Today, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued the first-ever published guidance on the Short Supply Controls, the regulations that limit the export of crude oil out of the United States. The guidance, provided in the form of Frequently Asked Questions (“FAQs”), sheds light on a number of issues, including the definition of “crude oil” under BIS regulations and the extent to which crude oil must be processed in order to qualify as a product that is exportable without prior BIS authorization.
Impetus for BIS Action Today’s publication marks the first time BIS has issued public interpretive guidance on the Short Supply Controls, even though the regulations have been in effect (in various forms) since 1975. The FAQs are timely, however, in that they address issues that came to the fore earlier this year.
In June 2014, many were surprised by commodity classification rulings BIS issued to Pioneer Natural Resources and Enterprise Product Partners. In these private rulings, BIS classified lightly processed lease condensate as an exportable product outside the BIS definition of “crude oil.” The Export Administration Regulations (“EAR”) specify that “lease condensate” is within the definition of crude oil; however, the EAR also exempts from the definition of crude any oil that is “processed through a crude oil distillation tower.” 15 C.F.R. § 754.2(a). BIS determined that this exception applied with regard to the Pioneer and Enterprise condensate. This decision was somewhat unexpected because, in the eyes of some, the processing at-issue was not very extensive.
The response to the Enterprise and Pioneer rulings from both Capitol Hill and the industry was immediate. Lawmakers like Robert Menendez (D-N.J.) and Edward Markey (D-Mass.) criticized the rulings, suggesting they were contrary to law. Several U.S. refiners echoed this criticism. Other companies, however, were encouraged by the rulings and submitted their own classification requests, seeking confirmation from BIS that similar or analogous distillation processes would be sufficient to render crude oil exportable without a license. These classification requests have been pending, for the most part, while BIS collects and analyzes data on the proposed processing. BIS, however, has made clear that informed self-classification is preferable to a situation in which BIS must classify each individual commodity prior to export. The FAQs issued today provide exporters with some additional tools to engage in such self-classification.
The FAQs The guidance BIS published today provides information in response to six frequently asked questions, ranging from a general overview of the Short Supply Controls, to newly articulated policies on the definition of “crude oil.” Of particular interest is FAQ No. 4, which addresses the question: To what extent must crude oil be “processed through a crude oil distillation tower” in order to qualify as a “petroleum product” that can be exported without a BIS license?
In response, BIS explained that for crude oil to be transformed into an exportable “petroleum product,” there “must be material processing through a crude oil distillation tower”—not mere “de minimis” processing. For example, BIS noted that processes that utilize “pressure reduction alone to separate vapors from liquid or pressure changes at a uniform temperature, such as flash drums with heater treaters or separators, do not constitute processing through a crude oil distillation tower.” (emphasis added). BIS also identified the following six factors to consider in classifying commodities in this context:
- “Whether the distillation process materially transforms the crude oil, by using heat 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 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 a consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.”
These six factors are not, according to BIS, “categorical or exhaustive.” They do, however, correlate well with the issues BIS has emphasized in reviewing recent commodity classification requests.
Conclusion The guidance issued today by BIS provides some much-needed insight into how BIS interprets its regulations, particularly the definition of “crude oil” in section 754.2(a) of the EAR. However, while BIS has provided additional tools for self-classification, exporters must take great care, utilizing the advice of counsel, to determine on a case-by-case basis whether the output of a given distillation process can be considered a petroleum product under the current regulatory definition. If a misclassification leads to an unauthorized export, exporters face serious civil and criminal penalties. The BIS guidance published today is helpful in this regard; however, in some cases, it may be necessary to request a BIS classification.
Moreover, as we have noted previously,1 exporters are not the only parties exposed to penalties for violations of the Short Supply Controls. The EAR makes clear that “no person” may “buy” or “transport” a product “with knowledge” that it is being exported in violation of the EAR. 15 C.F.R. § 764.2(e). Nor may a party act in such a way that is construed to be a solicitation, attempt, or action to “aid, abet, counsel, command, induce, procure, or permit” a violation. Id. § 764.2(b)-(d). It is incumbent, therefore, on parties in the chain of export—including producers, sellers, exporters, and purchasers—to take adequate measures to confirm the classification of a commodity prior to export.
Jeffrey Orenstein and Leah Rudnicki are attorneys in Reed Smith’s Washington, D.C. and Houston offices where they provide clients with strategic counsel on the export, sale, and transportation of crude oil and petroleum products.
- See Jeffrey Orenstein, Condensate Exports Raise Compliance Questions for Purchasers, REED SMITH CLIENT ALERTS (Nov. 7, 2014) (available at http://www.reedsmith.com/Condensate-Exports-Raise-Compliance-Questions-for-Purchasers/).
Client Alert 2014-347