HQ H270579
OT:RR:CTF:VS H270579 YAG
Ms. Sarah M. Nappi
Latham & Watkins LLP
555 Eleventh Street, Suite 1000
Washington, D.C. 20004-1304
RE: NAFTA Eligibility; Commingled Crude Oil; Fungible; Inventory Management
Dear Ms. Nappi:
This is in response to your advance ruling request, dated October 12, 2015, filed on behalf of your client, [***] (hereinafter, the “Company”), regarding the eligibility of crude oil commingled and pooled with other crude oil during transit in a pipeline system for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”).
Inasmuch as your request conforms to the requirements of 19 C.F.R. § 181.93(b)(7) that certain information in your submission be treated as confidential, we will excise the bracketed confidential information from public versions of this decision.
FACTS:
The Company purchases crude oil from various Canadian crude oil suppliers and transports it into the United States via the Enbridge Pipeline (“EPL”) system. Because EPL has implemented a “quality pooling” approach to optimize system capacity, certain types of crude oil, each type identified by its own specific commodity name (“receipt commodity”), may be commingled into common pools upon injection into the EPL system and delivered under a different commodity name (“transport commodity”).
Under this approach, 70 types of receipt commodities correspond to one of 10 transport commodities. When any of these individual receipt commodities is injected into the EPL system, it will be commingled into its corresponding transport commodity common pool. The transport commodity may contain a combination of any of the receipt commodities that fall under that transport commodity common pool. Each transport commodity has a minimum of two different receipt commodities, but some have upwards of 14 and 19 different receipt commodities making up their common pool.
Each transport commodity common pool has a specifically assigned “first commingling point,” located in one of four cities in Canada. The “first commingling point” is the first point where “a minimum of two components to a specific pool combine using common receipt and/or breakout tanks.” According to EPL’s quality pool program, each transport commodity pool maintains a narrow range of quality specifications. This range is calculated “using a volume-weight average subject to usual pipeline variations” and follows ratio-based guidelines. Because receipt commodities may be injected into the EPL system prior to the “first commingling point,” EPL indicates that such receipt commodities may be commingled prior to the “first commingling point” in any ratio under specific operational circumstances where EPL “at its sole discretion deems it necessary for the safe or efficient operation of the system.”
The Company states that “as a user of the EPL system,” it “is not given a choice of whether its crude oil is commingled with other crude oils within the commodity pool.” Rather, if the purchased receipt commodity is subject to a common pool, the Company “as the recipient will always receive a batch of crude oil under the pooled commodity name and not the name of the original crude oil type that entered the system.” For instance, a purchaser may purchase a batch of the Surmont Heavy Blend (“SHB”) receipt commodity, but after transport through the EPL system, the purchaser would receive a batch of the Synbit Blend (“SYB”) transport commodity, “which could potentially consist of some combination of SHB, Statoil Cheecham Synbit (‘SCS’), Christina SynBit (‘CSB’), MacKay River Heavy (‘MKH’), and Long Lake Heavy Synbit Blend (‘PSH’)” receipt commodities.
The subject crude oil crosses the Canadian border into the United States via the EPL system at the Port of Minneapolis, Minnesota. The Company serves as the Canadian exporter and U.S. importer of the subject crude oil, which is classified under heading 2709.00, Harmonized Tariff Schedule of the United States (“HTSUS”). As the exporter, the Company issues blanket NAFTA certificates of origin for the crude oil it exports into the United States based on corresponding NAFTA documentation that it receives from its crude oil suppliers in Canada. As the importer, it files entries at a pipeline terminal within the Port, claiming preferential tariff treatment under the NAFTA when such entries have been properly documented as “originating” by the crude oil suppliers, per the NAFTA rules of origin. Upon delivery of the crude oil into the United States, EPL issues a “Meter Custody Transfer Delivery Ticket,” containing details of the discharge volume and quality, including the API gravity. According to the Company, this information allows it “to file accurate customs entries using the actual entered volume (quantity) and a full 10-digit HTSUS classification based on the actual API of the delivered batch.”
The Company seeks to determine whether the EPL commingling and quality pooling system prevents the Company from claiming preferential tariff treatment under the NAFTA for imported crude oil that has been certified as NAFTA-originating by the Canadian suppliers under the following three scenarios involving the SYB transport commodity:
Scenario 1 – Purchases at a Feeder Facility:
The Company purchases MKH crude oil from a Canadian supplier, and receives a NAFTA certificate of origin from the supplier indicating that this crude oil originates in Canada. The Company does not take title to the MKH until the supplier delivers it to a “feeder” facility operated by a party unrelated to the Company or EPL. The feeder facility is where crude oil is stored until EPL takes custody of it for delivery through its pipeline. When the Company’s MKH is stored at this facility it is commingled with MKH belonging to other parties. At its own discretion, EPL withdraws the Company’s corresponding quantity of MKH from the feeder storage and transfers it into the EPL system under a batch number for the Company’s account, while converting the commodity name from MKH (receipt commodity) to SYB (transport commodity). For example, EPL transfers MKH–#### –# (i.e., batch name) into its system, and converts the batch name to SYB–#### –#, but keeping the same batch number (i.e., #### –#) used in the initial batch name. As soon as the Company’s batch of MKH enters the EPL system converting to SYB, it may be commingled with other receipt commodities within the SYB transfer commodity pool. The Company files entry with U.S. Customs and Border Protection (“CBP”) when this corresponding SYB batch is delivered to it in Minnesota.
Scenario 2 – Transfers at Source:
The Company purchases SHB crude oil from a Canadian supplier, and receives a NAFTA certificate of origin from the supplier indicating that this crude oil originates in Canada. The Company does not take title to the SHB until the supplier delivers it to a tank owned and operated by EPL. Because the tank is within EPL’s system, the SHB is designated as SYB, and may be commingled with other receipt commodities within the SYB transfer commodity pool, as soon as it enters the tank. At its own discretion, EPL withdraws the Company’s corresponding quantity of SYB from the tank and transfers it into the pipeline as SYB for the Company’s account. Here, EPL does not assign individual batch numbers to pipeline injections of crude oil, but does assign batch numbers to individual deliveries of SYB. For example, EPL transfers the Company’s SYB from EPL’s tank into the pipeline without a batch name, and delivers the Company’s corresponding quantity of crude oil as SYB–#### –#. The Company files entry with CBP when this corresponding SYB batch is delivered to it in Minnesota.
Scenario 3 – Inline purchases:
The Company purchases crude oil from a Canadian supplier, which is already in the EPL pipeline. The purchased crude oil is identified as SHB or SYB in the contract between the parties, and the Company receives a NAFTA certificate of origin from the supplier indicating that this crude oil originates in Canada. As the purchased crude oil is already within the pipeline, EPL assigns a specific SYB batch number to the purchased quantity and designates it for the Company’s account. For example, EPL assigns the purchased crude oil already in the pipeline to the Company as SYB–#### –#, and delivers the corresponding quantity under this batch name to the Company. The Company files entry with CBP when this corresponding SYB batch is delivered to it in Minnesota.
With regard to these three scenarios, the Company states that it has not made a claim for preferential tariff treatment under the NAFTA. The Company also provided EPL’s quality specifications for the receipt commodities in the SYB transport commodity as follows: density between 904and 940 kg/m3; viscosity between 100 and 350 cST; olefins less than 1 wt%; vapour pressure no more than 95.103 kPa; BS&W no more than 0.5 vol%; organic chlorides less than 1 wppm; MCR less than 9 wt%; naphtha between 7 and 14 mass% recovered; resid between 29 and 38 mass% recovered; TAN more than 1.1 mgKOH/g; Nickel less than 65 mg/L; and, Vanadium less than 172 mg/L.
To evaluate these specifications, CBP sought comment from its San Francisco Laboratory. Research by the Laboratory’s National Petroleum Chemist indicated that the receipt commodities in the SYB transport commodity are very similar with physical properties that are very close in range. The Laboratory also noted that certain crude oils within EPL’s system are subject to a financial equalization pool, and that such crude oils should not be considered commercially interchangeable. The Company states the subject crude oils are not subject to the financial equalization pool.
Additionally, CBP reviewed entry packages concerning prior crude oil entries exported and imported by the Company, which qualified for preferential treatment under the NAFTA. The entry packages included invoices and Meter Custody Transfer Delivery Tickets, covering the type of information noted in the Shipper’s Balance documents, including the import and export dates, crude oil volumes, and batch names. The invoices listed the batch name, classification, volume, estimated value subject to reconciliation, weight, ticket number, and Canada as the country of origin. The Meter Custody Transfer Delivery Tickets showed the closing and opening volumes for the crude oil delivery; the meter names; the calibration dates for the meters; the volumes measured by each meter; a certification from an EPL employee; and, two handwritten notes, one indicating a tank number, and the other indicating a sulfur measurement. None of the batch names in these entries claiming preference under the NAFTA involved an SYB transport commodity.
ISSUE:
Whether the crude oil imported into the United States by the Company via the EPL system, as described in the three scenarios above, is eligible for preferential treatment under the NAFTA?
LAW AND ANALYSIS:
Pursuant to General Note (“GN”) 12, HTSUS, for an article to be eligible for a NAFTA preference, two criteria must be satisfied. The good must be “originating” under the terms of GN 12(b), and the good must qualify to be marked as a good of a NAFTA country under the NAFTA Marking Rules contained in Part 102 of the CBP Regulations. With regard to the first criterion, GN 12(b) provides, in part, as follows:
[G]oods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if--
(i) they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States…
In the three scenarios described above, the Company purchases crude oil from Canadian crude oil suppliers and delivers it into the United States through the EPL system. The Company claims that the crude oil is an originating receipt commodity (MKH or SHB) or transfer commodity (SYB) when purchased; however, because the crude oil is delivered through the EPL system, the purchased originating receipt commodity or transfer commodity may be commingled with other receipt commodities within the SYB transfer commodity pool, according to EPL’s quality pooling approach. Therefore, even though the Company may have purchased an originating receipt commodity or transfer commodity, because the unrelated parties that subsequently store and deliver this crude oil commingle it with other crude oil, the crude oil that is injected into the EPL system for delivery under the Company’s account is not necessarily the crude oil that the Company will receive in the United States. As such, the Company may not be able to demonstrate that the commingled crude oil itself is originating, rather it may only be able to account for the purchased crude oil prior to injection into the EPL system.
Counsel for the Company argues that “CBP has repeatedly recognized in various contexts that storage, transportation, and importation practices common to the petroleum industry often prevent the tracking of physically discrete quantities of product, and that this commercial reality does not defeat an individual company’s ability to track imported products for purposes of the customs laws.” In support, counsel cites to Marathon Oil Co. v. U.S., 93 F. Supp. 2d. 1277 (CIT 2000); Headquarters Ruling Letter (“HQ”) H012415, dated August 3, 2010; HQ 228616, dated July 1, 2002; HQ 224812, dated February 15, 1995; HQ 224628, dated January 10, 1994; and, HQ 213498, dated September 16, 1981.
In HQ H012415, CBP acknowledged Marathon Oil, namely “that a claimant need not receive the actual molecules of petroleum product it placed into a common storage tank,” finding that commingled products could receive preferential tariff treatment under the NAFTA, provided they were fungible and the claimant could account for its input into the shared storage. As a result in HQ H012415, CBP found that an entity’s use of non-originating condensate in a pipeline did not affect another entity’s NAFTA eligibility of other originating products or materials that shared the same pipeline or storage tanks as the non-originating condensate. To this extent, the proposed commingling of crude oil via a storage and delivery pipeline system should not affect the NAFTA eligibility of originating crude oil that is only commingled upon entering such a system.
Therefore, provided the Company’s crude oil is fungible with the other crude oil it is commingled with during storage and transportation, and provided the Company can account for its input into the shared storage, we find that the Company’s use of the EPL system should not render, what would otherwise be originating crude oil, non-originating. Accordingly, we will address the following issues with regard to the three scenarios: (1) whether the commingled crude oils are fungible; and, (2) whether the Company adequately tracks the crude oil it inputs into shared storage.
Whether the commingled crude oils are fungible?
The Company claims that the originating receipt commodities (MKH or SHB) or transport commodity (SYB) that it purchases from Canadian crude oil suppliers are fungible with the SYB in EPL’s system, which may be a combination of the following receipt commodities: SHB, SCS, CSB, MKH, and PSH. For purposes of NAFTA eligibility, “the term ‘fungible’ means that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties.” See GN 12(g), HTSUS.
Previous CBP decisions have dealt with the question of the scope of the term fungible materials within the meaning of GN 12(g), HTSUS. See HQ H012415 and HQ 563062, dated October 13, 2004. These decisions examined the two requirements addressed in the definition of “fungible” materials: (1) fungible materials are “interchangeable for commercial purposes”; and, (2) fungible materials have “essentially identical properties.”
With regard to the first requirement, to determine whether fungible materials are “interchangeable for commercial purposes,” the factors that CBP examines will be decided on a case-by-case basis, taking into account the nature of the material and the use to which it is put. See HQ H012415. This requires examining how the materials are bought, sold, and used in their commercial marketplace. Id. CBP considers whether a reasonable buyer in the marketplace would accept the non-originating material in lieu of the originating material in order to use the non-originating material for the same purpose as the originating material. Id. With regard to the second requirement, to determine whether fungible materials have “essentially identical properties,” CBP considers the specific role and purpose for which the material is used in the imported article. Id.
HQ H012415 held that a non-originating diluent and originating diluent were fungible because they were “interchangeable for commercial purposes” and had “essentially identical properties.” The originating and non-originating diluents were examined in accordance with the pipeline standards and chemical composition. Similarly, HQ 563062 held that non-originating base oils and originating base oils were “interchangeable for commercial purposes” and had “essentially identical properties” on the basis of the API guidelines. The API guidelines allowed substituting one base oil for another, if certain standards were met, for the purpose of satisfying engine performance tests. CBP determined that the originating and non-originating base oils had standards of saturates level, viscosity index, and sulfur content that were within the same API group. CBP noted that there was an allowable range and parameters for the viscosity, saturates, and sulfur.
In this case, crude oil that the Company purchases and potentially non-originating SYB will be stored and commingled in EPL’s system for the same purpose: to be delivered in particular amounts through EPL’s system to an ultimate recipient as SYB. That is, regardless of whether the Company injects originating SYB, or any of the originating receipt commodities from the SYB pool (SHB, SCS, CSB, MKH, or PSH), into EPL’s system, the purpose and ultimate result from this injection is to deliver SYB only. The Canadian Association of Petroleum Producers define “synbit blend” as “[b]lends made from heavy crudes and/or bitumens and a diluent usually synthetic crude oil, for the purpose of meeting pipeline viscosity and density specifications, where the density of the diluent included in the blend is greater than or equal to 800 kg/m3.” Unrelated market participants recognize synbit blend (i.e., SYB) as the combination of SHB, SCS, CSB, MKH, and PSH, and having the following average properties over the last year: 932.0 kg/m3 for density; 1.54 mgKOH/g for TAN; 53.8 mg/L for Nickel; and 141.9 mg/L for Vanadium. These definitions and quality specifications, at least with regard to density, TAN, Nickel, and Vanadium, align with EPL’s quality management standards for the SYB transport commodity pool in the EPL pipeline. Moreover, the CBP Laboratory’s research, looking at the density, API, Sulfur, Nickel, Vanadium, and total acid number of the subject receipt commodities, indicated that such crude oils had very similar physical properties. The CBP Laboratory also noted that these crude oils in the SYB pool appeared commercially interchangeable provided they were not subject to the financial equalization pool. Considering the purpose of storing the commingled crude oils in the EPL system, the very similar physical properties of the crude oil, and to the extent such crude oils are not subject to the financial equalization pool as claimed by the Company, we find that the Company’s crude oil in the three scenarios is fungible with the SYB already in EPL’s system prior to commingling.
Whether the Company adequately tracks the crude oil it inputs into shared storage?
The Company accounts for the crude oil it injects into the EPL system through documentation it obtains when it purchases the crude oil (a contract and a NAFTA certificate of origin), and EPL’s Shipper Balance document, which tracks the dates and amounts of crude oil that are injected and delivered through EPL’s system under the Company’s account.
This first set of documents, a contract and a NAFTA certificate origin, are obtained by the Company in a similar manner when it initially purchases crude oil from Canadian crude oil suppliers. We were not provided with samples of the contract or the NAFTA certificate of origin. However, counsel for the Company indicates that the contract will identify the crude oil as: MKH in Scenario 1; SHB in Scenario 2; and, SYB or SHB in Scenario 3. Additionally, counsel for the Company states that the NAFTA certificate of origin will indicate that the “crude oil”, MKH, SHB, or SYB (depending on the scenario) purchased by the Company qualifies as originating in Canada.
The second documentation, EPL’s Shipper’s Balance, differs slightly per scenario. In Scenario 1, since the Company purchases MKH and stores it at a feeder facility with other MKH prior to its injection into the EPL system, the Shipper’s Balance shows the date when a certain volume of MKH under the Company’s account is transferred from the feeder facility into the EPL system under an MKH batch name. It then notes that the crude oil under the MKH batch name was converted to a SYB batch name, while maintaining the date and volume that were indicated in the initial transfer to the EPL system. Lastly, it shows the date when a similar quantity of crude oil under this particular SYB batch name was delivered into the United States. In Scenario 2, since the Company’s purchased SHB is stored directly in EPL’s storage tanks, EPL only records the date when a certain volume of SHB is transferred into EPL’s system under the Company’s account. It does not refer to it under a SHB batch name, and does not assign it a SYB batch name until it is delivered into the United States. The volume of SHB upon transfer into the EPL system, together with the Company’s opening balance before transfer, align with the volume of SYB that is delivered to the Company in the United States. In Scenario 3, since the Company’s purchased SYB or SHB is already in EPL’s pipeline, EPL assigns this crude oil with a SYB batch name, recording the date when a certain volume of this crude oil is transferred under the Company’s account. The volume that is transferred to the Company’s account under particular SYB batch names, together with the Company’s opening balance before this transfer, align with the volume of SYB that is delivered to the Company under these SYB batch names in the United States.
While the Company did not submit examples of its contracts and NAFTA certificates of origin, the Company indicated that it will rely on this information from the crude oil suppliers to issue its own blanket NAFTA certificates of origin as the exporter. After examining prior crude oil entries from the Company, which qualified for preferential treatment under the NAFTA, we noted that the invoices corresponding to these entries listed the batch name, volume, estimated value subject to reconciliation, weight, ticket number, and Canada as the country of origin. To the extent that these entries and corresponding invoices relied on contracts and NAFTA certificates of origin from crude oil suppliers in the same manner that the Company is proposing to rely on such information for the three scenarios, then we find no particular issue with the documents that the Company is proposing to rely on for the three scenarios. However, while we have no indication that the Port has needed to question the origin of the crude oil entries entered under the NAFTA by the Company, the Company should be prepared to substantiate the origination claims for the proposed entries under these three scenarios, as may be needed by CBP upon entry or for verification purposes.
Assuming the proposed crude oil entries at issue are originating, the Company would still need to show that the purchased originating crude oil was the same crude oil that was injected into the EPL system. That is, the documentation should be able to trace the crude oil from the point it was purchased through and up until the point it was injected into the EPL system. Here, the contract and NAFTA certificate provide information from the time of purchase, whereas the Shipper’s Balance documents provide information from injection into the EPL system and onward. Whether this documentation reasonably traces the crude oil from the point of purchase through injection into the EPL system, depends on what happens between purchase and injection into the EPL system.
For example, in Scenario 1, the purchased MKH is first transferred to a feeder facility before it is transferred into the EPL system. The submitted documents do not show when the MKH, or how much MKH, was delivered into the feeder facility. Similarly, the submitted documents indicate that the batch name is assigned upon withdrawal from the feeder facility. Without this information accounting for the injection and storage of the crude oil in the feeder facility, it is difficult to trace the crude oil withdrawn by EPL from the feeder facility back to the crude oil that was purchased from the Canadian supplier. Thus, with regard to Scenario 1, the Company needs to provide documentation showing when it transferred its purchased MKH to the feeder facility for storage, and how much MKH it transferred into the feeder facility for storage.
Similarly, in Scenario 3, because the Company is purchasing crude oil that is already in the EPL system, it only appears to be tracing the crude oil from this point forward, and not from any point prior to its injection into the EPL system. Here, all we know is that the Company purchased a certain quantity of originating crude oil, and that a certain quantity of the same type of crude oil was transferred within EPL’s system under the Company account. However, even though the Company may have purchased crude oil that was originating, this documentation does not indicate that such originating crude oil was actually injected into the EPL system. Thus, with regard to Scenario 3, the Company needs to provide documentation showing that the originating crude oil it purchased was actually injected into the EPL system.
Unlike Scenarios 1 and 3, the purchased crude oil in Scenario 2 is directly stored in EPL’s storage tanks after the Company purchases it from the supplier. Here, the contract, NAFTA certificate of origin, and Shipper’s Balance documents account for the crude oil from the time of purchase through injection into the EPL system. That is, provided that the date of purchase and purchase quantity in the contract and other relevant documentation align with the Shipper’s Balance date of transfer and quantity transfer, this information is sufficient to trace the Company’s crude oil from purchase through delivery via the EPL system.
Based on the above, the documentation provided for Scenario 2 adequately tracks crude oil from purchase through delivery. However, the Company will need to provide additional documentation that traces the crude oil from purchase to injection into the EPL system under Scenarios 1 and 3.
HOLDING:
Based on the facts described in this case, we find that commingling fungible crude oil for storage and delivery purposes by a third party, does not prevent the Company from claiming NAFTA eligibility for crude oil that is originating and was not commingled until it was stored by the third party. While the Company has demonstrated sufficient documentation to trace the crude oil under Scenario 2, it would need to provide additional documentation to trace the crude oil under Scenarios 1 and 3.
U.S. Customs and Border Protection NAFTA Regulations, 19 C.F.R. § 181.100(a)(2), provide that each NAFTA ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of an advance 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 advance ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the advance ruling was based. If any of the facts are materially different or a condition has not been satisfied, the treatment specified in the advance ruling will not be applied to the actual transaction.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Robert Dinerstein, Acting Chief
Valuation and Special Programs Branch