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HQ 115762

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September 3, 2002

VES-3-24-RR:IT:EC 115762 GEV

CATEGORY: CARRIER

Thomas M. Dyer, Esq.
Dyer Ellis & Joseph
Watergate, Suite 1000
600 New Hampshire Ave., NW
Washington, D.C. 20037

RE: Coastwise Trade; Commingled Merchandise; 46 U.S.C. App.

Dear Mr. Dyer:

This is in response to your letter dated July 24, 2002, with enclosures, requesting a ruling on behalf of your client, [ ] (the “Company”), that a foreign-flag vessel may be used in the scenario described below. Our ruling in this matter is as follows.

FACTS:

The Company and another U.S.-based energy company plan to construct an LNG terminal and gasification plant in Mexico. The plant will receive Alaska and foreign-source LNG for gasification. The Alaska LNG will be transported to Mexico aboard foreign-flag vessels, and will be commingled with the LNG arriving from non-U.S. points of origin. After gasification, the product will be transferred to a pipeline by which it will be transported to parts of Mexico and the United States either directly or through an interconnect with another pipeline. The Company proposes two alternative arguments with respect to the applicability of 46 U.S.C. App. § 883 to this scenario.

ISSUES:

Whether the gasification process described above is sufficient to create a “new and different product” within the meaning of 19 CFR § 4.80b(a) so that the proposed transportation of the Alaska LNG by foreign-flag vessels is not violative of 46 U.S.C. App. § 883.

Whether the transportation of LNG from Alaska by a foreign-flag vessel in the proposed scenario constitutes a violation of 46 U.S.C. App. § 883 if, after the Alaska-source LNG is commingled with the foreign-source LNG and processed into gas form, an amount of product equal to the amount brought from Alaska is first sold in Mexico and remains in Mexico.

LAW AND ANALYSIS:

Title 46, United States Code Appendix, § 883 (the merchandise coastwise law often called the "Jones Act") prohibits the transportation of merchandise between United States coastwise points, either directly or via a foreign port, or for any part of the transportation, in any vessel other than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States (i.e., a coastwise-qualified vessel).

In interpreting § 883, Customs has ruled that a point in United States territorial waters is a point in the United States embraced within the coastwise laws. The territorial waters of the United States consist of the territorial sea, defined as the belt, 3 nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and the coastline differ.

The Customs Regulations promulgated pursuant to 46 U.S.C. App. § 883 are found at title 19, Code of Federal Regulations, §§ 4.80 et seq. (19 CFR §§ 4.80 et seq.) In regard to the first issue presented for our consideration, we note that § 4.80b(a), Customs Regulations, provides, in pertinent part, that:

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 posses- sion of the U.S. 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. (Emphasis added)

In applying § 4.80b(a), Customs has held that merchandise manufactured or processed into a “new and different product” must be landed and processed at an intermediate port or place other than a coastwise point. The manufacturing or processing may not take place on board a vessel. Pursuant to Treasury Decision (T.D.) 91-32 published in the Federal Register on April 10, 1991 (56 FR 14467) and in the Customs Bulletin on April 24, 1991 (Customs Bulletin and Decisions, vol. 25, no. 17, April 24, 1991, at pp. 1-5) prior to reaching a determination that a “new and different product” has in fact been created by a blending operation for purposes of § 4.80b(a), the procedures and specific data of such operations should be submitted by the party seeking such a determination. Customs will then review the data and make the necessary determination which will form the basis for a decision regarding any possible violation of 46 U.S.C. App. § 883.

With respect to Issue 1, upon reviewing the specific data submitted by the Company pertaining to the gasification process in Mexico, (Appendices A, B, and C), we note at the outset that the sole purpose of liquification of natural gas is to allow enormous quantities of it to be stowed and carried on vessels. As indicated by the Company, LNG is not usable until it is gasified. However, other than changing the physical state of the LNG from liquid to gas, no other transformation takes place during the gasification process in question. The LNG in the foreign-flag tanker and the natural gas produced by the gasification process and placed into the pipeline are identical except for the fact that the gas in the vessel is very tightly compressed to allow for efficient storage and transport.

Accordingly, we are of the opinion that under the Company’s proposal, LNG leaving Alaska by foreign-flag vessel and the natural gas that results from the gasification process in Mexico and sent by pipeline into the United States are essentially the same product. Therefore, a “new and different product” has not been produced within the meaning of § 4.80b(a), Customs Regulations, and the use of a foreign-flag vessel to effect the transportation in question would violate 46 U.S.C. App. § 883.

In regard to Issue 2, the Company is contemplating supplying and discharging up to 300,000 mmbtu/d of LNG at the LNG terminal in Mexico, where it will be converted to natural gas and transferred into the various pipelines. It is also possible that in the future small quantities of LNG could be transferred to LNG tanker trucks for transportation to points in the United States for use as an alternative
motor vehicle fuel in vehicles capable of converting LNG into natural gas. As described below, the pipeline(s) will provide transportation for the gas, and the Company will take delivery of some of the gas in the United States. Alaska is the point of origin for 140,000 – 200,000 mmbtu/d of the Company’s LNG being discharged in Mexico, with the remainder originating at a non-U.S. point of origin. All of the LNG being delivered to the Mexico terminal by the Company’s partner will be of non-U.S. origin.

Therefore, there will be gas in the planned pipeline(s) that will not be subject to the Jones Act (foreign-source LNG that will be discharged at the Mexico terminal by the Company and its partner), as well as U.S.-source gas delivered into the pipeline in the United States from U.S. sources. Along the pipeline, gas consumers in Mexico will be taking substantial deliveries of gas from the pipeline, which will have a direct effect on the net amount of gas that ultimately reaches the United States from Mexico.

All the LNG brought to Mexico for processing will be necessarily commingled, as it is impractical to segregate the Alaska-source LNG from the foreign-source LNG at the terminal and during the gasification process. However, the Company seeks to keep an amount of gas equal to the amount produced from the Alaska-source LNG from entering the United States. To accomplish this, and to further demonstrate the Company’s intention to not enter the Alaska-source gas into the United States, the Company’s contracts will be structured so that an amount equal to or greater than the Alaska-source LNG volume is sold directly to Mexican producers for consumption in Mexico. These sales will be made to either independent power producers (“IPPs”) or local distribution companies (“LDCs”) along the pipeline. The Company will replace some or all of the gas sold in Mexico with gas purchases in the United States. Some or all of the United States gas may be purchased from the IPPs or LDCs from quantities they have already contracted to purchase in the United States in what would amount essentially to a “swap” agreement. A diagram depicting a proposed product distribution and the related contractual arrangements is provided in Appendix D.

With respect to this second issue under consideration, Customs has had prior occasion to address the applicability of 46 U.S.C. App. § 883 to the commingling of merchandise. In Customs ruling letter 114172, dated June 18, 1998, we determined that the transportation of caustic soda from the United States to Canada on a coastwise-qualified vessel, its commingling in Canada with fungible soda shipped to

Canada on non-coastwise-qualified vessels, and its subsequent return by truck to the United States, did not violate 46 U.S.C. App. § 883, provided adequate records were maintained to show that an amount of the commingled soda equal to the amount transported to Canada on non-coastwise-qualified vessels was first sold foreign. We find the rationale of that decision (i.e., that action must be taken to alleviate Customs’ concern that an amount of the product equal to that transported on non-coastwise-qualified vessels will end up back in this country), to be controlling in this case.

Accordingly, Customs will approve the Company’s proposed plan only on the condition that it maintain records to show that an amount of gas equal to the amount of LNG shipped on foreign-flag vessels is first sold in Mexico before any of the remainder is returned to the United States.

HOLDINGS:

The gasification process described above is insufficient to create a “new and different product” within the meaning of 19 CFR § 4.80b(a) so that the proposed transportation of the Alaska LNG by foreign-flag vessels is violative of 46 U.S.C. App. § 883.

The transportation of LNG from Alaska by a foreign-flag vessel in the proposed scenario does not constitute a violation of 46 U.S.C. App. § 883 if, after the Alaska-source LNG is commingled with the foreign-source LNG and processed into gas form, an amount of product equal to the amount brought from Alaska is first sold in Mexico and remains in Mexico. Adequate records must be maintained to verify that an amount equal to that transported to Mexico on foreign-flag vessels is first sold in Mexico. The failure to maintain such records would subject the Company to penalties for violation of the aforementioned statute.

Sincerely,

Acting Chief
Entry Procedures and Carriers Branch

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