Petroleum Refineries in Foreign Trade Subzones

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 146

RIN 1515-AB20

Petroleum Refineries in Foreign Trade Subzones

AGENCY: U.S. Customs Service, Department of the Treasury.

ACTION: Proposed rule.

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SUMMARY: This document invites public comment on a proposed revision of

the notice of proposed rulemaking published in the Federal Register on

August 10, 1992 (57 FR 35530), which would add special procedures and

requirements to the Customs Regulations governing the operations of

crude petroleum refineries approved as foreign trade subzones. The

proposed rule is necessary to implement a section of the Technical and

Miscellaneous Revenue Act of 1988 which amended the Foreign Trade Zone

Act to make specific provision for petroleum refinery subzones. Customs

has significantly revised the initial notice of proposed rulemaking as

a result of the extensive and varied input received from the oil

refinery and foreign trade zone communities, as well as from other

interested parties, in response to the initial notice.

DATES: Comments must be received on or before May 3, 1994.

ADDRESSES: Comments (preferably in triplicate) must be submitted to

U.S. Customs Service, ATTN: Regulations Branch, Franklin Court, 1301

Constitution Avenue, NW., Washington, DC 20229, and may be inspected at

the Regulations Branch, 1099 14th Street, NW., suite 4000, Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Legal aspects: Cari Berdut, Entry

Rulings Branch, (202-482-7040).

Operational aspects: Louis Hryniw, Office of Regulatory Audit,

(202-927-1100).

SUPPLEMENTARY INFORMATION:

Background

On August 10, 1992 (57 FR 35530), Customs published a document in

the Federal Register, proposing to amend the Customs Regulations to add

special procedures and requirements governing the operations of crude

petroleum refineries approved as foreign trade subzones, in

implementation of section 9002 of the Technical and Miscellaneous

Revenue Act of 1988, which amended the Foreign Trade Zones Act, 19

U.S.C. 81c(d), to make specific provision for petroleum refinery

subzones.

Briefly, as stated in the August 10, 1992, notice of proposed

rulemaking, the amendment obviates the need to determine exactly when

and where in the manufacturing process crude and other feedstocks

become other products. In so doing, it permits refiners as well as

Customs to assess the relative value of such multiple products at the

end of the manufacturing period from which such products were produced,

when the actual quantities of these products resulting from the

refining process can be measured with certainty. Also, the amendment

permits the products refined in a subzone during a manufacturing period

to be attributed to given crude or other feedstocks introduced into

production during the period, to the extent that such products were

producible (could have been produced) therefrom in the quantities

removed from the subzone.

By a document published in the Federal Register on September 14,

1992 (57 FR 41896), Customs extended the public comment period for the

proposed rule until December 8, 1992. Subsequently, by a document

published in the Federal Register on November 24, 1992 (57 FR 55198),

Customs further extended the public comment period until February 8,

1993, and gave notice of a public meeting which was held on December 15

and 16, 1992, concerning the proposed amendments.

As a result of the extensive and varied input received from the oil

refinery and foreign trade zone communities, as well as from other

interested parties, in response to the initial notice of proposed

rulemaking and the public meeting, Customs has decided to significantly

revise its initial notice, and is requesting additional public comment

on the revised proposed rule.

The following discussion includes a summary of the various comments

received in response to the August 10, 1992, notice of proposed

rulemaking, together with an explanation and analysis regarding the

sections proposed to be added, eliminated or further revised. The

proposed rule as revised is thereafter set forth.

Discussion of Comments

Comment: Most commenters favor deletion of proposed Sec. 146.92(a),

involving the definition of ``Assay''.

Response: Customs agrees. Laboratory analyses are sufficient to

verify feedstock characteristics and provide API gravity.

Comment: Most commenters indicated that the cumulative entry

activity report defined in proposed Sec. 146.92 (c) is only required in

the Houston District and, therefore, favor its deletion because the

information is already contained in the subzone activity report.

Response: Upon further consideration, Customs has determined to

delete proposed Sec. 146.92 (c), (d), (h) and (l), involving the report

in question, as well as certain related reports, specifically, the duty

and user fee report, the inventory disposition report, and the product

shipment report, all of which were principally addressed in proposed

Sec. 146.96 which, as a result, is also deleted from the proposed rule.

Comment: Commenters indicated that the definition in proposed

Sec. 146.92(e) concerning ``feedstock'' should be expanded to include

natural gas and other hydrocarbons to comply with EPA regulations.

Response: Customs agrees and has so modified the wording of

proposed Sec. 146.92(e) (now redesignated as Sec. 146.92(b)).

Comment: Many commenters noted that proposed Sec. 146.92(f)

defining ``final product'' should also include products consumed in the

zone.

Response: Customs agrees with this suggestion and has so changed

proposed Sec. 146.92(f) (now redesignated as Sec. 146.92(d)).

Comment: Most commenters indicated that fungibility is already

defined in Sec. 146.1(b), and that a definition for this term is not

needed in the proposed subpart if the assay requirement is deleted.

Response: Customs agrees. Proposed Sec. 146.92(g) has been

eliminated.

Comment: A majority of commenters propose that the ``manufacturing

period'' coincide with the normal accounting cycle.

Response: After reviewing the comments, particularly those of the

Congressional sponsors of the legislation, Customs is convinced that a

literal interpretation of the statutory language would not be

appropriate. Therefore, proposed Sec. 146.92(i) (now redesignated as

Sec. 146.92(e)) dealing with this matter has been reworded. The

definition allows an operator to make the attribution of a final

product either during the period in which the final product was

produced (even if not consumed or removed from the refinery subzone

during that same period) or the period in which the final product was

consumed or removed from the zone (even if the final product was made

in a prior period). The selection of the method is at the operator's

option, but once selected, the method must be used consistently.

Comment: Most commenters suggested that they should be permitted to

use standard product values, based on published prices.

Response: Customs agrees that standard product values, based on

published prices, may be utilized, but that this must be done on a

consistent basis. Thus, proposed Sec. 146.92(j) (now redesignated as

Sec. 146.92(g)), involving the price of products in the subzone, has

been reworded.

Comment: Most commenters suggested rewording proposed

Sec. 146.92(n) which defined the ``relative value'' of products

produced in the subzone.

Response: The definition of ``relative value'' proposed by the

commenters has been included in proposed Sec. 146.92(n) (now

redesignated as Sec. 146.92(i)) because it states the same information

as the proposed regulation, albeit more succinctly.

Comment: Many commenters noted that, generally, the ``time of

separation'' will coincide with the ``manufacturing period''.

Response: Customs agrees that the ``time of separation'' coincides

with the ``manufacturing period''. Therefore, proposed Sec. 146.92(p)

(now redesignated as Sec. 146.92(k)) defining the time of separation

has been modified accordingly.

Comment: Most commenters favor deletion of proposed Sec. 146.92(q)

which defines the term ``unique identifier'' (UIN) because this term is

already defined in Sec. 146.1(b)(19).

Response: Customs agrees and, therefore, this definition has been

deleted.

Comment: Most commenters proposed eliminating proposed

Sec. 146.93(a)(1) regarding the use of the UIN (unique identifier)

because this matter is already covered elsewhere in part 146.

Response: Customs agrees that existing Sec. 146.22 adequately

addresses this matter, and, therefore, paragraphs (a), (a)(1) and

(a)(2) of proposed Sec. 146.93 have been eliminated.

Comment: A number of commenters suggested that proposed

Sec. 146.93(b)(1) be deleted because zone admittance is already covered

in subpart C of part 146.

Response: Customs agrees. Proposed Sec. 146.93(b)(1) has been

deleted.

Comment: Most commenters suggest deletion of the requirement that

domestic feedstock be assigned a UIN, as provided in proposed

Sec. 146.93(c)(1), because existing regulations do not require that a

Customs Form (CF) 214 be filed on domestic feedstocks.

Response: Customs agrees that a CF 214 is not required, and,

therefore, proposed Sec. 146.93(c)(1) has been deleted. Nevertheless,

it must be noted that a domestic feedstock must be assigned a UIN under

existing regulations.

Comment: A few commenters suggested that references to T.D. 66-16

concerning the attribution of final product to given feedstock be

eliminated from proposed Sec. 146.93(d)(1) because this is already

discussed elsewhere in the proposed regulations.

Response: Customs agrees and, therefore, the proposed language has

been duly modified and the section redesignated as proposed

Sec. 146.93(a)(1). Also, proposed Sec. 146.93(d)(2) (now redesignated

as Sec. 146.93(a)(3)) dealing with attribution using alternative

inventory control has been revised to make reference to the use of

FIFO; the use of FIFO is illustrated in an Appendix which has been

added to the revision of proposed subpart H. In addition, proposed

Sec. 146.93(d)(3) dealing with ``stock in process'' has been deleted,

in concert with the deletion of this term from the definition section;

in its place, a new proposed Sec. 146.93(a)(2) makes reference to the

use of actual production records in attributing product to feedstock.

Comment: Commenters suggested that products consumed within the

zone should be included in proposed Sec. 146.93(e).

Response: This suggestion has been incorporated in proposed

Sec. 146.93(e) (now redesignated as Sec. 146.93(b)).

Comment: Commenters objected to the language of proposed

Sec. 146.94(a) regarding the introduction of feedstock into the

refining process because they believe it requires a direct

identification system.

Response: The commenters have misread this section, the purpose of

which is to establish the amount and identity of the feedstocks

available for attribution during each manufacturing period. The

proposed language has been modified to eliminate any such

misunderstanding.

Comment: Most commenters suggested deletion of the sentence, ``This

date establishes the end of the manufacturing period.'', in proposed

Sec. 146.94(b).

Response: Given the proposed definition of ``manufacturing period''

this suggested change has been adopted.

Comment: Commenters indicated that the language contained in

proposed Sec. 146.94(c) regarding the removal of product from a

refinery subzone is specific to a calendar week. However, an accounting

period may be greater than a week.

Response: While a manufacturing or accounting period may be greater

than a week, there is no authority to permit a consumption entry

covering products removed from a zone to exceed one week. Thus, the

language of Sec. 146.94(c) remains in substance as originally proposed.

However, Customs will reevaluate the possibility of permitting monthly

entries, in light of the Customs modernization portion of the recently

passed North American Free Trade Agreement Implementation Act,

particularly Sec. 637.

Currently, a refiner who desires to make attributions on the basis

of a monthly manufacturing or accounting period must attribute and make

any required relative value calculation by attributing current removals

or consumptions to final products that were produced in a prior

manufacturing or accounting period. A refiner who reports removals and

consumption on a weekly basis and who elects to attribute a final

product that is removed or consumed, in the same week that it is

produced, must make the appropriate attribution and relative value

calculation for that week.

Comment: Commenters noted that attribution is more appropriately

dealt with in proposed Sec. 146.99 (now redesignated as proposed

Sec. 146.96), rather than in proposed Sec. 146.95 titled ``Feedstock

inventories''.

Response: Customs agrees with the comments that attribution can be

dealt with more appropriately in proposed Sec. 146.99 (now redesignated

as Sec. 146.96); therefore, proposed Sec. 146.95 concerning feedstock

inventories has been deleted. Proposed Sec. 146.97 titled

``producibility'' is now renumbered as Sec. 146.95.

Comment: Commenters suggested deleting the last sentence and four

reports listed in proposed Sec. 146.96 concerning a subzone activity

report.

Response: As already stated above, this proposed section has been

deleted in its entirety.

Comment: Commenters noted that proposed Sec. 146.97(a) must provide

for products consumed within the subzone.

Response: Customs agrees with the comments that proposed

Sec. 146.97(a) must provide for consumption within the zone. Therefore,

appropriate language has been included in proposed Sec. 146.97(a) (now

redesignated as Sec. 146.95(a)).

Comment: Comments indicated that, as currently worded, proposed

Sec. 146.98(a) is limited to operators using producibility.

Response: Proposed Sec. 146.98(a) (now redesignated as

Sec. 146.93(c)) has been modified to avoid any misunderstanding in this

respect.

Comment: Commenters stated that attributions are binding except for

adjustments needed upon reconciliation.

Response: Proposed Sec. 146.99(a) (now redesignated as

Sec. 146.96(a)) has been modified to address this concern.

Reconciliation is limited to changes in amounts, and mathematical and

clerical errors, but does not include changes in the identity of the

feedstock.

Comment: Commenters noted that other inventory control methods are

already covered in proposed Sec. 146.93(d)(2), so there is no need for

proposed Sec. 146.99(c).

Response: Customs has decided to essentially revise former proposed

Sec. 146.99(c) and to make it the subject of a new Sec. 146.97

regarding the approval of other recordkeeping systems for subzone oil

refinery operations. As already noted above, proposed Sec. 146.93(d)(2)

(now redesignated as Sec. 146.93(a)(3)) has been revised to refer

exclusively to the use of the FIFO method of inventory accounting.

Comment: Commenters also indicated that the proposed regulations do

not take into account the three relative value methods listed in

proposed Sec. 146.98(b). Commenters also pointed out that the proposed

regulation does not provide a mechanism to attribute consumption within

the zone.

Response: Customs agrees and has determined to eliminate proposed

Sec. 146.98(b) from the revised proposed rule; and proposed

Sec. 146.98(c) is now redesignated as Sec. 146.93(e). In addition, as

previously emphasized, revised Secs. 146.93, 146.95 and 146.96 now

provide for consumption within the subzone. Moreover, Customs has

decided to add an Appendix to proposed subpart H as revised in order to

give detailed examples of attribution as well as the relative value

calculation.

Conclusion

After careful consideration of the comments received and further

review of the matter, it has been determined to republish the proposal

with the modifications noted and to allow interested persons an

additional opportunity to submit comments on the proposal. Also,

Customs has determined to add definitions in the revised proposed rule

for ``feedstock factor'', ``petroleum refinery'', and ``refinery

operating unit'', and to eliminate the definitions for ``protection of

the revenue'' and ``stock in process'' formerly set forth in proposed

Sec. 146.92(m) and (o), respectively. Commenters on the original

proposal need not resubmit their comments. They will be considered

along with any new comments received in response to this notice.

Comments

In developing the final regulations, any written comments

(preferably in triplicate) that are timely submitted to Customs will be

given consideration, along with the comments already submitted in

response to the August 10, 1992, notice of proposed rulemaking.

Comments submitted will be available for public inspection in

accordance with the Freedom of Information Act (5 U.S.C. 552),

Sec. 1.4, Treasury Department Regulations (31 CFR 1.4), and

Sec. 103.11(b), Customs Regulations (19 CFR 103.11(b)), during regular

business days between the hours of 9 a.m. and 4:30 p.m., at the

Regulations Branch, 1099 14th Street, NW., suite 4000, Washington, D.C.

Regulatory Flexibility Act and Executive Order 12866

For the reasons explained in the peamble to the prior notice of

proposed rulemaking and to this document, pursuant to the provisions of

the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is hereby

certified that the proposed amendments set forth in this document, if

adopted, will not have a significant economic impact on a substantial

number of small entities. Accordingly, they are not subject to the

regulatory analysis or other requirements of 5 U.S.C. 603 and 604. This

proposed rule is not a ``significant regulatory action'' under E.O.

12866.

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking is in Secs. 146.93-146.97. The respondents would be

businesses. The information is necessary in order to effectively

supervise and control the activities of oil refineries operating in

foreign trade subzones, and to ensure compliance with the requirements

of law as well as the protection of the revenue.

The collection of information contained in this notice of proposed

rulemaking has already been approved by the Office of Management and

Budget (OMB) under 1515-0189, in connection with the prior notice of

proposed rulemaking.

Estimated total annual reporting and/or recordkeeping burden: 18,824

hours

Estimated average annual burden per respondent and/or recordkeeper:

2,353 hours

Estimated number of respondents and/or recordkeepers: 8

Estimated annual frequency of responses: 52

Comments on the collection of information should be sent to the

Office of Management and Budget, Attention: Desk officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, D.C. 20503, with copies to the U.S. Customs

Service at the address previously specified.

Drafting Information

The principal author of this document was Russell Berger,

Regulations Branch, U.S. Customs Service. However, personnel from other

offices participated in its development.

List of Subjects in Part 146

Customs duties and inspection, Exports, Foreign trade zones,

Imports, Reporting and recordkeeping requirements.

Proposed Amendment

For the reasons set forth in the preamble, it is proposed that part

146, Customs Regulations (19 CFR part 146) be amended as follows:

PART 146--FOREIGN TRADE ZONES

1. The general authority citation for part 146 is revised to read

as follows:

Authority: 19 U.S.C. 66, 81a-u, 1202 (General Note 17,

Harmonized Tariff Schedule of the United States), 1623, 1624.

* * * * *

2. It is proposed to amend part 146 by adding a new subpart H

thereto to read as follows:

Subpart H--Petroleum Refineries in Foreign Trade Subzones

Sec.

146.91 Applicability.

146.92 Definitions.

146.93 Inventory control and recordkeeping system.

146.94 Records concerning establishment of manufacturing period.

146.95 Producibility.

146.96 Methods of attribution.

146.97 Approval of other recordkeeping systems.

Appendix to Subpart H--Examples of Attribution and Relative Value

Subpart H--Petroleum Refineries in Foreign Trade Subzones

Sec. 146.91 Applicability.

This subpart applies only to a petroleum refinery (as defined

herein) engaged in refining petroleum in a foreign trade zone or

subzone. This subpart also applies only to feedstocks (crude petroleum

and derivatives thereof) which are introduced into production in a

refinery subzone. Further, the provisions relating to zones generally,

which are set forth elsewhere in this part, including documentation and

document retention requirements, and entry procedures, such as weekly

entry, shall apply as well to a refinery subzone, insofar as applicable

to and not inconsistent with the specific provisions of this subpart.

Sec. 146.92 Definitions.

The following definitions are applicable to this subpart H:

(a) Attribution. ``Attribution'' means the association of a final

product with its source material by application of:

(1) Actual operating records;

(2) Producibility under T.D. 66-16; or

(3) Other Customs approved method.

(b) Feedstocks. ``Feedstocks'' means crude petroleum or

intermediate product that is used in a petroleum refinery to make a

final product.

(c) Feedstock factor. ``Feedstock factor'' means the relative value

of final products utilizing T.D. 66-16 (see Sec. 146.92(h)), and which

takes into account any loss or gain.

(d) Final product. ``Final product'' means any petroleum product

that is produced in a refinery subzone and thereafter removed therefrom

or consumed within the zone.

(e) Manufacturing period. ``Manufacturing period'' means a period

selected by the refiner which shall not exceed a calendar month, for

which attribution to a source feedstock must be made and, if required,

a relative value assigned for every final product made, consumed in or

removed from the refinery subzone.

(f) Petroleum refinery. ``Petroleum refinery'' means a facility

that refines a feedstock listed on the top line of the tables set forth

in T.D. 66-16 into a product listed in the left column of the tables

set forth in T.D. 66-16.

(g) Price of product. ``Price of product'' means the average per

unit market value of each final product for a given manufacturing

period or the published standard product value if updated each month.

(h) Producibility. ``Producibility'' is a method of attributing

products to feedstocks for petroleum manufacturing in accordance with

the Industry Standards of Potential Production set forth in T.D. 66-16.

(i) Relative value. ``Relative value'' means a value assigned to

each final product attributed to the separation from a privileged

foreign feedstock based on the ratio of the final product's value

compared to the privileged foreign feedstock's duty.

(j) Refinery operating unit. ``Refinery operating unit'' means a

unit in a refinery in which feedstock is processed such as a

distillation tower, cracking tower or reformer.

(k) Time of separation. ``Time of separation'' means the

manufacturing period in which a privileged foreign status feedstock is

deemed to have been separated into two or more final products.

Sec. 146.93 Inventory control and recordkeeping system.

(a) Attribution. (1) Producibility. The producibility method of

attribution requires that records be kept to attribute final products

to feedstocks which have been introduced into a refinery operating unit

during the current or prior manufacturing period.

(2) Actual production records. An operator may use its actual

production records as provided for under Sec. 146.96(b) of this

subpart.

(3) Other inventory method. An operator may use the FIFO (first-in,

first-out) method of accounting (see Sec. 191.22(c) of this chapter).

The use of this method is illustrated in the Appendix to this subpart.

(4) Feedstock not eligible for attribution. Feedstock admitted into

the refinery subzone, until it is introduced into a refinery operating

unit in the subzone, is not eligible for attribution to any final

product.

(b) Consumption or removal of final product. Each final product

that is consumed in or removed from a refinery subzone must be

attributed to a feedstock introduced into a refinery operating unit

during the current or a prior manufacturing period. Each final product

attributed as being produced from the separation of a privileged

foreign status feedstock must be assigned the proper relative value as

set forth in paragraph (c) of this section.

(c) Relative value. A relative value calculation is required when

two or more final products are produced as the result of the separation

of privileged foreign status feedstock. Ad valorem and compound rates

of duty must be converted to specific rates of duty in order to make a

relative value calculation.

(d) Consistent use required. The operator must use the selected

method and the price of product consistently (see Sec. 146.92(g)) of

this subpart).

Sec. 146.94 Records concerning establishment of manufacturing period.

(a) Feedstock charged into a refinery operating unit. The operator

must record the date and amount of each feedstock charged into a

refinery operating unit during each manufacturing period.

(b) Final product consumed in or removed from subzone. The operator

must record the date and amount of each final product consumed in, or

removed from the subzone.

(c) Consumption or removal. The consumption or removal of a final

product during a week may be considered to have occurred on the last

day of that week for purposes of attribution and relative value

calculation instead of the actual day on which the removal or

consumption occurred, unless the refiner elects to attribute using the

FIFO method (see Example II to Appendix to this subpart).

(d) Gain or loss. A gain or loss that occurs during a manufacturing

period must be taken into account in determining the attribution of a

final product to a feedstock and the relative value calculation of

privileged foreign feedstocks. Any gain in a final product attributed

to a nonprivileged foreign status feedstock is dutiable if entered for

consumption unless otherwise exempt from duty.

(e) Determining gain or loss; acceptable methods.

(1) Converting volume to weight. Volume measurements may be

converted to weight measurements using American Petroleum Institute

conversion factors to account for gain or loss.

(2) Calculating feedstock factor to account for volume gain. A

feedstock factor may be calculated by dividing the value per barrel of

production per product category by the quotient of the total value of

production divided by all feedstock consumed. This factor would be

applied to a finished product that has been attributed to a feedstock

to account for volume gain.

(3) Calculating volume difference. Volume difference may be

determined by comparing the amount of feedstocks introduced for a given

period with the amount of final products produced during the period,

and then assigning the volume change to each final product

proportionately.

Sec. 146.95 Producibility.

(a) Industry standards of potential production. The industry

standards of potential production on a practical operating basis

necessary for the producibility attribution method are contained in

tables published in T.D. 66-16. With these tables, a subzone operator

may attribute final products consumed in, or removed from, the subzone

to feedstocks during the current or a prior manufacturing period.

(b) Attribution to product or feedstock not listed in T.D. 66-16.

For purposes of attribution, where a final product or a feedstock is

not listed in T.D. 66-16, the operator must submit a proposed

attribution schedule, supported by a technical memorandum, to the

appropriate district director. If an operator elects to show

attribution on a producibility basis, but fails to keep records on that

basis, Customs shall use the operator's actual operating records to

determine attribution and any necessary relative value calculation.

Sec. 146.96 Methods of attribution.

(a) Producibility. (1) General. A subzone operator must attribute

the source of each final product. The operator is limited in this

regard to feedstocks introduced into a refinery operating unit during

the current or a prior period. Attribution of the final products is

allowable to the extent that the quantity of such products could have

been produced from such feedstocks, using the industry standards of

potential production on a practical operating basis, as published in

T.D. 66-16. Once attribution is made for a particular product, that

attribution is binding. Subsequent attributions of feedstock to product

must take prior attributions into account. Each refiner shall keep

records showing each attribution.

(2) Attribution to privileged foreign feedstock; relative value. If

a final product is attributed to the separation of a privileged foreign

feedstock, their relative values must be assigned.

Example. An operator who elects to attribute on a monthly basis

files the following estimated removal of final products for the

first week in September:

Jet Fuel (deemed exported on international flights).......... 20,000

Gasoline:

Domestic Consumption....................................... 15,000

Duty-free certified as emergency war material.............. 10,000

Petroleum coke exportations.................................. 10,000

Distillate for consumption................................... 5,000

Petrochemicals exported...................................... 10,000

----------

Total removals......................................... 70,000

Because it does not elect to make attributions for feedstocks that

were charged to operating units during the same week, the operator

attributes the estimated removals to final products made during August

from the following feedstocks:

Class II PF (privileged foreign) crude....................... 20,000

Class III PF crude........................................... 35,000

Class III D (domestic) crude................................. 20,000

Class III NPF (nonprivileged foreign) crude.................. 20,000

----------

95,000

During August the operator produced from those feedstocks:

Jet.......................................................... 35,000

Gasoline..................................................... 40,000

Petroleum Coke............................................... 10,000

Distillate................................................... 5,000

Petrochemicals............................................... 15,000

----------

105,000

There is a gain: 105,000-95,000=10,000

Using the tables in T.D. 66-16, the following choices are available

for attribution:

----------------------------------------------------------------------------------------------------------------

Petroleum

Charged Jet Gasoline -------------------------- Petro-

Coke Distillate chemical

----------------------------------------------------------------------------------------------------------------

Class II PF Crude................. 20,000 13,000 17,200 4,400 17,200 5,000

Class III PF Crude................ 35,000 24,500 31,850 14,000 31,150 10,150

Class III D Crude................. 20,000 14,000 18,200 8,000 17,800 5,800

Class III NPF Crude............... 20,000 14,000 18,200 8,000 17,800 5,800

----------------------------------------------------------------------------------------------------------------

Relative value factors are calculated:

----------------------------------------------------------------------------------------------------------------

Feedstock

Barrels Value/barrels Value factors

----------------------------------------------------------------------------------------------------------------

Gasoline.............................................. 40,000 $25 $1,000,000 .9117

Jet Fuel.............................................. 35,000 23 805,000 .8388

Distillate............................................ 5,000 20 100,000 .7294

Petroleum Coke........................................ 10,000 10 100,000 .3647

Petrochemicals........................................ 15,000 40 600,000 1.4587

------------- ----------------

105,000 .............. 2,605,000

Gain.................................................. -10,000 2,605,000

-----------------------------

Total........................................... 95,000 \1\95,000

----------------------------------------------------------------------------------------------------------------

\1\Equals $27.42 average value p/bbl.

Using the feedstock factor

the refiner makes the

following attributions:

Jet Fuel..................... 24,192 (20,291 feedstock attributed to Class III PF Crude.)

10,808 --Class III NPF Crude (attribution of 9066 solely for purpose of

accounting for the amount of NPF used).

-------------

35,000

Gasoline..................... 5,000 (4,559 feedstock attributed to Class III PF Crude.)

5,000 --Class III NPF Crude (attribution of 4599 solely for purpose of

accounting for the amount of NPF used).

15,000 (13,676 feedstock attributed.)

-------------

25,000

Petroleum Coke............... 8,418 (3,070 feedstock attributed to Class II PF Crude.)

1,582 --Class III NPF Crude (attribution of 577 solely for purpose of

accounting for the amount of NPF used).

-------------

10,000

Distillate................... 5,000 (3,647 feedstock attributed to Class III Domestic.)

Petrochemicals............... 3,975 (5,800 feedstock attributed to Class III NPF Crude solely for

purpose of accounting for the amount of NPF used).

6,025 (8,789 feedstock attributed to Class III PF Crude.)

-------------

10,000

(b) Actual production records. An operator may use the actual

refinery production records to attribute the feedstocks used to the

removed or consumed products. Customs shall accept the operator's

recordation conventions to the extent that the operator demonstrates

that it actually uses the conventions in its refinery operations.

Whatever convention is elected by the operator, it must be used

consistently in order to be acceptable to Customs.

Example. If the operator mixes three equal quantities of

material in a day tank and treats that product as a three-part

mixture in its production unit, Customs will accept the resulting

product as composed of the three materials. If, in the alternative,

the operator assumes that the three products do not mix and treats

the first product as being composed of the first material put into

the day tank, the second product as composed of the second material

put into the day tank, and the third product as being composed of

the third material put into the day tank, Customs will accept that

convention also.

Sec. 146.97 Approval of other recordkeeping systems.

(a) Approval. An operator must seek approval of another

recordkeeping procedure by submitting the following to the Director,

Office of Regulatory Audit:

(1) An explanation of the method describing how attribution will be

made when a finished product is removed from or consumed in the

subzone, and how and when the feedstocks will be decremented;

(2) A mathematical example covering at least two months which shows

the amounts attributed, all necessary relative value calculations, the

dates of consumption and removal, and the amounts and dates that the

transactions are reported to Customs.

(b) Failure to comply. Requests received that fail to comply with

paragraph (a) of this section will be returned to the requester with

the defects noted by the Director, Office of Regulatory Audit.

(c) Determination by Director. When the Director, Office of

Regulatory Audit, determines that the recordkeeping procedures provide

an acceptable basis for verifying the admissions and removals from or

consumption in a refinery subzone, the Director will issue a written

approval to the applicant.

Appendix to Subpart H--Examples of Attribution and Relative Value

I. Attribution Using Producibility

Day 1

Transfer, within the refinery subzone, from one or more storage

tanks to the crude distillation unit:

50,000 pounds privileged foreign (PF) class II crude oil

50,000 pounds PF class III crude oil

50,000 pounds domestic status class III crude oil

Day 20

Removal from the refinery subzone for exportation of 50,000

pounds of aviation gasoline.

The period of manufacture for the aviation gasoline is Day 1 to

Day 20. The refiner must first attribute the designated source of

the aviation gasoline.

In order to maximize the duty benefit conferred by the zone

operation, the refiner chooses to attribute the exported aviation

gasoline to the privileged foreign status crude oil. Under the

tables for potential production (T.D. 66-16), class II crude has a

30% potential, and class III has a 40% potential. The maximum

aviation gasoline producible from the class II crude oil is 15,000

pounds (50,000 x .30). The maximum aviation gasoline producible

from the privileged foreign status class III crude oil is 20,000

pounds (50,000 x .40). The domestic class III crude would also

make 20,000 pounds of aviation gasoline.

The refiner could attribute 15,000 pounds of the privileged

foreign class II crude oil, 20,000 pounds of the privileged foreign

class III crude oil, and 15,000 pounds of the domestic class III

crude oil as the source of the 50,000 pounds of the aviation

gasoline that was exported; 35,000 pounds of class II crude oil

would be available for further production for other than aviation

gasoline, 30,000 pounds of privileged foreign class III crude oil

would be available for further production for other than aviation

gasoline, and 35,000 pounds of domestic status class III crude oil

would be available for further production, of which up to 5,000

pounds could be attributed to aviation gasoline.

Day 21

Transfer, within the refinery subzone, from one or more storage

tanks to the crude oil distillation unit:

50,000 pounds PF status class I crude oil

50,000 pounds PF status class IV crude oil

Day 30

Removal from the refinery subzone:

30,000 pounds of motor gasoline for consumption

10,000 pounds of jet fuel sold to the US Air Force for use in

military aircraft

10,000 pounds of aviation gasoline sold to a U.S. commuter airline

for domestic flights

10,000 pounds of kerosene for exportation

To the extent that the crude oils that entered production on Day

1 are attributed as the designated sources for the products removed

on Day 30, the period of manufacture is Day 1 to Day 30. If the

refiner chooses to attribute the crude oils that entered production

on Day 21 as the designated sources of the products removed on Day

30 using the production standards published in T.D. 66-16, the

manufacturing period is Day 21 to Day 30. This 30 choice will be

important if a relative value calculation on the privileged foreign

status crude oil is required, because the law requires the value

used for computing the relative value to be the average per unit

value of each product for the manufacturing period. Relative value

must be calculated if a source feedstock is separated into two or

more products that are removed from the subzone refinery. If the

average per unit value for each product differs between the

manufacturing period from Day 1 to Day 30 and the manufacturing

period from Day 21 to Day 30, the correct period must be used in the

calculation.

In order to minimize duty liability, the refiner would try to

attribute the production of the exported kerosene and the sale of

the jet fuel to the US Air Force to the privileged foreign crude

oils. For the same reason, the refiner would try to attribute the

removed motor gasoline and the aviation gasoline for the commuter

airline to the domestic crude oil.

Accordingly, the refiner chooses to attribute up to 5,000 pounds

of the domestic status class III crude as the source of the 10,000

pounds of aviation gasoline removed from the subzone refinery for

the commuter airline. Since no other aviation gasoline could have

been produced from the crude oils that entered production on Day 1,

the refiner must attribute the remainder to the crude oils that

entered production on Day 21. Again, using the production standards

from T.D. 66-16, the class I crude could produce aviation gasoline

in an amount up to 10,000 pounds (50,000 x .20). Likewise, the

class IV crude oil could 31 produce aviation gasoline in an amount

up to 8,500 pounds (50,000 x .17).

The refiner selects use of the class I crude as the source of

the aviation gasoline. The refiner could attribute up to 27,300

pounds (35,000--5,000 x .91) of the domestic class III crude oil

as the source of the motor gasoline. This would leave 2,700 pounds

of domestic class III crude available for further production for

other than aviation gasoline or motor gasoline. The remaining motor

gasoline removed (also 2,700 pounds) must be attributed to a

privileged foreign crude oil. The refiner selects the privileged

foreign class II crude oil that entered production on Day 1 as the

source for the remaining 2,700 pounds of motor gasoline.

This would leave 32,300 pounds of privileged foreign class II

crude oil available for further production, of which no more than

27,400 pounds could be designated as the source of motor gasoline.

The refiner attributes the jet fuel that is removed from the

refinery subzone for the US Air Force for use in military aircraft

to the privileged foreign class II crude oil. The refiner could

attribute up to 20,995 pounds of jet fuel from that class II crude

oil (32,300 x .65). Designating that class II crude oil as the

source of the 10,000 pounds of jet fuel leaves 22,300 pounds of

privileged foreign class II crude oil available for further

production, of which up to 10,995 pounds could be attributed as the

source of the jet fuel. Because the motor gasoline and the jet fuel,

under the foregoing attribution, would be considered to have been

separated from the privileged foreign class II crude oil, a relative

value calculation would be required.

The jet fuel is eligible for removal from the subzone free of

duty by virtue of 19 U.S.C. 1309(a)(1)(A). The refiner could

attribute the privileged foreign class II crude oil as being the

source of 9,812 pounds of jet fuel (22,300 x .44). The refiner

chooses to attribute the privileged foreign class III crude oil as

the source of the jet fuel. The refiner could attribute to that

class III crude oil up to 15,000 pounds of kerosene (30,000 x

.50).

II. Attribution on a FIFO Basis

Day 1-5

Transfer, within the Refinery Subzone, from one or more storage

tanks into process 150 barrels of Privileged Foreign (PF) Class II

crude oil, equivalent to 50,000 pounds.

Day 6

Removal from the refinery subzone 119 barrels of residual oils

to customs territory, equivalent to 40,000 pounds.

Since the operator uses the FIFO method of attribution, as the

product is removed from the subzone, or consumed or lost within the

subzone, attribution must be to the oldest feedstock available for

attribution. Accordingly, the 40,000 pounds (119 barrels) of

residual oils will be attributed to 40,000 pounds of the PF Class II

crude oil from Day 1-5.

Day 10

Transfer, within the refinery subzone, from one or more storage

tanks 4 barrels of domestic motor gasoline blend stock, equivalent

to 1,000 pounds to motor gasoline blending tank.

Day 6-15

Transfer, within the refinery subzone, from one or more storage

tanks into process 320 barrels of Domestic Class III crude oil,

equivalent to 100,000 pounds.

Day 16

Removal from the refinery subzone 14 barrels of asphalt to

customs territory, equivalent to 5,000 pounds.

The 5,000 pounds of asphalt will be attributed to 5,000 pounds

of PF Class II crude oil from Day 1-5.

Day 17

Removal from the refinery subzone, 324 barrels of motor gasoline

to customs territory, equivalent to 81,000 pounds.

The 81,000 pounds of motor gasoline will be attributed to 1,000

pounds of domestic motor gasoline blend stock from Day 10, to the

remaining 5,000 pounds of PF Class II crude oil from Day 1-5 and

75,000 pounds of domestic Class III crude oil from Day 6-15.

Day 16-20

Transfer, within the refinery subzone, from one or more storage

tanks into process 169 barrels of Privileged Foreign (PF) 34 Class

III crude oil, equivalent to 50,000 pounds.

Day 22

Removal from the refinery subzone, 214 barrels of jet fuel for

exportation, equivalent to 60,000 pounds.

The 60,000 pounds of jet fuel will be attributed to the

remaining 25,000 pounds of domestic Class III crude oil from Day 6-

15 and 35,000 pounds of PF Class III crude oil from Day 16-20.

Day 21-25

Transfer, within the refinery subzone from one or more storage

tanks into process, 143 barrels of domestic Class I crude oil,

equivalent to 50,000 pounds.

Day 30 (End of Manufacturing Period)

It is determined that during the manufacturing period just

ended, that 34 barrels of fuel, equivalent to 10,000 pounds was

consumed, and 5 barrels of oil, equivalent to 1,500 pounds was

irrecoverably lost as provided in Sec. 146.53(c)(1)(iv) of this

part, in the refining production process within the refinery

subzone.

The 10,000 pounds of fuel consumed will be attributed 10,000

pounds of PF Class III crude oil from Day 16-20. The 1,500 pounds of

oil lost in the refining production process will be attributed to

1,500 pounds of PF Class III crude oil from Day 16-20. The remaining

3,500 pounds of PF Class III crude oil from Day 16-20 will be the

first to be attributed during the next manufacturing period.

III. Relative Value Calculation

Because privileged foreign feedstocks transferred into process

during Day 1-5 and Day 16-20 have two or more products attributed to

them, each feedstock will require a relative value calculation.

Relative value calculation for UIN Day 1-5, 50,000 pounds,

equivalent to 150 barrels.

----------------------------------------------------------------------------------------------------------------

G

A lbs B bbls C $/bbl D product E feedstock F r.v. dutiable

value factor bbl bbl

----------------------------------------------------------------------------------------------------------------

Residual, Oil Po;............ 40,000 119 15.00 1,785 .9047 108 108

Asphalt...................... 5,000 14 13.00 182 .7840 11 11

Motor Gasoline............... 5,000 20 26.00 520 1.5682 31 31

----------------------------------------------------------------------------------

Totals................. 50,000 153 ......... 2,487 ........... 150 150

----------------------------------------------------------------------------------------------------------------

A=Pounds Attributed.

B=Equivalent Barrels.

C=Price of Product.

D=B x C.

E=C/(Total of Column D/Attributed Crude BBLS).

Residual Oil Feedstock Factor=15.00/(2,487/150)=.9047.

F=B x E.

G=Dutiable Barrels.

Since all products attributed to the 50,000 pounds (150 BBLS) of

PF Class II crude entered customs territory duty equals $7.88 (150

x .0525).

Relative value calculation for UIN Day 16-20, 46,500 pounds

equivalent to 157 barrels.

----------------------------------------------------------------------------------------------------------------

Product R.V. factor Dutiable

Lbs Bbls $/bbl value R.V. bbl bbl

----------------------------------------------------------------------------------------------------------------

Jet Fuel..................... 35,000 125 27.00 3,375 1.1030 138 0

Fuel......................... 10,000 34 12.00 408 0.4902 17 0

Consumed Process Loss........ 1,500 5 12.00 60 0.4902 2 0

----------------------------------------------------------------------------------

Totals................... 46,500 164 ......... 3,843 ........... 157 0

----------------------------------------------------------------------------------------------------------------

Since jet fuel was exported, no duty is applicable. Fuel consumed

for refinery process was consumed within the subzone premises and did

not enter customs territory, thus no duty is applicable. Likewise, the

process loss occurred entirely within the subzone. Therefore, no duty

is applicable.

Samuel H. Banks,

Acting Commissioner of Customs.

Approved: February 28, 1994.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 94-5023 Filed 3-3-94; 8:45 am]

BILLING CODE 4820-02-P