Frozen East Coast Pays as Law Blocks Cheaper Fuel Flows

As freezing weather drained stockpiles of propane to their lowest seasonal level in two decades on the U.S. East Coast this month, shivering New Englanders couldn’t tap abundant supplies sailing out of Texas. They had to look 4,000 miles away to more-expensive heating fuel from Europe.

The reason? The Jones Act, a 94-year-old law that prohibits non-U.S. ships from transporting cargoes between the country’s ports. With pipelines full and not a single eligible propane tanker to deliver fuel from Houston to states such as New York, consumers have had to pay more than $100 a metric ton extra for propane from across the Atlantic.

“It’s kind of a crazy thing, where we’re sending ships to Europe and then in return, at some point in time, Europe is sending propane cargoes back to us,” Peter Fasullo, a principal at energy consultant EnVantage Inc. who has been following the natural gas liquids market for over 30 years, said by phone from Houston. “You have to think, isn’t there a more efficient way of doing this?”

Related: Natural Gas Futures Gain on Forecasts for Frigid March Weather

This costly two-way propane trade is the latest example of how the unforeseen U.S. boom in shale oil and gas has left energy consumers and producers, such as Houston-based Enterprise Products Partners LP (EPD), complaining about outdated laws and infrastructure.

Jones Act

Trading in growing domestic supplies of heating oil and gasoline has also been inhibited by the Jones Act. Oil drillers are lobbying the government to allow crude exports, currently banned under a different 39-year-old law.

The Jones Act has a broad support group among U.S. shipyards, vessel owners and labor unions, such as the Washington, D.C.,-based American Maritime Partnership, which said in an emailed statement yesterday that it is critical for the U.S. economy and national security.

Demand for propane jumped this winter as an arctic weather system, or polar vortex, caused temperatures to plunge from Boston to Miami. The more than 3 percent of households in the Northeast that use propane as a main source of heating are expected to spend on average $206, or 11 percent, more on the fuel this winter than last, according to the U.S. Energy Information Administration.

Propane stockpiles in the region dropped to 1.6 million barrels in the week ended Feb. 14, the lowest level for the time of year since 1994, said the EIA, the Energy Department’s statistical arm. They were at 1.68 million last week, the lowest seasonal level since 2010.

Cheaper Fuel

“If you didn’t have the Jones Act, you could have had this thing resolved pretty easily by moving product off the Gulf Coast into the Northeast,” James Teague, the chief operating officer of Enterprise Products, which runs propane export and transportation facilities, said in a conference call on Jan. 30. “We don’t have that in our toolbox.”

A ton of propane cost about $673 in Houston on Feb. 24, according to data compiled by Bloomberg. Were the Jones Act not in place, this could be transported by tanker to the port of Philadelphia for about $18 a ton, based on current charter rates compiled by ship broker Clarkson Plc, Erik Stavseth, an analyst at Arctic Securities in Oslo, said by phone on Feb. 24.

The same product was about $785 in Northwest Europe, according to the Gaithersburg, Maryland-based Oil Price Information Service, and would cost $28 a ton to ship to Philadelphia, Stavseth said. This cargo would cost about $121 per ton, or 18 percent, more than product shipped from the Gulf, if such a journey were possible.

Foreign Propane

Signed into law in 1920, the Jones Act requires all domestic cargoes to travel on vessels that are U.S.-built, - owned and -crewed. Limited supply has pushed up rental rates for such vessels carrying other fuels including heating oil, making international imports a cheaper option.

U.S. authorities tried to improve the flow of propane overland by ordering Enterprise Products to prioritize propane shipments by pipeline from Texas to the Midwest and Northeast and authorizing truck drivers moving propane and other heating fuels in 34 states to work longer hours.

“We have wanted Jones Act waivers for ships from Houston to New England,” Jeff Petrash, vice president of Washington-based trade group the National Propane Gas Association, said in an e-mailed answer to questions. “It would have greatly taken the pressure off the Northeast and supplied New England with domestic propane rather than the foreign propane.”

The U.S. Maritime Administration, part of the Department of Transportation, said the Jones Act had not affected supply of propane to the Northeast.

Emergency Waivers

“Both U.S.-flag and non-U.S.-flag vessels were fully employed” during the recent freezing weather, meaning the law did not negatively affect trade, Kim Strong, spokeswoman for the Maritime Administration, said in an e-mailed answer to questions. “The Jones Act supports U.S.-flag vessel operators, U.S. mariners, and U.S. shipyards vital to this country’s economic and national security.”

Short-term waivers to the Jones Act have been issued during emergencies, most recently in the aftermath of Hurricane Sandy, when non-U.S. flagged ships were allowed to deliver petroleum products from the Gulf coast to the storm-damaged Northeast.

The rise in shale oil and gas production has made the U.S. more self-sufficient. It supplied 86 percent of its own energy in the first 11 months of 2013, the most since 1986, EIA data show. U.S. production of propane and propylene, byproducts of natural gas processing and petroleum refining, rose by 39 percent in the four years to January, enabling the country to be a net exporter of the fuel in 2012, the most recent full year of data, according to the EIA.

Exports Triple

Total U.S. exports of the fuels more than tripled between 2009 and 2013. They reached an average of 373,000 barrels a day in the first seven weeks of this year. At the same time, imports of the fuels on the East Coast rose to a four-year seasonal high of 73,000 barrels a day, according to Energy Department data compiled by Bloomberg.

“We were shipping propane out of the south side and bringing it in on the north side. It’s ridiculous,” Bill Smith, who purchases the fuel wholesale to sell to domestic consumers and businesses in Delaware, said by phone on Feb. 21, referring to the exports and imports. Smith raised the price he charges for a gallon of propane by 20 percent to $3.59 in late January, from $2.99 at the beginning of the month.

“The Jones Act, which is the most stupid law ever on books, was good for its time, but it’s a little out of date,” he said.

Lower Prices

Gasoil used for heating has also been shipped from Europe to the U.S. Northeast, even as exports of similar fuels from the Gulf Coast run near record levels, the International Energy Agency said in a report published Feb. 13. Revoking the Jones Act would reduce gasoline prices by as much as 15 cents a gallon by increasing the supply of ships able to shuttle the fuel between U.S. ports, Fadel Gheit, an analyst at Oppenheimer & Co. in New York, said by phone Feb. 26.

As the shale boom continues, making the U.S. the world’s biggest oil producer by 2015 according to the IEA, pressure on the Jones Act will grow.

“There’s going to come a point where things have to change,” Charlie Papavizas, a partner and specialist in maritime law at Winston and Strawn LLP, said by phone from Washington. “There’s going to be so much oil and so much gas, it’s like a tidal wave of issues. But for the foreseeable future I don’t see the law changing.”

To contact the reporters on this story: Natasha Doff in London at ndoff@bloomberg.net; Naomi Christie in London at nchristie5@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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