Albert D. Farr | Comment
As a converted World War II Liberty freighter, the METHANE PIONEER, with her balsa wood supports and plywood insulation, made a courageous transatlantic voyage in 1959 from Lake Charles, Louisiana, to Canvey Island, United Kingdom, to deliver the world’s first shipment of liquefied natural gas (LNG). This successful crossing helped the maritime practice strengthen its image in the oil and natural gas industry and reassured the global marketplace that LNG tankers would play a vital role in the commodity’s international transportation. Fifty years later, innovative natural gas extraction methods in the U.S. Barnett, Eagle Ford, and Marcellus shale fields have revolutionized the production process and created an oversupply of the commodity.
This U.S. natural gas surplus has sparked the interest of energy-hungry countries in the Asia-Pacific that depend on the relatively cheap, clean-burning fossil fuel to power their growing economies and conform to tightening environmental regulations. As a result, the energy industry’s focus has shifted to LNG marine transportation. However, only 379 LNG vessels currently operate throughout the world. In response to this shortage, the vessel construction industry has recently experienced a massive demand for LNG tanker orders.
This development is exciting news for the maritime industry, natural gas producers, and developing countries that need low-priced, efficient energy. Surprisingly, however, in contrast to producers who stand to profit significantly from the boom, the U.S. maritime industry may not accrue much economic benefit. Outdated U.S. maritime and tax laws prevent U.S.-owned, U.S.-flagged vessels from obtaining lucrative international shipping contracts. Federal maritime statutes, coupled with federal income tax regulations, have crippled the U.S. maritime industry and pushed capital investment into foreign vessel construction and trade. Over time, these puzzling anticompetitive policies have aggressively tipped the scales significantly in favor of foreign-flagged vessels.
This Comment will analyze the reasons for this imbalance and will use a tax-focused lens to provide explanations that will examine the ultimate damaging effects these policies have had on the U.S. maritime industry. While these antiquated tax policies may have previously bolstered foreign imports and provided inexpensive goods for the American consumer, the current tax laws on marine shipping income disrupt growth opportunities for a U.S. maritime industry that could benefit from the U.S. LNG export boom.
Part I of this Comment will provide an introduction to the recent surge in U.S. natural gas production, describe U.S. lawmakers’ efforts to export the commodity internationally, and explore the associated international marine transportation chartering opportunities. The Comment then comprehensively discusses the current U.S. federal income tax regime for maritime shipping income and includes an example in the LNG marine transportation industry to contrast the U.S. tax consequences between a U.S.- and foreign-flagged vessel. Next, the Comment will advance statistical data that illustrates the harmful consequences of outdated tax laws on U.S.-flagged vessel chartering operations. Finally, Parts VIII-X will conclude with a discussion of the resurgence of the U.S. maritime industry within the natural gas markets and recommend various tax reform policies that could incentivize and strengthen U.S. LNG marine transportation. In sum, the objective of this Comment is to inform the reader about influential U.S. federal income tax policies that have, over time, impaired the U.S. maritime industry.