Why Blanket Waivers Wouldn't Help New England with OSG's Sam Norton

Thank you, Jennifer, and good afternoon. Wonderful to be here with you.

So, Overseas Shipholding Group, often referred to as OSG, is an owner-operator of oil tankers and articulated tug barges. Our main job is to transport transportation fuels and crude oil around the United States. As you say, we're based in Tampa. We operate today a fleet of 20 vessels in total, including large crude oil tankers that bring Alaskan produced crude oil from Alaska to the West Coast refineries, and our principal business is distributing transportation fuels from refinery centers in the Gulf of Mexico into Florida and the east coast of the United States.

So, it's pretty well known that the United States today is one of the largest producers of energy of all types in the world. That energy needs to be distributed around the United States. Much of it goes by pipeline, but along the coasts of the United States—and up and down the rivers—the maritime industry plays an important role. Our vessels are basically transporting the raw material, crude oil. As I said, we bring Alaskan crude oil from Valdez, Alaska down to the West Coast refineries in Washington state and California. We also move crude oil within the Gulf of Mexico from production outlets to refinery facilities in the Gulf of Mexico, and as well, crude oil up to the East Coast refineries based predominantly in the Delaware Bay. That's an important part of our business, but by far and away the largest part of our business is moving transportation fuels. Transportation fuels are roughly gasoline—everybody knows they go fill up their car with gasoline—diesel oil, or middle distillates in general, includes jet fuel and diesel oil. Those are for more industrial uses and also for heating oil. So really important parts of the U.S. economy are intermediated by our company from the refining and production centers into the principal distribution points, mostly on the east coast of the United States, as I said.

So, the global market has been more immediately and directly impacted by the Russian invasion of Ukraine. Understand that like any complicated system, the well-worn paths and established supply chains in a very complex system get well established, and people get used to operating within those lanes. Russia is a huge supplier of energy to Europe in particular, less so to the United States, but also to the United States. With the advent of the incursion into Ukraine, a lot of that stopped. There were sanctions put on Russian oil exports, Russian oil exports stopped—for crude oil in December will soon be banned completely from the 5th of February. But even ahead of those deadlines, the self-sanctioning, as it's called—a lot of people have moved away from participating in Russian energy trades. That has disrupted the established supply chains in a big way. The upside of that is that oil must move much longer distances to get from further sources of energy to Europe in particular, but also to some of the other places that Russia supplied. That lengthening of supply chains has the effect of tightening the global shipping market—it's an artificial constriction of supply—so that sent tanker rates to very high levels over the second half of last year. They've come off a bit in recent months, but they're still very high, and the disruption is still being sorted out as people try to understand what the long-term implications of sanctions against Russian products are going to be. For the United States, the principal impact has been that the U.S. has become far more integrated in the international markets in the last 10 years. If you go back 10 years, crude oil exports were prohibited by law, LNG exports didn't exist at all, and even the refined product of our domestic refining industry didn't really get much into the international markets. Today, probably 30 to 40 percent of everything produced in the United States is finding its way into international markets. So when you see the disruption caused by the Russian invasion internationally, it tends to draw a lot of supply that would maybe have found its way into the United States over to overseas markets because the prices are better there, and the market reacts to that.

So, like many things, location, location, location is the answer to a lot of questions. The Strategic Petroleum Reserves are centered in the Gulf of Mexico along the Texas and Louisiana coast. Many of these sites are connected by pipelines, so the domestic refineries that have been bidding for those barrels have, in most cases, opted to have pipeline delivery. So there's no need to deliver them through a waterborne capacity. Some has been, and the Jones Act fleet that would be necessary to move those cargos that have been waterborne delivered have been met by the Jones Act fleet that was available, including in the case of OSG several of our vessels over the course of the second half of last year were actually delivering Strategic Petroleum Reserve cargos. The other interesting thing is, as I said earlier, the integration of the U.S. energy markets into the global markets—those Strategic Petroleum Reserves, many of them were actually exported. They were bought by traders that then directed those crude oil cargos into the international market. Some might think, 'What's the point of releasing strategic reserves if ultimately it doesn't help the United States?' But the impact of that was to put an overall cap on crude oil prices because crude oil trades on a global market. So in many ways, it's fungible. If that crude oil were to go into the international market, it helps to increase supply overall and therefore pull some of the hot speculative pricing structure out of the crude oil prices that we saw in the immediate aftermath of the Ukraine invasion.

I think so. There's a lot of soundbite value in trying to pinpoint the Jones Act as being the singular cause for problems in the gasoline and diesel in general, in particular over the last several months, but the facts just don't support that. As I said, most of the energy supply in the United States—the transportation fuels—are delivered by pipeline or truck. There is an important element of energy supply up and down the river systems in the central part of the United States, as well as the business that OSG is involved in along the coast. But the fact of the matter is that a waiver of the Jones Act, from an economic point of view, would probably have less than one cent per gallon differential in the delivered price or the retail price of gasoline. So it's really hard for me to understand why that would have any impact whatsoever on retail consumer pricing.

Jennifer, I'm glad you asked that question. It seems like every year we come upon the same kind of issues. New England is, in many ways, an energy island for the United States, and that's by choice. Everyone will acknowledge and accept that the best and most cost-effective way to deliver energy is by pipeline, but the New England states and many of the states around them have vehemently opposed new pipelines to be able to deliver, in particular, natural gas, which is the primary energy source that is in the news mostly in the past several months. If you don't have pipeline delivery of natural gas, then the only other way to do that is by sea. But if you need to bring liquefied natural gas in by sea, you need to be able to build the infrastructure and the storage capacity to allow yourself to accept sufficient quantities of gas during the low season. In New England, the low season is in the summer, so when everybody's not worried about their heating requirements, you should be building gas storage facilities so that when the colder weather comes, you have enough supply to meet the surges— peak demand—that would come because of the cold weather. None of that infrastructure exists in New England, mostly because the political will to challenge those who are against energy infrastructure in general doesn't exist. So when you get a cold winter like this year, and when you have home heating for natural gas competing against electrical power generation for an expanding population in New England, you get potential for shortages of gas because of that very low storage capacity that's inherent in the infrastructure that's been committed to. This is a problem everybody acknowledges, nobody wants to take responsibility for it, so the Jones Act becomes an easy scapegoat. People say, 'You can't—there are no Jones Act LNG tankers, and therefore we should allow foreign-flag tankers to come in and bring that gas to New England, and all problems would be solved.' I think that's a really naive approach. The gas is going to be priced at the margins, and whether a foreign-flag vessel can bring it from Trinidad or from Corpus Christi, the delivered price is probably going to be the same, so there will be no relief. And even then, the storage capacity in New England is not sufficient to allow for a large build, so it's still going to be kind of just-in-time inventory delivery that is not likely going to remove the threat of shortages in my opinion.

So again, the situation in Europe as a consequence of the Russian invasion I think had the largest impact on the diesel markets in the lead-up to this winter. A lot of diesel produced in the United States was being exported to Europe as opposed to directed to domestic inventory storage areas. Pricing differentials encouraged that—people in Europe were willing to pay more for the diesel. And again, the point that I made earlier about the integration of the U.S. energy markets and international markets just becomes more and more apparent every year, and this is a factor that we have to deal with. One of the things that was really interesting to me is, for much of the fall, the pipeline capacity from the Gulf of Mexico up to the Northeast—the pipeline was not full. So if there was a pricing issue or a Jones Act issue or some sort of logistical impediment to building inventories in the Northeast, you would have felt that. The first thing that would have happened is that pipeline would have been filled up to be able to deliver the maximum amount of product possible, but that just wasn't the case. So there were some technical issues. The market was, in oil traders' language, called backwardated, which means it was more expensive to store oil than to sell it, so that also impacted inventory levels. It was a case of the market needing to work in order to create the right incentives. In the last several months, we've seen the market go from backwardation to contango, which means the forward price is higher than the spot price, so then you get paid to store oil. You've also had a little bit of easing of the pressure in Europe to be able to bring cargos across the Atlantic. So we've seen supplies begin to move up the east coast and begin to restock those inventories. Frankly, that news story seems to have gone off the front pages and off the evening news. I haven't seen any story on a shortage of diesel for weeks now, so the market seemed to have worked there. But again, to me, the main takeaway is the integration of our domestic energy industry into the national industry is going to create these kinds of dislocations likely more often than it has in the past as we look forward, and it's something that bears watching.

For OSG, I can speak to specifically. As I said, we have 20 vessels—probably 16 of those are operating in the Gulf of Mexico and into the East Coast of the United States. We're quite fortunate right now that all of our ships are under contract with oil major refineries and distributors, so those are the companies that decide where the ships go and where the cargo that is loaded on those ships will eventually wind up. But we have been able to observe, through the fall and into the early part of the winter, several of our vessels have indeed gone north to New York Harbor, or to New Jersey, or to New Haven, bringing cargos of diesel and gasoline that are directed by our customers to go to those areas. So that's been an encouraging thing to see, and I think that's part of the resolution of that shortage of inventory that we spoke about earlier.

They rely a lot on spot markets. When the markets are functioning normally, when there's ample supply, when the supply chains are well lubricated and everything is running as per normal, that looks great. Everything works, the supply gets delivered, prices are relatively attractive, and there's no news in effect. The problem is when you get the disruptions like we saw last year with the Russia-Ukraine situation—then that spot market tends to get very volatile or disappear altogether. That's when that risk really manifests itself, and you think, 'Wow, shouldn't we have a better plan, at least a fallback plan, build more robust capabilities to be able to handle these kinds of dislocations?' I touched on some of those solutions earlier. In my view, New England should recognize the importance of natural gas—LNG and pipeline-delivered gas—to their electrical generating grid as well as their home heating capacity, and they should build surplus storage capacity in order to allow a buffer storage to be held, rather than relying totally on the spot market. Then, to fill those buffer storages with contract deliveries. If you have those kinds of contract deliveries, I think you could probably develop a scenario where a Jones Act vessel could operate and do that relatively competitively, as long as the volumes and the consistency of those volumes were spread out across the year to allow a regular service to be developed. That's one of the problems: New England's natural gas demand is so seasonal. The LNG deliveries—if you look at the deliveries, there are no deliveries between April and October; they're all centered in the November-December-January-February period. It's very difficult to build a business around that kind of seasonality if you're trying to build something that's more robust. So spreading those deliveries out on a contract basis and building the necessary storage to allow that to happen—I think that would ultimately give New Englanders a lot more comfort in knowing that they're not going to be exposed to the volatility and the price spikes that occur when you're wholly dependent upon a spot international market.

I think we all have to acknowledge that this is the world that we're living in right now, and climate change is a very important topic. For companies—private companies, public listed private companies like OSG—we certainly feel a responsibility to work to see improvement, to acknowledge the impact of greenhouse gas emissions, and to invest in and think and become more intelligent and act more smartly to try and reduce the impact that our company in particular, and our industry in general, has on climate change, as we contemplate what our children and grandchildren's future will look like. So we're committed to trying to make a difference. That's one of the reasons why we joined the Blue Sky Maritime Coalition, because that's a coalition of domestic companies that have like-minded objectives and recognize that it's very difficult to make a major impact if you have singular participants trying to pursue these objectives. Getting together and trying to define broad industry goals that reach from charters to owners to ports to builders to engine manufacturers—trying to put the senior leadership of these organizations together to try and define and identify solutions to problems—that's the goal of the Blue Sky Maritime Coalition. I think it's a very admirable goal, one that we're proud to be part of. I think that there's a lot of unknown today. I generally believe the answers to many of the questions that are being posed about how do we best address climate change are still to be developed. But to me, that's no excuse to not try and make incremental progress in the medium term. I think there's definitely scope for doing that. Operationally, we can be smarter in the way that we operate our vessels. In my personal opinion, I also think there's scope for looking at carbon capture technology on board vessels that will allow the existing vessel fleet to continue to operate, yet reduce their carbon footprint through carbon capture. There's a lot of infrastructure work that needs to be done to allow that to happen, but carbon capture technology does exist today. To scale that up to make it economical is something that I think is within reach within the next five to ten years. Then the question becomes how do you build out the infrastructure to allow the carbon, once captured on a ship, to be offloaded and then either sequestered or put into some other recyclable use—methanol, sustainable aviation fuel, any number of ideas that are out there on how to recycle that carbon once captured. So I personally think it's a really exciting part of the maritime industry today and offers a lot of opportunity for forward-thinking and curious people to seek out solutions that I think can be achieved and will be an important part of our future.

Thank you, Jennifer. I think I've kind of said the main points. I strongly believe that the maritime industry is a vital part of our economy. The Jones Act has ideological opponents that tend to overblow the negative aspects of the Jones Act. I think some of that is driven by opportunism that is very specific to some of the opponents that are out there. I think a broad understanding and an objective view would conclude that sustaining the maritime industry in the United States is really, really important, and that the cost of doing that is, once spread across the entire country, not that high compared to the alternatives. I would really advocate that people trying to understand this issue dig deeper into the real facts and not be swayed by the soundbites and easy political targets that tend to be put on the backs of the Jones Act, because the issues are much more important than just the simple dollars and cents that many would lead you to believe are the principal factors here. So do a little bit of homework if you're interested in this industry, and I think you will, if not agree with me, you'll at least understand the perspective that we're advocating.