BIS Published New Russian Energy Sector Sanctions on August 6, 2014 That Will Significantly Impact Companies Involved in Russia's Oil and Gas Industry
By Doug Jacobson and Michael Burton, Jacobson Burton PLLC
Following the European Union’s adoption of Russian energy
sector sanctions last week and successive waves of targeted economic sanctions
by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), on August 6, 2014 the
U.S. Commerce Department's Bureau of Industry and Security (BIS) published a final rule amending the U.S. Export Administration Regulations (EAR)
to implement the most aggressive set of export controls against Russia since
the end of the Cold War.
The BIS final rule, which took effect upon publication in
the Federal Register on Wednesday,
August 6, 2014, imposes controls on a wide range of items intended for use in the exploration or production of “deepwater”, “Arctic offshore” or “shale projects” that have the potential to
produce oil or gas in Russia.
The complete text of the final BIS regulation published in the Federal Register on August 6, 2014 can be found here.
Unlike the EU regulation, which contains no definition of the term "deepwater", that term is defined in the BIS regulation to included depths of more than 500 feet. Like the EU regulation, the terms "arctic offshore" and "shale projects" are not defined in the BIS regulation.
As discussed in more detail below, the BIS rule has no
"savings clause", meaning that any delivery of the listed items to Russia occurring on or after
the August 6, 2014 publication date is prohibited and would result in a violation of the EAR if the listed items are delivered to Russia for use in deepwater, Arctic offshore or shale oil and gas projects.
A.
Entity List Addition
The final rule contains two separate sections, referred to
as Part A and Part B.
Part A of the final rule adds United Shipbuilding
Corporation, a Russian state-owned company that designs and constructs ships
for the Russian Navy, to the BIS Entity
List. This means that a BIS license will be required to export, reexport,
or transfer (in-country) any items subject to the EAR (i.e., U.S. origin items
and non-U.S. origin items with a greater than de
minimis amount of U.S. content) to United Shipbuilding Corporation.
OFAC previously added United Shipbuilding Corp. to the List
of Specially Designated Nationals and Blocked Persons on July
29, 2014. The addition to the Entity
List is significant in that it prohibits exports, reexports, and transfers of
items subject to the EAR even by non-U.S. persons, whereas the OFAC sanctions
are limited to U.S. persons.
B. Russia Industry Sector Sanctions
More significantly, Part B of the final rule outlines the
new Russia Energy Industry Sector Sanctions on certain aspects of the Russian
oil and gas sector as follows:
Elements of Russia Deepwater/Arctic/Shale End-Use Rule.
New section 746.5 of the EAR is the key section added to the EAR, which is
entitled “Russian Industry Sector Sanctions.” This new provision imposes a BIS
license requirement (with a presumption of denial) for:
- any person (U.S. or foreign) to
- export, reexport, or transfer (in-country)
- any item "subject to the EAR"
- listed on the new Russian Industry Sector Sanctions List (Supplement No. 2 to Part 746 of the EAR)) and items specified on the Commerce Control List (CCL) under ECCNs 0A998 (which is new), 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 (also new)
- when the exporter, reexporter, or transferor knows or is informed that
- the items will be used directly or indirectly
- in exploration for, or production of oil or gas
- in Russian deepwater (greater than 500 feet), or Arctic offshore locations, or shale formations in Russia,
- or is unable to determine whether the listed item will be used in such projects.
The restrictions of the items included on the new Russian
Industry Sector Sanctions List and the eight listed ECCNs is similar to
the EAR's “China Military Rule,” except that this is a “Russia
Deepwater/Arctic/Shale End-Use” rule.
Creation of the Russian Industry Sector Sanction List.
The new Russian Industry Sector Sanction List is included in the BIS rule as new
Supplement No. 2 to Part 746 of the EAR.
This list covers a wide range of items used by oil and
gas exploration and production companies, as well as oilfield services companies, that normally do not require an
export license to be exported or reexported to Russia since they are
classified as EAR99.
The list of controlled items is virtually identical to the items included in Annex II of the EU Regulation issued on July 31, 2014, but is broken out by the 10-digit U.S.
Schedule B number, which is consistent with the EU list to the 6-digit level. Because classification interpretation can vary by country, it is possible that EU Member State countries and the United States might
differ in their interpretations of which items fall within their respective
lists.
Examples of Listed Items. BIS states that the items
on the Russian Industry Sector Sanction List include but are not limited to
items such as drilling rigs, parts for horizontal drilling, drilling and
completion equipment, subsea processing equipment, Arctic-capable marine
equipment, wireline and down hole motors and equipment, drill pipe and casing,
software for hydraulic fracturing, high pressure pumps, seismic acquisition
equipment, remotely operated vehicles, compressors, expanders, valves, and
risers.
This list is not precise. Therefore, U.S. and non-U.S. exporters of any of these types of items should
carefully examine the list of Schedule B numbers to determine whether the items that will be exported to Russia are covered or
not. For example, most valves are classified in HTS Subheading 8481, not 8413. In addition, as noted below, the term "high pressure pumps" is not defined.
ECCNs Controlled to Targeted Types of Projects. In
addition to the EAR99 items included on the Russian Industry Sector Sanction List,
items covered by the following eight ECCNs are also now subject to the license
requirement of section 746.5:
- ECCN 0A998. This is a new ECCN that covers certain specified Oil and gas exploration equipment, software. This ECCN includes: (a) oil and gas exploration data, e.g., seismic analysis data; and (b) certain hydraulic fracturing (commonly known as "fracking") items, including hydraulic fracturing design and analysis software and data. This new ECCN is unusual since it treats seismic analysis data as a commodity and not as "technology" or "software."
- 1C992: Commercial charges and devices containing energetic materials, n.e.s. and nitrogen trifluoride in a gaseous state (see List of Items Controlled).
- 3A229: Firing sets and equivalent high-current pulse generators (for detonators controlled by 3A232), as follows (see List of Items Controlled).
- 3A231: Neutron generator systems, including tubes, having both of the following characteristics (see List of Items Controlled).
- 3A232: Detonators and multipoint initiation systems, as follows (see List of Items Controlled).
- 6A991: Marine or terrestrial acoustic equipment, n.e.s., capable of detecting or locating underwater objects or features or positioning surface vessels or underwater vehicles; and “specially designed” “parts” and “components,” n.e.s. [note" n.e.s. means not elsewhere specified]
- 8A992: Vessels, marine systems or equipment, not controlled by 8A001 or 8A002 and “specially designed” “parts” and “components” therefor, and marine boilers and “parts,” “components,” “accessories,” and “attachments” therefor (see List of Items Controlled).
- 8D999 (new): “Software” “specially designed” for the operation of unmanned submersible vehicles in the oil and gas industry. Unlike the other ECCNs subject to section 746.5, the list of items controlled is contained in the ECCN heading.
The following restrictions apply to these eight ECCNs and
the items listed on the Russian Industry Sector Sanctions List:
Licensing
Presumption of Denial. BIS’s licensing policy will be a “presumption of denial” for any item that requires a license to Russia . . . when for use directly or indirectly for exploration or production from deepwater (greater than 500 feet), Artic offshore, or shale projects in Russia that have the potential to produce oil.” (Emphasis added.) This presumption of denial, therefore, seems to go beyond the items listed on the new Russian Industry Sector Sanctions List (Supplement No. 2 to Part 746 of the EAR) and items specified under the eight ECCNs enumerated in section 746.5.
Significantly, natural gas projects in Russia do not appear to be subject to this policy of denial and presumably would be reviewed on a case-by-case basis.
Significantly, natural gas projects in Russia do not appear to be subject to this policy of denial and presumably would be reviewed on a case-by-case basis.
License
Exceptions Revoked. No EAR License
Exceptions (such as ENC, RPL or TMP) are now available to overcome the Russia end-use prohibitions described in new section 746.5 of the EAR, except for License Exception GOV.
Other Important Aspects of the BIS Oil and Gas Industry Sanctions Regulations
The following is a summary of some
of the other important aspects of this new regulation imposing sectoral sanctions on certain aspects of Russia's oil and gas industry.
No
Savings Clause. It is important to
note that the BIS regulation does not contain a "savings clause", meaning that any in-process
shipments of the restricted items that are intended for export or reexport to Russia may not proceed to Russia on or after August 6, 2014. This includes items exported NLR (no license required) or pursuant to a License Exception.
Application to Non-U.S. Persons. Goods subject to the U.S. Export Administration Regulations remain subject to U.S. jurisdiction wherever the item is located. Thus, even if an item has been sold and exported by a U.S. company to an non-U.S. company, the item is still subject to BIS reexport and in-country transfer controls. In this case, if one of the restricted items noted above has been previously been exported from the U.S., that item cannot be reexported or transferred by non-U.S. persons for use in deepwater/Arctic offshore/shale projects in Russia.
Application to Non-U.S. Persons. Goods subject to the U.S. Export Administration Regulations remain subject to U.S. jurisdiction wherever the item is located. Thus, even if an item has been sold and exported by a U.S. company to an non-U.S. company, the item is still subject to BIS reexport and in-country transfer controls. In this case, if one of the restricted items noted above has been previously been exported from the U.S., that item cannot be reexported or transferred by non-U.S. persons for use in deepwater/Arctic offshore/shale projects in Russia.
Treatment
of Technology. The BIS regulation does
not control any new “technology” to Russia.
Technology previously controlled to Russia, however, no longer would
qualify for License Exceptions and would be subject to a licensing policy of
denial, if intended for prohibited end-uses.
De Minimis. The new BIS regulation does not appear to modify the de minimis threshold applicable for Russia, which is currently 25%.
De Minimis. The new BIS regulation does not appear to modify the de minimis threshold applicable for Russia, which is currently 25%.
Definitional
Difficulties. The
absence of definitions for the terms “Arctic offshore” and “shale projects”
coupled with the fact that 500 feet is not considered particularly deep within
the oil and gas industry increases the potential scope of these controls and
creates a considerable degree of uncertainty for exporters. Because the
EU regulation does not define “deepwater”, it is possible that EU Member States
will interpret this term to mean depths significantly greater than 500 feet,
placing U.S. industry at a competitive disadvantage.
In addition, the term "high pressure pumps" in ECCN 0A998.b.3 is not defined and it is not clear if the controls are intended for hydraulic fracturing applications only or high pressure pumps.
In addition, the term "high pressure pumps" in ECCN 0A998.b.3 is not defined and it is not clear if the controls are intended for hydraulic fracturing applications only or high pressure pumps.
CCL/End-User/End-Use
Controls Remain. Section 746.5 includes
language reminding exporters that “other provisions of the EAR, including parts
742 [CCL-based controls] and 744 [end-use and end-user controls] also apply to
exports and reexports to Russia.”
Russia's National Security Favorable Licensing Policy Revoked. This final rule revokes Russia’s
favorable licensing policy for items controlled for National Security (NS) reasons. Although the policy is now stated to be
case-by-case for such NS items, section 746.5(b) imposes a presumption of denial if the item is
intended for use in deepwater/Arctic offshore/shale projects.
BIS Prohibition on Exports Contributing to Russia's Military Capabilities Remains in Effect, but no "Military Catch-All". While this final rule does not specifically address exports to Russia's military, BIS’s April
28, 2014 policy announcement that it would deny licenses to export or reexport "any high technology item subject to the EAR to Russia or occupied Crimea deemed
to contribute to Russia's military capabilities" remains in effect. While BIS has indicated
that it will take actions to revoke any existing export licenses which meet
these conditions, as of this writing BIS has not yet revoked any such export
licenses but plans to contact licensees whose licenses will be revoked.
It is important to note that BIS does not currently impose any restrictions or license requirements on the export or reexport of goods, technology or software for military end-use in Russia, or for military or defense-related companies in Russia, as long as the goods, software or technology are classified as EAR99 or would not otherwise require a license to Russia (for example, computers classified as ECCN 4A994 or other items subject to Anti-Terrorism (AT) controls only).
Since April 28, 2014, the Directorate of Defense Trade Controls has implemented a policy of denying license applications for the export or reexport of defense articles subject to the ITAR that would contribute to Russia's military capabilities.
It is important to note that BIS does not currently impose any restrictions or license requirements on the export or reexport of goods, technology or software for military end-use in Russia, or for military or defense-related companies in Russia, as long as the goods, software or technology are classified as EAR99 or would not otherwise require a license to Russia (for example, computers classified as ECCN 4A994 or other items subject to Anti-Terrorism (AT) controls only).
Since April 28, 2014, the Directorate of Defense Trade Controls has implemented a policy of denying license applications for the export or reexport of defense articles subject to the ITAR that would contribute to Russia's military capabilities.
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