The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. – William Arthur Ward

The U.S. maritime industry is much like a great ship: It is subject to unforeseen forces, and it takes a giant rudder to effect change. With 2023 behind us, the outlook on the horizon in the U.S. maritime sector indicates that there will be something that impacts operations, decision-making or interests.

This Holland & Knight alert offers an outlook of five issues that will be worth watching as the maritime industry faces geopolitical and macroeconomic challenges, continuing U.S. sanctions involving the shipping sector, an evolving and aspirational climate agenda, and unknowns in a U.S. election year.

1. Geopolitical Shockwaves

Following the tumultuous times of the COVID-19 pandemic that saw a historical spike in container freight rates, workforce challenges, contractual disputes and unprecedented Federal Maritime Commission (FMC) litigation, there is no rest for the weary. Lingering geopolitical issues carry into the new year, with geopolitical conflict rising in the Red Sea and compounding ongoing tensions with Russia, China and Iran. In the southern Red Sea, it is widely reported that Houthi rebels have targeted naval and merchant ships with drones and missiles in reported retaliation for Israel's war with Hamas. Such actions have caused many cargo ships, tankers and cruise lines to divert around the Cape of Good Hope to mitigate their risk of attack, adding weeks to delivery times of cargo, vessels and passengers, all of which adds to fuel costs and increased logistical challenges to U.S. East Coast and West Coast ports as owners alter routes and scheduling. The Red Sea tensions, if left unchecked, could inevitably lead to disputes under contracts of carriage and increased transit costs passed on to the consumer, as around one-third of the world's container ship capacity is reportedly affected by the Red Sea attacks and around-Africa reroutings.

In response, the U.S. and several allies declared that the Houthis will "bear the responsibility" of the consequence, should they continue to threaten lives, the global economy and free flow of commerce in the region's critical waterways. Even murkier is what is meant by "bear the responsibility." Thus far, U.S. assets have responded in "self-defense" at sea and, more recently, targeted Houthi-controlled areas in Yemen – reportedly in direct response to attacks against international maritime vessels in the Red Sea – to protect lives, the global economy and the free flow of commerce in the region's critical waterways, according to a White House statement. However, a long-term clear security strategy to resolve the regional tensions remains elusive, and justifications under the law of armed conflict and the U.N. Charter for the use of force could be scrutinized. A coalition-level naval buildup in the coming weeks or months may increase safety of vessel transits, but it could also ratchet up tensions with adversaries, including Iran, and increase risk of retaliations against U.S. and allied vessels around the globe, including potentially increasing risk of a Suez Canal closure, as severe drought has led to water depth and weight restrictions on ships passing through the Panama Canal.

Separately, some carriers are rumored to have been negotiating safe passage directly with the Houthis through backchannel agreements. Others are reportedly using Automatic Identification Systems (AIS), an International Convention for the Safety of Life at Sea (SOLAS) requirement overseen by flag states, to disavow connections to Israel or affirm a China nexus. Nonetheless, if ships continue to avoid the Red Sea routes, this could certainly create a shortage of shipping supply capacity and surges in freight rates, impact oil prices, threaten food security and disrupt the supply chain, all of which could lead to higher transportation costs for the carriage of goods (and perhaps the costs of goods) that will flow down to consumers. This issue is complicated by the resurgence of piracy in recent weeks off the east coast of Africa – everything old is new again.

It is not possible to predict with certainty whether these disruptions will be short-lived or if a more protracted conflict for the foreseeable future could be in the making. For now, the Red Sea and Suez Canal remain open to navigation, with shipowners making calculated decisions on whether to risk the Red Sea transit or add weeks to voyages to divert around Africa. A shutdown of the Suez Canal, however, remains a risk worth monitoring. Even though industry stakeholders have made operational corrections to improve resiliency in the post-pandemic world, a protracted threat that closes off the Suez Canal could cause even greater disruptions that could strain the supply chain, with freight rates subject to the supply and demand of ships. In any case, decisions to reroute vessels to avoid the Red Sea and Suez Canal will lead to a slew of potential charterparty and supply contract disputes, including claims related to fuel costs, compliance with charterers' employment orders, cargo damages, frustration, lawful deviation and interpretations of force majeure clauses.

Also worth watching is how the FMC reacts to the Red Sea disruptions, as it has been monitoring actions taken by ocean common carriers related to rates, fees and surcharges "to ensure their compliance with all statutory and regulatory requirements." At the end of 2023, the FMC began granting "special permission authority" for Red Sea diversion freight hikes, although cargo interests will undoubtably review any such increases for compliance and proper application to respective shipments. This could be the makings of a similar influx of FMC enforcement actions as seen post-pandemic.

2. Ever-Evolving Sanctions

The Red Sea tensions are set against the backdrop of ongoing geopolitical issues with Russia, Iran and China as the U.S. government continues to paint a broader target on the maritime industry as a means to effect political and military will through the use of sanctions. Indeed, the attempts at sanctions on Iran – the effectiveness of which remains debatable – and a tightening of enforcement on the Russian Oil Price Cap has led to the rise of a "dark" fleet, posing unprecedented challenges and risks. At the end of 2023, the U.S. government took further steps to target sanctions evasion (essentially casting an even wider net) when it issued a "Know Your Cargo" notice, signaling its intentions to reach further down the contractual chain to place obligations on cargo interests in the maritime and other transportation industries to ensure compliance with U.S. law. Pending legislation, such as the Stop Harboring Iranian Petroleum (SHIP) Act (S.1829) and Solidify Iran Sanctions Act of 2023 (S.1390), is also intended to address additional measures on Iran and carriage of oil, all of which means stakeholders should expect that the U.S. government will zero in on the shipping sector as it has increasingly done over the past several years.

As such, stakeholders should emphasize due diligence procedures and implement policies and procedures to ensure compliance with U.S. sanctions and export control laws. With a reinvigorated focus on cargo interests and shipping documents, it will be worth closely scrutinizing whether counterparties are disguising the true origin, destination or nature of their cargo. To prepare for these geopolitical shockwaves, stakeholders may benefit from a review of current and contemplated contracts, the development of more robust internal screening and due diligence procedures and expecting the unexpected by building resiliency into processes. Make no mistake, the long arm of U.S. sanctions enforcement is just getting longer, and principles of supply and demand will resound in 2024 as the enforcement vise tightens and markets respond.

3. The Green Agenda

It is commonly accepted that the maritime sector accounts for about 3 percent of the total U.S. transportation sector emissions. During the energy transition, the U.S. maritime industry expects a range of available options to meet emission reduction targets across their entire life cycle – the so-called "well-to-wake." Markets are beginning to accept that fossil fuels will be needed in the transition, while owners adopt operational measures such as vessel speed, maintenance and route optimization as new technologies and designs, such as carbon capture, take effect.

However, while the U.S. maritime industry generally concedes that decarbonizing shipping is necessary, it faces several headwinds due to operational requirements, limited available financial incentives and lack of a readily available, one-size-fits-all alternative fuel solutions. Low-carbon or zero-carbon alternative fuels and technologies remain in the nascent developmental stages for alternative fuel propulsion systems, and there is a lack of respective supply-side and bunkering infrastructure. For new builds, ships currently being built are expected to remain in operation for the next 20 to 30 years, and for the Jones Act fleet, perhaps decades longer. Retrofitting is expensive and not always possible. This is all compounded by uncertainty about the regulatory framework, as shipowners must decide whether to build new vessels, retrofit existing vessels or take a wait-and-see approach until there is greater clarity about regulatory frameworks. Regulations are generally seen as a means to minimize uncertainty, and lack of clear regulations could arguably impact investment decisions of shipowners, shipyards and ports. Even so, it is not clear that regulations are the answer, and any regulations must have industry input to avoid unintended consequences. In any case, there is little indication in the unified agenda that the U.S. Coast Guard (USCG) will promulgate substantive decarbonization-related regulations this year, even as initial ratings on Carbon Intensity Indicator (CII) are due in 2024. The industry may instead see a combination of incentives, policy and collaboration that become priorities in 2024.

In terms of incentives, concepts such as a levy on fuels or a carbon price are being floated as options to level the playing field between conventional and low-carbon or zero-carbon fuels. In turn, this could make alternative fuels more competitive, and it may be impossible to achieve decarbonization goals without such incentives – at least with near-term timelines. U.S. stakeholders may see more commentary of whether the European Union's (EU) Emissions Trading System (ETS) could serve as a template for a similar U.S. program. Opportunities for maritime book and claim will continue to grow as markets develop. The recently introduced Renewable Fuel for Ocean-Going Vessels Act (H.R.6681) aims to amend the Clean Air Act to include fuel for oceangoing vessels as additional renewable fuel for which credits may be generated under the renewable fuel program and may be worth monitoring as well. The Inflation Reduction Act (IRA) also may offer some reprieve for vessel owners, engine manufacturers and shipyards as federal agencies continue to explore options for funding projects with grants, loans and tax credits. However, much is still needed to get the funding to the right recipients, as the IRA was not developed with the maritime industry expressly in mind. It remains to be seen if the IRA can be a financing panacea, but efforts are underway that may bear fruit in 2024. 

This is where policy may become more relevant in particular, given the diverse makeup of the U.S.-flag fleet and the lack of current measurable data on the vessels with the greatest impact on emissions. Stakeholders should expect to see more in the form of an updated U.S. National Blueprint for Transportation Decarbonization (Blueprint), developed by the U.S. Department of Energy (DOE), U.S. Department of Transportation (DOT), U.S. Department of Housing and Urban Development (HUD) and U.S. Environmental Protection Agency (EPA) to support an improved and sustainable transportation future. Notably missing from this collection of federal entities authoring the Blueprint is the USCG, which is, thus far, seemingly resigned to stay clear of the limelight, leaving it to DOE (an agency with no true maritime-centric office) to champion the policies needed to effect real decarbonization change, including through the hosting of a Maritime Decarbonization Action Plan Workshop in late 2023 that may help shape necessary updates to the Decarbonization Action Plan in 2024 (Plan). That Plan is expected to outline multiple decarbonization pathways in fuels, energies and technologies across vessel types and operational profiles. All this is not to suggest the USCG or the Maritime Administration (MarAd) are completely out of the loop. The USCG will remain a vital player in the design, engineering and design basis agreement process for alternative fuels and related testing and, along with MarAd, will likely continue to collaborate on the development of a U.S. Maritime Decarbonization Strategy that is anticipated to focus on ports and vessels while better defining the needs and goals of the maritime sector.

While the incentives and policy measures take shape, the industry will continue to focus on a key part of the energy transition: collaboration. This may be either domestic or international in nature (or both) and may take clearer form this year with the advancement of green corridors, essentially zero-emission maritime routes between two (or more) ports. According to the U.S. Department of State's Green Shipping Corridors Framework, the U.S. "envisions green shipping corridors as maritime routes that showcase low- and zero-emission lifecycle fuels and technologies with the ambition to achieve zero greenhouse gas emissions across all aspects of the corridor in support of sector-wide decarbonization no later than 2050." The concept has since gained steam and, in late 2023, the ports of Los Angeles, Long Beach and Shanghai developed a Green Shipping Corridor Implementation Plan Outline. This plan is notable, as it includes some of the largest shipping lines in the world and reportedly included input from leading cargo owners, key stakeholders in the transition and a focus of consumers who are demanding goods be shipped sustainably. There are reportedly 44 green corridor initiatives across the globe, including new agreements with U.S. interests, so stakeholders will likely hear much more on this in the coming year. Similarly, the industry can expect to hear more about the DOE's regional clean hydrogen hubs, as they impact the supply chain and ports. Nordic countries such as Denmark and Norway have extensive offshore experience and aggressive domestic decarbonization strategies and will continue to be important trade partners in the areas of offshore wind and development of alternative fuels such as leading candidates ammonia and methanol. Overall, collaboration will remain key in the green agenda.

4. Greenwashing and ESG

While decarbonization and sustainability initiatives will continue to progress in 2024 with ever-increasing demands for clients to respond to calls for environmental and social change, so will the watchful eye of regulators on the lookout for so-called "greenwashing." Essentially, greenwashing is the practice of making something appear more sustainable, renewable or otherwise environmentally friendly than it really is. Greenwashing could involve misleading claims or marketing strategies that exaggerate an environmental commitment such as deceptive marketing regarding carbon offsets, carbon-neutral and low-carbon claims, or energy-efficient claims. It also could simply entail making claims with no intent to fulfill them and, relevant here, could include greenwashing of green shipping corridors. This is notable because U.S. agencies such as the U.S. Securities and Exchange Commission (SEC) have for the past few years focused on prosecuting conduct related to greenwashing by bringing enforcement actions and levying fines – a trend that is likely to continue this year. In a similar vein, regulators will continue to investigate issues with environmental, social and governance (ESG) disclosures, financing and supply chain management efforts, as stakeholders may take steps to increase ESG scores, protect directors, satisfy activist shareholders and increase market capitalization. As with sanctions, the maritime industry has a widening target on its back by regulators.

What this means is that no good deed may go unpunished if maritime stakeholders do not have the necessary experience identifying greenwashing or mitigating its effects Adding the SEC to the maritime decarbonization conundrum is a reality, but these are issues that will run in parallel with the aggressive green agenda and must be balanced in 2024.

5. Unknowns in a U.S. Election Year

Lastly, ushering in 2024 brings with it the realization that the U.S. is now in a presidential election year. The pace of the energy transition and the approach to maritime policy could depend on the outcome of U.S. elections, but the industry may see a confluence of federal funding and projects this year. If past is prologue, a new administration could take a markedly different policy approach, and more – or fewer – regulations may be seen. Regardless, it will be difficult to a new administration to claw back IRA funding, but stakeholders may want focus efforts before September 2024 in anticipation of the congressional recess and the November 2024 election, and the clock may be ticking to get projects in the pipeline for 2025.

One of the sectors to watch will be the offshore wind market, which has been facing headwinds with changing financial forecasts due to inflation, supply chain disruptions and lobbying efforts by opposition groups. For the optimist, the start of 2024 is bolstered by the first delivery of power from a U.S. offshore wind farm, with hopefulness of a stabilizing and growing offshore wind market within the energy supply chain. Though the financial aspects of investment will likely continue to be subject to market volatility, it is becoming clearer that ports will be the crucial interface as production of the key components such as turbine blades must be done at or near the port. New proposals to develop wind energy in state waters may also increase in an attempt to avoid federal red tape.

Views on the Merchant Marine Act of 1920, commonly referred to as the Jones Act, could also be impacted by the election cycle. The Jones Act is a cabotage law intended to support the development and maintenance of a U.S. merchant marine and mandates certain U.S. crew, build and ownership requirements for vessels engaged in the coastwise trade. It remains unlikely that a repeal of the Jones Act (or any substantial changes to same) is on tap this year. Indeed, the mere mention in public forums of any suggested improvement to the Jones Act – for example, to address U.S. crewing shortages and to support gaps in offshore construction due to limited vessel capacity – has historically been met with swift condemnations by proponents and trade associations. It will likely continue to be the law of the land, with widespread (but not universal) support in Congress and within the Jones Act fleet remaining strong. Instead, U.S. Customs and Border Protection (CBP) rulings on interpretations of the coastwise trade will likely continue to be the lodestar for stakeholders navigating the Jones Act. A piece of Jones Act legislation worth tracking to this end is Rep. John Garamendi's (D-Calif.) Close Agency Loopholes to the Jones Act, although it remains to be seen whether this legislation (if passed) would have any appreciable effect on the reported mariner shortage the U.S. is facing and lack of growth in the U.S. merchant marine vessel capacity – issues for which MarAd has yet to publicly offer long-term solutions. Separately, Sen. Mark Kelly (D-Ariz.) is reportedly developing legislation meant to revitalize the U.S. commercial maritime industry, which he called an economic and national security imperative to accomplish three goals: 1) make it more cost-competitive to operate a U.S.-flagged merchant ship, 2) grow American shipbuilding capacity and 3) invest in the maritime workforce. It remains to be seen if this legislation will be introduced or enacted this year. Overall, foreign and U.S. stakeholders should continue to manage respective operations within the confines of the Jones Act to ensure compliance in complex areas such as corporate transactions, offshore wind, energy trade and vessel construction.

Finally, the election year could bring with it a revitalized discussion on the U.S. joining the 1982 United Nations Convention on the Law of the Sea (UNCLOS). What seems different now in the decades-long UNCLOS debate is that at the end of 2023, the U.S. announced that it had determined the geographic coordinates defining the outer limits of the U.S. extended continental shelf (ECS) in accordance with customary international law, as reflected in the relevant provisions of UNCLOS. This was quite an audacious (and perhaps dubious) claim for a country that has not joined UNCLOS. Separately, joining UNCLOS may become more relevant as the International Seabed Authority (ISA), the U.N.-affiliated body that regulates seabed extraction, is expected to progress this year on finalizing rules on deep seabed mining in areas beyond national jurisdiction, with rules anticipated in 2025. Deep seabed mining of nodules is seen as a source of critical minerals (nickel, copper, manganese and cobalt) to meet demand for clean energy technologies such as wind turbines and electric vehicles, although deep sea mining is not immune from controversy, as pushback continues from environmental interests. Notably though, countries such as Norway are pressing ahead with deep sea mining and, domestically, states such as Texas have expressed interest in having deep sea-mined minerals refined on the Gulf Coast. Because the U.S. has not joined UNCLOS and only has observer status at the ISA – and thus not entitled to participate in the taking of decisions – it may frustrate the ability of U.S. companies to proceed with deep seabed mining exploration contracts. Whether the U.S. government takes steps to join UNCLOS (which has widespread support) remains to be seen, but hope springs eternal.

Conclusion

Sailing into 2024 brings a sense of hope and optimism, balanced against the realities of unsettled tensions. An election year brings with it an added layer of uncertainty, but momentum is building to support the energy transition and growth of the U.S. maritime industry as national security priorities. All this being said, the U.S. maritime sector is still subject to "black swans" that can cause shocks to the shipping industry, and shipping has certainly had its fair share of such events. In the words of Yogi Berra, "It's tough to make predictions, especially about the future." Those words of wisdom are as true as ever this election year, and perhaps the best advice is to batten down the hatches for what could come in 2024.