United States: Mainbrace - March 2015 (No. 2)

A NOTE FROM THE EDITOR

by Thomas H. Belknap, Jr.

The opening session for this year's Connecticut Maritime Association Shipping Conference is titled, "We've always been an industry, now we need to be a business." The subtitle explains that the session will explore how the maritime industry can "contend with a world of challenges and still make money." These are, perhaps, not new questions, but they are ones that have assumed increasing importance as we start the ninth year of what seems to many to be an eternal economic hangover.

Not all areas of the business have been stagnant, of course, and there have unquestionably been opportunities to make money in these past few years. But there have been many pitfalls as well, and we have seen the effects on many fronts, from a proliferation of maritime arrest and attachment actions, arbitrations and litigation, bankruptcies, and distressed workout deals, to ever-expanding and stricter regulatory activity, to active and aggressive criminal environmental enforcement actions. Add to that the increase in outside investment in the industry, from public share offerings to private equity investments, and it seems clear that the world's attention on the shipping industry is only increasing. With that attention comes an increased pressure to provide a return on investment and to employ "best practices" in all aspects of the business.

The need to excel goes beyond the technical and operational responsibilities of running the business; companies these days increasingly recognize that they must employ "best practices" from a legal perspective as well. That means everything from ensuring the company is protected from cyber attacks, both technologically and legally; anticipating and preparing for changing regulations on operations, navigation, and environmental impacts; analyzing corporate organization to minimize liability and tax exposure; auditing operations to prevent non-compliance with regulation and reduce risk of casualties; and so on. As a law firm, we are increasingly asked by our clients to help perform this critical self-analysis as part of their ongoing effort to improve their businesses and reduce their risk.

Blank Rome was very proud to receive Lloyd's List 2015 North American Maritime Award for "Maritime Services – Legal." The maritime services award, as stated by Lloyd's List, is awarded "for exceptional achievement or contribution to any service sector of the North American maritime industry by a company, individual or organisation." We would like to think that this award recognizes the value we place on providing a truly "full service" approach to servicing the maritime industry's legal needs. We take this opportunity to thank Lloyd's List for this great recognition, but more importantly, we thank our clients for continuing to give us the opportunity to prove our worth.

BLANK ROME WINS LLOYD'S LIST 2015 MARITIME LEGAL SERVICES AWARD

Blank Rome LLP is pleased to announce that the Firm's maritime group was selected as the winner of the Lloyd's List 2015 North American Maritime Award for "Maritime Services – Legal." The maritime services award, as stated by Lloyd's List, is awarded "for exceptional achievement or contribution to any service sector of the North American maritime industry by a company, individual or organisation."

"In selecting Blank Rome for this highly prestigious award, Lloyd's List's panel of judges recognized that we offer a range and breadth of shipping knowledge to clients that is unmatched among U.S.-based law firms," said John D. Kimball, co-chair of the Firm's maritime practice group.

"We are very grateful to Lloyd's List for this recognition of top-level experience and great teamwork that we provide to our clients. We have worked very hard to create a maritime practice with a footprint throughout the United States that can handle all of the needs of our clients," added maritime practice group co-chair Jonathan K. Waldron.

This year's annual awards event attracted more than 300 maritime industry representatives and celebrated the success of the North American maritime industry.

For a full list of winners, please click visit http://ibiawards.com/north-america/.

CONGRESS AND ADMINISTRATION TAKE CAUTIOUS APPROACH TO CRUDE EXPORTS AS OIL PRICES FALL

by Matthew J. Thomas

Two months into the 114th Congress, only tentative initial steps toward easing the U.S. crude export ban have been undertaken. The cautious approach being taken by key congressional decision-makers signals that, despite the change of control in the Senate, the process of realigning U.S. energy policy will need to be a gradual and strategic one, especially given the recent rollercoaster economics of global oil markets. The maritime and trading sectors will have to continue to watch and wait for the sort of major changes that would allow substantial volumes of light crude and condensate to move from U.S. ports.

House

In the House, on February 4, Congressman Joe Barton (R-TX) and a dozen co-sponsors introduced legislation to lift the ban on crude exports entirely. Co-sponsors have not rushed to back the measure, however. Energy exports and permitting decisions are included as part of House Energy and Commerce Committee Chair Fred Upton's recently released "Architecture of Abundance" legislative framework for 2015-16, setting out a framework for the committee's energy plans. However, the details of any particular energy export measures have yet to emerge from the committee. Additional draft legislative proposals and hearings on this issue appear likely in the House later this Congress, giving proponents more time and opportunity to make the case for uneasy lawmakers.

Senate

In the Senate, all eyes have been on Republican Senator Lisa Murkowski, the new chair of the Senate Energy and Natural Resources Committee. Although an outspoken proponent of liberalized energy trade, she has opted not to pursue a legislative solution at this juncture. Instead, she and 20 colleagues have focused their attention on a more attainable aim: persuading the Administration to authorize freer crude trade with Mexico, to align it with the treatment already provided to NAFTA partner Canada.

In a February 18th letter, Senator Murkowski and her colleagues urged Energy Secretary Penny Pritzker to approve an application by Mexican producer Pemex to undertake swap transactions, whereby heavy Mexican crude will be imported into the U.S. in exchange for export of lighter U.S. oil. Moreover, the senators urged the energy secretary to issue a finding that crude exports to Mexico (for consumption therein) are in the United States' national interest. Such a finding would be akin to the action taken by President Reagan with regard to Canada in 1980, resulting in largely unrestricted exports north of the border.

These steps, combined with policy changes south of the border allowing for increased inbound investment, would have the potential to push North America further in the direction of a free-trade area in the energy sector, an aim that was out of reach when NAFTA was first negotiated.

Administration

On December 30, 2014, the Department of Commerce Bureau of Industry & Security ("BIS") published new policy guidance on crude oil export issues, in the form of Frequently Asked Questions ("FAQs") published at www.bis.doc.gov/index.php/policy-guidance/faqs. These FAQs set forth BIS' approach to technical issues that have been of concern to traders, including what sort of processing (through a "distillation tower") is required to make crude oil and lease condensate exportable, and whether Canadian crude shipped through the U.S. can be exported if it has incidental mixing with U.S. crude in storage and pipeline facilities.

These FAQs were under consideration for much of last year, when BIS suspended action on several pending commodity classification requests for exporters seeking rulings on whether processed condensates are considered "crude oil" under the export ban. The pause reportedly was to allow BIS to consider additional information collected from applicants and to develop its internal policy regarding the types of processing sufficient to render crude exportable.

Unfortunately, while the FAQs provide some insights into BIS' thinking, they stop short of giving the industry transparent and objective technical specifications for determining what processed commodities fall within the crude ban. As a result, the limits on the scope of the crude ban will continue to have to be determined on a case-bycase basis, a process that will hopefully now resume after Commerce's lengthy hiatus.

Treatment of Condensate under the Crude Export Ban

"Crude oil" is defined in the Commerce Department Export Administration Regulations (15 CFR Part 754) as a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities, and which has not been processed through a crude oil distillation tower. The definition set forth in the rule includes reconstituted crude petroleum, and lease condensate, liquid hydrocarbons produced from tar sands, gilsonite, and oil shale; drip gases are also included, but topped crude oil, residual oil, and other finished and unfinished oils are excluded. The newly issued FAQs recite those definitions, without much elaboration, in response to questions regarding how to determine if a commodity is crude oil, and if lease condensate is considered crude oil.

Although the current definition of crude oil has been in place for nearly two decades, little attention was paid in the past to fleshing out what was in and what was out of the regulation's imprecise wording until just this past year. Now, however, with the boom in domestic hydrocarbon production and the corresponding push to export light petroleum products, BIS has had to grapple with the issue of what hydrocarbons are considered "crude oil and lease condensate" in the modern era of shale production, and what types of processing might open the door to export by triggering the exceptions for crude "processed through a crude oil distillation tower" and for "topped crude oil, residual oil, and other finished and unfinished oils."

FAQs Factors in Classifying Processed Crude and Lease Condensate

On the much-watched issue of how much processing is needed to export crude and condensate, BIS' new FAQs set forth six factors that it will weigh to determine whether the product has been "processed through a crude oil distillation tower."

While the FAQs give a window into BIS' analysis, the multi-factor test remains complex and subjective, since it requires BIS to weigh various details of the "distillation tower" equipment, the characteristics of the output streams, and the end use of the products. No objective or quantitative cut-offs are provided, so the new factors will not provide much certainty for exporters looking to "self-classify" new and unique products for export.

The six factors are below (although Commerce states that these factors are not exclusive; other unnamed factors may be considered as well):

  • whether the distillation process materially transforms the crude oil by using heat (not just negative pressure) to induce evaporation and condensation into liquid streams that are chemically distinct from the crude oil input;
  • the change in API gravity between the input of the process and the output of the process;
  • the change in the percentage of different types of hydrocarbons between the input and output of the process;
  • whether the streams resulting from distillation have purposes other than allowing the product to be classified as exportable petroleum products, such as use as petrochemical feedstock, diluent, and gasoline blendstock;
  • whether the distillation process utilizes temperature gradients and has significant internal structures, such as trays or packing, and differentiated output streams; and whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.

As a result, while the new crude FAQs give a window into BIS' broad reasoning and will help with preparing commodity classification requests for submission to BIS, the FAQs do not set out clear, objective technical specifications that would help exporters to self-certify commodities with a high degree of certainty and minimal risk.

Treatment of Canadian Crude Transiting the U.S.

Over the past two years, the industry has examined various options for exporting Canadian crude via U.S. ports, after carriage through the states via rail or pipeline. According to BIS regulations, "foreign-origin" crude oil can be exported (with a valid license) as long as it is not "co-mingled" with domestic crude oil. There has been considerable uncertainty and concern regarding the extent to which even de minimus mixing of domestic crude in transit compromised the exportability of foreign crude.

In the FAQs, BIS signaled some flexibility on incidental mixing, but again leaves the details to be considered on a case-by-case basis, explaining:

What is the acceptable level of domestic crude that can be mixed with foreign crude and still be eligible for export?

The Regulations do not specify any de minimis amount of U.S.-origin oil that can be co-mingled with the foreign oil. However, BIS understands that a minimal amount of mixing may occur due to incidental contact in pipelines and/or storage tanks when foreign and U.S. origin-oil is sequentially transported or stored in the same pipeline or tank. We encourage those applying for export licenses for foreign-origin crude to include in their application an explanation of the precautions they are taking to ensure that U.S. crude oil is not mixed with the foreign-origin crude, other than incidental contact.

Both the Administration and Congress are understandably cautious in modifying decades-old energy policies, but are easing into the debate gradually, carefully eyeing the potential impacts on U.S. energy prices and supplies as crude prices have plunged, and working on regional issues at the margin of the export ban. We expect further activity this year by this Congress on this matter, but it may be some time before policy makers loosen trading restrictions enough to significantly impact U.S. tanker trades.

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Authors
Joan M. Bondareff
Stefanos N. Roulakis
Alan Weigel
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