C. 292 to require U.S.

ownership of dredges (as well as U.S. construction),

however, that condition is in fact met by almost all of the

fleet today. It could also be possible to include dredging

within the EEZ for purposes other than that covered under

the OCSLA, but they would have only minor importance

at present. The Customs Service also warns that it may be

confusing to have two statutory provisions applying

coast-wise laws to both the EEZ and the OCS because

they have different definitions of geographic coverage.

Marine Mining Vessels

Marine mining is only currently an active industry in a

few specialized areas such as: offshore sand and gravel

recovery near New York harbor, and alluvia gold mining

offshore of Nome, Alaska. Near-term prospects for

significant development of a marine mining industry are

not good. Much more information about potential mineral

resources in the EEZ would be needed before any major

commercial mining activity would be contemplated,

The statute covering dredging (46 app. U.S.C. 292),

discussed above, also applies to marine mining in the

OCS. That is, mining vessels must be U.S. built but not

necessarily U.S. owned and operated. Vessels transporting mined material from a point on the high seas within

the EEZ to the United States would be covered under

cabotage policies. The Deep Seabed Hard Minerals

Resources Act (30 U.S.C. 1401 et seq.; 94 Stat. 553) even

contains provisions requiring certain vessels to be U.S.

documented when recovering minerals from the deep

seabed beyond the EEZ if they are operating under a

permit pursuant to this act, No deep-sea mining is now

underway or planned.

Given the infancy of the marine mining industry and

the fact that most activities would be covered under

cabotage policies, OTA has concluded that further

analysis of this industry is not needed at this time.

Waste Disposal Vessels

Waste disposal operations in the ocean are growing in

recent years as a series of waste disposal problems

become more acute for the Nation as a whole and the

options of dumping in the ocean, incineration at sea, or

just transporting by sea are proposed and, in some cases,

used. The current fleet of waste disposal vessels is small

and operations are concentrated near some of the major

U.S. metropolitan areas such as New York. But this

activity will certainly grow, and it may grow substantially.

A recent law, The Transportation of Sewage Sludge

Act (Public Law 100-329, 102 Stat. 588) amended section

27 of the Merchant Marine Act of 1920 (the Jones Act) to

require that vessels used to transport valueless material

(including tugs used to tow barges) from a point or place

in U.S. territory to a point or place on the high seas within

the EEZ, as well as between any two points within those

areas, be U.S. built, owned, and documented. A few

exemptions were made in the law including certain barges

under construction in a foreign shipyard or already in use

by a municipality when the law was passed.

Actual offshore dump sites are designated by the

Environmental Protection Agency, either in published

regulations or as part of the individual dumping permits

issued.

Transportation of hazardous waste from a point in the

United States for the purpose of incineration of that waste

at sea is subject to cabotage under the eighth and ninth

provisos of the Jones Act. No U.S.-flag incinerator ships

exist today, and construction of two new buildings has

been suspended. Two U, S.-owned, foreign-flag incinerator ships were “grandfathered” to make them eligible for

coast-wise trade. The development of incinerator ships

stopped in 1987 when EPA decided not to complete final

rules for issuing permits to bum waste at sea. It is not clear

when such rules might be considered again or, therefore,

if and when hazardous waste incineration at sea would be
34 ● Competition in Coastal Seas: An Evaluation of Foreign Maritime Activities in the 200-Mile EEZ

possible under a U.S. permit. Incineration at sea of

nonhazardous wastes, however, has been proposed and it

may be possible to anticipate that such activity may

become important in the future.

Since most existing and potential activities within the

EEZ using waste disposal vessels are already covered by

cabotage policies, it appears that a general geographic

extension of cabotage would have little or no effect on

current practice in the industry.

Icebreaking Vessels

Most of the icebreaking operations that take place in

U.S. waters are carried out by Coast Guard icebreakers,

with some assistance from the Canadian Coast Guard and

a few private icebreaking vessels. There is usually not a

sufficient thickness of ice offshore U.S. coasts to require

icebreakers except for Alaskan waters. In Alaskan waters

the current practice for transportation by sea is to bring

shipping through only during the summer, ice-free season

and to stockpile during the winter. This reduces the need

for icebreaking services to a minimum.

In the future, there may be an increased need for

Alaskan waters icebreaking services if major offshore oil

and gas resources are discovered and produced. Some

plans for such production in the Beaufort, Chukchi, and

Bering Seas call for icebreakers to assist tankers and other

vessels engaged in offshore oil transportation.

Currently there are no cabotage laws that apply to

commercial icebreaking vessels. Foreign-flag icebreakers

could be used in the U.S. EEZ, but the present requirements for the service are limited and such vessels have

been used in the past only for certain specialized

operations. Extension of cabotage policies to include

icebreaking as an activity that would be covered, could

have the effect of limiting the activity to U.S. built,

owned, and operated vessels. However, the only significant future need for commercial icebreakers seems to be

in the offshore oil and gas industry, and OTA has noted

this under the analysis of oil and gas exploration and

development.

Shipping in U.S. Pacific Territories

Guam, American Samoa, and The Commonwealth of

the Northern Marianas all are presently exempt from

cabotage to some extent. The laws that govern shipping

operations in these waters are different from the other U.S.

cabotage laws cited above.

Foreign-built vessels under U.S. ownership and registry may trade within Guam and between Guam and other

U.S. points. American Samoa is totally exempt from

cabotage. Only activities of the Federal Government or its

contractors within the Northern Marianas are subject to

cabotage. As noted in the section on commercial fisheries,

foreign built or rebuilt fishing vessels of less than 200

gross tons, which are otherwise eligible for documentation and a fisheries license or endorsement, maybe issued

a license to engage in fishing in the territorial sea and

fishery conservation zone adjacent to the three territories.

Some in the U.S. maritime industry have suggested that

laws affecting trade with and within Guam be changed so

as to apply standard U.S. cabotage policies here. This

would have the effect of requiring U.S. built and operated

vessels to be used. While it appears that increased tourism

and military construction on Guam would create some

growing demand for shipping services, OTA has not

obtained specific data that would allow an accurate

estimate of these effects on the shipping industry.

The U.S. Maritime Administration has commented that

an extension of cabotage policies to these territories

would affect principally American Samoa and the Northern Marianas because there are currently no regular

U.S.-flag shipping services to either Samoa or the

Northern Marianas; there are two foreign-flag services

between Samoa and the U.S. mainland and most service

to the Northern Marianas is through Japan. Here again,

OTA has not obtained data to make any accurate estimate

of costs and benefits of these possible changes.