Exports of Certain California Crude Oil

DEPARTMENT OF COMMERCE

Bureau of Export Administration

15 CFR Part 777

[Docket No. 930653-4299]

RIN 0694-AA70

Exports of Certain California Crude Oil

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Final rule.

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

SUMMARY: The Bureau of Export Administration (BXA) is amending the

short supply provisions of the Export Administration Regulations (EAR)

by revising the restrictions on exports of crude oil produced in the

lower 48 states to allow exports, under individual validated licenses,

of up to 25,000 barrels per day (MB/D) of California heavy crude oil

having a gravity of 20.0 degrees API or lower.

This final rule revises the licensing requirements and procedures

that apply to exports of California heavy crude oil by removing a

number of significant restrictions, e.g., the prohibition against

transporting crude oil by pipeline over rights-of-way granted pursuant

to the Mineral Leasing Act of 1920 and the requirement that any export

of crude oil must be offset by importing an equal or greater volume of

crude oil of equal or higher quality.

In order to minimize procedural delays in licensing exports of

California heavy crude oil, BXA's Office of Chemical and Biological

Controls and Treaty Compliance (CBTC) will issue licenses on a first-

come, first-served, basis. Based on comments received on the March 24,

1994, proposed rule, this rule allows CBTC to issue licenses contingent

upon the exporter submitting, prior to any export under a license,

documentation showing that the exporter has title to the oil (or a

contract to purchase the oil) and a contract to export the oil. This

change in documentation requirements should provide exporters with

greater flexibility in completing small cargo transactions on the spot

market. Such transactions are likely to account for the bulk of

California heavy crude oil exports.

EFFECTIVE DATE: March 27, 1995.

[[Page 15670]] FOR FURTHER INFORMATION CONTACT: Bernard Kritzer, Office

of Chemical and Biological Controls and Treaty Compliance (CBTC),

Bureau of Export Administration, Telephone: (202) 482-0894.

SUPPLEMENTARY INFORMATION:

Background

Section 777.6(d)(1) of the Export Administration Regulations (EAR)

restricts exports of crude petroleum, including reconstituted crude

petroleum, tar sands, and crude shale oil. This rule amends

Sec. 777.6(d)(1) to permit exports of certain California crude oil

pursuant to a Presidential memorandum of October 22, 1992,1 in

which the President determined that exports of California heavy crude

oil having a gravity of 20.0 degrees API or lower were in the national

interest. Prior to authorizing the export of this California crude oil,

the President made certain findings and determinations under the

following statutes:

\1\The President's memorandum of October 22, 1992, was published

in the Federal Register Vol. 57, No. 226, November 23, 1992, p.

54895.

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

(1) Section 103 of the Energy Policy and Conservation Act (42

U.S.C. 6212(b));

(2) Section 28(u) of the Mineral Leasing Act, as amended by the

Trans-Alaska Pipeline Authorization Act of 1973 (30 U.S.C. 185(u)); and

(3) The provisions of the Export Administration Act of 1979 (EAA),

as amended, to the extent permitted with law, continued in effect after

its August 20, 1994, expiration through the President's invocation of

the International Emergency Economic Powers Act in Executive Order

12924 of August 19, 1994.

The President made findings that exports of California heavy crude

oil having a gravity of 20.0 degrees API or lower:

(1) Are in accordance with the provisions of the Export

Administration Act of 1979, as amended;

(2) Are consistent with the purpose of the Energy Policy and

Conservation Act; and

(3) Will not diminish the total quality or quantity of petroleum

available to the United States.

Based on the above findings, the President authorized the Secretary

of Commerce to modify the existing restrictions on the export of crude

oil produced in the lower 48 states to allow initially the export of an

average quantity of 25 MB/D of California heavy crude oil having a

gravity of 20.0 degrees API or lower.

The President also directed the Secretary of Energy, in

consultation with the Secretaries of Commerce, the Interior,

Transportation, and other interested agencies, to conduct periodic

reviews of such exports in light of then-existing market circumstances.

In addition, the President authorized the Secretary of Energy to

recommend to the Secretary of Commerce, based on the results of these

periodic reviews, what, if any, adjustments should be made in the

quantity of California heavy crude oil that may be authorized for

export (i.e., adjustments to the currently authorized level of 25 MB/

D).

Publication of Proposed Rule (March 24, 1994)

In response to the President's decision, the Department published a

proposed rule and request for public comments in the Federal Register

on March 24, 1994 (59 FR 13900). The proposed rule would have allowed

the CBTC to authorize exports of up to 25 MB/D of California heavy

crude oil having a gravity of 20.0 degrees API or lower. The March 24

rule proposed that CBTC would grant export licenses on a first-come,

first-served, basis with the quantity authorized on any one license not

to exceed 25 percent (2.28 million barrels) of the annual authorized

volume (i.e., 9.125 million barrels). The proposed rule would have

allowed CBTC to approve only one application per month from each

company and its affiliates, as long as applications from non-affiliated

companies were still pending. In addition, the validity period for

licenses would have been 90 days; and CBTC would have returned to the

available authorized export quota any volumes that had been licensed

but not exported during the 90-day validity period, except that no

unshipped volumes would have been carried over more than 30 days into a

new calendar year. Any unlicensed portion of the quota would have been

carried forward by CBTC from month to month, except that no volumes

would have been carried forward more than 30 days into a new calendar

year. The proposed rule would have allowed exporters a 10-percent

tolerance on the unshipped balance based on the number of barrels

authorized on the license, as well as a 25-percent tolerance on the

total dollar value of the license.

Applicants would have been subject to a number of documentation

requirements under the proposed rule: (1) Documentation showing that

the applicant has or will acquire title to the quantity of barrels

stated in the application; (2) a contract to export the quantity of

barrels stated in the application; (3) documentation showing that the

crude oil has a gravity of 20.0 degrees API or lower and was produced

within the state of California; and (4) an affidavit that the crude oil

was not produced or derived from a U.S. Naval Petroleum Reserve and was

not produced from the submerged lands of the U.S. Outer Continental

Shelf.

Finally, the proposed rule solicited public comments on three

possible license allocation schemes: (1) The first-come, first-served

licensing scheme described in the proposed rule; (2) a prorationing

scheme similar to the one used for exports of Alaskan North Slope crude

oil to Canada; and (3) a licensing scheme employing pre-qualification

with export nominations.

Public Comments on the Proposed Rule

The Bureau of Export Administration (BXA) received seven comments

on the March 24, 1994, proposed rule. One commenter opposed allowing

exports of up to 25 MB/D of California heavy crude oil, asserting that

this change would provide little or no economic benefits for California

crude oil producers and would likely result in price increases in the

domestic fuel market. Two commenters had no objections to allowing the

export of an average of 25 MB/D of California heavy crude oil, but

urged the Department not to increase this level without a formal public

rulemaking.

One commenter felt that the 25 MB/D average was quite small

relative to the potential marketable oil and suggested that state and

local governmental entities should be exempted from this limit. This

commenter expressed no preference concerning the method by which

licenses would be allocated and noted that the rule probably would not

have a significant impact on inland producers because many of them

lacked access to heated oil pipelines to transport crude oil to export

terminals.

Two commenters urged BXA to drop the proposed requirement that

applicants provide documentation showing the existence of a contract to

export California heavy crude oil, because this requirement would make

it difficult for companies to complete small cargo transactions on the

spot market. One alternative that was suggested would permit applicants

to submit one application per quarter, for cargoes not exceeding

500,000 barrels, to be supported by nonbinding letters of intent,

instead of a signed contract.

Several alternative licensing regimes were suggested. One commenter

suggested two alternative regimes. Under the first alternative,

applicants would be allowed to identify potential [[Page 15671]] supply

sources and end-users, subject to approval by BXA, and would then be

allowed to make shipments involving these approved parties, providing

proof of compliance and performance to BXA after each shipment. The

second alternative would involve the issuance of two types of licenses:

(1) short-term (30- to 90-day) licenses not exceeding 500,000 barrels,

with unused portions returned to the available quota, and (2) longer

term (6- to 12-month) licenses of 1 to 2 million barrels, with up to

half the amount returned to the available quota if no shipment is made

within 3 months. This commenter also urged that applicants be allowed

to apply for licenses several months in advance of the effective date.

Finally, the commenter suggested that licensees who fail to make any

shipments under their licenses be given a lower priority when filing

applications for subsequent licenses.

Another commenter suggested an alternative licensing regime that

would involve a prorationing mechanism with a validity period of not

less than 1 year and a minimum quantity of 500,000 barrels. This

commenter also favored eliminating the one application per month

limitation and removing the 25 MB/D cap on exports.

Finally, one commenter urged the Commerce Department to work toward

eliminating export restrictions on California heavy crude oil produced

from the submerged lands of the U.S. Outer Continental Shelf and, as

part of this action, increase the proposed gravity limit from 20

degrees API to 22 degrees API.

Changes Made by This Final Rule

The Department reviewed the public comments on the March 24, 1994,

proposed rule and decided to retain, for the most part, the licensing

regime contained in that rule (i.e., first-come, first served).

However, the Department recognizes that a number of concerns were

raised in the public comments on the proposed rule and, where

practical, has made changes in this final rule to address these

concerns.

This final rule makes certain significant changes in the

documentation requirements for license applications to export

California heavy crude oil. These changes are based on the Department's

review of the public comments on the proposed rule, its consultations

with industry representatives familiar with the California heavy crude

oil export market, and its review of certain in-house data on actual

shipments of California heavy crude oil under validated export

licenses. The documentation requirements in the proposed rule specified

that each application must be accompanied by: (1) a contract or bill of

sale, showing title to the crude oil, and (2) a contract to export the

crude oil. Several commenters felt that this requirement would make it

difficult for companies to complete small cargo transactions on the

spot market, noting that the timeframe for completing small cargo

transactions can be very short and that a limited window of opportunity

could be missed if proof of a contract had to be obtained before an

export license could be issued. These commenters also noted that the

negative effects of the prior proof of contract requirement could be

quite significant because the bulk of California heavy crude oil

exports are spot market transactions.

Because of the unique characteristics of the California heavy crude

oil export market (most sales consist of small spot market

transactions), the Department decided to modify the proof of contract

requirement. This final rule requires that each application be

accompanied by documentary evidence of an order as described in

Sec. 772.6(a)(2), such as a letter of intent. Although this final rule

does not require proof of a contract at the time an application is

submitted, all licenses to export California heavy crude oil will be

subject to the condition that the licensee submit to the CBTC, prior to

any export under the license, documentation proving that the licensee

has: (1) title to the quantity of barrels stated in the application and

(2) a contract to export the quantity stated on the application. This

change will provide applicants with greater flexibility to engage in

spot market transactions. Applicants will be able to obtain export

licenses more quickly, since they will not have to wait until they have

a firm contract to submit their applications. They also will have

additional time in which to obtain proof of a contract, since they are

only required to submit such proof to CBTC at some point prior to the

time of export.

To encourage applicants to apply for a validated license only when

they have a real opportunity to make an export sale, this final rule

requires CBTC to consider the following factors when determining what

action should be taken on individual applications:

(1) The number of validated licenses to export California heavy

crude oil that have been issued to the applicant or its affiliates

during the current calendar year;

(2) The number of applications pending in CBTC that have been

submitted by applicants who have not been issued validated licenses to

export California heavy crude oil during the current calendar year;

and,

(3) The percentage of California heavy crude oil authorized under

export licenses previously issued to the applicant that has actually

been exported by the applicant.

Another significant change in documentation requirements involves

the affidavit requirement contained in Sec. 777.6(d)(1)(xii) of the

proposed rule. This requirement has been replaced in the final rule by

a certification requirement, i.e., the applicant is required to certify

that: (1) the commodity has a gravity of 20.0 degrees API or lower; (2)

the commodity is produced in the state of California; (3) the commodity

is not produced or derived from a U.S. Naval Petroleum Reserve; and (4)

the commodity is not produced from the submerged lands of the U.S.

Outer Continental Shelf.

The Department decided to retain the first-come, first-served,

mechanism that was proposed in the March 24, 1994, rule because it

provides a greater degree of flexibility and administrative simplicity

than the prorationing and pre-qualification licensing alternatives that

also were described in the proposed rule. Under the first-come, first-

served licensing regime adopted in this final rule, CBTC will accept

only one application per month from each company and its affiliates

(regardless of whether or not applications from non-affiliated

companies are pending) for a total quantity not to exceed 25 percent

(2.28 million barrels) of the annual (9.125 million barrels) authorized

volume of California heavy crude oil. CBTC will issue licenses in the

order in which it receives applications, with all licenses having the

same validity period, i.e., 90 calendar days. The Department considered

establishing a longer validity period, but felt that the 90-day term

provided the best compromise between the needs of spot market

applicants and applicants anticipating larger volume transactions

covering a longer term. Since licensees are permitted to wait until

immediately prior to making shipments under their licenses before

providing CBTC with documentation showing proof of title and a contract

to export, the Department felt that the 90-day license term was

necessary to ensure that no applicant would tie up large volumes of

California heavy crude oil for a significant period of time (e.g., for

six months to a year), without having received a firm contract offer,

thereby denying commercial opportunities to other applicants.

This final rule also implements the provisions of the proposed rule

concerning: (1) volumes that have not [[Page 15672]] been licensed for

export and (2) licensed volumes that have not been exported prior to

the expiration date of the license. CBTC will carry forward any portion

of the 25,000 barrel per day quota that has not been licensed and will

return to the available authorized quota any portion that has been

licensed, but not shipped, within the 90-day validity period of the

license, except that these volumes will not be carried over more than

30 days into a new calendar year. This approach will ensure that the

total volume available for export in any one year does not

significantly exceed the annual (9.125 million barrels) authorized

volume of California heavy crude oil. If market conditions dictate that

an adjustment should be made in the annual authorized volume, the

Secretary of Energy is authorized to recommend that the Secretary of

Commerce make the necessary adjustment.

Consistent with the March 24, 1994, proposed rule, this final rule

allows licensees to combine authorized quantities into one or more

shipments, provided that the validity period of none of the affected

licenses has expired. In addition, this rule retains the shipping

tolerances set forth in the proposed rule, i.e., a 10-percent tolerance

on the unshipped balance (based on the number of barrels authorized on

the license) and a 25-percent tolerance on the total dollar value of

the license. This final rule also prohibits licensees from transferring

their licenses to other parties without prior written authorization

from CBTC, in accordance with Sec. 772.13.

The Department considered the effect on the environment of exports

of California heavy crude oil in its 1989 ``Report to Congress on U.S.

Crude Oil Exports'' which recommended the liberalization of export

restrictions resulting in the 1992 Presidential determination. The

Department also conducted an assessment in connection with the approval

of an export license application during 1991. In both cases, the

Department determined that the export of California heavy crude would

not have a significant impact on the environment.

The Department completed an assessment of the environmental affects

of the export of California crude oil in connection with the present

rulemaking. The assessment confirmed the previous findings that the

export would not have a significant impact on the environment. On

October 12, 1994, the National Oceanic and Atmospheric Administration

(NOAA) approved the assessment, including the conclusion that exports

of California heavy crude oil will not have a significant impact on the

human environment in accordance with the Council on Environmental

Quality's regulations implementing the National Environmental

Protection Act. The environmental assessment is available for public

inspection in Room H-4513.

Rulemaking Requirements

1. This rule was determined to be significant for the purposes of

Executive Order 12866.

2. This rule contains a collection of information subject to the

requirements of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et

seq.). The public reporting burden for this collection of information

is estimated to average 12 hours per response, including the time

required for reviewing instructions, searching and maintaining the

necessary data, and completing and reviewing the collection of

information. Send comments regarding this burden to: Bernard Kritzer,

Manager, Short Supply Program, Office of Chemical and Biological

Controls and Treaty Compliance, Room 2096, U.S. Department of Commerce,

14th Street and Pennsylvania Avenue, N.W., Washington, DC 20230; and to

the Office of Information and Regulatory Affairs, Office of Management

and Budget, Washington, D.C. 20503 (ATTN: Paperwork Reduction Project--

0694-0027).

3. This rule does not contain policies with Federalism implications

sufficient to warrant preparation of a Federalism assessment under

Executive Order 12612.

4. A notice of proposed rulemaking and an opportunity for public

comment were not required for this rulemaking by section 13(a) of the

Export Administration Act of 1979, as amended (50 U.S.C.A. app. 2401-

2420 (1991, Supp. 1993), and Pub. L. No. 103-277, July 5, 1994).

Although the Export Administration Act expired on August 20, 1994, the

President invoked the International Emergency Economic Powers Act and

determined that, to the extent permitted by law, the provisions of the

Export Administration Act shall be carried out under Executive Order

12924 of August 19, 1994, so as to continue in full force and effect

and amend, as necessary, the export control system heretofore

maintained by the Export Administration Regulations and Act. As such,

under section 3(a) of the Regulatory Flexibility Act (5 U.S.C. 603(a)

and 604(a)) no initial or final Regulatory Flexibility Analysis has

been or will be prepared.

List of Subjects in 15 CFR Part 777

Administrative practice and procedure, Exports, Forest and forest

products, Petroleum, Reporting and recordkeeping requirements.

Accordingly, Part 777 of the Export Administration Regulations (15

CFR Parts 730-799) is amended as follows:

1. The authority citation for 15 CFR Part 777 continues to read as

follows:

Authority: Pub. 90-351, 82 Stat. 197 (18 U.S.C. 2510 et seq.),

as amended; sec. 101, Pub. L. 93-153, 87 Stat. 576 (30 U.S.C. 185),

as amended; sec. 103, Pub. L. 94-163, 89 Stat. 877 (42 U.S.C. 6212),

as amended; secs. 201 and 201(11)(e), Pub. L. 94-258, 90 Stat. 309

(10 U.S.C. 7420 and 7430(e)), as amended; Pub. L. 95-223, 91 Stat

1626 (50 U.S.C. 1701 et seq.); Pub. L. 95-242, 92 Stat. 120 (22

U.S.C. 3201 et seq. and 42 U.S.C. 2139a); sec. 208, Pub. L. 95-372,

92 Stat. 668 (43 U.S.C. 1354); Pub. L. 96-72, 93 Stat. 503 (50

U.S.C. App. 2401 et seq.), as amended; E.O. 11912 of April 13, 1976

(41 FR 15825, April 15, 1976); E.O. 12002 of July 7, 1977 (42 FR

35623, July 7, 1977), as amended; E.O. 12058 of May 11, 1978 (43 FR

20947, May 16, 1978); E.O. 12214 of May 2, 1980 (45 FR 29783, May 6,

1980); E.O. 12730 of September 30, 1990 (55 FR 40373, October 2,

1990), as continued by Notice of September 25, 1992 (57 FR 44649,

September 28, 1992); E.O. 12735 of November 16, 1990 (55 FR 48587,

November 20, 1990), as continued by Notice of November 12, 1993 (58

FR 60361, November 15, 1993), and E.O. 12924 of August 19, 1994 (59

FR 43437, August 23, 1994).

PART 777--[AMENDED]

2. Section 777.6 is amended by adding a new paragraph (d)(1)(xii)

and a new paragraph (k) to read as follows:

Sec. 777.6 Petroleum and petroleum products.

* * * * *

(d) * * *

(1) * * *

(xii) Exports of certain California crude oil. California heavy

crude oil may be exported under the following conditions:

(A) The applicant certifies that:

(1) The commodity has a gravity of 20.0 degrees API or lower;

(2) The commodity is produced in the state of California, including

its submerged state lands;

(3) The commodity is not produced or derived from a U.S. Naval

Petroleum Reserve;

(4) The commodity is not produced from the submerged lands of the

U.S. Outer Continental Shelf;

(B) All aspects of the transaction comply with the provisions of

paragraph (k) of this section.

* * * * *

(k) Exports of certain California crude oil pursuant to

Sec. 777.6(d)(1)(xii). The [[Page 15673]] export of California heavy

crude oil having a gravity of 20.0 degrees API or lower, at an average

volume not to exceed 25 MB/D, will be authorized as follows.

(1) Applicants must submit their applications on Form BXA-622P to

the following address: Office of Exporter Services, ATTN: Short Supply

Program--Petroleum, Bureau of Export Administration, U.S. Department of

Commerce, P.O. Box 273, Washington, DC 20044.

(2) The quantity stated on each application must be the total

number of barrels proposed to be exported under the license--not a per-

day rate. This quantity must not exceed 25 percent of the annual

authorized export quota. Potential applicants may inquire of BXA as to

the amount of the annual authorized export quota available.

(3) Each application shall be accompanied by a certification by the

applicant that the California heavy crude oil:

(i) Has a gravity of 20.0 degrees API or lower;

(ii) Was produced within the state of California, including its

submerged state lands;

(iii) Was not produced or derived from a U.S. Naval Petroleum

Reserve; and

(iv) Was not produced from submerged lands of the U.S. Outer

Continental Shelf.

(4) Each license application must be based on an order, as defined

by Sec. 772.6(a) of this subchapter and must be accompanied by

documentary evidence of an order as described in Sec. 772.6(a)(2),

e.g., a letter of intent.

(5) The Office of Chemical and Biological Controls and Treaty

Compliance (CBTC) will adhere to the following procedures for licensing

exports of California heavy crude oil:

(i) CBTC will issue individual validated licenses for approved

applications in the order in which the applications are received (date-

time stamped upon receipt by CBTC), with the total quantity authorized

for any one license not to exceed 25 percent of the annual authorized

volume of California heavy crude oil.

(ii) CBTC will approve only one application per month for each

company and its affiliates.

(iii) CBTC will consider the following factors (among others) when

determining what action should be taken on individual license

applications:

(A) The number of validated licenses to export California heavy

crude oil that have been issued to the applicant or its affiliates

during the then-current calendar year;

(B) The number of applications pending in CBTC that have been

submitted by applicants who have not previously been issued validated

licenses under this section to export California heavy crude oil during

the then-current calendar year; and,

(C) The percentage of the total amount of California heavy crude

oil authorized under other export licenses previously issued to the

applicant pursuant to this section that has actually been exported by

the applicant.

(iv) CBTC will approve applications contingent upon the licensee

providing documentation meeting the requirements of both paragraphs

(k)(5)(iv) (A) and (B) of this section prior to any export under the

license:

(A) Documentation showing that the applicant has or will acquire

title to the quantity of barrels stated in the application. Such

documentation shall be either:

(1) An accepted contract or bill of sale for the quantity of

barrels stated in the application; or

(2) A contract to purchase the quantity of barrels stated in the

application, which may be contingent upon issuance of an export license

to the applicant.

(B) Documentation showing that the applicant has a contract to

export the quantity of barrels stated in the application. The contract

which may be contingent upon issuance of the export license to the

applicant.

(v) CBTC will carry forward any portion of the 25 MB/D quota that

has not been licensed, except that no unallocated portions will be

carried forward more than 90 days into a new calendar year.

Applications to export against any carry forward must be filed with

CBTC by January 15 of the carry-forward year.

(vi) CBTC will return to the available authorized export quota any

portion of the 25 MB/D per day quota that has been licensed, but not

shipped, during the 90-day validity period of the license.

(vii) CBTC will not carry over to the next calendar year pending

applications from the previous year.

(6) License holders:

(i) Have 90 calendar days from the date the license was issued to

export the quantity of California heavy crude oil authorized on the

license. Within 30 days of any export under the license, the exporter

must provide CBTC with a certified statement confirming the date and

quantity of California heavy crude oil exported.

(ii) Must submit to CBTC, prior to any export under the license,

the documentation required by paragraph (k)(5)(iv) of this section.

(iii) May combine authorized quantities into one or more shipments,

provided that the validity period of none of the affected licenses has

expired.

(iv) Are prohibited from transferring the license to another party

without prior written authorization from CBTC in accordance with

Sec. 772.13 of this subchapter.

(7) CBTC will allow, pursuant to Sec. 786.7(c) of this subchapter,

a 10-percent tolerance on the unshipped balance based upon the volume

of barrels it has authorized. CBTC will allow a 25-percent shipping

tolerance on the total dollar value of the license.

Dated: March 22, 1995.

Sue E. Eckert,

Assistant Secretary for Export Administration.

[FR Doc. 95-7525 Filed 3-24-95; 8:45 am]

BILLING CODE 3510-DT-P