U.S. and EU Release New Export Restrictions on Exports of Equipment and Technology to Russia Exploration Projects

U.S. and EU Release New Export Restrictions on Exports of Equipment and Technology to Russia Exploration Projects

In a sweeping expansion of export restrictions against Russia in response to their finding that Russia’s recent actions and policies in respect of Ukraine have contributed to destabilization of that country, the EU and U.S. each announced last week broad new restrictions on exports of identified items for use in Russian exploration or production of oil or gas in deepwater, Arctic offshore locations, or shale formations in Russia. The EU rules1 were adopted on July 31, 2014, and were effective August 1, 2014, while the U.S. rules were officially announced on August 1, 2014 and will take effect as of the date of publication in the Federal Register.

I. EU Export Restrictions

The Council of the EU has adopted additional restrictive measures in response to its finding regarding Russia’s actions and policies in respect of Ukraine. The Regulation applies not only within the territory of the EU,2 but also to:

  • any person inside or outside the territory of the Union who is a national of a Member State;
  • any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State;
  • any legal person, entity or body in respect of any business done in whole or in part within the Union.

A. Military End-Use/End-User Restriction

With regard to “dual-use goods and technology”, (i.e., products and technologies that can be used for both civil and military applications), the following activities are prohibited:

  • the direct or indirect sale, supply, transfer, export;
  • the direct or indirect provision of “technical assistance” or “brokering services” (also related to the provision, manufacture, maintenance and use of dual-use goods and technology);
  • the direct or indirect provision of financing or financial assistance (including grants, loans, export credit insurance) for any sale, supply, transfer, or export or any provision of related technical assistance

to any natural or legal person, entity or body in Russia or for use in Russia, if those items are or may be intended, in their entirety or in part, for military use or for a military end-user. If the competent authority of the Member State has reasonable grounds to believe that the end-user might be a military end-user, or that the goods might have a military end-use, it shall not grant an authorisation in accordance with the EU Dual-Use Regulation.

Grandfathering clauses. The competent Member State authority may grant an authorisation where the export concerns an obligation arising from a contract/agreement concluded before August 1, 2014. Also, the prohibitions related to technical assistance, brokering services, financing and financial assistance are without prejudice to the execution of an obligation arising from a contract/agreement concluded before August 1, 2014, and to the provision of assistance necessary to the maintenance and safety of existing capabilities within the EU.

B. Arms Embargo

With regard to arms and related materials, the following activities are prohibited:3

  • the direct or indirect sale, supply, transfer, export to Russia by nationals of Member States or from the territories of Member States (or using their flag vessels or aircraft)
  • the import, purchase or transport from Russia by nationals of Member States (or using their flag vessels or aircraft).

With regard to goods and technology listed in the Common Military List, the following activities are prohibited:

  • the direct or indirect provision of “technical assistance” (also related to the provision, manufacture, maintenance and use of such goods)
  • the direct or indirect provision of financing or financial assistance (including grants, loans, export credit insurance or guarantee) for any sale, supply, transfer, or export or any provision of related technical assistance

to any natural or legal person, entity or body in Russia or for use in Russia.

Grandfathering clauses. The above prohibitions are without prejudice to the execution of an obligation arising from an agreement concluded before August 1, 2014, and to the provision of assistance necessary to the maintenance and safety of existing capabilities within the EU.

C. Certain Goods and Technologies Suited for Use in Russian Deepwater, Arctic Offshore and Shale Projects

The Council of the EU adopted certain measures related to the equipment and technologies listed under Annex II of the Regulation (“Annex II”). Annex II “shall include certain technologies suited to the oil industry for use in deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.”

A prior authorisation from the competent authorities of the EU Member States shall be required for the following activities related to the technologies listed under Annex II:

  • the direct or indirect sale, supply, transfer or export of such technologies, whether or not originating in the Union;
  • the direct or indirect technical assistance;
  • the direct or indirect brokering services;
  • the direct or indirect financing or financial assistance (including in particular grants, loans and export credit insurance) for any sale, supply, transfer or export of these technologies or for any provision of related technical assistance

to any natural or legal person, entity or body in Russia or in any other country, if such equipment or technology or if such assistance are “for use in Russia.”

A prior authorisation will also be required for technical assistance and brokering services related to the provision, manufacture, maintenance and use of the items listed under Annex II (if the assistance/services will be provided to a party in Russia party, or for use in Russia).

An authorisation will not be granted by the competent authorities of the EU Member States for the sale, supply, transfer or export of the technologies included in Annex II if the authorities have reasonable grounds to determine that the sale, supply, transfer or export of the technologies is for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia. An authorisation may however be granted if the export concerns the execution of obligations arising from a contract or agreement concluded before August 1, 2014.

D. Access to the Capital Market

Certain activities related to transferable securities and to money-market instruments with a maturity exceeding 90 days, issued after August 1, 2014 by:

  • a major credit institution or other major institution having an explicit mandate to promote competitiveness of the Russian economy, its diversification and encouragement of investment, established in Russia with over 50% public ownership or control as of August 1, 2014, as listed in Annex III of the Regulation; or
  • a legal person, entity or body established outside the EU whose proprietary rights are owned more than 50 % by an entity listed in Annex III of the Regulation; or
  • a legal person, entity or body acting on behalf or at the direction of an entity referred to in point (b) of this paragraph or listed in Annex III of the Regulation

are prohibited: e.g., purchase, sale, brokering services, assistance in the issuance of, or otherwise dealing in the securities or money market instruments.

II. U.S. Export Restrictions

The Russian Industry Sector Sanctions at newly issued § 746.5 of the Export Administration Regulations restrict the export, reexport or in-country transfer of

(i) any item “subject to the EAR” listed in Supplement No. 2, and
(ii) items specified in Export Classification Numbers (ECCNs) 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999,

when the exporter, reexporter or transferor knows or has reason to know that, is informed by BIS that, or is unable to determine whether the item will be used directly or indirectly in exploration for or production of oil and gas in Russian deepwater (greater than 500 feet), Arctic offshore locations, or shale formations.

Items listed in Supplement 2 include, but are not limited to, 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. The full list is available here.

In addition, identified ECCNs generally include the following:

  • six existing ECCNs 1C992 (commercial charges and devices containing energetic materials), 3A229 (firing sets and equivalent high-current pulse generators), 3A231 (neutron generator systems), 3A232 (detonators and multipoint initiation systems), 6A991 (marine or terrestrial acoustic equipment), and 8A992 (vessel, marine systems or equipment);
  • new ECCN 0A998 controlling “oil and gas exploration data, including seismic analysis data, and hydraulic fracturing design and analysis software and data, hydraulic fracturing ‘proppant, ‘fracking fluid’ and chemical additives.
  • new ECCN 8D999 controlling software specially designed for the operation of unmanned vessels used in the oil and gas industry of Russia.

The EAR apply to goods, software and technology that are “subject to the EAR”, including:

  • U.S.-origin items wherever located;
  • U.S.-origin parts, components, materials, or other commodities incorporated abroad into foreign made products, U.S. origin software commingled with foreign software, and U.S. origin technology commingled with foreign technology, in quantities exceeding de minimis levels (25%));
  • Certain foreign-made direct products of U.S. origin technology or software;
  • Certain commodities produced by any plant or major component of a plant located outside the United States that is a direct product of U.S. origin technology or software;
  • The reexport (i.e., shipment from one foreign country to another foreign country) of any of the above listed items; and
  • Dual-use items currently located in the U.S.

No license exceptions may be used for items requiring a license under the new Russian Industry Sector Sanctions, except License Exception GOV (at § 740.11(b)), which covers exports to U.S. government agencies or personnel and agencies of cooperating governments. License applications for export, reexport or (in-country) transfer of any item that requires a license for Russia will be reviewed with a presumption of denial when for use directly or indirectly for exploration or production from deepwater (greater than 500 feet), Artic offshore locations or shale projects in Russia.

The rule will become effective upon publication in the Federal Register. However, restricted shipments that are en route aboard a carrier to a port of export or reexport on the date of the rule’s publication pursuant to actual orders for export or reexport to a foreign destination may not proceed to that destination without a license.

We will continue to monitor and provide updates on major U.S. and Russia sanctions law and regulatory developments.

1Council Regulation (EU) No. 833/2014 of July 31, 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, published in the Official Journal of the EU L 229/1 of July 31, 2014 (the “Regulation”) and Council Decision 2014/512/CFSP of July 31, 2014 concerning restrictive measures in view of Russia’s actions destabiling the situation in Ukraine, published in the Official Journal of the EU L 229/13 of July 31, 2014 (the “Decision”).
2Also on board of any aircraft or any vessel under the jurisdiction of a Member State.
3The prohibitions are provided for in the Decision, not the Regulation, and will be enforced on the basis of export control legislation of EU Member States.

Topics:  Energy Exploration, EU, Exports, Russia, Sanctions, Ukraine

Published In: General Business Updates, Energy & Utilities Updates, Finance & Banking Updates, International Trade Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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