The Jones Act is a challenge for the LNG industry in the United States. The Jones Act requires that all vessels used to transport merchandise between points in the United States satisfy certain requirements: to be Jones Act compliant, vessels must be U.S.-built, U.S.-owned, U.S.-flagged, U.S.-operated and U.S.-crewed, subject to certain limited exceptions. 

No Jones Act Compliant LNG Tanker

There is currently no Jones Act compliant LNG tanker, and therefore, no LNG tanker can move LNG between U.S. terminals—for example from the Gulf region, where many LNG plants are located, to regions where there is a need for LNG, such as Puerto Rico or New England. As a result, the vessels that pick LNG up from U.S. terminals are all directed to non-U.S. terminals, and the vessels that deliver LNG to U.S. terminals all come from non-U.S. terminals. There are some Jones Act compliant barges that can handle minor operations, such as moving a small quantity of LNG from the shore to a tanker that is waiting at a U.S. anchorage point in order to cool its tanks down. These barges cannot move large quantities of LNG between the regions of the United States that export LNG, and those that need it.

This situation is unlikely to change in the near future. From a commercial perspective, there is probably no business case to invest in building the first Jones Act compliant LNG tanker, because such a vessel will be too expensive to be competitive in the international market, and there is currently not enough domestic need to keep such a vessel employed in the United States only. And from a legal perspective, the federal agency in charge of enforcing the Jones Act’s requirements on the coastwise transportation of merchandise, Customs and Border Protection (“CBP”), has not given any indication that it intends to relax these requirements for the LNG industry.

New CBP Ruling on Two-Part-Loads Scenario

CBP issued on November 14, 2023 a Jones Act ruling (HQ H335463) that further limits the types of operations that foreign LNG tankers can undertake in the United States. As a result of this new ruling, in addition to being precluded from loading U.S.-bound LNG, foreign tankers will be precluded from loading several part cargoes of foreign-bound LNG at several U.S. terminals. 

This is because, when an LNG tanker loads a first part cargo at a first U.S. terminal, and then loads another part cargo at another U.S. terminal, a small portion of the LNG loaded at the first terminal must be released through the vapor return lines at the second terminal, in the form of vaporized LNG or boil-off gas, in order to control pressure levels in the tanks of the LNG tanker during the second loading operation. CBP has held that this is not permissible because the vaporized LNG is transported from the first to the second terminal on a vessel that is not Jones Act compliant in violation of the Jones Act. 

CBP noted in the ruling that the release of vapor at the second terminal is necessary for safety reasons, but emphasized that the Jones Act does not contain any exception for safety considerations. CBP has also previously refused to recognize any de minimis exception to the Jones Act, such that the minimal quantity and value of the product—in this case, the boil-off gas—does not avoid the need to use a Jones Act compliant vessel for any intra-U.S. movement.

Implications for the U.S. LNG Industry

The new CBP ruling effectively prevents the loading of two part cargoes of LNG at two different U.S. terminals, and it can have broader implications as well.  For example, even the transfer of a small quantity of LNG to a tanker for gas-up or cool-down purposes at a location in the United States, prior to a loading operation at a different location in the United States, could be found to violate the Jones Act in view of CBP’s reasoning in the recent ruling: a small part of the LNG transferred for gas-up or cool-down purposes will also be returned to the shore through the vapor lines during the loading operation, and that LNG will arguably have been transported between two points in the United States on a vessel that is not Jones Act compliant.

It remains possible that the ruling will be revoked, or that CBP will reach a different conclusion when considering a different scenario, given that each of its rulings is very fact specific.  We expect to see more CBP rulings on the Jones Act compliance of LNG operations as LNG production and export activities are intensifying in the United States.  Players in the industry will likely seek rulings from CBP to optimize the use of foreign LNG tankers in compliance with the Jones Act.