REFILE-Customs about-face could make Bahamas key source for U.S. gasoline

Thu Apr 24, 2014 5:59pm EDT

(Refiling to show in 2nd paragraph company is complying with Jones Act)

By Anna Louie Sussman

NEW YORK, April 23 (Reuters) - A massive oil storage facility in the Bahamas may offer nimble gasoline traders a new way to profit by shipping fuel in foreign ships from the oversupplied U.S. Gulf Coast to the gasoline-thirsty East Coast following a recent U.S. Customs ruling.

The March 6 judgment in favor of Buckeye Partners LP , which owns the Bahamas Oil Refining Company (BORCO) oil storage hub, allows traders to use lower-cost foreign ships to transport fuels between the Gulf and East Coast via BORCO without violating a near-century old law called the Jones Act.

The law requires U.S.-made fuels to be moved between domestic ports using a tiny fleet of U.S.-flagged, U.S.-built and U.S.-crewed ships. It costs three times more to transport with Jones Act ships than with foreign-flagged ships.

In its ruling, Customs said traders may export to the Bahamas certain blending components of gasoline on a foreign-flagged vessel and ship it back to the United States on a foreign-flagged ship if it is blended to produce the gasoline grades RBOB and CBOB.

The 25-million-barrel BORCO storage hub, the Caribbean's biggest, is located less than 100 miles (160 km) from the Florida coast.

The ruling states the blending must create a "new and different product" for it to be eligible for re-export to the United States on a foreign-flagged ship.

Industry participants said the ruling, which came after earlier petitions from Buckeye in January 2013 and August 2012 had failed, could potentially open up a new trading route from the Gulf Coast to the East Coast.

By giving traders an alternative to scarce and costly U.S.-flagged Jones Act ships, the new option could also back out imports from European and Canadian refiners who typically sell gasoline into the U.S. East Coast.

Going via the Bahamas would be "a hell of a lot cheaper" than using a Jones Act vessel, said Jerry Lichtblau, director of research at True North Chartering in Wilton, Connecticut.

With Jones Act tankers commanding as much as $100,000 a day in the spot market thanks to soaring U.S. energy production, shipping costs from the U.S. Gulf Coast to the New York Harbor can run as much as $6 per barrel, or 14 to 15 cents a gallon, shipping sources said.

Lichtblau estimated the transport costs for the same route via the BORCO terminal at less than $2 per barrel.

Buckeye could not be reached for comment.

STILL IMPORTING GASOLINE

Shipping industry participants said Buckeye, which bought the 44-year-old plant in 2011, has executed the trade a handful of times since the March 6 ruling and was set to load one cargo of gasoline in BORCO at the end of the month.

It is unclear how much of the 25-million-barrel capacity is dedicated to refined products, or who is trading from there, although Shell Trading Company and JPMorgan Chase & Co have won similar rulings for moving fuel oils through BORCO in the past. Buckeye's 2012 annual report said three customers account for two-thirds of BORCO's storage revenue.

JPMorgan declined to comment.

If the economics work and the trade takes hold, Jones Act ship owners and operators could see their stranglehold on the U.S. coastal market loosened.

"If it's done enough, you're backing out potential business out of the Gulf to Florida," said Bruce Holzberg, a Jones Act broker at Connecticut-based shipbroker MJLF.

Even with record domestic oil production and gasoline exports, the United States remains a net importer of gasoline, thanks largely to the Jones Act. The U.S. Energy Information Administration (EIA) projects total finished motor gasoline imports to average 240,000 bpd this summer.

To be sure, domestically produced gasoline still lands in storage tanks in New York and New Jersey from Houston via the Colonial pipeline, but it is not enough to satiate the populous Northeast. Most Jones Act tankers shuttle between Gulf Coast refiners and Florida ports such as Tampa or Port Everglades.

"Given existing pipeline and tanker constraints, there's been a lot of discussion about how the Gulf Coast could service the East Coast with additional volumes of gasoline," said John Galante, an analyst with Energy Security Analysis, Inc., in Wakefield, Massachusetts. (Reporting by Anna Louie Sussman; editing by Josephine Mason and Cynthia Osterman)

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