CLA-2 RR:CR:SM 562387 TJM
Mr. Joseph F. Donohue, Jr.
Donohue and Donohue
26 Broadway
Suite 911
New York, N.Y. 10004
RE: Petroleum products; U.S. Virgin Islands; insular possession; duty-free treatment; General Note 3(a)(iv), HTSUS; delayed coking process; Hovensa; Amerada Hess; HRL 555032; HRL 557180; T.D. 88-17; C.S.D. 80-34.
Dear Mr. Donohue:
This is in response to your letter dated April 1, 2002, on behalf of Hovensa, LLC, and Amerada Hess Corporation, concerning the applicability of General Note 3(a)(iv), Harmonized Tariff Schedules of the United States (HTSUS), to certain petroleum products from the U.S. Virgin Islands.
FACTS:
Your client, Hovensa, LLC, owns and operates a petroleum refinery in St. Croix, U.S. Virgin Islands, and Amerada Hess Corporation imports into the U.S. the products produced by Hovensa.
Hovensa’s processing facilities include crude oil distillation units; vacuum distillation units; visbreakers; naphtha, kerosene, light gas oil and vacuum gas oil desulfurizers (catalytic hydrotreaters); a PENEX unit (pentane and hexane isomerization process); Platformers (naphtha reformers); a Sulfolane unit (BTX aromatics extraction and fractionation processes); a fluid cat cracker; an alkylation unit; a Dimersol unit; MTBE and TAME units; various fractionation units; fuel gas, LPG and cat naphtha treating facilities; sulfur plants; and a sulfuric acid regeneration plant.
You state that Hovensa will establish a coker complex at its manufacturing facilities. It will consist of a delayed coking unit, a gas plant, a fuel gas treating unit, a LPG treating unit and sour water stripping facilities. The delayed coking unit will consist of four coke drums approximately 100 feet high and 29 feet in diameter, a fractionator, and other equipment. Offsite facilities will include a boiler, piping that connects the coker complex to existing refinery units and utilities, an enclosed coke-conveying system, coke storage domes and a coke loading dock. The operation of the coker complex will be controlled by use of a computer system in a control room.
PROCESSING
IMPORT
CRUDE OIL DISTILLATION
VACUUM DISTILLATION
DELAYED COKING
POST-COKING PROCESSING
DOWNSTREAM PROCESSING
RESULTING PRODUCT
Crude Oil
Resid
Pitch
Fuel Gas
N/A
Fuel Gas
Liquefied Petroleum Gas (LPG)
Alkylate
Propylene Propane Cut (P-P)
Refinery fuel
Alkylate
Dimate
Butane Butene Cut (B-B)
MTBE/ETBE
Alkylate
Fuel
Gasoline Blendstock
Coker Light Naphtha
Desulfurized Light Naphtha
Low-octane gasoline
Penexate
Coker Heavy Naphtha
Desulfurized Heavy Naptha
Platformate (a.k.a. reformate)
Coker Naphtha/Gas Oil Mixture
Desulfurized Naphtha/Gas Oil Mixture
Kerosene
Jet Fuel
Light Gas Oil
Heavy Gas Oil
Light Naphtha
Heavy Naphtha
Coker Light Gas Oil
Desulfurized Light Gas Oil
No. 2 Home Heating Oil
Diesel Fuel
Blending stock for No. 2 Oil
Blending stock for Diesel fuel
Coker Heavy Gas Oil
Desulfurized Heavy Gas Oil
Catfeed
Blending stock catfeed
Fuel oil blending stock (No. 6)
Petroleum Coke
Fuel
Fuel
Distillation of Crude Oil
Crude oil is imported and undergoes the crude oil distillation process where it is heated to a temperature of about 650°F and separated into several different products based on their respective boiling ranges. The heaviest of these products is known as residuum (“resid”). Resid has several possible uses, one of which is as feed to a vacuum distillation unit.
You note that Headquarters Ruling Letter (HRL) 555032, dated September 23, 1988, which was addressed to you, ruled that distillation of crude oil at the Virgin Islands refinery substantially transformed the crude oil into new articles of commerce, including resid. You state that resid is a product of the crude oil distillation process. In HRL 555032, Customs noted that the distillation process separates the crude oil into light ends, naphthas, kerosene, gas oils, and residuum (“resid”), which are products with qualities and capabilities distinct from the original crude. Therefore, you argue that in the instant case, resid produced by Hovensa is a product of the U.S. Virgin Islands.
Vacuum Distillation of Resid
You state that Hovensa feeds resid to the vacuum distillation unit to produce several products, including pitch. On a few occasions, counsel stated that Hovensa may import foreign resid into the U.S. Virgin Islands. In either case, resid is sent to a vacuum distillation unit where it is separated by distillation into light vacuum gas oil (LVGO), heavy vacuum gas oil (HVGO) and pitch. The separation is performed in a large-diameter tower at a vacuum pressure of approximately 60 mm Hg or less and a temperature of 700°F. Pitch will be used as feed to the delayed coker unit. Pitch also can be fed to a visbreaker, where it is subjected to thermal cracking, which results in several products, one of which is tar. Tar can be used as delayed coker feed in relatively small portions.
III. Coker Processing
You state that delayed coking is a cyclic, thermal cracking process that converts high molecular weight, high boiling point hydrocarbons into lighter, more valuable products. The chemical reaction takes place in the coke drums. The feedstock (i.e. pitch or tar) is fed to the coker fractionator (main fractionator) where it mixes with hot vapors from the coke drums. This is done to both heat the feed and cool (quench) the coke drum vapors to initiate fractionation. The fractionator tower “bottoms” are then heated in a fired heater (furnace) to cracking temperature, typically 900+°F. They then flow to the coke drums where cracking occurs. The cracked hydrocarbon vapors flow from the top of the coke drums to the fractionation column where they are separated into discrete products by distillation. The products of the coker processing includes: fuel gas, liquefied petroleum gas (LPG), light naphthas, heavy naphthas, light gas oil, heavy gas oil, petroleum coke.
You assert that the products that will emerge from the coker process
will be new articles of commerce that will differ in name, character and use from the coker feedstock. The coker feed will be pitch (or occasionally tar or resid), whereas the resulting coker products will be fuel gas, LPG, light naphtha, heavy naphtha, light gas oil, heavy gas oil, and coke. You provided information regarding the change in character or physical properties. You also assert that the “use” and “name” of the coker feed further changes downstream: 1) fuel gas to refinery fuel; 2) LPG to fuel gas or to feedstock for alkylation, dimersol or MTBE unit to produce alkylate, dimate or MTBE/ETBE; 3) light and heavy naphtha as feed to produce Penex and Platformate or low-octane gasoline blendstocks; 4) gas oils to fuel oil blending stock or cutterstock to produce fuel oils, catfeed, fuel oil blending stock, catfeed blending stock, kerosene, jet fuel; and 5) coke to fuel.
Downstream Products
Fuel Gas and Petroleum Coke
Fuel gas and petroleum coke are two of the products that will emerge from the coker processing of pitch. The fuel gas will be used by Hovensa within its refinery. The petroleum coke is often sold, but it is also sometimes processed into fuel.
LPG Products
LPG off the coker LPG treating unit may be sent directly to an alkylation unit for processing into alkylate, a high-octane gasoline blendstock. Or it may first be sent to a fractionation unit and separated by distillation into a propylene-propane cut (P-P) and butane-butene cut (B-B). The P-P may be used as refinery fuel. It may also be sent to the Dimersol unit and/or the alkylation unit for production into dimate (a gasoline blendstock) or alkylate.
The B-B may be used as fuel, or as a gasoline blendstock, or it may be sent to the MTBE unit for production into MTBE or ETBE (gasoline blendstocks). It may also be sent to the alkylation unit for processing into alkylate.
You state that each of the above processes involves chemical reactions that convert hydrocarbons with high vapor pressures into high-octane gasoline blendstocks. Hovensa may sell the alkylate, dimate, MTBE and ETBE or use them at its refinery for blending with other materials to produce gasoline. You state that HRL 557180 held that the processing of LPG into alkylate, dimate, MTBE and ETBE is a substantial transformation.
C. Naphtha-Derived Products
Light and heavy napthas are first desulfurized to remove harmful sulfur and nitrogen, saturate olefins, and to improve other properties. You state that desulfurization is a catalytic hydrotreating process by which sulfur, nitrogen and oxygen compounds are converted by their chemical reaction with hydrogen to form hydrogen sulfide, ammonia, and water, respectively, which are subsequently removed from the material. Desulfurization typically removes approximately 90% of the sulfur, and 30-60% of the nitrogen, oxygen, concarbon, and metals that may be present.
1. Penexate
Once the light naphtha is desulfurized, it may be processed into penexate (also known as isomerate). You state that the penex process chemically converts straight chain hydrocarbons (normal paraffins) into branched hydrocarbons (isoparaffins). The resulting product, penexate, is a high-octane gasoline blendstock that Hovensa may use as a component in the blending of gasoline at its refinery, or may sell to refineries in the United States for their use in gasoline blending.
You note that in HRL 555032, Customs held that penexate derived from naphtha is one of the resulting materials that is a marketable product, or that can be blended to produce other products, such as gasoline.
Platformate
Desulfurized coker heavy naphtha may be converted into platformate (a.k.a. reformate), a high-octane gasoline blendstock. The platformate processing is a series of chemical reactions that reform the molecular structure of the naphtha and significantly improve octane quality. Hovensa may use the platformate in gasoline blending at its refinery, or may process it further in a sulfolane unit to produce benzene, toluene, xylene, heavy aromatics, and raffinate, which are other gasoline blendstocks. Or Hovensa may market the platformate to refineries in the U.S. for their use in gasoline blending.
You note that HRL 557180 ruled that processing naphtha into platformate was a substantial transformation of the naphtha.
Coker Gas Oils
Coker Light Gas Oil
Coker light gas oil that results from the delayed coking process must undergo desulfurization. Desulfurized coker light gas oil that does not meet finished fuel oil specifications may be blended with other fuel oil blendstocks to produce No. 2 fuel oil (home heating oil), diesel fuel oil, or No. 6 fuel oil.
Coker Heavy Gas Oils
Coker heavy gas oil is first desulfurized. Desulfurized coker heavy gas oil may be used as catfeed for Hovensa’s cat cracker or it may be sold as catfeed to other refineries. Coker heavy gas oil also may be blended with other fuel oil blendstocks to produce marketable No. 6 fuel oil.
You note that fuel oil blending was discussed in HRL 557180 but none of the blendstocks discussed were coker-derived materials. You state that undesulfurized coker light gas oil is outside the specifications for No. 2 oil and diesel fuel with respect to sulfur content and therefore could not be sold or used as those finished fuel oils. You also note that undesulfurized coker light and heavy gas oils are outside the specifications for No. 6 fuel oil. You assert that each of the finished products is a different article of commerce from the undesulfurized coker gas oil.
Coker Naphtha/Gas Oil Mixture
Coker naphtha and coker gas oil will often be mixed together prior to desulfurization. After desulfurization, the mixture will go to a distillation tower for separation (fractionation) into various products of different boiling ranges. The resulting products include kerosene, jet fuel, No. 2 oil, diesel fuel, catfeed, blending stocks, and light and heavy naphtha.
F. Production of Gasoline
Marketable gasoline is a blend of several components that have been mixed together in required proportions to achieve a product of defined specification. Various blendstocks used to make gasoline were listed in your submission.
While Hovensa may ship one or more of the coker-derived gasoline blendstocks to the United States for use in gasoline blending, more frequently it will use them at its own refinery for blending into gasoline. You note that HRL 555032 and 557180 ruled that the process of blending to produce gasoline is a manufacturing operation that produces new and different products.
In summary, you assert that the following products made by your clients are eligible for duty-free entry under GN 3(a)(iv):
Delayed Coker Products
Downstream Products
- Coker Light Naphta
- Coker Heavy Naphtha
- Coker light gas oil
- Coker heavy gas oil
- Liquified Petroleum Gas (LPG)
- Petroleum Coke
- Fuel Gas
Gasoline Blendstocks:
Alkylate; Dimate; MTBE; ETBE; Desulfurized light naphtha; Desulfurized Heavy naphtha; Penexate; Platformate
Gasoline
Fuel Oil Blendstocks:
Desulfurized light gas oil; Desulfurized heavy gas oil
Fuel Oils:
No. 2 oil; No. 6 oil; Diesel Fuel
Kerosene
Jet fuel
Catfeed and Catfeed Blendstock
Cat Cracker Products:
Light cat naphtha; Heavy cat naptha; Light cycle oil;
Slurry oil
Finally, we note that we received a report from the U.S. Customs Service’s Laboratories and Scientific Services on May 31, 2002, regarding the manufacturing processes involved in this submission. The opinion in the report was considered for this ruling.
ISSUE:
Whether the petroleum products described above qualify for duty-free entry pursuant to General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS).
LAW AND ANALYSIS:
I. GN 3(a)(iv), HTSUS
Under General Note 3(a)(iv), HTSUS, (19 U.S.C. § 1202) goods imported from an insular possession of the United States may enter the customs territory of the U.S. free of duty if they:
(1) are manufactured or produced in the possession;
(2) do not contain foreign materials which represent more than 70 percent of the goods' total value (or more than 50 percent with respect to textile and apparel articles subject to textile agreements, and other goods described in section 213(b) of the Caribbean Basin Economic Recovery Act); and
(3) come directly to the customs territory of the U.S. from the possession.
Petroleum products are described in section 213(b) of the Caribbean Basin Economic Recovery Act as articles which are not eligible for duty-free treatment. Therefore, the foreign materials making up the merchandise at issue may not represent more than 50 percent of the appraised value of the petroleum product imported into the U.S.
II. Double Substantial Transformation
T.D. 88-17 published in the Federal Register on April 13, 1988 (53 Fed. Reg. 12143) applied the double substantial transformation concept to products of U.S. insular possessions for purposes of determining whether the products meet the value requirements under General Note 3(a)(iv), HTSUS. T.D. 88-17 concluded that if foreign material (material not originating in an insular possession) is transformed into a new and different product in an insular possession and then that product is transformed again in that insular possession into yet another new and different product which is imported into the U.S., its cost will be considered part of the value of materials produced in the insular possession.
A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
You contend that each product described above is the result of at least two substantial transformations: “Hovensa’s production of coker feedstock followed by the processing of the feedstock in the coker process results in two or more substantial transformations of the starting foreign materials.” You further state that "as a result, the coker naphtha and coker gas oils directly off the delayed coker are eligible for duty-free entry. . . .The downstream processing of coker LPG, coker naphtha and coker gas oils constitutes further substantial transformations. . . .”
Previous rulings addressing the manufacture of products from chemicals have held that an intermediate product created in a two (or more) step reaction process is an article of commerce if: (1) the intermediate product is or can be isolated; and (2) it has been or can be marketed in that form. See HRL 055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust. Bull. 780 (1980)). When chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernable, they have undergone a substantial transformation. See HRL 555989 dated June 24, 1991, in which we held that raw materials used to produce three varieties of antioxidants undergo a double substantial transformation in the Bahamas. See also HRL 555032, dated September 23, 1988, and HRL 557180, dated December 23, 1993.
Conversely, where the manufacturing process, from starting materials to final product, is continuous, and no market exists for the intermediate in its unrefined form, we have held that the intermediate is not an "article of commerce." See T.D. 77-273, 77 Cust. Bull. 551 (1977). Similarly, where the evidence shows that an intermediate created in the course of a two-step reaction is not traded in commerce, is relatively unstable, and cannot be economically isolated for trade, we have ruled that the purported intermediate article is no more than a "transitional stage which is always reacted to completion" of the final product, and not itself an independent "article of commerce." See HRL 055652 dated May 18, 1979 (C.S.D. 80-4, 14 Cust. Bull. 729 (1980)).
In Headquarters Ruling Letter (HRL) 555032 dated September 23, 1988, we held that various gasoline blending stocks, feedstocks, gasoline and fuel oils produced at HOVIC's refinery from imported crude oil qualified for duty-free entry under Headnote 3(a)(iv) of the Tariff Schedules of the United States (TSUS) (the precursor to General Note 3(a)(iv), HTSUS). In HRL 555032, we found that the distillation of imported crude oil in the primary distillation tower resulted in a substantial transformation of the crude oil. We stated that the distillation process separated the crude oil into fractions according to boiling points. These primary cuts included so-called "light ends," mostly hydrocarbon gases like propane, naphtha, kerosene, gas oils and residuum. In addition, we held that converting these primary distillation products into finished products, such as motor fuel, etc., resulted in a second substantial transformation of the imported crude oil.
III. Substantial Transformation of Crude Oil
Based on HRL 555032, we are of the opinion that in the first process which you describe, the production of residuum (“resid”) from the distillation of crude oil results in a substantial transformation of the foreign crude oil. In HRL 555032, we held that the distillation process which involved separating the crude into fractions or cuts, including naphtha, kerosene, gas oils and residuum, resulted in a substantial transformation of the crude oil into new and different articles of commerce.
IV. Substantial Transformation of Coker Feedstock
As for the products that emerge from the coker process (fuel gas, LPG, naphthas, gas oils, and petroleum coke), you assert that they are new articles of commerce that differ in name, character and use from the coker feedstock (pitch, resid, or tar).
As noted above, the delayed coking process is a cyclic, thermal cracking process that converts high molecular weight, high boiling point hydrocarbons into lighter, more valuable products. Coking feedstock is heated to a temperature in excess of 850°F and allowed to crack in vessels referred to as “coke drums.” Hydrocarbon vapors flow from the drums to the fractionating column for separation by distillation. You provided information regarding the physical and chemical characteristics of coker feed and the resulting products including LPG, light naphtha, heavy naphtha, light gas oil, heavy gas oil, and petroleum coke. You also represent that many of these products resulting from the delayed coking process is sold to other refineries or end users.
Based on the information provided and consistent with the reasoning in HRL 557180, it is the opinion of this office that coker feedstock is substantially transformed when it undergoes the delayed coking process. The process changes the name, use and character of the feedstock. The Customs Laboratories & Scientific Services notes that:
Review of the delayed coking process shows that it is substantive in that through chemical reaction (cracking) and separation, valuable light and medium weight petroleum products are produced from heavy cheaper petroleum materials. Specifically, high value light products such as naphtha and gas oils are produced from cheap by-products such as tar and residual oils. . . .
Accordingly, it is apparent that the product exiting from the delayed coker has been passed through two or three processes. . .which substantially change the feedstock [in each process] from a use, market and specifications point of view.
Therefore, the resultant products from the delayed coking process that are made from coker feedstock derived from the distillation of crude oil will have undergone double substantial transformation.
Additionally, counsel notes that in a minority of cases, Hovensa may use imported foreign resid as a feedstock in the vacuum distillation process to produce pitch. Vacuum distillation process is performed in a large tower at a vacuum pressure of approximately 60 mm Hg or less and at a temperature of 700°F. The process separates the resid into three distinct products: light vacuum gas oil, heavy vacuum gas oil and pitch. Counsel contends that in this scenario of using foreign imported resid, the foreign resid is substantially transformed into light vacuum gas oil, heavy vacuum gas oil and pitch. Counsel provided a description of changes in the physical and chemical properties of resid when processed into pitch in terms of API gravity, sulfur content, nitrogen content, metals contents and viscosity. Based on the facts provided, it is the opinion of this office that the foreign resid imported into the U.S. Virgin Islands and processed into pitch undergoes a substantial transformation. Thus, the pitch (derived from the foreign resid), after having undergone the delayed coking process will have undergone double substantial transformation.
Finally, it follows then that downstream processing in the U.S. Virgin Islands of products resulting from delayed coking (specifically as described above) would also qualify those products as materials produced in the U.S. Virgin Islands, pursuant to the provisions of GN 3(a), HTSUS.
HOLDING:
Based on the information submitted, we are of the opinion that the operations performed in the U.S. Virgin Islands result in a double substantial transformation of the imported raw material as described herein. Therefore, the material imported into the U.S. Virgin Islands will not be considered foreign material for purposes of calculating the 50 percent maximum foreign material value limitation set forth in General Note 3(a)(iv), HTSUS, but will be considered a material produced in the Virgin Islands.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
Myles B. Harmon, Acting Director
Commercial Rulings Division