The Implications of CBP's Offshore Jones Act Changes
In December, after years of debate within the offshore industry, U.S. Customs and Border Protection (“CBP”) issued a decision in its Customs Bulletin entitled “Modification and Revocation of Ruling Letters Relating to CBP’s Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points” (“the Decision”). This decision became effective on February 17. So now the question arises - how does this actually affect offshore activities going forward?
In short, the notice eliminates previous erroneous decisions that allowed non-coastwise qualified vessels to transport items that should have been considered merchandise and not “vessel equipment” under the Jones Act. The notice also clarifies that lifting operations may be conducted by non-Jones Act vessels.
Specifically, as discussed in more detail below, the Decision (1) broadens the definition of merchandise to make it clear that non-Jones Act vessels can no longer carry out certain offshore activities that they have performed for years under an “equipment of the vessel” theory, and (2) establishes a new interpretation of “Lifting Operations,” to specify the movements that a non-Jones Act vessel can perform, when conducting installation or decommissioning operations, which will not be considered “transportation” within the meaning of the Jones Act.
Background
In both 2009 and 2017, CBP published notices to revoke or modify various rulings which potentially could have overturned decades of precedent with regard to a sweeping range of offshore operations which have never been subject to the Jones Act. To be frank, CBP did not fully understand how the offshore industry operated offshore, and the proposals were potentially over broad, without CBP understanding the economic impacts on the various types of offshore operations these proposals would have adversely affected.
As a result of strong industry backlash on both occasions, the proposals were withdrawn for reconsideration. Finally, following the 2017 withdrawal, CBP undertook an intensive exchange of information with all facets of industry to fully understand how industry actually operates offshore and to fine-tune and focus its 2019 proposal on the equipment of the vessel issues and lifting operations which resulted in this fair and well-balanced Decision.
The changes in the Decision will affect:
Vessel Equipment
For decades, CBP used a “Mission of the Vessel” concept to justify certain subsea installation, repair, and maintenance work. This concept was incorrectly applied over broadly, which allowed non-Jones Act vessels to perform some of these activities that should have been reserved to the Jones Act fleet. The Mission of the Vessel regime was revoked by the Decision and replaced with a new “Vessel Equipment” interpretation. Under this interpretation, the scope of vessel equipment was narrowed to include only items, which are “necessary and appropriate for the navigation, operation, or maintenance of a vessel and for the comfort and safety of the persons on board.”
CBP stressed that if an item is necessary and appropriate for the operation or maintenance of a vessel, it is considered vessel equipment. Items considered “necessary and appropriate for the operation of the vessel” are those items that are integral to the function of the vessel and are carried by the vessel. CBP also emphasizes that the fact that an item is returned to and departs with the vessel after an operation is completed, and is not left behind on the seabed, is a factor that weighs in favor of an item being classified as vessel equipment but is not the sole determinative factor. In addition, CBP determined that other historically used rationale using the terms “foreseeability,” “incidental” to an activity, “de minimis,” or “unforeseen,” can no longer be relied on to support an interpretation of vessel equipment.
Lifting Operations
Non-Jones Act vessels have been used for decades to perform lifting operations in the offshore sector. However, in a series of three rulings issued in 2012 and 2013, CBP ruled that a movement of a crane vessel off its central axis while a topside module is suspended from its crane - in order to avoid hitting the offshore facility before unlading the topside on it - is a violation of the Jones Act. The off-axis movement of the vessel was interpreted by CBP as providing part of the transportation of the topside between a point in the U.S. and the offshore facility. This created great confusion in the industry by making virtually any lifting operation a potential violation of the Jones Act.
As a result of its discussions with industry on this point, CBP made it a priority to clarify in its Decision that lifting operations are distinct from transportation within the meaning of the Jones Act. Accordingly, offshore “lifting operations” now include the lifting by cranes, winches, lifting beams, or other similar activities or operations, from the time that the lifting activity begins when unlading from a vessel or removing offshore facilities or subsea infrastructure until the time that the lifting activities can be safely terminated in relation to the unlading, installation, or removal of offshore facilities or subsea infrastructure.
CBP explained that offshore lifting operations are distinct from transportation in that any lateral movement of the vessel or the item in the vicinity of the structure or facility where the item is being positioned or removed is merely subordinate to and a direct consequence of the lifting operations. CBP reasoned that this interpretation was necessitated by safety and practical concerns, including the physical demands of the lifting operations, the mitigation of risk to human life and health, and the avoidance of damage to the marine environment. Importantly, CBP confirmed that this interpretation applies to all offshore lifting operations and is not limited to heavy lifts.
Pipelaying, Drilling Related Operations and Offshore Wind Energy Facilities
CBP specifically confirmed in its Decision that CBP’s existing rulings on pipelaying and cable laying remain valid and are unaffected by its Decision. In addition, while not providing similar a statement with regard to drilling, it noted that drilling ruling letters previously identified for revocation pertaining to cement, chemicals, and other consumable materials will remain in force.
Several comments sought clarification regarding the impact of the Decision on the development of offshore wind energy facilities. CBP responded that any future interpretations by CBP on the application of the Jones Act to wind energy facilities or other activities will be in response to ruling requests based on specific transactions. Accordingly, it remains prudent to assume that for the most part, until CBP issues future rulings, the Jones Act applies to wind projects in much the same manner as it applies to oil and gas projects.
Pending legislation
Meanwhile, as of the time of the writing of this article, “Installation Vessel” legislation is pending in Congress in the form of an amendment to the coastwise laws that would create a “waiver” procedure for certain lifting operations that could statutorily overturn the Decision with regard to Lifting Operations as discussed above. This provision is contained in the House passed version of the Coast Guard Authorization Act of 2019 (“CGAA 2019”). The Senate version of this bill is silent on this point. It is unclear what action (and when) Congress will act on this bill.
In conclusion, CBP should be commended for its hard work to reach this result and future offshore activities must be conducted in accordance with the Decision. Non-Jones Act vessels must now comply with a narrower definition of what constitutes vessel equipment not subject to the Jones Act. On the other hand, non-Jones Act vessels may conduct lifting operations in accordance with the Decision’s new interpretation without fear of enforcement action, because such operations are not transportation subject to the Jones Act. However, industry must closely watch what action Congress ultimately takes on the Installation Vessel provision passed by the House to determine if the Decision’s interpretation of Lifting Operations will be changed.
“The Implications of CBP's Offshore Jones Act Changes,” by Jonathan K. Waldron was published in Maritime Executive on March 11, 2020.