Protecting the Supply Chain: U.S. Government Studies the Role of Federal Agencies in Ocean Carrier Bankruptcies

Rick Antonoff and Evan Jason Zucker

In December 2018, the Frank LoBiondo Coast Guard Authorization Act (the “LoBiondo Act”) was enacted to, among other things, improve and support the operation and administration of the Coast Guard and update maritime and environmental policy. Section 713 of the LoBiondo Act directs the Comptroller General of the United States to “conduct a study that examines the immediate aftermath of a major ocean carrier bankruptcy and its impact through the supply chain.” In accordance with that mandate, in January 2020, the U.S. Government Accountability Office (“GAO”) published a report on the role of the Federal Maritime Commission (the “FMC”) and Department of Commerce (“Commerce”) in an ocean carrier’s bankruptcy case.

The study was prompted by supply chain disruption at sea and at numerous ports caused by the bankruptcy of Hanjin Shipping Co., Ltd. in August 2016. At the time, Hanjin was one of the world’s largest integrated logistics and container shipping companies transporting cargo to and from ports throughout the world. The GAO concluded that the FMC and Commerce played an important monitoring function in the industry, but did not recommend any changes to either agency’s role in an ocean carrier bankruptcy. This is because the GAO found that industry participants have already taken steps to mitigate the effects of another ocean carrier bankruptcy and current law does not authorize these agencies to have a more active role.

The Ocean Carrier Industry

The maritime transport industry is the backbone of globalized trade and the manufacturing supply chain. According to the United Nations Conference on Trade and Development’s Review of Maritime Transport 2019, more than four-fifths of world merchandise trade by volume is carried by sea. Annually, more than one trillion dollars in U.S. exports and imports are moved by ocean vessels. Prior to the current pandemic, the industry was already coping with low-freight rates, reduced earnings, and oversupply as a result of increased global tariffs, volatility in demand, and new environmental regulations. These market conditions have led to the continued consolidation of ocean carriers. “In February 2019, the [top] 10 deep-sea container-shipping lines represented 90 per cent of deployed capacity and dominated the major East-West trade routes through three alliances.” This consolidation in the industry increases the risk of disruption that the financial instability of any one shipping company can have on the global supply chain.

Scope of the GAO Study

To address the objectives mandated in the LoBiondo Act, the GAO reviewed documents filed in Hanjin’s bankruptcy case and documents provided by the FMC and Commerce. Additionally, the GAO interviewed 15 industry stakeholders representing various roles in the supply chain including representatives from four ports, two ocean carriers, one association representing carriers, one association representing freight forwarders and customs brokers, five associations or companies representing transportation and equipment providers, one association representing retailers, one association representing agricultural cargo owners, and officials with the FMC and Commerce. Continue Reading

Implications of Jones Act Changes to the Offshore Energy Industry

Jonathan K. Waldron and Stefanos N. Roulakis

Vessels are the backbone of any offshore construction project, and the Jones Act, which celebrated its centennial this month, regulates their operations in U.S. waters on the Outer Continental Shelf. Originally promulgated as a transportation statute, the Jones Act has governed vessels engaging in offshore construction for nearly four decades. While offshore oil and gas construction operations have been conducted in compliance with the Jones Act for decades, with the burgeoning offshore wind sector there is renewed interest on how the Jones Act will be applied to such projects. Indeed, planning for Jones Act compliance is a major component of successful wind farm installation operations, as has been the case for years with oil and gas-related work. Interestingly, despite the fact that the Jones Act is now a century old, there have been recent significant regulatory and legal developments in its interpretation.

Specifically, after years of debate within the offshore industry, on December 19, 2019, U.S. Customs and Border Protection (“CBP”) issued its decision in its Customs Bulletin, “Modification and Revocation of Ruling Letters Relating to CBP’s Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points” (the “Decision”). The Decision became effective on February 17, 2020. Offshore developers, vessel operators, and other stakeholders must now face the question: How does the Decision affect offshore activities?

Further, the Decision currently faces challenges both in Congress and the courts. Some members of Congress who are not pleased with CBP’s actions have been focused on legislating in this area and modifying the Jones Act to include restrictions on lifting operations undertaken by installation vessels. This would effectively overrule parts of the Decision. Stakeholders in the offshore wind, ocean renewable energy, and offshore oil and gas sectors should pay attention to these developments as they will intimately impact offshore construction activities.

Background on the CPB Decision

In both 2009 and 2017, CBP published notices to revoke or modify various rulings, which potentially could have overturned decades of precedent with regard to a sweeping range of offshore operations that have never been subject to the Jones Act. To be frank, CBP did not fully understand how the offshore industry operated offshore, and the proposals were potentially overbroad without CBP understanding the economic impacts on the various types of offshore operations these proposals would have adversely affected. As a result of strong industry backlash on both occasions, the proposals were withdrawn for reconsideration.  Finally, following the 2017 withdrawal, CBP undertook an intensive exchange of information with all facets of industry to fully understand how industry actually operates offshore and to fine-tune and focus its 2019 proposal on vessel equipment issues and lifting operations, which resulted in a decision that took into account comments and input from all stakeholders.

As far as substance, the Decision eliminates previous erroneous decisions that permitted non-coastwise-qualified vessels to transport items that should have been considered merchandise under the Jones Act. The Decision also clarifies that lifting operations may be conducted by non-Jones Act vessels. Specifically, as discussed in more detail below, the Decision 1) broadens the definition of merchandise to make it clear that non-Jones Act vessels can no longer carry out certain offshore activities that they have performed for years under a misguided and overly broad “mission of the vessel” theory, and 2) establishes a new interpretation of “Lifting Operations” to specify the movements that a non-Jones Act vessel can perform when conducting installation or decommissioning operations, which will not be considered “transportation” within the meaning of the Jones Act.

Should the Decision be overturned either in court or through legislation, it will have a significant impact on the market for offshore construction, whether for renewable energy or fossil fuel production. Currently, there are few or no Jones Act-qualified vessels that can perform the necessary lifting operations needed to undertake the multitude of varying construction projects offshore, depending on the crane capacity and vessel and stability characteristics required for a particular lifting operation. Continue Reading

U.S. Customs and Border Protection Decision Makes Substantial Changes Affecting the Offshore Industry

Jonathan K. Waldron and Stefanos N. Roulakis

U.S. Customs and Border Protection (“CBP”) issued a significant decision on December 19, 2019, which will substantially alter how certain operations conducted by coastwise and non-coastwise vessels can be conducted offshore in the oil and gas and wind industries. The changes become effective on February 17, 2020. Stakeholders should examine this decision to determine how it will impact their operations.

NEW DEVELOPMENT

On December 19, 2019, CBP issued its decision in the Customs Bulletin entitled “Modification and Revocation of Ruling Letters Relating to CBP’s Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points” (the “Notice”). Available here. The Notice clarifies CBP’s position on whether certain items constitute “vessel equipment,” which is not “merchandise” and may be transported by non-coastwise qualified vessels. The Notice also contains a section clarifying that “lifting operations” are not “transportation” within the meaning of the Jones Act. In short, the Notice eliminates previous erroneous decisions that allowed non-coastwise qualified vessels to transport items that should have been considered merchandise and not “vessel equipment” under the Jones Act. The Notice also returns CBP to the position that it held for decades that lifting operations may be conducted by non-coastwise qualified vessels.

BACKGROUND

In January 2017, CBP proposed a notice that would have overturned decades of precedent with regard to offshore operations potentially subject to the Jones Act. This notice, which was published in the CBP Customs Bulletin, proposed the modification of approximately 25 CBP rulings that delineated the difference between “equipment of the vessel,” the transportation of which does not implicate the Jones Act, and “merchandise,” which may only be transported by qualified vessels under the Jones Act. CBP withdrew this notice on May 10, 2017. Since then, regulatory officials engaged stakeholders in dialogue to resolve the issues raised in the notice.

The Notice also addressed issues related to lifting operations. Since at least 1983, CBP has held that a stationary, foreign-flag crane vessel may load and unload cargo as well as construct or dismantle a marine structure in compliance with the Jones Act. In 2012-2013, CBP issued what have become known as the “Koff Rulings” (HQ H225102 (September 24, 2012); HQ H23542 (November 15, 2012); and HQ H242466 (July 3, 2013)), which held that any movement of a vessel, even a short distance, while a topside is suspended from its crane and off its central axis for safety reasons is a violation of the Jones Act because in the Koff Rulings, this movement of the vessel is interpreted by CBP as providing part of the transportation of the topside between two points in the United States.

CBP issued its proposed Notice on October 23, 2019. There were 37 commenters to the Notice. CBP responded to the comments it received and clarified some points, but there were no substantive changes between CBP’s proposal and the Notice itself.

ANALYSIS

Vessel Equipment

Historically, CBP used a “Mission of the Vessel” concept to justify certain installation, repair, and maintenance work subsea. This concept was applied over broadly, which allowed non-coastwise qualified vessel to perform some of these activities that should have been reserved to Jones Act vessels. The Mission of the Vessel concept was revoked by the Notice and replaced with a new “Vessel Equipment” interpretation. Under this interpretation, the scope of vessel equipment includes items, which are “necessary and appropriate for the navigation, operation, or maintenance of a vessel and for the comfort and safety of the persons on board.”

Please click here for the full client alert.

Potential Impacts of Offshore Legislation on Industry

Jonathan K. Waldron and Stefanos N. Roulakis

The U.S. House of Representatives has introduced legislation that could potentially greatly alter the landscape for oil, gas, and wind installation and decommissioning activities on the U.S. Outer Continental Shelf (“OCS”). Stakeholders should examine the legislation for impacts to their operations.

New Development

The House Committee on Transportation and Infrastructure marked up and approved H.R. 3409, the Coast Guard Authorization Act of 2019 (“2019 CGAA”) on June 26, 2019. This legislation, if enacted, could have significant impacts on how oil, gas, and wind vessel activities are conducted on the OCS. Of particular note, the legislation could have an outsized effect on offshore wind in the United States, which is at a nascent stage and requires installation activities of the type contemplated in the 2019 CGAA.

Background

In January 2017, U.S. Customs and Border Protection (“CBP”) proposed to overturn decades of precedent with regard to offshore operations potentially subject to the Jones Act in its “Proposed Modification and Revocation of Ruling Letters Relating to Customs Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points” (the “Notice”). The Notice, which was published in the CBP Customs Bulletin, proposed the modification of approximately 25 CBP rulings that delineated the difference between “equipment of the vessel,” the transportation of which does not implicate the Jones Act, and “merchandise,” which may only be transported by qualified vessels under the Jones Act.

Please click here for the full client alert. 

CBP Announces the “Jade”—A New Enforcement Division for the Jones Act

Jeanne M. Grasso, Jonathan K. Waldron, Matthew J. Thomas, and Stefanos N. Roulakis

 

 

 

Action Item: The creation of the National Jones Act Division of Enforcement (“JADE”) signals that U.S. Customs and Border Protection has made Jones Act outreach and enforcement a national priority. U.S. and foreign stakeholders in the coastwise trade, including the offshore sector, should consult with counsel to discuss the implications of the establishment of JADE and activities that could implicate the Jones Act to help ensure compliance. Continue reading “CBP Announces the “Jade”—A New Enforcement Division for the Jones Act”

The U.S. Imperative for New Icebreakers

Mainbrace | March 2016 (No. 2)

Joan M. Bondareff and James B. Ellis

Executive Summary

The U.S. Coast Guard, under new guidance from President Barack Obama, is moving forward to acquire one new polar icebreaker for the United States. But the United States, as a leading maritime power and Arctic nation, needs more icebreakers and has yet to determine how to fund these very expensive ships. This article describes the United States’ disappointing history with polar icebreakers and why they are badly needed. Continue reading “The U.S. Imperative for New Icebreakers”