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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. ' P S P W F S Z F B S T . B D ( 3 & ( 0 3 µ T F O H J O F F S J O H J O O P W B U J P O T I B W F T I B Q F E U I F X B Z T I J Q T µ D B S H P J T I B O E M F E 5 I J T V O S J W B M M F E F Y Q F S J F O D F J T B W B J M B C M F U P P X O F S T X I P X B O U U I F J S T I J Q T U P C F B T F G G J D J F O U B T Q P T T J C M F 8 I F U I F S U I F D B S H P F T B S F H F O F S B M E S Z C V M L D P O U B J O F S T P S 3 P 3 P W F I J D M F T 8 I F O Q M B O O J O H Z P V S O F Y U O F X C V J M E J O H U B L F B E W B O U B H F P G P V S D B S H P I B O E M J O H F Y Q F S U J T F 8 F µ M M D P N F V Q X J U I B T P M V U J P O U I B U O P U P O M Z T V J U T Z P V S J N N F E J B U F O F F E T C V U X J M M B M T P F O T V S F U I B U F G G F D U J W F D B S H P I B O E M J O H J T N B J O U B J O F E U I S P V H I P V U B T I J Q µ T M J G F U J N F : P V D B O S F M Z P O . B D ( 3 & ( 0 3 R V B M J U Z 8 F V O E F S T U B O E T I J Q T B O E X F L O P X B C P V U D B S H P I B O E M J O H e looking for fresh ideas Profit from our experience Shipbuilding Technology Robert Cowen is a partner in the mar- itime and environ- mental practices at Venable LLP,. He previously served as COO and General Counsel of Overseas Shipholding Group, a publicly traded oil tanker companies. nefit From Dramatic Growth in LNG Trade MR AUGUST2006 #4 (25-32).qxd 8/3/2006 9:48 AM Page 29
