The Energy Marine Trade in North America has a molecular basis.

1. The Canadian/U.S Energy Marine Trade in the context of NAFTA and the Jones Act.
by Simon Jacques

2. NAFTA Agreement
It essentially eliminates both tariffs and merchandise processing fees for goods that originate in a NAFTA country- Canada,
U.S, Mexico. NAFTA allows Canadian and American traders to maintain a continual flow of energy products between
borders without problems and largely duty-free. The Shipping of goods through Canada, the U.S or Mexico that were made in
foreign countries or performing minor processing on them in North America, will not qualify for preferential NAFTA
treatments.
example: importing EUROBOB made in Amsterdam-Rotterdam-Antwerp (ARA) and blend it in Canada to re-export it in the
U.S. Harmonized Tariff schedule assigns tariff classification numbers to all goods imported into the U.S or Canada.
There is a specific NAFTA Rule(s) of Origin applicable to each tariff classification. “Rules of Origin” determine where goods
“originate” for NAFTA purposes. Goods produced entirely in the NAFTA region exclusivity from originating materials pass
this test (ex: a Canadian refiner buying Maya-22 crude oil, processing it and exporting gasoline and distillate to the U.S).

3. NAFTA AGREEMENT
The Trader must take significant precautions to ensure that foreign feedstock doesn’t enter in the tank farm system and is not
commingled with NAFTA-originating products. Record keeping is crucial.
In the early 2000′s, Encana had imported cargoes of Peruvian (non-NAFTA) condensates into Canada for use as a diluent for
blending with bitumen and heavy crude oil. Company was unable to identify its specific use of the imported diluent due to
commingling – unable to allocate the Peruvian material to goods on a physical (i.e., “molecular”) basis. [1] T
the consequences of an importer being unable to substantiate NAFTA eligibility of crude oil or natural gas imported into the
United States can be severe. In the case of crude oil, the duty rate jumps from the NAFTA rate of “free” to 5.25¢ or 10.5¢ per
barrel. Natural gas will still qualify for a general “free” rate.

4. The Merchant Marine Act of 1920, The Jones ACT
The Jones ACT (JA) requires that goods transported between two points in the United States must be carried on a U.S-Flag
vessel that is U.S. owned and U.S.-crewed. . The Jones Act also requires that vessels are at least 75% owned by U.S.
citizens.[2].
If a cargo moves from the United States on a foreign-flag vessel to Canada is off-loaded and stored in Canada, and
subsequently send back to the U.S on a foreign-flag vessel, there is a violation of the JA. This would be considered by the
U.S CBP as a “single voyage” between two U.S points, regardless of the fact that it moved via a foreign port.
Example: a ULSD Cargo arriving in Quebec city from Galveston, TX on a foreign flagged vessel (FFV) must be segregated so
as to only be sold in Canadian domestic market. The JA imposes strict penalties- possible seizure and forfeiture of the cargo
and fines up to the value of the cargo or the freight cost, whichever is greater.
However, we could bring in products on FFV into Canada from the U.S and then returned to U.S on FFV under 2 strict
conditions.

5. The Jones ACT
Condition 1) There must be two separate voyages.
Condition 2) The first product must be blending/process into a completely different 2nd product, both technically and
commercially as per ASTM Standards. U.S CBP relies on ASTM specs to determine if the blend/process has resulted in a
truly “new and different product”.
Example: We Bring Crude Oil on FFV and refine into RBOB or ULSD to send on FFV to U.S- No violation of the JA.
Example: Trader imports 87 octane gasoline on FFV from US, blend and send back 93 Gasoline on FFV- Violation of the JA.
Example: FFV vessel is used to ship products from U.S to Canada and trucks are used to ship some of the same products from
Canada back to the U.S. – Violation of the JA, a U.S Flag-vessel would be required in the shipment.

6. The Jones ACT
If there are some molecules of a U.S sourced gasoline in the heel of a vessel wing, vessel is empty or not ?
U.S-sourced gasoline may not be returned to the United States unless a Jones Act vessel is used.
The Canadian/U.S Energy Marine Trade has a country of origin rule and a molecular basis.
Compliance to JA and NAFTA is critical for traders because inadvertent co-mingling could be enormous and costly. In the
Energy Trade, huge sales volumes and non-compliance of JA and NAFTA means a risk exposure.

7. NAFTA proportionality
U.S was designated preferential buyer for Canadian Energy under NAFTA.
It was by far the most important consideration for Reagan during the very early beginning of the NAFTA negotiations in the
80′s.
Proportionality is a protective clause under NAFTA whereas Canada must keep exports to the U.S at greater or more than the
minimum of Net exports to the U.S set by the previous year.
Example: If Canada exports an average of 2.850 million b/d in 2014, this will set the minimum levelfor Canadian oil &
Products exports into the U.S for the next year. Under NAFTA, U.S crude exports licenses to Canada are bound by this
proportionality clause.

8. U.S Crude exports to Canada
U.S producers can export under licenses exclusively to a Canadian Refiner NAFTA member who can sell products in the U.S
and comply with U.S. Department of Commerce requirements.
U.S producers require a Swap agreement whereby:
-U.S crude is exchanged for better crude grade or more likely refined products.
-Swap is needed for refining or marketing reasons which are beyond exporter’s controls.

9. The Market
As you know, the U.S Gulf Coast (USG) is geared for Heavy Crude Oil and is a key market for Western Canadian Select
(WCS). Canadian/USEC refiners are more geared towards lights and are markets for U.S Light Grades.
It’s a fundamental refining configuration imbalance or what Economists call “international trade specialization”.
Energy East Pipeline through Canaport will be really a “Keystone XL ship pipeline” for landlocked WCS to the USG.
This “Ship pipeline” will create an an energy arbitrage trade between Eastern Canada and the USG. Whenever this “arb” will be
open, only more U.S Crude, Refined Products of Canadian origin will be exported (or swapped) between borders.
. In terms of Marine Freight, will create more demand for Aframax or MR size FFVs.

10. The Market
Another project in Canada, the Enbridge Inc.’s Line 9 pipeline will open new markets for the Canadian Crude Oil.
This particular project will also be a positive development for the U.S. Jones Act market.
Any U.S crude oil exports through Line 9 commingled with WCS Canadian crude, even a single drop of Bakken Oil imported
into Canada will required a U.S flag vessel at the end of the PMPL in South Portland, Maine as per Jones Act (JA).
Again because of the molecular basis, this crude can’t be exported out of the United States unless you can determine that that
Canadian crude did not mix with oil extracted from the United States.