Published on 25 May 2017
On May 10, 2017, U.S. Customs and Border Protection (“CBP”) issued Customs Bulletin & Decisions, Vol. 51, No. 19, “Withdrawal of 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 International Marine Contractors Association (“IMCA”) immediately welcomed this Decision and noted that it would protect the economy of the United States and protect against significant American job losses in the Gulf of Mexico (“GOM”). This Decision represents a pivotal step in protecting the U.S. National economy by promoting the offshore oil and gas industry. In addition, IMCA noted that it looked forward to working with stakeholders in the future with regard to how the Jones Act should be interpreted to foster American jobs and prosperity.
Unfortunately, there have been numerous media releases and various press statements by some other interested parties that creates the incorrect impression that this Decision puts foreign interests first to the detriment of the national and economic security of the United States including U.S. companies and jobs. In short, nothing could be further from the truth. Such releases and statements simply cannot be ignored. As a result, IMCA would like to set the record straight and to demonstrate why the Administration’s decision was not only a reasoned decision, but the correct one.
The primary thrust of these statements allege that the Decision is deeply damaging to the U.S. economy, American crews and shipyards, and that U.S. vessels have the capacity to meet industry’s needs and instead will be tied to the dock while foreign vessels profit with foreign crews at work. As a starting point, these allegations are simply wrong which is exactly why the Decision was reasoned and correct. Specifically, the process being followed by CBP was hasty, and did not take into account the economic, safety, and environmental aspects of the proposal, let alone the impact on jobs. Equally important, the process being used was geared for the revocation/modification of a single CBP ruling, one at a time – and not geared to reverse four decades of rulings and precedent. As the Office and Management Budget director Mick Mulvaney recently articulated, the Obama Administration simply failed to follow the law in many circumstances and imposed regulation without proper regard to the cost side of that analysis. In other words, it is critical that the government and industry perform the proper due diligence to ensure the actual impacts of changing the current precedence are fully understood to make sure there are not devastating unintentional consequences that adversely affect critical U.S. interests.
With regard to U.S. fleet vessel capacity, there are virtually no Jones Act vessels capable of performing any of the complex deepwater construction operations on the U.S. Offshore Continental Shelf (“OCS”). In addition, despite investment in recent years, there remains a shortfall of deepwater capable light construction vessels. While the Jones Act fleet has the capability to support shallow water activities, the existing Jones Act fleet simply cannot meet deepwater offshore construction and well intervention requirements, and there remains a significant shortage of deepwater capable inspection, maintenance, and repair capacity which can perform subsea lifts in water depths of 1,000m (3,280 ft.) or greater. Accordingly, the operational restrictions that could have been imposed on foreign vessels under the CBP Notice, along with the insufficient Jones Act capability to sustain offshore demand, would have had substantial adverse implications to ongoing and future deepwater activities.
The lack of U.S. vessels cannot practicably be addressed by Jones Act waivers. Jones Act waivers are clearly not an appropriate response or practical solution to commercial matters, as such waivers are only issued in the interest of “national defense,” and are subject to a rigorous review and approval process by the U.S. Department of Homeland Security (“DHS”), Department of Defense, Department of Energy, and the Maritime Administration. In absence of issues implicating national security, it will be extremely difficult, if not impossible, to obtain waivers for straightforward commercial projects. Equally, it is unrealistic for oil companies to commit to multi-billion dollar deepwater investments on the basis that their contractors might obtain waivers – where it is highly unlikely that such waivers will be granted.
As to the potential economic impact, the American Petroleum Institute (API), the voice of the American oil and gas industry, published their economic impact study on April 4, 2017, which unequivocally demonstrates the hugely significant and far-reaching unintended consequences of the changes that could have resulted from implementation of the CBP Notice during the 2017-30 time period, including:
- $75 billion of investments terminated by oil and gas companies
- $90 billion of GDP contribution to the U.S. economy lost
- $27 billion of U.S. Government Revenues lost
In short, according to API, upwards of $200 billion could have been lost. The intended benefits of CBP’s proposed actions are dwarfed by the negative impact on investment, and contribution to the U.S. economy, let alone local communities.
With regard to investment and U.S. jobs creation, the fact is, the engagement of specialist foreign vessels in U.S. OCS activities has encouraged inward investment and job creation in the United States. A survey by IMCA of 12 global and international contractors in February 2017 found that these companies employed almost 11,000 people in the United States, including over 1,100 seafarers and offshore workers. International companies have invested heavily in onshore spool bases, industrial facilities, and U.S. based design and management capability providing American jobs for American workers. The CBP Notice would have severely restricted the operations of foreign-flag vessels, thereby slowing down or shutting down offshore operations and production. This would have resulted in decreased demand for Jones Act vessel support, with a loss of U.S. jobs and revenues. Companies would have been forced to either stop investing in work in the GOM or forced to build components in foreign yards and transport components from foreign yards to the offshore field (e.g. to the U.S. OCS from Mexico). In this regard, API estimated in its economic study that if the CBP proposal was implemented, up to 30,000 U.S. jobs were projected to be lost in 2017 and a projected averaged decrease in employment of over 80,000 U.S. jobs from 2017 to 2030. The brunt of these U.S. jobs losses would have been borne by U.S. Gulf Coast States.
This debate is not about foreign employers under-cutting the wages of U.S. workers – which is certainly not the case in any event. Instead, it is about different markets in the offshore industry using very different types of vessels performing vastly different jobs. In short, it is the difference between the types of vessels capable of engaging in deepwater construction activities and the types of vessels capable of engaging in transportation activities.
The CBP Notice would not have strengthened national security measures, as foreign personnel aboard foreign vessels are already subject to strict U.S. immigration laws and visa requirements, as enforced by the Department of State, DHS, CBP, and the U.S. Coast Guard. Foreign personnel are permitted to work aboard vessels engaged in U.S. OCS activities only where the vessel owner/operator obtains a manning exemption from the U.S. Coast Guard. Foreign crews must go through extensive security vetting by numerous U.S. agencies before they can enter the United States at both air and port borders. Moreover, foreign-flag vessels operating in U.S. waters, including the U.S. OCS, are currently subject to strict security requirements under international, flag-state, and U.S. federal law. Thus, these foreign vessels are not a threat to homeland security nor an immigration free zone and the CBP Notice would not have enhanced the already strict security regulatory and vetting requirements.
With regard to taxes, the CBP Notice would have had no impact on current U.S. federal and/or state tax requirements mandating that foreign companies that own and/operate foreign-flag vessels pay applicable taxes. Instead, foreign companies operating on the OCS will remain liable for applicable taxes and may, like a U.S. business operating internationally, utilize double tax treaty relief or any other tax relief lawfully available to them. The United States has an extensive network of double tax treaties, in which the U.S. and the treaty partner have agreed the allocation of taxing rights for income and profits arising to residents of one sovereign state from activities carried on in the other state, and the requirements for residents to be eligible for treaty benefits, in each case based on generally accepted international principles. Applicable tax treaties and requirements, which are separate and apart from CBP requirements, have been agreed upon for the mutual benefit of contracting parties and any perceived benefits for foreign companies must be considered alongside the benefits for U.S. companies similarly operating under these treaties in foreign countries.
Finally, it is important to keep in mind that the overall economic situation of our offshore industry today is depressed. Indeed, the offshore industry is suffering from one of the deepest downturns ever seen, and mariners across the entire globe are impacted by the lack of demand for our collective services. This is not about putting foreign interest first above that of U.S. companies and U.S. mariners. We are in a $50 a barrel oil price environment with an oversupply of vessels of every category, with very limited demand. Every contractor and/or vessel owner in this industry, whether of U.S. or foreign origin, is impacted and has vessels laying idle, resulting in deep staff cuts. Let us not lose sight of the situation we find ourselves in, rather, let’s find a common-sense approach for all sides to coexist as we have since the offshore industry started.
In conclusion, the Decision puts U.S. jobs, U.S. security, the U.S. economy, and the sovereignty of the United States first, not foreign interests, by making sure these U.S. interests are not harmed by hasty action without understanding the potential consequences as outlined above.