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Acquisition strategy, content requirements and funding dog TAO(X) oiler

Warship Technology: July/Aug 2015

The aim of the TAO(X) oiler programme is to build a new class of 17 fleet oilers for the US Navy, the primary role of oilers being to transfer fuel to surface ships at sea. The US Navy wants to procure the first TAO(X) in FY2016.

As Ron O’Rourke, an analyst with the Congressional Research Service explained in a recent report, the US Navy’s proposed FY2016 budget requests US$674.2 million to fully fund the procurement of the first TAO(X). The US Navy is requesting this funding in its regular shipbuilding account (the Shipbuilding and Conversion, Navy, or SCN, account), rather than in the National Defense Sealift Fund (NDSF), a separate account under the Department of Defense with which sealift ships and auxiliary vessels have been funded.

As O’Rourke also explained, it was reported in January 2015 that the US Navy wants to bundle the competition for the TAO(X) programme with the competition for an amphibious assault ship called LHA-8 that it wants to procure in FY2017 and the competition for the LX(R) programme to procure a new class of 11 amphibious ships, the first of which it wants to procure in FY2020. It was also reported that the US Navy wants to limit bidding for this bundled competition to two bidders ­ Ingalls Shipbuilding of Huntington Ingalls Industries (HII/Ingalls) and National Steel and Shipbuilding Company of General Dynamics (GD/NASSCO) ­ on the grounds that these are the only two shipbuilders that have the capability to build both TAO(X)s and LHA-8.

Among the issues highlighted by O’Rourke regarding the TAO(X) programme include: whether to approve, reject, or modify the FY2016 request for US$674.2 million for the procurement of the first TAO(X); whether to fund the procurement of TAO(X)s in the SCN account, as the US Navy proposes, or in the NDSF, and; whether to approve, reject, or modify the US Navy’s proposal to bundle the competition for the TAO(X) with competitions for two amphibious shipbuilding programmes and limit bidding in the bundled competition to HII/Ingalls and GD/NASSCO. “Decisions that Congress makes regarding the programme could affect US Navy capabilities and funding requirements and the US shipbuilding industrial base,” said O’Rourke.

As highlighted above, the US Navy envisages building 17 TAO(X) oilers as replacements for the 15 Kaiser-class ships but, as the designation TAO(X) suggests, the exact design of the ship has not yet been determined. The figure of 17 TAO(X)s was determined as part of a Force Structure Analysis (FSA) that it completed in 2012 and presented to Congress in 2013. This FSA established a goal of achieving and maintaining a future fleet of 306 battle force ships of various kinds, including 17 oilers. The required number of oilers largely depends on the numbers and types of other surface ships (and their embarked aircraft) to be refuelled, and the projected operational patterns for these ships and aircraft.

Undetermined design
The US Navy wants to procure the first TAO(X) in FY2016 and the remaining 16 ships at a rate of one per year during the period FY2018-FY2033.  If this procurement schedule were implemented, the US Navy projects that the lead ship would enter service in FY2020 and that the remaining ships would enter service at a rate of one per year during the period FY2021-FY2036.

In July 2013, the US Navy awarded three shipbuilding firms ­ GD/NASSCO; HHI/Ingalls; and VT Halter Marine ­ contracts to conduct eight-month design trade-off studies for the new oiler. The studies informed Navy deliberations regarding the capabilities and cost of the TAO(X).

Although the design of the TAO(X) has not yet been determined in detail, the US Navy anticipates that the ship will have capabilities similar to those of the Kaiser-class ships, and that the TAO(X) will rely on existing technology rather than new technology. To guard against oil spills, TAO(X)s are to be double-hulled, like modern commercial oil tankers, with a space between the two hulls to protect the inner hull against events that puncture the outer hull. (The final Kaiser-class ships were double-hulled, but earlier ships in the class were single-hulled.)

At an April 2013 hearing of the House Armed Services Committee, Sean Stackley, the Assistant Secretary of the Navy for Research, Development, and Acquisition (the US Navy’s acquisition executive), said: “We’re doing design studies leading up to the ultimate competition for procurement in 2016. We are, in fact, doing everything we can to just leverage mature technologies. There is no invention or breakthrough required for TAO(X). We want to leverage commercial design to the extent practical, and we’re working through those details right now.”

Utilising lessons learned
A July 2013 press report quoted Frank McCarthy, the US Navy’s programme manager for support ships, boats, and craft, as stating that: “We know the [TAO(X)’s] basic capacities, the size, the relative speed, how much dry cargo we’re going to hold, and whether it’s going to be aircraft-capable or not, and how capable it’s going to be.... So we do know those things, and we have tons of lessons learned from the T-AO-187 and the [Lewis and Clark-class] T-AKE [dry cargo ship] programmes because it’s a similar mission ship in terms of being a shuttle [UNREP] ship. We’ve taken all those lessons learned and rolled them into the system specification, and we’ve involved our operators and users at Military Sealift Command to help inform the system specification.”

The press report stated that the TAO(X) would have capabilities similar to the Kaiser-class ships, but that compared to the Kaiser-class design, the TAO(X) will have increased space for dry cargo, as well as a refuelling capability for helicopters on its deck. At an April 2014 hearing on US Navy shipbuilding programs before the Seapower subcommittee of the Senate Armed Services Committee, the Navy testified that “research and development efforts continue as the Navy matures its concept for the replacement of the Kaiser-class oilers. The new replacement oilers, currently designated as T-AO(X), will be double-hulled and meet Oil Pollution Act 1990 and International Marine Pollution Regulations. Similar to the LHA(R) and LX(R) [amphibious ship acquisition] programmes, T-AO(X) benefitted from early industry engagement in terms of cost/capability trade-off studies that will help to refine the ship specifications.”

At a July 2014 hearing on logistics and sealift ships before the Seapower and Projection Forces subcommittee of the House Armed Services Committee, the US Navy stated: “Basically, we did a complete study of the current oiler base, [the] Kaiser class, to determine what pieces of the Kaiser class gave us our acceptable requirement set. We took the Kaiser class, [and] increased some of the freeze chill [cargo-carrying] portions. [We] increased the lift so we could handle a heavier lift. [We] readdressed speed requirements so we have an array of different speed requirements that we went and looked at… different propulsion sets.”

Explaining its decision to request procurement funding for TAO(X)s in the SCN account rather than in the NDSF, the US Navy said it judged that it “has received a signal from Congress” that this is what Congress wants to see. It cited a decision by Congress to fund research and development work for the TAO(X) programme not in the NDSF account, as the US Navy had requested, but in the Navy’s regular research and development account. It also cited Senate Appropriations Committee report language on the FY2015 Department of Defense (DoD) Appropriations Act; and Bill language in the enacted FY2015 DoD Appropriations Act.

O’Rourke said the US Navy’s proposals for the TAO(X) programme raise certain issues for Congress for FY2016, the first being whether to approve, reject, or modify the FY2016 request for US$674.2 million for the procurement of the first TAO(X). “Decisions on this issue could depend in part on assessments as to whether the US Navy has accurately estimated the procurement cost of the first TAO(X),” said O’Rourke.

A second issue for Congress is whether to fund the procurement of TAO(X) in the SCN account or in the NDSF, which, as highlighted above, is an account in budget that has been used in recent years for funding the construction of new sealift ships and auxiliaries.

O’Rourke explained that the NDSF was established by the FY1993 Defense Authorization Act, as amended by the FY1993 Defense Appropriations Act, to fund the construction of DoD sealift ships. The provision in the US Code governing the NDSF (10 USC 2218) was amended in 1999 to, among other things, permit the NDSF to also be used for the construction of CLF ships and other auxiliary support ships. Consistent with congressional views expressed in committee reports on the FY2001 Defense Authorization Bill, the NDSF since FY2003 has been used to fund the construction of auxiliaries. The NDSF was established and later amended in large part so that sealift ships and auxiliaries would not have to compete directly against combat ships for finite shipbuilding funds in the SCN account.

Funding factors
In considering whether to fund the procurement of TAO(X)s in the SCN account of the NDSF, issues that Congress may consider include differences in how shipbuilding funds in the two accounts may be used, and differences in US content requirements for ships funded through the two accounts.

The NDSF is located in a part of the budget that is outside the procurement title of the annual DoD appropriations act. Consequently, ships whose construction is funded through the NDSF are not subject to the Department of Defense funding policy in the same way as are ships funded through the procurement title of the annual appropriations act.

In explaining the use of NDSF funding, DoD in 1995 stated: “The [NDSF] is not a procurement appropriation but a revolving fund. Dollars appropriated by Congress for the fund are not appropriated to purchase specific hulls. Rather, dollars made available to the NDSF are executed on an oldest money first basis. Therefore, full funding provisions as normally understood for ship acquisition do not apply.”

For NDSF-funded ships, what this has meant is that although Congress in a given year would nominally fund the construction of an individual ship of a certain class, the US Navy in practice could allocate that amount across multiple ships in that class. This is what happened with both the NDSF-funded Lewis and Clark-class (TAKE-1) dry cargo ships and, before that, an NDSF-funded class of sealift ships called Large, Medium-Speed Roll-on/Roll-off (LMSR) ships. In both cases, the result was that although ships in the two programmes were each nominally fully funded in a single year, they in fact had their construction financed with funds from amounts that were nominally appropriated in other fiscal years for other ships in the class.

The US Navy’s ability to use NDSF funds in this manner permits the US Navy to ­ among other things ­ marginally reduce the procurement cost of ships funded through the NDSF by batch-ordering certain components of multiple ships in a shipbuilding programme before some of the ships in question are funded ­ something it cannot do with a shipbuilding programme funded through the SCN account unless it receives approval from Congress to execute the programme through a multi-year procurement (MYP) contract.

In recent years, the paragraph in the annual DoD appropriations act that appropriates funds for the NDSF has contained a provision that states: “Provided, that none of the funds provided in this paragraph shall be used to award a new contract that provides for the acquisition of any of the following major components unless such components are manufactured in the US: auxiliary equipment, including pumps, for all shipboard services; propulsion system components (engines, reduction gears, and propellers); shipboard cranes; and spreaders for shipboard cranes...”

US manufacturer concerns
The paragraph in the annual DoD appropriations act that appropriates funds for the SCN account does not contain exactly the same provision. During Congress’ consideration of the Navy’s proposed FY2015 budget (which proposed disestablishing the NDSF ­ a proposal that Congress did not agree to), this led to concern among firms that manufacture the ship components listed in the above provision, and among supporters of those firms, that disestablishing the NDSF and shifting the execution of the TAO(X) programme and other future auxiliary and sealift shipbuilding programmes from the NDSF to the SCN account could lead to the US Navy selecting foreign firms rather than US firms to make these components for the TAO(X) programme and other future auxiliary and sealift shipbuilding programmes.

As also highlighted above, a third issue for Congress is whether to approve, reject, or modify the US Navy’s proposal to bundle together the TAO(X), LHA-8, and LX(R) competitions and limit bidding in the bundled competition to HII/Ingalls and GD/NASSCO.

Potential matters to consider include the rationale for bundling the competitions (which may relate, in part at least, to achieving effective competition in the bidding for all of the programmes being bundled) and the potential impact on various shipyards of the Navy’s proposal to limit bidding to HII/Ingalls and GD/NASSCO.

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