U.S. Flag

OSG is the only large tanker company with a significant presence in both the International Flag and U.S. Flag markets, and it has an established position in the Jones Act product tanker and crude tanker segments. The U.S. Flag shipping market comprises a number of relatively small or niche trades in the domestic and foreign trade, including crude oil, products, dry bulk, container and RoRo/Car Carriers.

Many U.S. Flag segments are subject to particular pieces of legislation:

• Under the Jones Act (Section 27 of the Merchant Marine Act of 1920), transporting commodities between United States ports, including the movement of Alaskan crude oil, is reserved for vessels that are built in the U.S., registered in the U.S., manned by U.S. seafarers and owned by U.S. companies that are more than 75 percent owned and controlled by U.S. citizens.
  
  
• The Cargo Preference Act of 1954, as amended, requires that preference be given to U.S. Flag vessels engaged in the cargo preference (PL-480) trade, if available at fair and reasonable rates for the shipment of:
  - At least 50 percent of all U.S. government-generated cargoes
  - At least 75 percent all of food-aid cargoes.
  
  
• The Cargo Preference Act of 1904 requires that cargoes for the U.S. military will be carried exclusively (100 percent) on U.S. Flag vessels.
  
  
• All cargoes generated by the Export-Import Bank of the United States¹ are to be shipped on U.S. Flag vessels, unless a waiver is granted.
  
  
• The U.S. Maritime Security Program (MSP) ensures that militarily useful U.S. Flag vessels are available to the Department of Defense in the event of war or national emergency. Under the Program, companies receive $2 million to $3 million per annum per ship in exchange for a guarantee that the ships which are engaged in the U.S. to foreign trades will be made available to the U.S. government in the time of war or national emergency.
  
  
• To encourage private investment in U.S. Flag vessels, the Merchant Marine Act of 1970 permits deferral of taxes on earnings from U.S. Flag vessels deposited into a Capital Construction Fund and amounts earned thereon, which can be used for the construction or acquisition of, or retirement of debt on, qualified U.S. Flag vessels. Examples of qualifying U.S. Flag vessels are those engaged in U.S. to foreign trades, Great Lakes trade and noncontiguous trades, such as Hawaiian islands to mainland U.S. or Alaska to mainland U.S.
  

The U.S. Flag tanker market is a niche market with strong fundamentals, whose distinct characteristics have created high barriers to entry. The relatively small fleet of existing tonnage is typically employed on medium to long-term charters and rarely changes hands. While demand for Jones Act tonnage is stable, the ageing fleet faces regulatory obsolescence as a result of the U.S. Oil Pollution Act of 1990 (OPA-90), which mandates the phase out of some 50% of the current product tanker fleet within the next 10 years. As constructing commercial tanker tonnage in U.S. yards is expensive compared to building in Asian yards and the availability of yard capacity is limited, the timely replacement of these vessels will present a challenge. This could create significant supply tightness in the coming years.

^{1 The Export-Import Bank of the United States is the official export credit agency of the United States. It assists in financing the export of U.S. goods and services to international markets.}