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HQ 230098

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January 15, 2004

DRA-4 RR:CR:DR 230098 RDC

CATEGORY: PROTEST

Port Director, Customs and Border Protection Houston Service Port
2350 N. Sam Houston Parkway East
Suite 1000
Houston, Texas 77032-3126

RE: Protest number 5301-03-100333; commercial interchangeability; 19 USC § 1313(j)(2); substitution unused merchandise drawback; denial of drawback claim; crude oil.

Dear Sir or Madam:

Protest number 5301-03-100333 was forwarded to this office for further review on August 19, 2003. We have considered the evidence provided and the points raised by your office and the Protestant. Our decision follows.

FACTS:

The Protestant and drawback claimant, BP Oil Supply Company, (“BP”), through its agent AEI Drawback Services, Inc., (“AEI”), protests the denial of two drawback claims: numbers AA6-xxxx909-7 and AA6-xxxx548-2. According to the Customs Form 7551s, Drawback Entry, BP claims drawback per 19 USC § 1313(j)(2), substitution unused merchandise drawback. According to BP, the merchandise at issue is “class III” petroleum crude oil, hereafter referred to as “crude.” According to the Houston Drawback Center, (“Houston”), the two drawback claims were denied because the Customs Laboratory at New Orleans requested additional information from the claimant, information deemed necessary to determine commercial interchangeability, but such information was not provided. The commercial interchangeability of the imported and exported crude is the only issue raised by Houston.

Since both drawback claims provide identical information for the respective imports and exports and were denied for the identical reason, only claim number 548-2 is described as is it representative of the two denied claims. Attached to the provided CF 7551 for drawback claim number 548-2 are two pages of computer printouts labeled as prepared by AEI for BP. Both pages are dated November 16, 1998. The first page details the information regarding the imports of crude. There are five entries and all reference subheading 2709.00.20, HTSUS, (Harmonized Tariff Schedule of the United States). The entry numbers are 074-6; 271-8; 337-7; 118-6; and 119-4. Included in the file as evidence for each of the five imports are CF 7501s, entry summaries, showing BP as the importer of record. The amount of crude is stated in barrels and the value is shown. Thus, the per barrel value can be calculated. The countries of origin are Nigeria, Angola and Zaire.

Imports
A copy of an email dated May 2, 1995, from SGS / Redwood / New Orleans, (“SGS”), to BP is attached to Entry 074-6. This email states that 959,078.99 barrels of crude, “grade of delivery: normal” was discharged; the cargo is also described as “Forcados crude oil” and the following values are stated as measured at 60 degrees Fahrenheit:

API: 29.2
BS&W, % .011=1055.85 barrels

(API is an arbitrary scale expressing the gravity or density of liquid petroleum products.)

Attached to entry 271-8 is a document dated May 18, 1995, to May 19, 1995, from SGS Control Services, Inc., labeled “SGS Redwood Loss Control Report No. 402382.” This document describes the cargo as “Cabinda crude oil.” The following are stated as “ships [sic] composite upon arrival as tested by SGS for comparison purposes:”

ASTM D-287 Gravity, API @ 60 Deg F 32.8
ASTM D-473 Sediment by extraction, Vol. % 0.001 ASTM D-4928 Water by Karl Fisher, Vol. % 0.019

Also stated are the following results labeled as “additional testing as per BP Oil Supply Company:

ASTM D-97 pour point, C +15
ASTM D-4294 sulfur, Wt. % 0.12
ASTM D-5191 Reid Vapor Pressure, PSI 4.05

Attached to entry 337-7 there is a document from SGS Control Services, Inc., labeled “SGS Redwood Loss Control Report No. 402542” and dated May 30, 1995, to May 31, 1995. The cargo is described as “Forcados crude oil.” The following values are stated as a result of “ships composite upon arrival as tested by SGS for comparison purposes:”

ASTM D-287 Gravity, API @ 60 Deg F 28.6
ASTM D-473 Sediment by extraction, Vol. % 0.003 ASTM D-4928 Water by Karl Fisher, Vol. % 0.065

The CF 7501 for entry number 118-6 states that both “Bonny Lt.” and “Bonny Med.” was entered, but only the Bonny Medium is included in the drawback claim. There is also an unlabeled document addressed to BP, with a copy to CBP, from “Inspectorate, Philadelphia” and dated May 1, 1995. This document contains the following information which appears relevant to the instant Protest but no explanation is provided as to how this information was obtained:

API 27.5
S&W 0.12
RVP 5.70
Pour Pint, ‘F <-20 sulphur 0.19 acid number 1.52

The CF 7501 for entry 119-4 shows that cargo described as “Zaire” and “Bonny Lt.” were entered but only the Zaire is included in the drawback claim. There also is a document from SGS Control Services, Inc., labeled “SGS Redwood Loss Control Report No. 382524” and dated April 30, 1995, to May 5, 1995. The cargo is described as “Zaire crude oil.” The page is numbered “1 of 4” but no other pages are provided. There is also a document labeled “shore quantity summary” from SGS which contains the following relevant values, “at discharge:”

API @ 60° F: 31.9
S&W % VOL: .05

Exports
The second page attached to the CF 7551 for drawback claim 548-2 is labeled “exporters chronological summary by date” and also is prepared by AEI. This printout shows three exportations of goods described as “crude.” Under a heading labeled, “Schedule B.” 2709.00.20, [HTSUS], appears for each export. For each of the three exports are provided a bill of lading which describes the goods as “Alaska North Slope Crude Oil” and a document from “Intertek Testing Services,” (“ITS”) labeled “certificate of quantity based on Alyeska data and meter information as supplied by Alyeska Marine Terminal.” Each certificate contains the number of barrels and the API gravity, which are 30.0, 30.0, and 30.1, respectively. No other information pertinent to the instant Protest is provided by these documents.

By memorandum dated November 17, 1999, to the Director of the Customs Laboratory in New Orleans, Houston requested that the lab determine if the imported crude was commercially interchangeable with the exported crude, with respect to the protested claim 548-2. According to an undated Memorandum, date-stamped as received by the Houston Drawback Center on December 14, 1999, with reference to a list of drawback claims, including 548-2, the New Orleans lab advised that it required additional information to determine - we assume - commercial interchangeability. For the imported and exported product the lab requested, the “distillation report, viscosity, gas chromatographic report” which should “have % olefins, % paraffins and % aromatics.” Further, “% sulfur” appears for both the imported and exported product. We assume the lab was requesting some documentation showing the percentage of sulfur contained in the crude oil.

On March 6, 2000, by letter marked “2nd and final notice” to AEI, Houston requested the following for both the imported and exported product: a distillation report; viscosity; percentage of sulfur; and a gas chromatographic report which should include “% olefins, % paraffins, and % aromatics.” On January 14, 2003, a letter was sent to BP referencing drawback claim 548-2, among others and also marked “2nd and final notice, requesting the same information as the March 6, 2000, letter described above. By letter dated February 20, 2003, AEI responded to “a letter dated January 16, 2003” from the Customs lab requesting additional information on the protested drawback claims, among others.

This letter states in part that, “crude of the same API Class is ‘commercially interchangeable” and documents establishing that the imported and exported oil at issue “consist of Class III API crude” have been provided to Customs, the imported and exported oil are commercially interchangeable. Attached to that letter was a spreadsheet prepared by AEI containing information about a list of drawback claims including 548-2 which is protested here. With regard to drawback claim 548-2 five entries are identified as the duty-paid importations upon which the claim is made. The information relevant here is the “crude type” for these entries which is described as: “Forcados / Bonny,” “Cabinda,” “Forcados,” “Bonny,” and “Zaire,” respectively.

By Memorandum dated February 26, 2003, the Houston Drawback Center requested that the Customs lab at New Orleans “determine if the imported product is commercially interchangeable with the exported product” with regard to drawback claim number 548-2, among others. According to this memo, documents submitted by BP were provided to the lab. On March 4, 2003, by e mail, the Acting Director of the new Orleans Lab recommended that claim number 548-2, among others be denied because the imported and exported crude oils were not commercially interchangeable.

According to this email, the imported crude oil from Nigeria, Angola and Zaire and the exported crude, “Alaska North Slope” are “essentially different commodities.” Further, the memo states that petroleum refineries are designed to process certain types of crudes usually based on sulfur and distillation range (amount of lights present.)” More high value products can be refined from crude with more lights and high vapor pressure, thus such a crude is more valuable than others with fewer lights or lower vapor pressure. Also, the lab notes that, “the variance in the essential characteristics of these crudes is also reflected in their [different] API gravities . . . .

On March 20, 2003, by letter, Houston advised AEI that drawback claim 548-2 was denied “based on inability to establish commercial interchangeability per Customs Laboratory.” The instant Protest, number 5301-03-100333, was filed on June 24, 2003, by BP through its agent AEI. On August 19, 2003, the Protest was forwarded to this office for further review and received on August 25, 2003. .

ISSUE:

Whether the claimant has shown that the imported and substituted crude are commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2)?

LAW AND ANALYSIS:

We note initially that the instant Protest was timely filed, i.e., within 90 days of the refusal to pay the drawback claim (19 U.S.C. § 1514(c)(3)(B)). Under 19 U.S.C. § 1514(a)(6) “decisions of the Customs Service, including the legality of all orders and findings entering into the same, as to . . . the refusal to pay a claim for drawback . . . “are final unless a protest of that decision is filed within 90 days of the decision (19 U.S.C. §1514(c)(3)(B)). The Houston Drawback Center liquidated these claims with zero drawback allowed on, according to BP, April 4, 2003, and this Protest was filed on June 24, 2003.

The criteria required for granting a Request for Further Review are set forth in 19 C.F.R. § 174.24. However, the Protestant does not allege any of the circumstances for which further review is provided by § 174.24; therefore we disagree with the Port’s conclusion that this Protest warrants further review. Nevertheless, we address the merits below.

Per 19 U.S.C. § 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, an exportation of any other merchandise that is commercially interchangeable with the imported merchandise and if the additional requirements of the statute are met. The two protested drawback claims were denied because there was not sufficient information provided by the claimant, BP, to determine if the imported and substituted crude was commercial interchangeable. Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] with an exemption from duty, a statutory privilege due only when the enumerated conditions are met."

Before its amendment by Public Law 103-182, the standard for substitution was fungibility. House Report 103-361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., “the Committee intends to permit substitution of merchandise when it is 'commercially interchangeable,' rather than when it is 'commercially identical'" (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations, prior to their amendment in 1998 (19 C.F.R. 191.2(l)). The report, at page 131, also states:

The Committee further intends that in determining whether two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values.

The Senate Report for the NAFTA Act (S. Rep. 103-189, 103d Cong., 1st Sess., 81-85 (1993)) contains similar language and states that the same criteria should be considered by Customs in determining commercial interchangeability. The amended Customs Regulations, 19 CFR 191.32(c), provide that in determining commercial interchangeability:

. . . Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value.

In order to determine commercial interchangeability, Customs adheres to the Customs regulations which implement the operational language of the legislative history. The best evidence whether those criteria are used in a particular transaction are the claimant's transaction documents. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard, or a governmental standard, or any combination of the two, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. The purchase and sale documents also provide the best evidence with which to compare relative values. Also, if another criterion is used by the claimant to sort the merchandise, the claimant's records would show that fact which will enable Customs to follow the Congressional directions. In order to determine whether the imported and substituted exported crude is commercially interchangeable, an analysis of the following factors is required: governmental and recognized industry standards, part numbers, tariff classification, and relative values.

In Texport Oil Co. v. United States, 185 F.3d 1291 (U.S. App. 1999) the Court of Appeals discussed meaning of the term "commercially interchangeable." The CAFC concluded that:
we are convinced that Congress intended "commercially interchangeable" to be an objective, market-based consideration of the primary purpose of the goods in question. See, e.g., S. Rep. No. 103-189, at 83 (noting intention to create objective, fact-based standard); H.R. Rep. No. 103-361, at 131 (1993), reprinted in 1993 U.S.C.C.A.N. 2552, 2681. Therefore, “commercially interchangeable" must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or the exported good for its primary commercial purpose, then the goods are "commercially interchangeable" according to 19 U.S.C. § 1313(j)(2).

(Id. at 1295). Further, the CAFC explained:

Whether two particular sets of merchandise are "commercially interchangeable," under the objective standard we discern above, raises a factual question. Evidence relevant to this question would, of course, include "governmental and recognized industrial standards, part numbers, tariff classification, and relative values." See, e.g., H.R. Rep. No. 103-361, at 131 (1993), reprinted in 1993 U.S.C.C.A.N. 2552, 2681. This analysis might also include evidence of arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices, . . . , as well as other factual evidence presented by the parties . . . .

(Id.) Thus, per the CAFC in Texport commercial interchangeability is determined using an “objective standard” and based on the “factual evidence presented by the parties.” However, with regard to the instant Protest no evidence of the transaction between BP as the buyer or as the seller of crude oil, i.e., sales contracts, purchase orders, bills of sale, invoices or similar documentation has been provided. Moreover, BP has declined to provide the additional information regarding analysis of the crude oils that was requested. Consequently our analysis does not “include evidence of arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices” as suggested by the CAFC in Texport.

1. Governmental and Recognized Industry Standards

We agree with BP’s contention that the imported and exported crude at issue is characterized as “Class III,” i.e., crude having an API Gravity of between 25.0 and 44.9 (see T.D. 84-49 (February 24, 1984)). However, since no sales documents were provided, there is no evidence to show that a reasonable competitor would accept either the imported or the exported crude based on the API gravity values alone. Nor does the Protestant provide any evidence to show that its buyer bought the exported crude oil based on the API gravity values alone. We agree with BP’s statement that “crude petroleum are nonuniform, highly complex mixtures of paraffinic, napthenic, and aromatic hydrocarbons.” Further, according to the Energy Information Administration, Department of Energy:

The physical characteristics of crude oils differ. . . . . Most simply, crude oils are classified by their density and sulfur content. Less dense (or "lighter") crudes generally have a higher share of light hydrocarbons -- higher value products -- that can be recovered with simple distillation. The denser ("heavier") crude oils produce a greater share of lower-valued products with simple distillation and require additional processing to produce the desired range of products. Some crude oils also have a higher sulfur content, an undesirable characteristic with respect to both processing and product quality. For pricing purposes, crude oils of similar quality are often compared to a single representative crude oil, a "benchmark," of the quality class.

. . . .

In addition to gravity and sulfur content, the type of hydrocarbon molecules and other natural characteristics may affect the cost of processing or restrict a crude oil's suitability for specific uses. The presence of heavy metals, contaminants for the processing and for the finished product, is one example. The molecular structure of a crude oil also dictates whether a crude stream can be used for the manufacture of specialty products, such as lubricating oils or of petrochemical feedstocks.

(http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/Refining_text.htm.)

Moreover, according to CBP’s Headquarters Laboratory in Washington, D.C., the information requested by the New Orleans lab, specifically, for the imported and exported crude the lab requested: the “distillation report, viscosity, gas chromatographic report” which should contain the percentage of olefins, paraffins and aromatics, and the percentage of sulfur contained in the crude is necessary to determine if the imported and exported crude would be considered interchangeable from a objective buyer’s perspective. Finally, there is no evidence to show that the prudent buyer or seller of crude oil would purchase or sell crude without such analysis of the crude as is necessary to determine the above stated characteristics. Consequently, absent the additional information requested from the drawback claimant it is impossible to determine if a finding of commercial interchangeability is supported by this criterion.

2. Tariff Classification

According to BP's submissions, both the imported and substituted domestic crude is classified in subheading 2909.19.1010, HTSUS. As both the imported and domestic crude are classified under the same HTSUS subheading, a finding of commercial interchangeability is supported by this criterion.

3. Part Numbers

Crude oil is traded in bulk and thus does not have any part numbers, nor similar identification assigned for either the imported or exported crude. Therefore, in this instance this criterion is inconclusive on the issue of commercial interchangeability.

4. Relative Values

Per the Energy Information Administration, Department of Energy:

The quality of the crude oil dictates the level of processing and re-processing necessary to achieve the optimal mix of product output. Hence, price and price differentials between crude oils also reflect the relative ease of refining. A premium crude oil like West Texas Intermediate, the U.S. benchmark, has a relatively high natural yield of desirable naphtha and straight-run gasoline (see graph). Another premium crude oil, Nigeria's Bonny Light, has a high natural yield of middle distillates. By contrast, almost half of the simple distillation yield from Saudi Arabia's Arabian Light, the historical benchmark crude, is a heavy residue ("residuum") that must be reprocessed or sold at a discount to crude oil. Even West Texas Intermediate and Bonny Light have a yield of about one-third residuum after the simple distillation process.

Refiners therefore strive to run the optimal mix (or "slate") of crudes through their refineries, depending on the refinery's equipment, the desired output mix, and the relative price of available crudes. In recent years, refiners have confronted two opposite forces -- consumers' and government mandates that increasingly required light products of higher quality (the most difficult to produce) and crude oil supply that was increasingly heavier, with higher sulfur content (the most difficult to refine).

(http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/Refining_text.htm.)

Since the value of the total amount of entered crude is shown on the respective 7501s, the value per barrel of imported crude can be calculated. However, no information as to the value of the exported Alaskan crude has been provided by BP. Though we were able to find information on “world crude oil prices” provided by www.eia.doe.gov there was no information regarding where the oil described as from the U.S. originated and there was insufficient basis to apply the pricing information provided by the DOE to the transactions underlying the disputed drawback claims. Thus we are unable to compare the relative values of the imported and exported crude to determine if the differences in these values are within an acceptable range and this criterion cannot support a finding of commercial interchangeability. Therefore, there is insufficient information provided to determine if the imported and exported crude have satisfied the government and industry standards, and value criteria required for a finding of commercial interchangeability. Consequently, the imported and exported crude cannot be determined commercially interchangeable.

HOLDING:

There is insufficient information to determine if the imported and substituted crude are commercially interchangeable; therefore, the claimant has not shown that the imported and substituted crude are commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2).

Therefore, the Protest should be DENIED in full. Consistent with the decision set forth above, you are hereby directed to deny the subject protest. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Myles Harmon, Director

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See also:

• Tariff No.: 2709.00.20 - Petroleum oils and oils from bituminous minerals, crude, testing 25 degrees A.P.I. or more
• Tariff No.: 2909.19.10 - Ethers of monohydric alcohols