Non duty paid Canadian Tanker

1. Overseas Shirley anchored in Halifax from February 1 to 5. Photo 2011-02-04

There is a strange category of Canadian flagged ships. These are ships which fly the Canadian flag, but are not considered to be Canadian under the Coasting Trade Act of 1992. The question is why does such a category exist?

The Coasting Trade Act restricts trade between Canadian ports to Canadian registered ships, which have paid all duties and taxes. This would seem to be straight forward enough. Many countries have so called cabotage laws with similar restrictions.

The best known is perhaps the United States, which has the Jones Act. That piece of legislation is full of all sorts of requirements governing ships, seafarers and shipping companies. The most relevant to this discussion is the requirement that ships trading between US ports must be: a) built in the United States, b) owned by US companies and c) crewed by US mariners. The Jones Act is a means of supporting a domestic shipbuilding, seafaring and ship owning industry. Ships may be registered in the US that do not comply with the Jones Act in category a) but they are restricted from trading between US ports. They are free to trade internationally, but they do not receive all the ancillary benefits of Jones Act ships. It is possible, through an Act of Congress, to have non-US built ships registered in the US for trade between US ports, but it is extremely rare.

There have also been exemptions granted for foreign built ships which were so totally rebuilt in the US as to be the equivalent of a new ship. However the recent "stink" over the suggestion that foreign ships might be allowed to participate in the BP oil spill cleanup in the Gulf of Mexico is a reminder that the Jones Act has substantial teeth and widespread support in some sectors of the US shipping community. There are also restrictions on where repairs or modifications can be made to ships. Several recent court actions cases have been brought against ship owners whose ships received extensive reconfigurations in foreign shipyards.

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A notable exception in the cabotage rules is the European Union. With no real borders remaining between states for most purposes, the EU allows ships of any nationality to trade throughout the EU. This results in flag of convenience vessels registered in such strange places as Cambodia and the Comoros Islands, trading between and within member countries of the EU. This is a totally open regime and intends to promote trade at low cost. It certainly provides an advantage to flag of convenience vessels over domestic ones and has seen the decline of many national flags as a result. Several countries within the EU have attempted to subsidize domestic shipping with tonnage taxes and other measures, but it is still largely open and free wheeling.

Canada falls somewhere in the middle. Cabotage is restricted in Canada, but not to the same degree as the US. For instance there is no restriction that Canadian flagged ships must be built in Canada. At one time the construction of ships in Canada was directly subsidized by the government, but that has largely ended. Subsidies are now in the form of loan guarantees, structured financing and shipyard subsidies. Until 2010 all imported foreign built ships were subject to a 25% custom duty. That has now also been relaxed to a degree, and duties are remitted for certain classes of large cargo ships/ tankers and ferries built abroad. However the duty still applies to smaller craft. This is seen as a means to promote Canadian shipyards.

Cabotage in Canada also includes ships working on the continental shelf such as oil field work, and passenger/cruise ships starting and terminating their voyages at Canadian ports.
The main area of distinction with the US regime is in the area of exceptions. The Canadian Transportation Agency has the authority to make a determination if a suitable Canadian ship is or is not available to carry out a certain coastal trip or trips. Subject to a number of other conditions relating to Ship Safety, foreign worker permits other taxes paid, etc., the Minister of Public Safety and Emergency Preparedness may grant a coasting license to a foreign flag ship. This makes sense when there is a small domestic shipping industry and a ship is needed short term. Under this arrangement there is no absolute requirement for the foreign ship to have a Canadian crew, however under certain circumstances it may be required.

There seems however to be one very strange by-product of this and that is in the area of crude oil transportation from the Newfoundland offshore. The major players in this field were committed to using Canadian ships with Canadian crews to transport oil to shore as part of their development agreement with the province of Newfoundland and Labrador. Specialized shuttle tankers were built in Korea and entered Canadian registry by paying all duties, taxes, etc., required, and became fully fledged Canadian ships. They were built to carry oil from the offshore wells to Canadian ports (cabotage in the true sense) but also to foreign ports and to that strange anomaly, Portland Maine. [If the oil is to be sent via the pipeline from Portland to Montreal the trip is considered to be a coastal trip.]

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However some of that oil needs to be transshipped. The Canadian shuttle tankers take the oil to Whiffen Head, NL or Point Tupper, NS where it is offloaded, stored (sometimes blended) and transshipped to another port for refining. Those other ports can be in Canada, such as Halifax, Saint John, St-Romauld (Quebec City) or again, Portland for Montreal, and these would be coastal voyages, not requiring sophisticated shuttle tankers, but ordinary crude carriers. Since there were none of these in Canada there has been a steady stream of applications for coasting licenses, some for a single voyage but also for multiple voyages over the course of a year, to allow foreign flag ships to do this work.

Some foreign companies have set up subsidiaries in Canada, registered their tankers in Canada (and thus taking on Canadian crews), but not paying the import duties. Since many of the tankers’ trips are between a Canadian and US port (e.g. Whiffen Head to Philadelphia) there is no need for Canadian flag. So what is the advantage?

When a tanker is needed to run between two Canadian ports, and no Canadian duty paid tanker is available, the cargo interest applies for a coasting license. The Canadian Transportation Agency, if it agrees that no suitable Canadian duty-paid vessel is available, will then consider if a suitable Canadian non-duty paid ship is available. It may then make a determination and recommend that the Minister grant a coasting license for a stated period of time.
If the license is granted, the duty and taxes are paid on a pro-rated basis for that period of time. Because the ship has complied with many other Canadian regulations such as ship safety, pollution permits, as required by the Canada Shipping Act, and has no issues with foreign worker permits, it is a much simpler process than for a foreign vessel.

However other operators continue to apply for coasting licenses for their foreign flagged ships over and over again and for extended periods of up to a year. Some of these ships even have Canadian crews or partly Canadian crews. This leads to a situation of foreign ships regularly trading in Canada. That may be corrected in new guidelines to the Act which were put in place in July 2010. There has been a noticeable drop off in these applications, but this may be partly explained by a reduction in offshore oil production because of reduced US demand.

One ship that is Canadian, but non-duty paid is Overseas Shirley. It regularly trades between Canadian ports (and often to Portland, Maine) and is granted coasting licenses year after year.
Built in 2001 and measuring 62,385 gross tons, 112,056 tonnes deadweight, it is owned in Barbados, managed by OSG Shipmanagement (UK) Ltd but represented in Canada by OSG Shipmanagement (Canada) Inc of Kirkland, QC.

Its most recent application for a coasting license is for the period January 22 to March 21 and entitles it to transport crude oil from Whiffen Head or Point Tupper to eastern Canadian refineries or terminals.

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