For more than 200 years, tugboats, towboats and barges have plied the United States’ vast inland river system, its Great Lakes and its three coasts. This distinctly American industry has built the coast of the Great Lakes into a global manufacturing center, enabled the U.S. to become the world’s largest wheat exporter and, today, provides the flexibility needed to become a major oil producer. Yet despite the critical role that it plays in the U.S. economy, the inland and coastal maritime industry is little known outside of the transportation sector.
The tugboat, towboat and barge industry is the largest segment of the U.S. merchant maritime fleet and includes 5,476 tugboats and towboats and 23,000 barges that operate along the Atlantic, Pacific and Gulf Coasts, the Great Lakes and the inland river system. The industry is fragmented and, for the most part, privately owned, with more than 500 operators either pushing, pulling or otherwise helping move waterborne cargoes through the United States’ waterways. The industry is bifurcated into inland and coastal sectors, which have little overlap due to the different vessels and licenses required to operate in their respective environments.
Recent market dynamics, particularly in the energy sector, have resulted in seismic shifts in supply and demand for the U.S. water transportation sector. This article looks at the current state of affairs in the market, with a focus on barges.
Inland and Coastal Sectors
Before delving into recent market trends, it may be helpful to give a brief overview of the market structure in towing and barging. There are effectively five main markets in the U.S. water transportation industry: inland tank barge, inland dry cargo, coastal tank barge, coastal dry cargo and coastal ship assist.
Inland towing companies, which comprise roughly 60% of the U.S. towing fleet, operate vessels called towboats or pushboats. Towboats have square bows that are used to push groups of barges lashed together on the Columbia-Snake, Illinois, Ohio, Mississippi, Missouri, Tennessee, Hudson and other major riverways. Typically, towboats push barge tows of up to 15 barges through locks and around river bends to deliver agricultural commodities to export markets in New Orleans, crude oil to refineries along the Gulf Coast and coal, chemicals and building materials to industrial sites throughout the inland river system. On the Lower Mississippi River, where there are no locks to restrict tow size, massive towboats powered by up to 10,000 horsepower engines can transport 40-barge tows toward the Gulf of Mexico.1 At today’s coal price, a 15-barge tow carrying 22,500 tons would be transporting a little under $1 million worth of coal.
Coastal towing companies constitute the remaining 40% of the U.S. towing fleet and operate vessels called tugboats. Tugboats have high, pointed bows and are used to transport goods coastwise – over the open ocean between ports – or to assist oceangoing vessels docking within a harbor. Tugboats engaged in commodity transportation are traditionally designed to transport a single large barge either “on the hawser,” using a thick cable up to 2,000 feet long, or “in the notch” by pushing a barge from behind.
Articulated tug-barge (ATB) units are the industry’s newest vessel class and consist of a purpose-built tug and barge that rigidly connects to create a single vessel that looks and handles like a ship. They offer higher speeds of up to 12 knots (14 mph) and are almost exclusively built to handle petroleum products.2 Furthermore, ATBs can be the size of a small oil tanker carrying as much as 330,000 barrels (bbls) of petroleum and are powered by up to 16,000 horsepower engines – nearly three times the typical 6,000 horsepower engine of modern heavy freight locomotives. At today’s crude prices, an ATB with capacity of 300,000 bbls would be able to carry about $14 million worth of crude oil.
Tugboats engaged in ship assist work in teams to guide ships safely within a harbor. While older ship-assist tugs have traditional rear-facing propellers, newer, more sophisticated tractor tugs have swiveling Z-drive propulsion systems that allow them to pull or push in any direction. Z-drive tugs have also become common on the inland rivers, where maneuverability is of heightened importance. These vessels typically have between 2,000 and 6,000 horsepower engines.
Drill Down: The Tank Barge Sector
The tank barge sector is driven by the production and transportation of four main types of bulk liquid commodities: refined petroleum products (50%), crude oil (30%), agricultural and petrochemicals (10%) and black oil and asphalt (9%).3 The fortunes of tank barge operators have tended to follow crude production levels in recent years. While operators have the flexibility to reallocate barges across product types as demand fluctuates, the process of cleaning and preparing barges for different products can be cost-prohibitive and time-consuming.
Coincident with the surge in U.S. shale oil production volumes from 2010 to 2015, barge operators saw tremendous demand for crude transportation. The trend can be witnessed in the total domestic crude oil delivered to refineries by barge, which grew by a factor of five between 2010 and 2015 to 250 million bbls annually. In anticipation of continued crude oil production growth, between 2010 and 2015, tank barge operators placed a record number of new orders for barges. In addition, the industry recently completed a 25-year phaseout of single-hulled barges, which are no longer permitted to carry petroleum products as of January 2015. As a result, the tank barge fleet is now the youngest segment of the industry and will likely remain as such in coming years as more vessels are completed and delivered.
Forces Shaping the Industry
Several converging forces are likely to drive further industry consolidation in the coming years. Previously surging crude oil production volumes, insufficient pipeline takeaway capacity and a closed market prompted a historic rise in orders of inland and coastal Jones Act tank barges and ships. In the coastal market in particular, 17 new product tankers and ATBs with a combined capacity of more than 4.5 million barrels will be delivered to Jones Act operators in the next 18 months, boosting fleet capacity by 20% before the end of 2018.4 Failing a drop in foreign crude oil production, the most likely outcome of a 20% increase in Jones Act tanker capacity is a drop in coastal chartering rates. U.S. waterway operators are no strangers to the boom-bust cycles that characterize the shipping industry, but the forthcoming capacity shock aligns with new regulatory requirements, as well.
The Coast Guard’s new Subchapter M regulation, finalized on June 20, 2016, is a major event for the entire towing industry. In it, the Coast Guard establishes safety regulations governing the inspection, standards and safety management systems of U.S. waterway towing vessels. Under the rule, every U.S. towing operator must obtain a certificate of inspection (COI) for every tugboat and towboat it operates. To comply, companies must choose to either have all vessels regularly inspected by a Coast Guard official or implement a companywide safety management system (SMS) that is audited by an independent organization. Both options pose economic and logistical challenges for companies, and compliance expenses are estimated to be $100,000 per vessel or more for those without an existing SMS.5 However, larger companies, including members of trade associations such as American Waterways Operators, have SMS already in place and will face little incremental cost in complying with Subchapter M. Observers expect Subchapter M to drive industry consolidation as compliance costs weigh on operators ill-equipped for the new regulatory regime.
Tugboat, towboat and barge operators have weathered many storms over two centuries. Moreover, this epoch will not be the last trying time for an industry that has endured advances in technology, competition from trucks and trains and a market that can refuse to cooperate with even the best-laid plans. It is with that spirit of adaptation that we can expect Jones Act carriers to continue to sail on, following William Arthur Ward’s advice that “the pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
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1 The Lower Mississippi River begins at the confluence of the Ohio and Mississippi Rivers in Cairo, Illinois, and flows nearly 1,000 miles to the Gulf of Mexico.
2 A handful of dry bulk ATBs exist; however, the vast majority are designed to carry petroleum products.
3 Source: U.S. Army Corps of Engineers.
4 Source: RBN Energy, “Flirtin’ With Disaster - The Coming Oversupply of Jones Act Tankers and ATBs,” June 19, 2016.
5 Source: MarineLink.com, “US Workboat Market: Domestic Drivers,” June 30, 2016.