Shale oil production is saving shipbuilding in Philadelphia

PHILADELPHIA -- The shale boom and the Jones Act are saving shipbuilding at the 213-year-old Philadelphia Navy Yard.

On a part of the grounds now operated by Aker, workers apply a coat of gray paint to the deck of a new 800,000-barrel oil tanker in one dock. The hull of another tanker sits in the adjacent berth. Blue sparks fly from welding torches in the warehouse-sized shop where workers assemble sections known as grand blocks. Blue-green sheets of steel that will make up the skeleton of future ships are piled throughout the yard.

"Less than three years ago, you would have seen an empty dock, empty building dock, no grand blocks lying around and practically empty production halls," Kristian Rokke, the shipyard's executive chairman, said during an oil tanker christening ceremony April 25 at the shipyard. "Many were starting to say that we might not make it."

Instead, the company has tripled employment, created a $978 million, four-year order backlog and seen its share price quadruple in the past year.

U.S. shipyards are enjoying a surge of demand to build vessels to transport the record amounts of shale oil being drilled in the fields of Texas and North Dakota.

Federal law bans most oil exports, and the Merchant Marine Act of 1920, called the Jones Act, restricts shipments within the United States to U.S.-built vessels.

Aker plans to build 10 petroleum tankers over the next five years. General Dynamics Corp.'s shipyard in San Diego has announced plans for as many as eight more. That would be a 45 percent increase in the U.S. fleet from 40 vessels, according to the Washington-based Shipbuilders Council of America.

There are about 4,386 oil and product tankers globally. Most of the fleet is built in Asia, said Dave St. Amand, president of Navigistics Consulting, a Boxborough, Mass.-based maritime firm.

Smaller U.S. shipyards manufactured 341 tank barges in 2013, up 88 percent from 2011, according to Tim Colton, a Delray Beach, Fla.-based analyst.

"Everyone that wants to build commercial product-carrying vessels is full right now, and it hasn't been that way in a long time," Mr. St. Amand said. "It's increased employment all over. It's been a boon. It's been real good for the yards."

Higher crude prices and advances in horizontal drilling and hydraulic fracturing have helped increase production by 57 percent in the past five years to the highest level since 1986. Pipelines bring crude to the Gulf Coast, where inventories rose to a record in May.

The glut has pushed the down the price of crude on the Gulf Coast. Light Louisiana Sweet this year has cost an average of $3.86 a barrel less than Brent, the benchmark grade foreign imports are based on.

A 1975 law bans most oil exports, so shipments must be between U.S. ports, and per the Jones Act, only on U.S. vessels.

Scarcity has raised demand for qualifying tankers. Phillips 66 leased two last year to carry crude around the Gulf of Mexico to its New Jersey refinery.

"I just wish we had gotten three or four," Greg Garland, the company's chief executive officer, told reporters at a May 7 news conference in Houston. "Outside of pipelines, it's the best way to transport oil if you're a coastal refiner."

Philadelphia became home to the U.S. Navy's first shipyard in 1801 on land leased by the Continental Congress in 1776. It moved to its current home on League Island in 1871, and in the 1940s employed more than 50,000 men and women to build war vessels, including the USS New Jersey, the most-decorated battleship in U.S. history, which fought in World War II, the Korean War and the Vietnam War.

The Navy closed the facility in 1995. State and local governments later pledged $429 million in incentives to Kvaerner to help redevelop part of it into a commercial shipyard. Other tenants on the site, now an industrial park, include Tasty Baking Co., GlaxoSmithKline and Urban Outfitters's corporate headquarters.

Kvaerner merged with Aker in 2005. The shipyard trades as Aker Philadelphia Shipyard on the Oslo Stock Exchange, with a majority of its shares owned by Aker's investment arm.

The yard reopened in 2000 and built several container ships and double-hulled product carriers to replace single-hull vessels that had been outlawed following the Exxon Valdez oil spill in 1989. Employment fell from 1,250 in 2009 to 330 in 2011.

"We didn't have anything. The future looked bleak," said shipbuilder Fred Chamberlain, who has worked at the yard since 2000. "But management told us to stay on top of our game, always reassuring us that things were on the downside now, but we were going to be alright."

State and city governments contributed another $42 million to the yard in 2011 to help it build two petroleum tankers eventually sold to Jacksonville, Fla.-based Crowley Maritime Corp.

Now, the yard has increased employment to more than 1,100, with workers typically earning between $50,000 and $70,000 a year, Mr. Chamberlain said.

He and other shipbuilders piece together steel into modules in white aluminum buildings large enough to house several football fields. Blue cranes hoist the modules to the yard's building dock, where they are welded together into ships.

Hundreds of workers came to the yard on their day off April 25 to see the fruit of their labor, the christening of the Liberty Bay, an 800,000-barrel oil tanker they built for Exxon Mobil Corp. to transport crude from Alaska to West Coast refineries.

"I've been in this business since I graduated from college in 1980," Rob Grune, Crowley's senior vice president and general manager for petroleum services, said in an interview. "In terms of all forms of commercial shipbuilding, I don't think I've ever seen it this healthy."

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