August 2006 29
of 2004, Congress adopted a highly
favorable tonnage tax election to pro-
mote the use of U.S. flag vessels operat-
ing in the foreign trades. Under a ton-
nage tax election, a U.S. flag operator in
the foreign trades pays only a nominal
annual tax based on the net tonnage of
the vessel. This eliminates the tax disad-
vantage of using a U.S. flag vessel in the
foreign trade. There is no requirement
for U.S. flag LNG tankers to be built in
U.S. shipyards because these vessels
will be engaged solely in the foreign
trades. This means that operators of
U.S. flag LNG tankers can order their
vessels from the same Far Eastern ship-
yards as their foreign flag competitors.
There is also no restriction on raising
capital for these vessels from foreign
investors because Jones Act citizenship
requirements do not apply to U.S. flag
vessels operating in the foreign trades.
The only economic impediment to
U.S. flag operation in the importation of
LNG arises from the higher cost of
using full U.S. crews. While the wages
of foreign LNG officers have risen dra-
matically, the cost differential of using
full U.S. crews is still likely to be sub-
stantial. But there are compelling com-
mercial and strategic reasons driving the
parties to find creative ways to reduce
U.S. flag operating costs and promote
the use of U.S. flag LNG tankers.
U.S. national security considerations
also strongly favor the use of American
officers and U.S. flag vessels to import
LNG into the U.S.
Today there are only five existing
LNG receiving terminals serving the
continental U.S. Reflecting the antici-
pated growth in LNG imports, the
Federal Energy Regulatory Commission
and the Maritime Administration have
granted approval for 17 new onshore
and offshore terminals and many more
applications are pending. Yet, even
many of those approved by federal
authorities continue to meet fierce local
community opposition. The opposition
stems in large part from the fear of cata-
strophic accidents or terrorist attacks
involving LNG tankers as they pass near
coastal communities.
Ways must be found to satisfy the
safety concerns of local communities or
else sufficient terminal capacity will not
be built and needed LNG supplies will
be diverted to markets in Europe and the
Far East. The use of U.S. crews and U.S.
flag tankers can add a significant addi-
tional dimension of security and control
in the movement of sensitive LNG car-
goes into U.S. coastal terminals. This
can go a long way toward addressing the
legitimate concerns of adjacent commu-
nities. The U.S. Congress has recog-
nized the strategic benefits of using of
U.S. flag vessels to import LNG. In
Section 304(a) of the recently enacted
Coast Guard and Maritime
Transportation Act of 2006, Congress
directed the Secretary of Transportation
to develop and implement a program to
promote the importation of LNG on
U.S. flag vessels. The increasing
demand for LNG has created a unique
opportunity for the U.S. maritime indus-
try to become a significant participant in
the expanding global LNG trade. It is in
the interest of all segments of the U.S.
maritime community to cooperate in
order to fully exploit this opening.
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