As the Offshore Technology Conference in Houston comes round again, I thought we should take a look at the current environment for oil & gas E&P in the US, particularly as it affects UK businesses in the sector.
Like many countries, the US has not surprisingly sometimes resorted to protectionist measures when affected by economic downturn to limit the impact on its domestic industry.
However, international agreements now regulate such measures and, judging from the disputes currently before the WTO, there is no immediate sign of an upturn in complaints against the Americans.
There is certainly no indication that Europe is a major victim of any such protectionism.
Although some longstanding disputes brought by the EU regarding large civil aircraft, beef imports and the methodology the US uses in calculating anti-dumping duties rumble on, there has been only one recent complaint from the EU, reviving the latter dispute in the context of imports of certain steel products from Italy.
In practice, protectionism is far more likely to have an impact on those countries responsible for cheap imports of manufactured and agricultural goods – primarily China.
One area of arguably protectionist legislation that has however come under scrutiny in recent months, has been a provision of the Merchant Marine Act of 1920, known as the “Jones Act”.
The Jones Act does a number of important things, including providing for seamen’s rights if injured by negligence or the unseaworthiness of vessels.
More significantly for this discussion, it includes rules of “cabotage”, which require that “all personnel and merchandise” shipped between US ports be carried by vessels which are built in the States, are US flagged, are owned by American persons (a US subsidiary of a foreign corporation will not qualify) and largely crewed by Americans.
The original justification for this measure was to ensure that the US shipbuilding industry and merchant marine fleet flourished, so that there would be ships and seamen available to support the US in time of war or national emergency.
However, some argue that as American yards are more expensive than foreign ones, and as the US fleet is protected from much foreign competition, there is little incentive to build new Jones Act vessels, so the US fleet is ageing and would be of little help in a real military crisis.
At the time of the Macondo incident, there was much discussion of whether the Jones Act was hindering the clean up by preventing foreign registered vessels from operating.
However, this was possibly something of a red herring.
There are provisions in the legislation enabling the federal government to waive the act, but the Obama administration did not do so, arguing that it would have done so if requested but no one had asked for such waivers.
This is not surprising – the Jones Act did not prevent foreign vessels from assisting at the site of the spill (in international waters), and indeed many of them did so – although it might have prevented such vessels from picking up clean-up equipment at one US port and then taking that equipment to the spill site.
This is because of the interpretation of the Jones Act by the US Customs and Border Protection (I’m grateful to Brett Wise at Liskow & Lewis in New Orleans for helping me understand the recent history of this affair.).
Under CBP rules, an offshore facility on the US Continental shelf is treated as a US port, even if it is in international waters.
This interpretation was widely accepted and companies learned to operate within the guidance issued by the CBP as to what constituted “personnel and merchandise”.
For instance, the crew of a vessel were not treated as personnel and therefore a foreign standby vessel, not carrying other equipment or personnel, would be permitted to operate.
A remotely operated vehicle (ROV) was treated as part of the ship’s equipment and therefore foreign vessels could potentially be used to operate ROVs.
A non-US heavy lift vessel could potentially carry out installation work, but it could not collect a piece of equipment from the dock at Port Fourchon and take it out to the installation site – it would need to be transported on a US barge and then lifted into the correct position by the HLV’s crane.
However, if the barge could not get close enough to the installation so that HLV needed to move into position after lifting the module from the barge, then it was carrying out transportation and would need to be a Jones Act vessel.
In order to ensure no inadvertent breach of the Jones Act rules, operators got accustomed to submitting requests to CBP for advance clearance.
Over the years, the CBP’s rulings extended the remit of what foreign vessels could carry out.
At perhaps its most lenient, it held that a Christmas tree was vessel equipment so a foreign vessel could install it.
After vociferous complaints by the domestic US industry through the Offshore Marine Service Association (OMSA), CBP decided to fundamentally revise its policy, reversing a number of its previous rulings which had been favourable to foreign vessels.
This sudden volte-face, however, resulted in an equally strong campaign from the oil & gas industry which complained about the short (30 day) consultation over the measure and its potential impact on competition in relation to their operations.
Caught between two powerful lobbies, the CBP withdrew its new policy and announced that further guidance would be issued.
However, nearly two years on, that guidance has still to emerge. The Department of Homeland Security, which is responsible for the CBP, decided to issue an Advanced Notice of Proposed Rulemaking, a step in the regulatory process through which the public are asked for their opinions on a series of questions before it drafts a new proposal.
In the meantime, politics came into the picture.
Various bills were introduced into Congress with the aim of strengthening the Jones Act, while Senator John McCain introduced legislation in 2010 to repeal it, arguing that it increased the costs of shipping and therefore consumer prices.
Pressure from the domestic shipbuilding industry and the labour unions appears to have killed off this initiative, at least for now, and the situation remains in limbo.
It’s possible that one concern preventing the CBP from publishing stricter guidance may be the potential for complaints about the provisions, and their interpretation under international treaties in relation to free trade.
In the UK, in part due to the European Union but also due to our own history as a maritime and trading nation, we are accustomed to relative freedom in relation to the cross border supply of trade and services, and rules like the cabotage provisions of the Jones Act can strike us as rampant protectionism.
But America is a proud and patriotic nation, and any lobbying for a relaxation of the current restrictions will need to respect this history and culture.
We might feel that the US would benefit more from a more competitive market for oil & gas services, than from protecting a domestic industry which cannot compete with cheap Asian shipyards and crews.
However, just as the US needs to protect its farmers from the ravages of global competition in order to sustain livelihoods in its heartlands, it also needs to consider the impact on its coastal communities, still reeling from the impacts of hurricanes and the Macondo spill, and from a change to the cabotage rules.
Penelope Warne is head of energy at the international law firm CMS Cameron McKenna