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US Customs proposes closing Jones Act equipment ‘loopholes’

May 2, 2017 02:47 PM
In early 2009, Customs and Border Protection ruled that subsea “Christmas trees” used in oil drilling should be considered vessel equipment, not merchandise. The ruling allowed for the units to be moved and installed by foreign-flag vessels. CBP later determined the ruling should be reviewed.

Courtesy Dana Petroleum

In early 2009, Customs and Border Protection ruled that subsea “Christmas trees” used in oil drilling should be considered vessel equipment, not merchandise. The ruling allowed for the units to be moved and installed by foreign-flag vessels. CBP later determined the ruling should be reviewed.

U.S. Customs and Border Protection (CBP) has proposed revising more than two dozen rulings that relate to equipment transport under the Jones Act. Changing the rulings, which date to the mid-1970s, could create American jobs but also raise costs for oil exploration companies active in the Gulf of Mexico.

On Jan. 18, just before President Obama’s second term ended, CBP began soliciting public comments on its proposal to revise the government’s position that vessel equipment moved between domestic points is not “merchandise” that must be carried on U.S.-flag vessels. The proposal modifies and revokes ruling letters related to CBP’s application of the Jones Act. The agency, which is part of the Department of Homeland Security, first sought comments by Feb. 17, but later extended that deadline to April 18 and could lengthen it further.

“CBP has relied on a 1939 definition of vessel equipment, which provides the term ‘includes articles necessary and appropriate for the navigation, operation or maintenance of a vessel,’” said maritime attorney Charlie Papavizas at Winston & Strawn LLP in Washington, D.C. “Over time, CBP has issued numerous rulings interpreting this definition, including determining that vessel equipment included items ‘essential to the mission of the vessel.’”

Under Jones Act interpretations, if an item is merchandise, only a coastwise-qualified vessel can transport it between domestic points. If an item is vessel equipment, a non-coastwise-qualified vessel can move it between U.S. points and can transport it from one domestic point and install it at another domestic point. Jones Act transport prohibitions also apply to movements in U.S. territorial waters and those on the Outer Continental Shelf (OCS).

A CBP ruling in early 2009 determined that a subsea wellhead assembly known as a “Christmas tree” was vessel equipment when transported by a construction boat specializing in equipment installation. A Christmas tree assembly could be moved from one domestic point to another and then installed by a foreign-flag vessel. Vessels involved in pipe-laying and cable-laying, heavy-lift crane construction and installation, and diving support have been exempt from Jones Act requirements.

In July 2009, however, CBP proposed modifying or revoking years of Jones Act rulings about moving offshore oil equipment. Most of these rulings involved CBP determining whether certain items on vessels could be considered equipment. In the July 2009 proposal, CBP said withdrawal of the Christmas tree ruling was necessary pending a review of past rulings. But as controversy about the proposal grew, CBP removed it.

In March 2010, the agency initiated formal rulemaking using federal notice-and-comment procedures. In November 2010, that rulemaking approach was withdrawn by CBP, however.

Meanwhile, from May to October 2010, a federal OCS drilling ban following the Deepwater Horizon spill hurt Gulf oil output. At the time, critics said Jones Act restrictions kept specialist vessels out of the spill area, slowing the cleanup. After the ban, the oil and gas industry continued to conduct subsea installation and repair operations based on existing CBP rulings.

In December 2015, Congress passed legislation that included a requirement for CBP to enforce the Jones Act more thoroughly on the OCS. And last summer, to administer coastwise rules, CBP established a national Jones Act Division of Enforcement, or JADE, in its New Orleans field office.

Among the supporters of CBP’s new proposal are the American Maritime Partnership, the Shipbuilders Council of America, the Offshore Marine Service Association and a number of legislators from states producing offshore oil and gas. Opponents include some U.S. offshore producers and service companies, and foreign offshore oil, service and marine firms.

Allen Leatt, CEO of the International Marine Contractors Association in London, said the CBP’s proposal could revoke decades of decisions, creating a major shift in U.S. maritime policy.

“Naturally, we understand the drive to protect U.S. tonnage, given the difficulties in the platform supply vessel market today,” he said. Demand for supply vessels has declined sharply since oil prices tumbled in 2014. “But the deepwater construction market represents a very different sector, with very different vessels and technologies. It’s a truly international market. No single domestic market can support the heavy investments of these assets.”

The Gulf of Mexico’s offshore industry is at risk if the proposal is adopted, Leatt said, and he warned that “unintended consequences haven’t been thought through.”

Sounding a different note, Thomas Allegretti, chairman of the American Maritime Partnership, said the CBP’s revocation notice corrects letters of interpretation and would close “loopholes” that give preference to foreign workers and shipbuilders. Closing these loopholes would bolster U.S. shipyards, which are critical to the nation’s economy and security, he said. More than 3,200 American jobs would be restored, he predicted.

Matthew Paxton, president of the Shipbuilders Council of America, echoed that sentiment. “This correction of past misinterpretations of the Jones Act will enable our shipyards to continue to supply, build, maintain and repair the essential vessels needed by the oil and gas industry,” he said.

As for the possible spark to domestic transport activity, “the offshore service industry is ready, willing and capable of completing this work, having recently invested $2 billion in U.S. shipyards on vessels tailored to safely complete it,” said Aaron Smith, president of the Offshore Marine Service Association.

U.S. Rep. Duncan Hunter, R-Calif., chairman of the House Subcommittee on Coast Guard and Maritime Transportation, said he hopes the CBP’s proposal will be the start of “an even stronger transition in favor of the Jones Act across the entire federal government.”

In January, the Trump administration called for a temporary freeze on new federal regulations pending a review of all regulatory initiatives, Leatt noted. “President Trump is ambitious to increase domestic oil and gas production,” he said. “But CBP’s latest Jones Act proposal seems to run contrary to those objectives.”

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