Tuesday, April 29, 2014

For My Friends at API: Petroleum Drawback

For the past several years, I have been privileged to speak at the American Petroleum Institute's annual meeting devoted to customs, drawback, and trade issues. I give an overview of legal developments from the prior year. Often, I am stretching to find petroleum-related issues. Here is the subject of my first slide for next year (assuming I am invited back and no one else covers this).

In BP Oil Supply Co. v. United States, the Court of International Trade had to determine whether BP had proven that it is entitled to drawback where it imported almost 42 million barrels of crude from various sources and exported an equal quantity of Alaskan North Slope crude. BP sought to establish that the ANS was a legally permitted substitute based solely on the API ratings.

Drawback is a refund of 99% of customs duties paid on import when the same quantity of qualifying product is exported. Because it is a statutory privilege and not a right, drawback claimants must satisfy all of the requirements and conditions. This case involved substitution unused merchandise drawback under 19 USC 1313(j), which requires that the substituted merchandise be "commercially interchangeable" with the imported merchandise.

The test for whether goods are commercially interchangeable comes from a Federal Circuit case called Texport Oil Co. In Texport, the Court said that it will decide whether goods are commercially interchangeable based on "an objective, market based consideration of the primary purpose of the goods in question." This analysis is done "from the perspective of a hypothetical reasonable competitor." So, if a reasonable competitor would accept either the imported goods or the substituted exports, for the same commercial use, then the goods are interchangeable for drawback purposes.

Here, the plaintiff made the reasonable assumption that API gravity was a sufficient basis on which to group products as commercially interchangeable. This makes sense from the standpoint of the operations of a refinery and trading crude.

The Court, however, was looking for more. According to the Court, crude is categorized on the basis of source (e.g., Alaska North Slope versus Rabi from Gabon) and requires periodic chemical assays to determine consistency of makeup. Elements that may vary even within a particular oil field include (at least according to the Court): sediment, water content, heavy metals, and sulfur. Given that disparity, the Court found that BP had not established that a reasonable competitor would accept the ANS crude as a substitute for the imported crude.

Another issue is whether the exported merchandise qualified as unused for purposes of the unused substitution merchandise drawback. For goods to be unused, they may not have been subject to an operations amounting to manufacture or production. Here, a portion of the ANS crude was extracted on the way to Valdez, Alaska and refined into fuel. The resulting residue was then injected back into the ANS. According to the Court, BP failed to provide evidence to establish that this process did not result in the use of the merchandise and, therefore, disqualify it from unused merchandise drawback.

On the record before it, the Court found that BP had not proven that it is entitled to drawback.

As an aside, there is a really interesting legal issue in the case that the Court did not need to resolve. That question is whether the administrative record, which Customs and Border Protection is required to file with the Court, is in evidence. If it is, the Court may rely upon it as part of the record before the Court. If not, the parties need to move those records into evidence to get them officially before the Court. This is a very technical and lawyerly distinction. Nevertheless, it is important as it sets the scope of what the Court can consider and also dictates what process the parties need to employ to use those documents. It strikes me that the Court handled it correctly here by acknowledging the existence of the administrative record without accepting that it was complete or accurate enough to establish facts. On the other hand, as the record is made by the United States government and must be filed with the Court, it seems there should be a logical (though not legal) assumption that it reflects the facts as CBP found them.

This should probably be clarified. If BP feels it lost this case because the CIT failed to give sufficient weight to the administrative record, the Federal Circuit may have to address this issue directly. On the third hand, Texport did not seem to require as much evidence of interchangeability as the Court is now demanding. Rather, my recollection of Texport is that HTSUS classification, invoice description, and a commercial standard (such as API gravity) should be enough. Thus, I think the question will be what Texport requires and whether that set a floor or a ceiling for proof.

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