US Crude Exports Shipping and Trade Issues

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1 US Crude Exports Shipping and Trade Issues API International Trade and Customs Conference March 30, 2016 Matt Thomas Blank Rome LLP Washington, DC

2 2016 Omnibus Appropriations Language - NATIONAL POLICY ON OIL EXPORT RESTRICTION. Notwithstanding any other provision of law, except as provided in subsections (c) and (d), to promote the efficient exploration, production, storage, supply, marketing, pricing, and regulation of energy resources, including fossil fuels, no official of the Federal Government shall impose or enforce any restriction on the export of crude oil. - Savings clause for trade sanctions restricting exports to foreign persons or governments

3 2016 Omnibus Appropriations Language Exceptions and Presidential Authority - One year export restrictions in the case of: Presidential declaration of national emergency, Restriction on countries, persons, or organizations in the context of sanctions or trade restrictions imposed by the United States for reasons of national security Secretary of Commerce (in consultation with the Secretary of Energy) finds that export of crude oil has caused sustained material oil supply shortages or sustained oil prices significantly above world market levels that are directly attributable to the export of crude oil; and those supply shortages or price increases have caused or are likely to cause sustained material adverse employment effects in the United States.

4 Transportation Sector Impacts Benefits for transport sector: - Funding Increase for Maritime Security Program (not the Jones Act fleet) - More favorable tax treatment of transportation costs for independent refiners (regardless of mode) Questions raised by refiners regarding treatment of US-flag and navigation requirements for ANS crude: BIS confirms all those maritime requirements are superseded.

5 Crude Shipments Jones Act Compliance Issues 46 USC Transportation of Merchandise A vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel is wholly owned by U.S. citizens and has a certificate of documentation with a coastwise endorsement Trigger is the lading of merchandise at one coastwise point and the unlading of it at a different coastwise point

6 Rules for indirect shipments to US points Foreign storage or transshipment considered part of continuous transportation unless there is an intent to enter the commodity into the stream of commerce of third country. Stopping, or even unloading, at a foreign point does not avoid a coastwise violation, unless the continuity of voyage is broken. This requires a showing of no intent for the merchandise to come back to the United States. Goods become common stock of a foreign country. Governmental rejection at border, or under the proper circumstances rejection by an overseas buyer.

7 Blending overseas: New and different products 19 CFR 4.80b(a) merchandise is not transported coastwise if at an intermediate port or place other than a coastwise point (that is at a foreign port or place, or at a port or place in a territory or possession of the United States not subject to the coastwise laws), it is manufactured or processed into a new and different product, and the new and different product thereafter is transported to a coastwise point. Rulings on fuel blending Does the fuel change ASTM grade? Blending may not occur aboard vessel.

8 Blending Ruling Crude and Condensate HQ H applied Jones Act to blending of processed condensate with crude. We have sought and received advice from the LSSD as to whether the processing you describe results in a new and different product. The LSSD determined that while there are slight differences between the processed condensate... and the crude oil..., both products are crude oil. In fact, the entire blending operation consists of placing a crude oil product from the United States in a tank with another crude oil product, which results in a third crude oil product that closely resembles the first two crude oil products. Adamant lack of transparency regarding standards applied. Result: any blending of US crude or condensate with foreign crude overseas is high risk, if it is shipped to or from the US on a foreign vessel.

9 Foreign Storage Special rules for commingled products stored outside the U.S.: - First Sold Foreign Rule - The quantity of commingled product equal to that of product transported out of the U.S. on non-coastwisequalified vessels must be sold foreign prior to transportation of any of the commingled product back to the U.S.

10 Floating Storage Floating storage permitted under Jones Act, but only if cargo returns to exactly the same berth at the same terminal. Cargo does not have to be unladen into the same tank. Recent proliferation of port-specific notice and approval processes has added uncertainty, diminished uniformity for floating storage.

11 Offshore Production - Looking for Jones Act Solution Ongoing dispute regarding topsides installation demonstrates extreme reach of Jones Act, threatens US offshore production and onshore fabrication. Efforts to craft a solution ongoing, demonstrate dynamics among Congress, industry and agency.

12 Jones Act Waivers May only be issued in the interest of national defense. Waiver examples: o In 1989, two waivers were granted following the Exxon Valdez oil spill in Alaska. In the interest of national defense determination because the incident was clearly tied to energy supplies. o On September 2, 2005, DHS granted a 17-day waiver for the transportation of oil and refined petroleum products due to Hurricane Katrina. DHS granted a second waiver after Hurricane Rita struck the Gulf Coast immediately following Hurricane Katrina.

13 Jones Act Waivers (cont.) o Waiver approved in 2006 upon a request for a one-time movement of a jack-up rig to facilitate exploration and production of natural gas in Cook Inlet, Alaska. Not a situation involving a response to a catastrophic event, such as a hurricane or major oil spill, but key members of Congress and DOE strongly supported the waiver. o Waivers granted for draw downs of the Strategic Petroleum Reserve, e.g., Operation Desert Storm (1991), Hurricane Katrina (2005), and unrest in Libya (2011). o In November 2012, there was a short-term Jones Act waiver issued during Hurricane Sandy.

14 Questions? Matt Thomas (o) (m)