OT:RR:BSTC:CCR H321332 TNA
Steven C. Sparling
K&L Gates, LLP
1601 K Street, NW
Washington, DC 20006
RE: 46 U.S.C. § 55102; 19 C.F.R. § 4.80b(a); New and Different Product; LNG Bunker Fuel
Dear Mr. Sparling:
This is in response to your letter of October 12, 2021, which requests a ruling on behalf of [] (“the Company”). This letter requested a determination as to whether Liquified Natural Gas (“LNG”) for use as marine bunker fuel constitutes a new and different product from the pipeline natural gas (“Pipeline Feed Gas”) from which it is produced, and whether the LNG’s proposed transportation by a non-coastwise-qualified vessel would constitute a violation of 46 U.S.C. § 55102. Following a September 29, 2022, meeting with CBP, the Company submitted supplemental information and arguments on October 24, 2022. The Company has also requested that confidential treatment be accorded to certain information submitted in connection with this ruling request. In consideration of the request and the sufficient justification presented pursuant to 19 C.F.R. § 177.2(b)(7), this office will not identify any business confidential information provided to U.S. Customs and Border Protection (“CBP”). Our decision follows.
FACTS:
The Company is engaged in bunkering activities that produce bunker fuel for marine vessels. Bunker fuel is defined as “any of various fuel oils used especially on ships.” It is a broad category that includes marine gas oil, marine diesel oil, intermediate fuel oil, marine fuel oil and heavy fuel oil. The Company is currently evaluating transporting LNG Bunker Fuel produced in Mexico, manufactured from U.S.-origin pipeline feed gas, that will be delivered to vessels in ports located in the United States. It will be delivered by foreign-flagged bunkering vessels. The Company anticipates this activity beginning in late 2024.
The Pipeline Feed Gas used to produce the LNG Bunker Fuel will be delivered to Energia Costa Azul (“ECA”), an LNG terminal in Mexico, via pipeline. It will be injected into pipelines in various southern states of the United States and transported, in a gaseous state, via pipeline to the LNG terminal in Baja California, Mexico. Once in Mexico, it will be manufactured into LNG Bunker Fuel. The LNG Bunker Fuel will then be transported, on board a foreign-flagged, non-coastwise-qualified vessel to the United States. The point of lading will not be the same as the point of return of the fuel, as the gas will be injected in a pipeline in the south and then shipped to the west coast.
The chemical composition of Pipeline Feed Gas varies according to its source. However, LNG Bunker Fuel is subject to the standards set forth by the International Organization for Standardization (“ISO”), in particular ISO 23306:2020, which specifies the quality requirements for LNG used as marine fuel. These are more stringent than for LNG generally, and are different than for pipeline gas. Specifically, ISO 23306:2020 limits the nitrogen level in LNG to a maximum of 1.0 (mol), as well as limiting the Net Caloric Value and methane number of marine LNG. See ISO 23306:2020 Sections 4.1 and 6.
The Company notes that the ISO’s restrictions are due to specific constraints in the
design of marine engines and states that compounds that are harmful for marine applications are removed or reduced to very low trace levels in its production of the subject LNG Bunker Fuel. Without this process, the Company contends, the LNG is not useable as marine fuel because of the corrosion and freezing the removed components would cause. The Company’s liquefaction process, which turns the Pipeline Feed Gas into the subject Bunker Fuel, is summarized as: []. During this process, harmful compounds are removed or reduced to very low trace levels. The Company specifically contends that the Pipeline Feed Gas is altered and chemically modified through the liquefaction process, such that it will be turned to a marine bunker fuel that qualifies for classification under ISO 23306.
In both the September 29, 2022, meeting with CBP and its October 24, 2022, supplemental submission, the Company notes that the Pipe Feed Gas goes through several rounds of transformations that remove a number of compounds which are themselves different products, as well as being valuable and independently marketable by-products. In addition, the Company notes that the feed natural gas could not even be liquified without this process. As such, the Company states that the LNG that is produced this way is a new and different product whose regasification would produce natural gas with a different chemical composition than the Pipeline Feed Gas that was first used to produce the LNG.
ISSUE:
Whether, based on the product specifications provided, the proposed liquefaction operation would result in the creation of a “new and different product” within the meaning of 19 C.F.R. § 4.80b(a), such that the proposed transportation by a non-coastwise-qualified vessel would not be in violation of 46 U.S.C. § 55102.
LAW AND ANALYSIS:
Pursuant to 46 U.S.C. § 55102 (“the Jones Act”), a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel has a coastwise endorsement. 46 U.S.C. § 55102 (emphasis added). The CBP regulations promulgated under the authority of 46 U.S.C. § 55102(a), provide that “[a] coastwise transportation of merchandise takes place. . . when merchandise laden at a point embraced within the coastwise laws (“coastwise point”) is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise.” 19 C.F.R. § 4.80b(a). However, Customs regulations provide an exception to 46 U.S.C. § 55102, if a “new and different product” is being transported. Specifically, in pertinent part:
A coastwise transportation of merchandise takes place, within the meaning of the coastwise laws, when merchandise laden at a point embraced within the coastwise laws (“coastwise point”) is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise. However, merchandise is not transported coastwise if at an intermediate port or place other than a coastwise point (that is at a foreign port or place, or at a port or place in a territory or possession of the United States not subject to the coastwise laws), it is manufactured or processed into a new and different product, and the new and different product thereafter is transported to a coastwise point.
19 C.F.R. § 4.80b(a) (emphasis added).
Here, while the feed gas will first transit through the United States via pipeline, it will then return to the United States via vessel. The Jones Act applies when “any part of the transportation of merchandise” occurs by water or land and water. Here, the fuel will be transported in part by water and we must determine if a violation would occur in this instance. See e.g., HQ H253080 (July 15, 2014) (“Insofar as a non-coastwise-qualified vessel will transport the subject merchandise for a part of the transportation between U.S. points to which the coastwise laws apply, via a foreign port, the transportation as described in scenario one violates 46 U.S.C. § 55102.”). We note that the Company only seeks confirmation that a new and different product is being transported and concedes to all pertinent elements of the Jones Act.
Prior CBP rulings that examine whether fuel oil qualifies as a new and different product have overwhelmingly focused on fuel oil blending operations. In these rulings, various types of fuel oil and other components have been transported to marine terminals or other locations where the fuel oil blending operations combine the various types of fuel oil and other components together. See, e.g., HQ H249067, dated March 6, 2014; HQ H319592, dated September 23, 2021. Sometimes, items such as ethanol are added during the process. See, e.g., HQ H219709, dated August 9, 2012.
However, the subject LNG undergoes a refining process that can be distinguished from fuel oil blending operations. With this refining process, the LNG goes through several rounds of transformations that remove a number of compounds that are harmful for marine applications. During this process, the Pipeline Feed Gas is altered and chemically modified. This process is more than simple purifying and liquifying of natural gas. Rather than simply removing components from the Pipeline Feeder Gas, this refining process creates new components that are themselves different products. These products can be used by the processing plant or exported. Furthermore, if the LNG is returned to its gaseous state after this process is complete, the natural gas thus produced would have a different composition than the original pipeline gas that was first used to make the LNG.
As such, we believe this is a case of first impression. Upon questioning at the September 29, 2022, meeting with CBP, the Company agreed that its bunkering process contained similarities to petroleum refining, in that it can be compared to catalytic cracking, whose purpose is to break down complex hydrocarbons into simpler molecules in order to increase the quality and quantity of lighter and more desirable products. As such, we further examine petroleum refining, whether it produces a new and different product, and its effect on Jones Act transportation.
In American Maritime Association v. Blumenthal, the court considered whether foreign tankers transporting Alaskan crude oil from Valdez, Alaska, to the Virgin Islands for processing oil that was then returned to the United States mainland was transportation between points in the United States, such that it required the use of American-flag tankers under the Jones Act. American Maritime Asso. v. Blumenthal, 458 F. Supp. 849, aff’d at 590 F.2d 1156. During the refining process, the crude oil was heated and distilled, during which “seven unfinished products are separated out according to their boiling points.” These seven products included fuel gas, light straight run, heavy naphtha, kerosene, No. 2 oil, heavy atmospheric gas oil, and unfinished residual fuel. “After further distillation and other changes, these unfinished products are transformed into finished products that meet industry specifications. The finished products include gasoline, jet fuel, distillates, various low sulphur residual fuel oils, and basic petrochemical products consisting of benzene, toluene, mixed xylenes and paraxylenes.” American Maritime Asso. v. Blumenthal, 458 F. Supp. at 862.
After examining the record, the court concluded that “all the credible evidence of record conclusively demonstrates that the products of the Hess refinery are new and different merchandise from the Alaskan crude oil.” Id. at 863. In particular, the court noted that:
Benzene, toluene, xylene and paraxylene are petrochemicals used in the manufacture of finished chemical products. Jet fuel is used as fuel for jet aircraft, and gasoline as fuel for motor vehicles. Sulphur is used in the manufacture of fertilizers and pharmaceuticals. No. 2 oil is used as home heating oil No. 6 oil is used as fuel by power plants. Each of these products is different in name, physical and chemical character, and use from each other and from crude oil. Moreover, crude oil cannot be used for any of these purposes.
Id. at 862-863.
As a result, the court found that the crude oil shipment at issue was exempt from the Jones Act because it constituted two discrete shipments of different merchandise, rather than one continuous voyage. Id. at 863. In affirming this decision, the United States Court of Appeals for the District of Columbia Circuit stated that “crude oil is simply quite different from the ultimate products which come out of a refinery.” American Maritime Asso. v. Blumenthal, 590 F.2d 1156, 1162.
Similarly, in the present case, the LNG produced as marine bunker fuel is different from the Pipeline Feed Gas that comes out of the pipeline at the beginning of the liquefaction process. During the liquefaction process, multiple components are removed from the gas- components that are separate and independently marketable products. Without this process, the LNG would not be able to become liquified, and could not be used as marine fuel without compromising a vessel’s engine. While simple purification or a mere change in phase (such as from a gas to a liquid) is insufficient to change an item into a new and different product, the process performed on the Pipeline Natural Gas at issue here is clearly more extensive than simple liquefication or purification. As a result, we find that the LNG at issue here is a new and different product from the Pipeline Feed Gas.
HOLDING:
Based on the specifications provided, the proposed liquefaction operations would result in the creation of a new and different product within the meaning of 19 C.F.R. § 4.80b(a). Therefore, the proposed transportation by a non-coastwise-qualified vessel would not be a violation of the Jones Act, 46 U.S.C. § 55102.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” If the terms of the import or export contracts and results of the sampling records vary from the facts stipulated to herein, or CBP ascertains discrepancies based upon a review of any other pertinent information, this decision shall not be binding on CBP as provided for in 19 C.F.R. § 177(b)(1), (2) and (4), and § 177.9(b)(1) and (2).
Sincerely,
W. Richmond Beevers
Chief, Cargo Security, Carriers and Restricted Merchandise Branch
Office of Trade, Regulations and Rulings
U.S. Customs and Border Protection