Tides Are Turning: The Arrival of Subchapter M

*This article was prepared by our summer law clerk, Ridge Miguez.

 

On June 20, 2016 the U.S. Coast Guard posted a preview of the final version of the long-awaited Subchapter M regulation, which will extend inspection requirements to the majority of tugs and towboats for the first time. In 2004, Congress reclassified towing vessels as vessels subject to inspection, and consistent with 46 U.S.C. 3305, this rule sets out the scope and standards of inspection. Now with the implementation of Subchapter M the U.S. Coast Guard has created a comprehensive safety system that includes company compliance, vessel compliance, vessel standards, and oversight in a new Code of Federal Regulations (CFR) subchapter dedicated to towing vessels. This rule, which generally applies to all U.S. flag towing vessels 26 feet or greater, and those less than 26 feet moving a barge carrying oil or hazardous material in bulk, lays out both inspection mechanisms as well as new equipment, construction, and operational requirements for towing vessels.

 

To provide flexibility, vessel operators will have the choice of two inspection regimes. Under the Towing Safety Management System (TSMS) option, routine inspections of towing vessels will primarily be performed by third-party organizations (TPOs), including certain classification societies, and this rule creates a framework for oversight and audits of such TPOs by the Coast Guard. The TSMS will provide operators with the flexibility to tailor their safety management system to their own needs, while still ensuring an overall level of safety acceptable to the Coast Guard. Alternatively, under the Coast Guard inspection option, routine inspections would be conducted by the Coast Guard, providing an option for those operators who choose not to develop and implement their own TSMS.

 

Subchapter M also creates many new requirements for design, construction, equipment, and operation of towing vessels. Those requirements are typically based on industry consensus standards or existing Coast Guard requirements for similar vessels.

 

The most important change to the final revision of Subchapter M has been the changes made to the Coast Guard’s proposal in the NPRM. They have clarified the system for Coast Guard oversight and inspection of towing vessels that complements the TPO system. To address concerns about the cost impact of the rule, they have added “grandfathering” provisions to several requirements, so the requirements will not apply to existing vessels or vessels whose construction began before the effective date of the rule. Also, they have reorganized several parts for greater clarity or to better align with the existing text of other parts of the CFR. As noted in the NPRM (7 FR 49985), the Coast Guard still plans to promulgate a separate rulemaking for an annual inspection fee for towing vessels that will reflect the specific program costs associated with the TSMS and Coast Guard inspection options. As of now the Coast Guard is establishing the existing fee of $1,030 in 46 CFR 2.10-101 for any inspected vessel not listed in Table 2.10-101, as the annual inspection fee for towing vessels subject to Subchapter M. Furthermore, this fee will not be charged for a vessel being inspected for the initial issuance of a certificate of inspection (COI), however the fee will be charged annually starting the following year.

 

The Coast Guard released a statement that Subchapter M will affect approximately 5,509 U.S. flag towing vessels engaged in pushing, pulling, or hauling alongside, and the 1,096 companies that own or operate them. Towing vessels exempt from this rule include towing vessels inspected under Subchapter I, work boats, and recreational vessel towing vessels.

 

The estimate for total industry and net government costs is $41.5 million annualized at a 7 percent discount rate over a 10 –year period of analysis. The estimate for monetized benefits is $46.4 million annualized at a 7 percent discount rate, based on the mitigation of risks from towing vessel accidents in terms of lives lost, injuries, oil spilled, and property damage. Thus, a net benefit of $4.9 million is estimated from implementing Subchapter M.

 

The new rule became effective July 20, 2016. However, certain existing towing vessels subject to this rule will have an additional 2 years before having to comply with most of its requirements. It will be interesting to see how small operators are affected by the changes Subchapter M brings their way. Only time will tell, but it seems the rule change is in the greater interest of the industry as a whole.

 

Advanced Technology from U.S. Military will soon find its way into Commercial Diving Operations

The United State Navy has developed the Divers Augmented Vision Display, which is a high-resolution, heads-up display installed directly into a diver’s helmet.  The system will allow the diver to access sonar, text messages, diagrams, and photographs. Significantly, the display will allow for augmented reality videos; technology that allows images and video to be superimposed in real time (think the “monocle” mode in your Yelp app).

 

This technology will assist divers in recovery and salvage operations by offering real-time positional awareness.  The Naval Sea Systems Command is also working on development of enhanced video systems that will increase diver sight in near zero visibility situations.  Like so many other advancements before, it is only a matter of time before these technologies make their way into commercial diving operations.

Implementation and Concerns Pertaining to the IMO’s Verified Gross Mass Regulations

The International Maritime Organization’s (“IMO”) amendments to the Safety of Life at Sea (SOLAS) convention will become legally binding on July 1, 2016.  The changes to SOLAS require exporters to verify the weight of the containers before they are received at the port and loaded aboard the ship.

 

The rules provide two methods for a shipper may obtain the verified gross mass (VGM):

  • Method 1, upon the conclusion of packing and sealing a container, the shipper may weigh, or have arranged that a third party weigh, the packed container.
  • Method 2, the shipper or, by arrangement of the shipper, a third party may weigh all packages and cargo items, including the mass of pallets, dunnage and other packing and securing material to be packed in the container, and add the tare mass of the container to the sum of the single masses of the container’s contents.

 

The new rules have raised numerous concerns, some of which include:

  • Whether there is an agreed format to communicate the verified gross mass;
  • Whether there is a deadline for when the information must be received by the carrier and the terminal operator;
  • Whether the rules obligate the carrier to check the values given by the shipper; and,
  • Whether there is an acceptable margin of error when establishing the verified gross mass.

 

Although there are many more concerns, there is no doubt that additional unforeseen issues may arise once the requirements are put into practice.

 

http://www.aaei.org/resources/new-solas-regulations-and-resources/

Bankruptcy on the Horizon: Offshore Supply Companies Prepare

Companies engaged in supplying offshore services, an essential corner of the oil sector here in Louisiana, should be preparing for the potential increase in bankruptcies as the worst crude market downturn in decades spreads. More than half of the public companies in the offshore supply-vessel industry face a high probability of restructuring or bankruptcy, according to research conducted by the consulting firm AlixPartners.

 

Supply vessels are a lifeline to the rigs, hauling everything from people to pipes to food. Moreover, they’re custom-made for the oil industry and depend on the rigs for work; when the rigs slow down, so too does this custom-made supply chain.

 

There are now more than five supply vessels for each offshore drilling rig, up from roughly three vessels per rig in 2008. With the falling demand, companies have been forced to make hard changes

 

Close to home, one of Louisiana’s largest offshore supply companies is set to have more than 30 OSVs fleet stacked by year-end as the slump in oil prices continues to wreak havoc on the offshore market. The 30 stacked vessels will represent about half of the company’s OSVs. It’s fleet currently consists of 59 OSVs, but that is expected to increase to 61 vessels if scheduled deliveries in Q4 go according to plan.

 

Back in April, the company reported 18 new generation OSVs stacked in its Q1 results. At the time, the company said the lay-ups were part of aggressive cost cutting measures undertaken in response to soft market conditions. Other measures included company-wide headcount reductions and across-the-board pay-cuts for shore-side personnel. The company reported that for the third quarter of 2015, revenues were $116.3 million, a decrease of $50.6 million, or 30.3%, from the same period last year.

 

Following an early December 2015 statement from the Organization of Petroleum Exporting Countries, that it was essentially lifting its production target for crude, we should prepare for oil prices to remain lower for longer than previously expected. According to Transocean Ltd., the world’s largest supplier of offshore drilling rigs, the challenging offshore market is expected to last into 2017.

 

AlixPartners looked at 33 publicly traded companies as part of their study, and found that the amount of debt those companies carry compared with earnings before interest, taxes, depreciation and amortization, which is known as leverage, climbed over the year end in June – often a precursor to restructuring or bankruptcy.