Cabotage Or Sabotage? Controversial Proposal By CBP To Reverse Course On Decades-Old Policy Regarding Foreign Flag Vessels In Gulf Of Mexico Oilfield Operations

In a sweeping move that has been widely and vociferously praised by supporters and passionately decried by opponents, the Customs and Border Patrol Agency (CBP) on the second-to-last day of the Obama administration’s tenure, issued a “General Notice” in its weekly “Customs Bulletins and Decisions” publication (dated January 18, 2017) proposing the in globo revocation of prior CBP (and/or its predecessor entities’) rulings – some specified in the Notice, others merely generally referenced – issued over the last nearly forty years concerning the coastwise carriage of oilfield equipment/materials (i.e. from U.S. ports to coastwise points on the Outer Continental Shelf (OCS)) by foreign-flagged, non-Jones Act/non-coastwise eligible vessels in the Gulf of Mexico oilfield. This proposed change, which hinges on whether such equipment/materials qualify as “vessel equipment” under applicable regulations and prior CBP rulings, would affect what has developed over the years into a niche fleet of specialized foreign flag vessels used in the Gulf of Mexico for deepsea and subsea construction and maintenance projects – i.e. pipelay vessels, heavy-lift vessels, and IRM (inspection/repair/maintenance) vessels used for construction/decommissioning of offshore facilities, laying/maintenance of pipelines, and similar deep-water projects.

This proposed change, which is CBP’s second effort following an aborted attempt in 2009 (as previously reported by Baker Donelson here) has invigorated hopes of new diversification opportunities for some industry concerns in the struggling domestic offshore vessel market (which is weathering one of the worst slumps in history due to depressed oil prices); but has posed a potentially existential threat for other industry concerns whose business models rely exclusively on providing special use foreign-flagged vessels in the niche offshore/subsea construction market. Further complicating this sharp divide, the end-users of both domestic and foreign vessels (i.e. energy companies and offshore operators) are concerned about whether there are enough – or in some cases any – readily available, capable vessels in the domestic fleet that can perform the specialized work without sharp and sudden increases in price.

Jones Act Coastwise/Cabotage Laws – Background

By way of context, the coastwise trading (also known as cabotage) provisions of the Jones Act (typically more well known more for its provisions regarding personal injuries to seamen) are set forth at 46 U.S.C. §§55101 et seq. These provisions prohibit the coastwise carriage – i.e. “between points in the United States to which the coastwise laws apply,” which includes installations/facilities on the OCS (pursuant to 43 U.S.C. §1333(a)) – of “merchandise” by foreign-flagged or majority foreign-owned vessels. In turn, “merchandise” is defined (at 19 U.S.C. § 1401(c)) as “goods, wares, and chattels of every description” and even includes “valueless material” (46 U.S.C. § 55102(a)(2)). Historically, the Jones Act coastwise/cabotage laws were enacted for the purpose of ensuring the existence of a competent and well-equipped domestic merchant marine fleet in the interest of both commerce and national defense. See 46 U.S.C. §55101.

Any violations of the coastwise/cabotage laws can result in penalties including forfeiture of the “merchandise” or fines equal in value to the “merchandise” or the actual cost of the carriage (46 U.S.C. §55102(C)). CBP is the federal agency that enforces the Jones Act coastwise/cabotage laws, through both civil penalty actions and by issuing advance “ruling letters” in response to inquiries from operators as to whether certain contemplated vessel movements would be Jones Act compliant. And the potential consequences of a Jones Act violation can be staggering, as evidenced by a $15 million fine levied by CBP involving vessel transport of an oil rig from Texas to Alaska by a foreign flagged vessel. This fine was levied even though the towage had been granted a Jones Act waiver by then-secretary of the Department of Homeland Security Michael Chertoff in 2006. But due to longer-than-expected repairs/logistical issues, the carriage did not take place until 2010, at which point Secretary Chertoff had been replaced and the new Secretary Napolitano denied a renewed/re-urged waiver request, despite the acknowledged lack of any domestic/coastwise eligible vessel to perform the tow. See Furie Operating Alaska, LLC v. U.S. Dep’t of Homeland Sec., 2015 WL 4076843(D. Alaska July 6, 2015).

The “Vessel Equipment” Problem

Under the Jones Act coastwise/cabotage laws, and despite the virtually all-encompassing definition of “merchandise,” CBP (and/or its predecessors) have since 1982 excluded from the definition of “merchandise” items constituting “vessel equipment” as that term is defined in the following excerpt from a 1939 Treasury Decision (TD) 49815(4) (March 13, 1939) interpreting §309 of the Tariff Act of 1930 (currently codified at 19 U.S.C. §1309): “portable articles necessary and appropriate for the navigation, operation or maintenance of the vessel and for the comfort and safety of the persons on board . . . [for example] rope, sail, table linens, bedding, china, table silverware, cutlery, bolts and nuts.” Relying in part on this definition, various letter rulings since 1982 from CBP/predecessors also included within the definition of “vessel equipment” (for purposes of non-application of Jones Act coastwise/cabotage laws) any items “in furtherance of the primary mission of the vessel.” This “primary mission of the vessel” language (and similar iterations) derives from a 1976 Treasury Department (CBP predecessor) ruling regarding subsea pipeline work on the OCS:

[T]he sole use of a vessel in effecting underwater repairs to offshore or subsea structures is not considered a use in coastwise trade. Further, the transportation by the vessel of such materials and tools as are necessary for the accomplishment of the mission of the vessel (i.e., materials to be expended during the course of the underwater inspection and repair operations and tools necessary in such operations) for use by the crew of the vessel is not, generally speaking, an activity prohibited by the coastwise laws since such transportation is incidental to the vessel’s operations.

However, while materials and tools, as described above, which are necessary for the accompalishment [sic] of the mission of the vessel are not considered merchandise within the meaning of section 883, any article which is to be installed and therefore, in effect, landed at an offshore drilling platform is normally considered merchandise. (emphasis added).

T.D. 78–387 (Oct. 7, 1976).

This aspect of CBP’s interpretation of the “vessel equipment” exception to the coastwise/cabotage laws gave rise to a series of letter rulings in which foreign-flagged (i.e. otherwise non-coastwise eligible vessels) were allowed to carry equipment/materials (that would otherwise fall within the broad Jones Act definition of “merchandise”) for use on/installation at OCS situses on the basis that the equipment/materials constituted “vessel equipment” insofar as they allowed the vessel to complete its “primary mission” of performing the work at those situses. For example, CBP has ruled that the following were all Jones Act-exempt “vessel equipment” that could be carried by foreign-flagged vessels for OCS operations: temporary suction piles (used as temporary anchors in connection with a pipeline installation on the OCS); concrete mattresses (used to construct pipeline crossings on the OCS); jumper pipes (50-85-foot lengths of pipe used to connect subsea wells to pipelines on the OCS); reels of flexible flowlines and umbilical tie-ins (to be carried and installed from the vessel at OCS facilities). See HQ H012082 (Aug. 27, 2007); HQ 115531 (Dec. 3, 2001); HQ 115185 (Nov. 20, 2000); HQ 115522 (Dec. 3, 2001). Likewise, pipelay operations in general have been held not to fall within the coastwise/cabotage laws, based in part on the fact that the pipe constitutes “vessel equipment.” See HQ 114487 (Oct. 19, 1998). In arguably the most controversial ruling under the CBP’s long-standing “primary mission of the vessel” interpretation of “vessel equipment,” CBP determined in 2009 that “Christmas trees” – i.e. “an assembly of valves, spools, pressure gauges and chokes fitted to a wellhead to control production of oil and gas” – constituted Jones Act-exempt “vessel equipment” that could be carried by and installed from a foreign-flagged vessel. HQ H046137 (Feb. 20, 2009).

CBP’s 2009 Efforts to Rescind the “Primary Mission of the Vessel”/“Vessel Equipment” Rulings

The “Christmas tree” ruling sparked significant controversy among Jones Act vessel operators (with equal pushback from foreign-flag operators), and led to CBP’s initial effort to rescind its prior “vessel equipment” rulings. Specifically, CBP explained that the “primary mission of the vessel” language had been improperly expanded from its original use in the 1939 Treasury Department ruling, and in T.D. 78-387, the ruling that first relied on the “primary mission” language:

In applying [the 1939] T.D. 49815(4) to 46 U.S.C. § 55102 rulings, CBP reasoned that if the article was used in the activity in which the vessel was about to engage, e.g. ‘‘in furtherance of the mission’’, ‘‘fundamental to the operation of the vessel’’, etc., the article would be considered vessel equipment without regard to whether the article was necessary to the navigation, operation, and maintenance or comfort and safety of the individuals aboard the vessel itself. As such, it appears that although T.D. 49815(4) was cited, it was a very minute part of T.D. 78–387, paraphrased and used out of context which was applied as the rule of law in these cases.

Customs Bulletin and Decisions, Vol. 43, No. 28, JULY 17, 2009, pp. 59-60.

Notably, CBP’s prior effort in 2009 initially commenced via a July 17, 2009 “General Notice” in the weekly “Customs Bulletins and Decisions” publication – i.e. the same mechanism as CBP’s currently pending January 18, 2017 Notice. As with the 2017 Notice, this 2009 initial notice purported to provide a thirty-day comment period, after which CBP’s rescission of its previous rulings would become effective. Critically – and unprecedentedly – this procedure was entirely outside of the normal notice-and-comment rulemaking procedure required by federal law for policy changes of the magnitude and scope of the proposed rescission of the “primary mission”/“vessel equipment” CBP rulings. Amidst significant backlash for this shortcut attempt at a sweeping policy/rule change, CBP ultimately drafted an advanced notice of proposed rulemaking (ANPRM); and then submitted the ANPRM to the Office of Management and Budget (OMB) for review, i.e. the second step in the formal rulemaking process, prior to actual publication of the ANRPM in the Federal Register. However, before OMB’s review was complete, CBP ultimately decided to rescind the ANPRM and abandoned its efforts to rescind the prior rulings.

CBP’s Current Notice Regarding Modification/Rescission of the Primary Mission of the Vessel”/“Vessel Equipment” Rulings

As noted at the outset, in the waning days of President Obama’s administration, CBP revived its effort – again via “General Notice” published in the “Customs Bulletins and Decisions” weekly notice, and outside of formal rulemaking procedures – to rescind its prior “vessel equipment” rulings regarding foreign-flagged vessels in the Gulf of Mexico and the extension of the 1939 Treasury Department ruling to include the “primary mission of the vessel” language.

As an initial point, the 2017 Notice seeks to “modify” T.D. 78-387 (the letter ruling that touched off the “primary mission” extension), based on what CBP described as changes to the Jones Act and OCS Lands Act (43 U.S.C. §1333) that made some of the holdings in T.D. 78-387 “no longer applicable.” Specifically, CBP’s proposed modification to the prior ruling would be as follows:

  • even though pipeline repair work itself, like pipelaying operations, does not constitute coastwise trade (i.e. there is no coastwise movement during the paying out of pipeline), the transportation of repair materials to the pipeline offshore does constitute coastwise carriage of “merchandise” viz. the repair materials, contrary to the holding in T.D. 78-387
  • installation of anodes on OCS pipelines is not coastwise trade, but carriage of the anodes to the worksite would qualify as coastwise trade. T.D. 78-387 had reached this same conclusion, but presumably on the basis that the anodes (although ultimately valueless and sacrificial) constituted “merchandise” insofar as they were “intrinsically foreseeable” items for pipeline maintenance. However, amendments to the Jones Act since the issuance of T.D. 78-387 have included even valueless materials in the definition of “merchandise,” and thus the analysis in T.D. 78-387 is no longer valid.
  • transportation of pipeline connectors constitutes coastwise trade and cannot be performed by foreign-flagged vessels, contrary to T.D. 78-387’s conclusion that such carriage did not constitute coastwise trade because it was “incidental” to non-coastwise pipelaying operations
  • transportation of pipeline repair materials (i.e. materials expended during the vessel’s subsea work) – regardless of their value – constitutes coastwise trade, contrary to T.D. 78-387’s conclusion that such materials contributed to “the mission of the vessel” and thus did not qualify as “merchandise.” However, tools carried aboard a vessel to be utilized in offshore work – but not unladed from the vessel during the work – would qualify as non-“merchandise” “vessel equipment,” not subject to the coastwise laws
  • wellhead equipment, valves, and associated equipment used for pipeline repairs expended to complete pipeline repairs on the OCS are not “vessel equipment” and constitute “merchandise” that must be carried by Jones Act-eligible vessels, contrary to T.D. 78-387’s conclusion that such items (if routinely carried on a vessel as “supplies”) qualified as exempt “vessel equipment”

Current Status of the 2017 Notice

Perhaps most importantly, President Trump’s off-the-bat “freeze” on all regulatory changes by the outgoing Obama administration has resulted in delays to what would otherwise have been the automatic rescission (pretermitting any issue of improper notice-and-rulemaking procedures) of the prior CBP rulings after the thirty-day comment period provided in the initial January 18, 2017 Notice. Moreover, the delay in implementation was also prompted by pushback from foreign-flagged vessel owners/operators and end-user oil companies:

  • As with CBP’s prior abortive effort in 2009 to rescind rulings based on its decades’-worth of “mission of the vessel” rulings, the response to the 2017 Notice has been swift and shrill from all sides.
  • Additionally, the 2017 Notice seeks rescission/as-necessary modification of various enumerated prior CBP letter rulings, as well as any un-enumerated rulings, relying on the prior “primary mission of the vessel” basis for Jones Act exemption.[1]

US President Donald Trump’s administration has slowed the introduction of a proposed rule change that the offshore sector fears could hit the operation of foreign-flag construction vessels in US waters. The decision comes after the International Marine Contractors Association (IMCA) and oil majors lobbied in response to [the 2017 CBP Notice].

Kathrine Schmidt & Eric Martin Houston, US Vessels Rule Change Slowed, Upstream (Feb. 10, 2017).

Accordingly, CBP has extended the comment period from the original deadline of February 18 (i.e. 30 days after issuance of the Notice) to April 18, 2017 (90 days post-Notice). Notwithstanding this extension, the issue of CBP’s avoidance of the ostensibly mandatory notice-and-comment rulemaking requirements under 5 U.S.C. §§551-552 remains a problem, and will presumably lead to challenges in the event CBP formalizes rescission of its prior rulings pursuant merely to a Notice published in the “Customs Bulletins and Decisions.”

Moreover, energy companies and foreign-flagged vessel operators have raised concerns as to whether the sweeping move by CBP would threaten the economics and logistics of current offshore projects, and could also (ironically) reduce the number of US offshore-related jobs:

[I]nternational operators fear that, if applied broadly and especially to top-flight vessels, both supply chain and project economics could suffer. “With all this execution uncertainty, it’s delaying some of the investment decisions on some big projects in deep water,” one Houston-based source said…

Heavy and complex offshore pipe, as well as subsea equipment such as umbilicals and risers, are part of an intricate supply chain that sees the pipe spooled on to reels housed on vessels at US shorebases along the Gulf coast.

Few companies are equipped to juggle reels of pipe between vessels offshore.

And while some US spooling and pipelay vessels do exist, they do not match the capacities of top-flight international vessels, particularly for the heaviest pipe used in deep waters.

Hypothetically, spooling pipe at overseas bases might keep an ­operator in compliance with the rule, one source speculated — an irony, given that the Jones Act is designed to protect US jobs and work.

Kathrine Schmidt & Eric Martin Houston, US Vessels Rule Change Slowed, Upstream (Feb. 10, 2017).

Additionally, in response to CBP’s prior 2009 efforts, many foreign-flagged operators raised safety concerns associated with effectively barring specialized foreign-flagged vessels that have worked in the Gulf of Mexico for decades. Specifically, if these specialized foreign-flagged vessels cannot carry their own equipment/materials due to Jones Act coastwise/cabotage law restrictions, then other coastwise eligible vessels would be required to transport those pieces of equipment/materials and then perform vessel-to-vessel transfers back onto the foreign-flagged vessel, a practice which is “inherently more hazardous” in open water and subject to shifting conditions. Energy companies and oilfield contractors have again raised these same concerns, as well as the specter of significantly increased costs, in response to CBP’s January 2017 Notice.

At the same time, domestic owners/operators of Jones Act eligible offshore supply and construction vessels, many of which do share capabilities with the foreign-flagged fleet, applaud CBP’s efforts to close what they describe as a regulatory “loophole” – particularly in these lean times when the domestic fleet has been brought to its knees by depressed oil prices:

Maritime industry groups that have long criticized those rulings as “loopholes” that opened the Gulf of Mexico to foreign shipbuilders and workers praised the Jan. 18 notice issued by CPB under the outgoing Obama administration.

Tom Allegretti, chairman of the American Maritime Partnership, asserted the move will “rightfully restore over 3,200 American jobs to the American economy and close loopholes that gave preference to foreign workers and foreign shipbuilding.”

Kirk Moore, Industry applauds US Customs closing Jones Act ‘loopholes’, Workboat Magazine (Jan. 31, 2017). That said, energy companies and foreign-flag operators have noted that the majority of crews working on foreign-flagged vessels in the Gulf of Mexico are American workers; thus, while eliminating these vessels may add shipyard jobs to respond to needs for construction of new domestic vessels to replace the foreign-flagged fleet, such a policy will at the same time eliminate existing jobs for American seafarers crewing those non-Jones Act vessels.

It remains to be seen how CBP’s second effort at confronting these issues will resolve. In particular, despite President Trump’s blanket efforts to “freeze” regulatory changes by the outgoing Obama administration, the proposal by CBP would (according to arguments by domestic fleet interests) create new American jobs, which is an equally front-and-center plank in President Trump’s platform:

“We applaud President Trump’s commitment to ‘buy American and hire American,’ and the correct and lawful interpretation of the Jones Act will ensure the preservation of American jobs and maintenance of the U.S. shipyard industrial base, both of which are critical to our economic security and national security,” [Tom Allegretti, chairman of the American Maritime Partnership] said in a statement.

Rep. Steve Scalise, R-La., the Republican majority whip in the House of Representatives, even offered a backhanded compliment to the recently departed Obama administration.

“This corrective action is the right thing to do for Louisiana workers and will also benefit the American economy,” Scalise said in a joint statement with the American Maritime Partnership. “In addition, unlike so many job-killing regulations and rules the Obama administration issued on its way out the door, this agency ruling from Customs actually reverses some of the economic damage the Obama Administration allowed to take place on its watch.”

Kirk Moore, Industry applauds US Customs closing Jones Act ‘loopholes’, Workboat Magazine (Jan. 31, 2017). CBP’s proposal appears to be caught between the goals of correct application of cabotage laws (as domestic interests advocate) and cries of sabotage to an existing and decades-old niche market for foreign-flagged operators (as the foreign-flag fleet interests and some energy companies contend).

[1] To be clear, any additional equipment/materials required (after initial mobilization) to be carried out to a work site – separate and apart from what a foreign-flagged vessel takes on its own – requires carriage by a Jones Act eligible vessel. Likewise, even if CBP finally rescinds the prior rulings as per the 2017 Notice, foreign-flagged vessels would apparently still be able to perform work on the OCS, provided that the materials to be used in installation/construction/repairs by that vessel are carried out to the OCS by a Jones Act eligible vessel.