FREE TRADE ZONE DESIGNATIONS INCREASE AMONG U.S. REFINERS

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U.S. refiners who process imported crude increasingly are using free trade zone (FTZ) designations to improve their profits.

A law establishing FTZs was passed in 1935 and updated in 1950. Sixteen refineries received FTZ status between 1972 and 1993.

A landmark case this year involving Amoco Oil Co.'s Texas City, Tex., refinery broadened FTZ benefits. Fourteen refineries have received FTZ approvals so far this year, including five reapplications, and nine more cases are pending.

The government estimates about 60 U.S. refineries might benefit from receiving FTZ status, saving themselves a combined $75-150 million/ year.

Most applications involve coastal refineries, but inland refineries that process significant volumes of imported crude are beginning to apply.

HOW IT WORKS

An FTZ designation allows a refinery to avoid or defer some of the customs duties on imported crude because U.S. law regards an FTZ as lying outside the U.S. for customs purposes.

A non-FTZ refinery has to pay a duty of 10.5/bbl for crude higher than 25 gravity and 5.25 below 25 gravity at the time the imported crude is offloaded.

But FTZ refiners can defer payment of that duty until the product leaves the zone and is sold to U.S. consumers. They may pay a duty at either the crude oil or finished products rate. If product is exported, there is no duty.

Dennis Puccinelli, assistant director of the FTZ office in the U.S. Commerce Department, said, "Duties on crude oil are 10 per barrel, so you're talking about marginal savings. But considering the volumes that refineries use, it's one way refiners can cut costs to remain competitive."

Robert Moore, an Arthur Andersen Co. partner, said the tariff structure always has favored value added to products in the host country. That's one reason the tariff on imported gaso- line is 52.5/bbl.

But the oil tariff has not worked well for refineries making products from imported crude because some finished petroleum products have no tariff.

Moore said, "If your refinery makes large volumes of those products, you're at a competitive disadvantage with foreign refiners. The tariff works opposite to the original intent, becoming an inverted tariff."

Also, products importers have an economic advantage over U.S. refiners when they bring in some products duty fee because refiners had to pay a tariff on the crude oil that they used to make the product.

AMOCO CASE

The original 16 FTZ designations gave refiners very limited, specific benefits.

Puccinelli said, "Some of the original FTZ designations were more restrictive because some other refineries were opposed to them. These days, the entire refining industry is on board, and everyone supports FTZ designations."

In the Texas City refinery application, Amoco argued U.S. refiners had higher environmental costs than their non-U.S. competitors. Because of that, U.S. refiners should get relief from duties paid on imported oil consumed in the manufacturing process and relief from the "inverted tariff."

The U.S. Treasury Department issued new FTZ regulations last spring. Based on those rules, the FTZ board approved Amoco's application.

Puccinelli said, "The Amoco case allowed more flexibility and additional benefits. Now, some of the original 16 refineries are coming back to update their FTZ authority."

Moore predicted additional inland refiners who process imported crude will seek FTZ status.

THE PROCESS

The FTZ board takes about a year to process new FTZ applications and 2-3 months to consider applications to expand existing ones. The application fee is $6,500. One of the board's criteria is that the FTZ designation must improve the refinery's international competitiveness.

All applications are reviewed by the Customs Bureau, Commerce Department, Treasury Department, and Army Corps of Engineers because it dredges harbors. The public also may comment.

Puccinelli said refineries have become a significant part of the FTZ board's workload. Of 70 cases pending, 11 involve refineries.

FTZ refineries operate under Customs Bureau supervision and must have a system that customs can audit.

Moore explained that if a FTZ refinery blends domestic and imported crudes, it must be able to compute how much product will come from the foreign crude alone. "The refinery must make complicated calculations weekly to determine how much foreign crude was used for producing zero tariff products."