November 25, 2002
Memo For: Foreign-Trade Zone Grantees
From: Dennis Puccinelli
Re: Scope of Authority - Readmissions of Merchandise to Oil Refinery Subzones (A(32c)-11-02)
We found that low levels of merchandise produced at refineries are readmitted in the normal course of business, mainly due to market conditions, and that such readmissions are within the scope of FTZ Board authority with respect to oil refinery subzones provided that they total less than two percent of overall refinery inputs per year.
The FTZ Board has approved subzone status for over 75 oil refineries, subject to certain restrictions. In August 2000, after an industry-wide review of the use of zone procedures within the oil refining industry, the Board approved extension of their FTZ authority. (See Board Order 1116, 8/24/2000) The August 2000 action standardized the authority for the oil refinery subzones involved and, today, the FTZ authority for most of the oil refinery subzones is virtually the same. The authority permits the refineries to admit to the subzones a range of refinery inputs from both foreign and domestic sources to be used in the production of a variety of petroleum products, including fuels, blendstocks and feedstocks. The inputs involve mostly crude oil, but other refinery feeds, both foreign and domestic, are also permitted. FTZ authority for oil refinery subzones is restricted, limiting the non-privileged foreign (NPF) status option to certain inputs which can be used in the production of certain refinery products, as listed in the Appendix C referred to in Order 1116 (attached). Refinery inputs not authorized for admission in NPF status may be admitted in privileged foreign or domestic status.
We conducted a survey of about one-third of active refinery subzones to determine the overall level of merchandise readmitted to the subzones, the reasons for the readmissions, the potential impact on FTZ savings and whether the readmissions are within the scope of authority of the Board actions approving the subzones. The survey indicated that the readmissions were not significant in terms of the overall volume of activity at the refineries, generally accounting for less than two percent of overall inputs (average - approx. 0.5%). The readmissions do not appear to involve a significant impact on FTZ savings. (Survey results indicated a savings impact of .0025% of total savings.) Most of the products readmitted to the subzone cannot be used for additional attribution because they do not have producibility and thus involve no possibility of impact on savings. However, one product that was readmitted by a number of subzones and does have producibility is butane which can be tied by a producibility factor of 100% to motor gasoline. Survey results indicated that readmitted butane accounted for 0.18 percent of total feedstocks. The reason for butane readmissions is that EPA requires butane to be removed from gasoline to meet summer evaporative standards. This creates a supply of butane that seasonally exceeds demand. The butane can be used for winter gasoline, and refineries use butane that they cannot otherwise sell or use for that purpose.
We found no evidence of a scheme to avoid higher duty rates or of an intent to conduct activity beyond the scope of authority. Further, based on the fact that the companies do not derive a net benefit from the readmissions when costs are considered, the risk of any adverse activity occurring under these circumstances appears to be very low. The FTZ Board's scope of authority included movements of merchandise that are within normal practice for the industry and that appears to be the case with activity at this level. Further, the products being readmitted are within scope of inputs for oil refinery subzones. Finally, it appears that a key factor in the readmissions of butane (the only significant product with potential savings impact) involves compliance with EPA summer gasoline standards which require refiners to remove butane from gasoline in summer, creating a seasonal excess of supply that is only balanced by demand in the winter when it can be reintroduced into gasoline. Assisting refineries in meeting EPA requirements is consistent with the scope of authority for FTZ Board action for this industry. The Board supported the industry's efforts at environmental compliance and gave special consideration to these circumstances in its actions.
A special case involves products that remain within a refinery system, but are removed to adjacent, dedicated facilities outside of the subzone boundary and later readmitted to the subzone for further activity. Such cases can usually be resolved through a clarification of the subzone boundary through the FTZ Board's minor boundary modification procedures. (Special expedited boundary modification procedures were issued on September 19, 2002, which are available on the FTZ web site - https://enforcement.trade.gov/ftzpage.) We recognize that, under some circumstances, the subzone boundary may not include all of a refinery's facilities based on refinery changes, inadvertent omissions or emergency situations. We expect that such facilities would be included in the subzone boundary and we will process minor boundary modifications on an expedited basis to account for emergency or temporary situations that arise or to update a refinery's boundaries to conform to the current facility configuration. A small amount of product may occasionally need to be removed and returned before changes can be made and this activity would be considered within the scope provided total returns for the refinery remain within the two percent readmission limit.
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