U.S. Refineries May Seek Jones Act Waiver Amid Strike, Torrance Explosion

An ongoing labor strike and an explosion at a major California facility may compel U.S. West Coast refiners to seek a Jones Act waiver from the Obama administration, arguing that the region could soon face gasoline shortages, sources said this week.

While the application process is confidential, government sources said that no company has formally applied for a Jones Act waiver. But market and legal sources said ExxonMobil is considering such a request amid climbing prices and supply shortages.

ExxonMobil spokesman Todd Spitler declined to comment, citing company policy.

The Jones Act, enacted as the Merchant Marine Act of 1920, requires all vessels shipping cargo between two U.S. locations to be U.S.-built, majority U.S.-owned and have at least 75 percent of the crew be U.S. citizens. Jones Act vessels are more expensive than non-Jones Act vessels, however, and are in short supply, making it difficult to move gasoline and other products to California from other U.S. ports.

The Jones Act has made it "virtually impossible" and "excessively costly" to move oil to and from the West Coast, a Center for Strategic and International Studies report published Thursday said.

One refining industry lobbyist said there is already a shortage of U.S.-flagged vessels, a situation that could be exacerbated by an ongoing strike and the February 18 explosion at ExxonMobil's 149,500-barrel per day (b/d) Torrance, California, refinery, which have driven up prices and could force one or more refiners to seek a waiver. The explosion shut a gasoline-making 98,000 b/d fluid catalytic cracker, which market sources expect to remain idle for six months.

The United Steelworkers strike, affecting 20 percent of U.S. refining capacity, entered its fourth week on Monday. Just one refinery -- Tesoro's 166,000 b/d Golden Eagle plant in Martinez, California -- has been idled by the job action.

"Gasoline has gone nuts," a West Coast market source said. "There's no premium around here. Good luck finding it. They need alkylates to blend gasoline but there's none about."

West Coast market sources said a shortage of high-octane blending components, such as alkylates, at California refineries is pressuring prices.

Los Angeles CARBOB was last heard talked at a 49 cents/gal premium to the NYMEX April futures contract Thursday, making it the most expensive low-octane blendstock in the country. Premium Los Angeles CARBOB was talked at a 74-cent premium to the NYMEX April futures contract.

Los Angeles CARBOB Wednesday was assessed at $2.5482/gal, 75 cents/gal above Houston waterborne CBOB. The higher quality CARBOB typically trades at a premium to Houston CBOB, although that premium has blown out from just 5.62 cents/gal January 26.

That premium would cover the cost of shipping on a Jones Act vessel from Houston to Los Angeles via the Panama Canal. One USWC broker pegged the cost at 40-50 cents/gal, but also said Jones Act ship availability was very tight.

Charlie Papavizas, chair of the law firm Winston and Strawn's maritime and admiralty practice, said that a national defense justification is needed for a Jones Act waiver and that commercial reasons alone would not meet the criteria.

However, refiners could argue that a potential gasoline shortage could justify such a waiver, similar to arguments that led to temporary Jones Act waivers issued following hurricanes Katrina and Rita in 2005 and Sandy in 2012, he said.

"Sometimes national defense gets interpreted in a funny way," Papavizas said. "What was the national defense justification if people couldn't get their gas in gas stations in the Southeast because of Katrina or Rita? I don't know, but it sufficed then."Because very few refineries outside of California can make the high-spec, low sulfur blendstock, that same argument could be made about gas shortages due to the refinery strike and Torrance explosion.

BP spokesman Scott Dean confirmed Thursday that BP's 234,000 b/d facility in Blaine, Washington, can produce CARBOB, and Valero spokesman Bill Day confirmed that the company's 325,000 b/d Corpus Christi, Texas, refinery is capable of producing the blendstock.

Alternatively, the West Coast may import gasoline and blending components from South Korea's 840,000 b/d Ulsan refinery, or from Neste Oil and Reliance in Singapore. The products vessel Ginny is currently heading to Los Angeles from South Korea and is due to arrive Sunday, data from Platts cFlow ship-tracking software showed. The Selini, also from South Korea, is due to arrive in Los Angeles March 9, while the Res Cogitans is due to arrive March 10.

Cargoes from South Korea typically carry jet fuel to the West Coast, but sources are watching for gasoline imports from that region.

Data from the California Energy Commission showed that in the week ended February 20, refinery production of CARBOB fell 4.4% to 6.115 million barrels, down 574,000 barrels from the same time last year.
Refinery stocks of CARBOB at 5.482 million barrels were down 16.6% from the same time last year.

Jones Act waiver requests are considered by the U.S. Customs and Border Protection within the Department of Homeland Security. But other agencies, such as the Department of Defense and the Department of Energy, would likely be consulted if any request was made. The US Maritime Administration within the Department of Transportation would also be required to determine if there were no vessels available, necessitating the waiver.

A CBP official on Thursday confirmed that no refiner had formally applied for a Jones Act waiver.
Papavizas said if U.S.-flagged vessels are available, even if the shipping companies are charging what refiners deem excessive rates, a waiver will not be granted.

"The trick is ... is there U.S. tonnage available or not?" he said. "When there's literally no capacity left, then I could see a waiver being granted for a period of time until available capacity comes back."

U.S. refiners opposed to a change in current U.S. crude export policy have floated the concept of a waiver for certain crude shipments between U.S. portsin exchange for a relaxed export regime. This idea is fiercely opposed by the U.S. maritime industry.