Offshore Energy Projects Must Consider Jones Act’s Reach

Offshore energy projects must carefully consider coastwise trade laws, such as the Jones Act, when making installation, manning and charter arrangements.

Section 27 of the Merchant Marine Act of 1920, commonly referred to as the Jones Act, dictates the types of vessels that may be used in the development, construction and operation of Outer Continental Shelf (OCS) installations. It also may operate to limit noncitizen participation and impact how transactions are to be structured.

Recent developments have extended the regulatory law’s reach from oil and gas activities on the OCS to energy sources outside minerals—such as wind. Offshore energy projects should consider the requirements created by the Jones Act and Outer Continental Shelf Lands Act and how they could affect citizenship, manning, crewing and charter arrangements.

The Jones Act

The coastwise trade laws of the U.S. consist of various statutes enacted by Congress and are administered and enforced by the U.S. Coast Guard (USCG), U.S. Customs and Border Protection (CBP) and the Maritime Administration, an agency within the U.S. Department of Transportation (DOT).

The Jones Act, currently codified at 46 U.S.C. § 55102, provides that “[a] vessel may not provide any part of the transportation by water, or by land and water, between points in the United States to which the coastwise trade laws apply, either directly, or by a foreign part, unless the vessel …” is wholly owned by U.S. citizens and has been issued a coastwise trade endorsement (or is exempt from documentation but otherwise coastwise trade eligible).

A coastwise transportation of merchandise occurs when merchandise laden at a point embraced by the coastwise laws is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise. Upon request, CBP will issue Ruling Letters advising whether certain contemplated maritime activities require the use of a U.S. flag vessel with a coastwise endorsement.

Pursuant to the Jones Act, only vessels that are wholly owned by U.S. citizens and hold a Certificate of Documentation issued by the USCG with a coastwise trade endorsement are allowed to transport merchandise or passengers between points in the U.S. to which the coastwise trade laws apply. Similarly, coastwise qualified vessels are required to tow a vessel between ports and places in the U.S. to which the coastwise laws apply, and to conduct dredging in the navigable waters of the U.S. Jones Act violations may result in civil penalties and merchandise transported in violation of the Jones Act is subject to forfeiture to the U.S. 

The Jones Act applies to operations on the OCS pursuant to the Outer Continental Shelf Lands Act (OCSLA), which extends the laws of the U.S. to “the soil and seabed of the Continental Shelf and to all artificial islands, and all installations or other devices permanently or temporarily attached to the seabed which may be erected thereon for the purpose of exploring for, developing or producing resources therefrom . . .”. 43 U.S.C. § 1333(a)(1). In 2021, Congress amended OCSLA to specifically apply to “non-mineral energy resources.” Id.

While OCSLA has historically applied to oil and gas operations on the OCS, CBP has construed the 2021 amendment as extending OCSLA to wind activities on the OCS. As such, the Jones Act is applicable to operations on the OCS that involve traditional oil and gas activities and wind activities.

The USCG operates the National Vessel Documentation Center and administers laws and regulations related to the documentation of vessels under the U.S. flag, including issuance of certificates of documentation with coastwise trade endorsements.

For a vessel to receive a certificate of documentation with a coastwise trade endorsement, it generally must be built in the U.S., owned by U.S. citizens and crewed by U.S. citizens.

The vessel-owning entity must satisfy the citizenship requirements set forth in the United States Code. The citizenship test is applied up the chain of beneficial ownership such that an intermediate company organized under the laws of a state in the U.S. will not automatically be deemed a U.S. citizen if its ultimate corporate parent does not satisfy the citizenship requirements. For the owning entity to be deemed a U.S. citizen, there can be no non-U.S. citizen control over it.

In any offshore energy project, the Jones Act may limit the participation of noncitizens and may impact how transactions are structured. Since non-U.S. citizens cannot own or operate a coastwise trade qualified vessel, transactions (including financial and charter party arrangements) must be carefully reviewed to ensure compliance with the Jones Act and other coastwise trade laws. 

Joint ventures (JV) involving U.S. citizens that satisfy the requirements of the Jones Act might be considered as a possible structure. Any proposed JV would have to satisfy the above statutory requirements under the Jones Act to qualify as a coastwise citizen eligible to own and operate a U.S. flag vessel engaged in coastwise trade. The availability and use of warrants or options to buy shares, or the use of convertible debt or traditional debt secured by a ship mortgage under the Ship Mortgage Act, 46 U.S.C. Chapter 313, must also be evaluated as part of compliance with the Jones Act. 

The overarching issue of “control” must be considered since a foreign citizen may not have impermissible control over any JV if the Jones Act applies. Parties may submit a request to the USCG’s National Vessel Documentation Center for approval that a proposed JV or other structure complies with the Jones Act.

Outer Continental Shelf Lands Act Manning Requirements for OCS operations

OCSLA requires U.S.-owned vessels operating on the OCS to be manned by U.S. citizens or permanent resident aliens. 43 U.S.C. § 1356(a)(3).

The OCS manning requirements are not applicable to any vessel that is over 50% owned by citizens of a foreign nation or over which the citizens of the foreign nation have a right to exercise control. 43 U.S.C. § 1356(c)(2). However, such vessels must obtain a Letter of Non-Applicability from the USCG to operate on the OCS.

The OCS manning restrictions are applicable only to foreign flag vessels that are U.S. owned. U.S. flag vessels are subject to the strict manning requirements for U.S. documented vessels.

A vessel otherwise subject to the OCS manning requirements may obtain a one-year exemption (Letter of Exemption) to those requirements if the owner or operator of the vessel can establish that, despite its diligent efforts, it cannot identify a sufficient number of qualified U.S. citizens or permanent resident aliens to man the vessel. 43 U.S.C. § 1356(c)(1)(B).

Additionally, workers who are not within the regular crew of a vessel are not subject to the OCS manning requirements. These workers are eligible for a Letter of Determination (Specialist Determination) that is issued by the USCG. 33 C.F.R. § 141.15.

Although CBP extended the application of the Jones Act to wind activities on the OCS pursuant to the 2021 amendment to OCSLA as noted above, the Coast Guard did not do the same with respect to the OCS manning requirements. As such, the OCS manning requirements are applicable to oil and gas activities on the OCS but not wind activities.

Citizenship, manning, crewing and charter arrangements in connection with offshore energy projects must be carefully considered and reviewed based on the applicability of the Jones Act and OCSLA to those projects.

Will Baldwin is co-leader of Jones Walker’s Maritime Industry Team and leader of the firm’s maritime transactional team, where he focuses on maritime transactions and marine finance. He also serves as co-chair of the firm’s offshore wind initiative.

Richard Bertram is a partner in the Maritime Practice Group and leader of the Maritime Regulatory Team. He has more than 30 years of experience handling a wide range of domestic and international admiralty and maritime matters, including transactions, litigation, arbitration, appellate, regulatory and administrative law, marine casualty investigations, regulatory compliance and marine pollution and environmental matters.

Scott Jenkins is a partner and leader of Jones Walker’s Maritime Practice Group and co-leader of the Maritime Industry Team. He advises clients on a broad range of maritime transactions, litigation, and compliance issues such as offshore regulatory matters, including Outer Continental Shelf manning requirements, the Maritime Labor Convention, and coastwise trade issues.