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HQ 219492


July 3, 1989

FOR-1-CO:R:C:E 219492

CATEGORY: FOREIGN TRADE ZONE

Mr. Hector Diaz
Conoco, Inc.
Post Office Box 2197
Houston, Texas 77252

RE: Dutiability of foreign crude oil used as fuel in a refinery subzone.

Dear Mr. Diaz:

This is to follow up on your letters dated November 18, 1986 and our response of March 3, 1987, which concern the dutiability of foreign crude oil used as fuel in a foreign trade zone (FTZ) and the appropriateness of Conoco's proposed inventory control system.

FACTS:

Conoco Oil Company requested a ruling on the issue of whether foreign crude oil imported into a foreign trade subzone, partially processed and refined and therein consumed as a secondary and supplemental source of fuel in the refining process, would be exempt from duty. At the time the request was made, Conoco had an application for a refinery subzone pending before the FTZ Board. Conoco proposed to use gas, produced at three different stages in the refining process, as an energy supply for the refinery's heater furnace.

Some of the gas, produced in the distillation unit, would be a direct byproduct of the crude oil fed into that unit; the remaining gas, produced in the fluid catalytic cracker and the coker, would be a byproduct of the hot oil left over from the distilling of the crude oil in the distillation unit. All of the gas would be a derivative of the imported foreign crude oil. The streams of gas channeled back to the heater furnace for feedstock would be measured and controlled throughout the refining process.

Conoco Oil Company submitted a proposed inventory control system for approval by the Customs Service. The subzone
application was approved by the FTZ Board in December, 1988. Certain conditions, including a provision that foreign crude oil used as fuel for the refinery process shall be dutiable, were attached to the grant.

ISSUE:

1) Whether derivatives of foreign crude oil imported into a refinery subzone, that are used therein as a secondary source of fuel in the refining process, are exempt from duty notwithstanding the fact that the subzone grant requires that foreign crude oil used as fuel for the refinery process shall be dutiable; and

2) Whether the inventory control system submitted by Conoco meets the Customs Service's requirements.

LAW AND ANALYSIS:

The issue of whether Conoco would be permitted to use partially processed and refined crude oil free of duty as a secondary source of fuel in the refining process within the zone, was effectively addressed in the subzone grant dated December 16, 1988. Specifically, the FTZ Board, exercising its broad powers to place restrictions on zone activity, stated that foreign crude oil used as fuel for the refinery shall be dutiable. This restriction would appear to apply to distillates of imported crude oil as well as to the crude oil itself, because a narrower interpretation would all but render the restriction meaningless: it may not be possible to use raw crude oil as a fuel source, and if duty were assessed only on crude oil, the zone operators could import other fuels into the zone or use processed crude products to circumvent the restriction. Any questions on this interpretation should be referred to the FTZ Board.

You cite Hawaiian Independent Refinery v. United States, 81 Cust. Ct. 117 (1978) (HIRI) as precedent for the proposed fuel use by Conoco. That case held, in part, that foreign crude oil imported into a foreign trade zone, partially processed and refined and therein consumed and used as a secondary and supplemental source of fuel in a refining process, was not subject to duty under the Tariff Schedules of the United States. Although the circumstances are similar, several factors would militate against the application of the holding of HIRI to the Conoco subzone: first, while the court noted that the Hawaiian subzone grant was in no way conditioned upon use of duty-paid fuel to serve as a source of heat in the refining process, Conoco's grant does contain such a condition. Furthermore, as footnote 11 of the decision and the 36th Annual Report of the

Foreign Trade Zones Board to the Congress observed, the HIRI refinery's total dependence on foreign sources of fuel was unique and, as such, the zone grant would not be precedential for similar zone sites in the continental United States. In contrast, Conoco's subzone is situated on the U.S. mainland in the midst of a readily available supply of domestic energy resources. C.S.D. 79-418 indicated that the ruling in HIRI would apply strictly to the factual situation in that case, and the differences outlined above demonstrate that its application would be inappropriate in the Conoco subzone.

The court went on to state that it was not deciding whether the use to which the oil was put was an authorized activity under the Foreign Trade Zones Act; it emphasized that that was the task of the FTZ board. The recent decision in Nissan Motor Mfg. Corp., U.S.A. v. United States, 693 F.Supp. 1183, Slip Op. 88-108 (CIT 1988) did, however, attempt to address what constituted a permissible activity within a subzone. The court in Nissan reviewed the Foreign Trade Zones Act and the relevant legislative history and found that machinery and related capital equipment imported to produce merchandise in a foreign trade zone were subject to duty. Although this case is currently under appeal, we find the trial court's interpretation of the dutiability of production equipment under the Foreign Trade Zones Act to be an indication that that the activity proposed by Conoco would be an impermissible operation.

Finally, it is the policy of the U.S. Customs Service to allow individual zones to adopt their own inventory control systems within the guidelines established by the government. See Treasury Decision 86-16. Inventory guidelines are set out in Subpart B, Part 146 of the Customs Regulations (19 CFR 146). A zone operator may seek a non-binding ruling from the district or a binding ruling from Customs headquarters on a particular aspect of a proposed inventory control and recordkeeping system, but Customs will not review any system in its entirety to render an opinion as to whether it meets all of the requirements of 19 CFR 146.

HOLDING:

1) A restriction placed on the zone grant by the FTZ board controls and a prohibition against use of crude oil as duty-free fuel in a foreign trade subzone applies to derivatives of crude oil.

2) The Customs Service will review particular aspects of a proposed inventory control system at the request of the zone
operator, but will not review any system in its entirety to render an opinion as to whether it meets all the requirements of 19 CFR 146.

Sincerely,

John Durant

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