November 25, 2002

Memo For:  Foreign-Trade Zone Grantees
U.S. Customs Service Port Directors

From:  Dennis Puccinelli
Executive Secretary

Re:   Scope of Authority - Readmissions of Merchandise to Oil Refinery Subzones (A(32c)-11-02)

The U.S. Customs Service field staff have requested a determination as to whether certain activities at oil refinery subzones are within the scope of authority of FTZ Board Orders that authorized subzone status for oil refinery facilities. The activities in question primarily regard the admission in domestic status of products that were produced at the refinery, removed from the refinery, entered for consumption and later returned to the refinery for storage or further processing/manufacturing. Representatives of oil refinery subzones and related parties and the National Association of Foreign-Trade Zones participated in the review.

We found that low levels of merchandise produced at refineries are readmitted in the normal course of business, mainly due to market conditions, and that such readmissions are within the scope of FTZ Board authority with respect to oil refinery subzones provided that they total less than two percent of overall refinery inputs per year.

The FTZ Act allows previously entered merchandise to be admitted to zones in domestic status. The Act provides that imported merchandise on which duties have been paid may be admitted/ readmitted to zones for activity and emerge from the zone free of duty. The Customs regulations place one limitation on such admissions in order to prevent zone users from taking advantage of tariff savings beyond the scope of authority intended by FTZ Board actions. In the preamble to the Customs regulations in 1986, when this provision was adopted, the Customs Service explained, with regard to Section 146.71(d)(2): "The prohibition on further processing was intended to avoid abuse of this privilege by an assortment of schemes designed to circumvent high duty rates or import restrictions."

The FTZ Board has approved subzone status for over 75 oil refineries, subject to certain restrictions. In August 2000, after an industry-wide review of the use of zone procedures within the oil refining industry, the Board approved extension of their FTZ authority. (See Board Order 1116, 8/24/2000) The August 2000 action standardized the authority for the oil refinery subzones involved and, today, the FTZ authority for most of the oil refinery subzones is virtually the same. The authority permits the refineries to admit to the subzones a range of refinery inputs from both foreign and domestic sources to be used in the production of a variety of petroleum products, including fuels, blendstocks and feedstocks. The inputs involve mostly crude oil, but other refinery feeds, both foreign and domestic, are also permitted. FTZ authority for oil refinery subzones is restricted, limiting the non-privileged foreign (NPF) status option to certain inputs which can be used in the production of certain refinery products, as listed in the Appendix C referred to in Order 1116 (attached). Refinery inputs not authorized for admission in NPF status may be admitted in privileged foreign or domestic status.

We reviewed the FTZ Board's numerous approvals for oil refineries, including the August 2000 approval of extension of authority for 58 oil refineries, and we found that the FTZ Board intended to approve the use of zone procedures for a broad range of refinery activity, with the exception of that activity that is specifically subject to the restrictions of the Board Orders. With respect to fuels and other petrochemical products entered and readmitted to the oil subzones in domestic status, it appears that this type of activity is within the range of activity that was authorized by the Board to the extent that such readmissions are part of normal commerce or business activity for this industry.

We conducted a survey of about one-third of active refinery subzones to determine the overall level of merchandise readmitted to the subzones, the reasons for the readmissions, the potential impact on FTZ savings and whether the readmissions are within the scope of authority of the Board actions approving the subzones. The survey indicated that the readmissions were not significant in terms of the overall volume of activity at the refineries, generally accounting for less than two percent of overall inputs (average - approx. 0.5%). The readmissions do not appear to involve a significant impact on FTZ savings. (Survey results indicated a savings impact of .0025% of total savings.) Most of the products readmitted to the subzone cannot be used for additional attribution because they do not have producibility and thus involve no possibility of impact on savings. However, one product that was readmitted by a number of subzones and does have producibility is butane which can be tied by a producibility factor of 100% to motor gasoline. Survey results indicated that readmitted butane accounted for 0.18 percent of total feedstocks. The reason for butane readmissions is that EPA requires butane to be removed from gasoline to meet summer evaporative standards. This creates a supply of butane that seasonally exceeds demand. The butane can be used for winter gasoline, and refineries use butane that they cannot otherwise sell or use for that purpose.

We find that a de minimus level of readmissions (< 2%) is within the range of normal business practice for this industry and that this low level of readmissions is within the scope of FTZ Board authority for oil refinery subzones. Generally, readmissions for most refineries are at or below this minimal level, compared to total refinery inputs. Readmissions at this level represent a negligible impact on FTZ savings and are within the FTZ savings range contemplated by the FTZ Board. Many of the products readmitted are not products that are available as feedstocks on TD 66-16, and such products can only be relieved from zone inventory by being tied to a removal and a subsequent entry for consumption of a commercially interchangeable product, limiting the potential impact. Certain products, such as butane, are available for attribution and could impact FTZ savings. However, our survey found that such impact is negligible. Further, the fact that our ruling will extend to a low level of readmissions will help to ensure that the impact remains negligible. The fact that the costs of removing, storing and returning butane to a refinery exceeds any possible savings impact also will serve to keep the activity at a minimal level.

We found no evidence of a scheme to avoid higher duty rates or of an intent to conduct activity beyond the scope of authority. Further, based on the fact that the companies do not derive a net benefit from the readmissions when costs are considered, the risk of any adverse activity occurring under these circumstances appears to be very low. The FTZ Board's scope of authority included movements of merchandise that are within normal practice for the industry and that appears to be the case with activity at this level. Further, the products being readmitted are within scope of inputs for oil refinery subzones. Finally, it appears that a key factor in the readmissions of butane (the only significant product with potential savings impact) involves compliance with EPA summer gasoline standards which require refiners to remove butane from gasoline in summer, creating a seasonal excess of supply that is only balanced by demand in the winter when it can be reintroduced into gasoline. Assisting refineries in meeting EPA requirements is consistent with the scope of authority for FTZ Board action for this industry. The Board supported the industry's efforts at environmental compliance and gave special consideration to these circumstances in its actions.

A special case involves products that remain within a refinery system, but are removed to adjacent, dedicated facilities outside of the subzone boundary and later readmitted to the subzone for further activity. Such cases can usually be resolved through a clarification of the subzone boundary through the FTZ Board's minor boundary modification procedures. (Special expedited boundary modification procedures were issued on September 19, 2002, which are available on the FTZ web site - We recognize that, under some circumstances, the subzone boundary may not include all of a refinery's facilities based on refinery changes, inadvertent omissions or emergency situations. We expect that such facilities would be included in the subzone boundary and we will process minor boundary modifications on an expedited basis to account for emergency or temporary situations that arise or to update a refinery's boundaries to conform to the current facility configuration. A small amount of product may occasionally need to be removed and returned before changes can be made and this activity would be considered within the scope provided total returns for the refinery remain within the two percent readmission limit.

I find that, pursuant to Section 400.32(c) of the FTZ Board regulations (15 CFR Part 400), levels of readmission of fuels and petrochemical products to oil refinery subzones that amount to less than two percent of total feedstock admissions on an annual basis are within the scope of authority for such subzones under the circumstances described above. Readmitted products that have no producibility can only be attributed to like products (same HTS classification) in order to be removed from zone inventory. The FTZ staff is available to assist Customs Service Port Directors in evaluating or monitoring individual subzones. Further, I recognize that there may be a need for individual scope rulings for certain refineries and the FTZ staff is prepared to review such requests from U.S. Customs Service Port Directors or from refinery operators. Finally, a subzone operator may also seek to expand its scope of authority to cover activity that is found to be outside of its existing scope.

If there are any questions, please call us at (202) 482-2862.