CIT Denies BP's Drawback Bid on Crude Oil, Says Different Types Not Interchangeable

The Court of International Trade on April 29 rejected a bid by BP Oil Supply Co. to get drawback on over 40 million barrels of crude oil it imported in the mid-1990s. Although the imported crude and the exported crude had been of different types, BP had requested unused merchandise drawback based on the fact that the different types of oil were about the same weight. But both CBP and CIT found that BP failed to provide enough evidence that the imported and exported oil were commercially interchangeable. And the court also found that the way the Alaska oil industry works means that the exported oil wasn’t unused, either.

BP Asks for Drawback on Different Types of Crude

The drawback claims were related to 41,980,559 barrels of crude oil imported by BP between 1994 and 1996 that were of various types, including Cabinda, Zaire, Bonny Light, Bonny Medium, and Guafitas crude. CBP liquidated the entries under subheading 2709.00.20 for crude oil with an American Petroleum Institute gravity (weight) rating of 25 or more. During the next two years, BP exported an identical amount of Alaskan North Slope crude. BP filed 27 unused merchandise drawback claims with CBP requesting drawback on the duties, environmental taxes, and merchandise processing fees.

In order to get drawback on unused merchandise, the exported “substitute merchandise” needs to be commercially interchangeable with the imported merchandise, and it cannot have been used before it was exported or destroyed. CBP denied BP’s drawback claims, citing BP’s failure to prove that the exported Alaskan crude was commercially interchangeable with the imported crude. BP filed protests, which CBP denied, leading the oil company to file suit at CIT in 2004. In 2011, CIT ruled that the case would have to go to trial (see 11092306).

Court Says Evidence Lacking that Different Crude Types are Interchangeable

After reviewing the evidence at trial, the trade court found that BP didn’t prove that the exported crude was commercially interchangeable. BP had argued that the exported Alaskan crude and the imported crude were interchangeable because both were classified in API Class III based on their weight. But CIT said that many other considerations affect whether different types of crude oil are interchangeable, including sulfur content (sweet or sour crude) and sediment. Even within the category of Alaskan North Slope crude, the oil is separated and priced differently based on quality. “Thus, the evidence demonstrates that the actual market competitors which have extracted crude petroleum known by the same industrial standard from the same region do not treat their crude petroleum as commercially interchangeable absent monetary adjustment,” said Judge Mark Barnett’s opinion.

Nor did BP prove that the substitute merchandise was unused. On its trip down the Trans-Alaska Pipeline System from the North Slope to the Port of Valdez, several refineries remove between four and six percent of the crude, refine it to extract a cut of diesel and jet fuel, and return the residual product into the pipeline. “Thus, evidence indicates that a portion of the substitute merchandise has been used to manufacture diesel and jet fuel prior to the output from the pipeline being exported as substitute merchandise,” said Barnett.

CIT Refuses to Consider Administrative Record as Evidence of Interchangeability

Part of BP’s problem may have been that the court refused to consider CBP’s administrative record of the drawback claims as evidence of interchangeability and non-use of the substitute merchandise. Although CBP transmitted to the court the documents related to BP’s drawback claim and subsequent protests, as is required by law, neither BP nor CBP submitted them as evidence. The administrative record, if used as evidence, may have provided a clearer picture. BP only submitted excerpts from its drawback claims -- its exhibits were missing signature pages, subsequent amendments, and the CBP Form 7501 that identified the type of oil entered. A lawyer representing BP was not immediately available for comment.

(BP Oil Supply Co. v. U.S., Slip Op. 14-48, dated 04/29/14, Judge Barnett)

(Attorneys: John Galvin of Galvin & Mlawski for plaintiff BP Oil Supply Company; Marcella Powell for defendant U.S. government)