On February 5, 2023, the G7 announced that the “price cap” on western-backed seaborne trades of Russian-origin petroleum products to third countries would be set at $45 per barrel ($45/bbl) for Discount to Crude petroleum products and $100 per barrel ($100/bbl) for Premium to Crude petroleum products.

Background

In September 2022, the G7 announced a plan to implement price caps with respect to Russian-origin crude oil and petroleum products in response to Russia’s continued invasion of Ukraine. The two goals of the price caps are reducing Russian revenues from the sale of crude oil and petroleum products, which are used to finance the war in Ukraine, while simultaneously maintaining the flow of Russian-origin crude oil and petroleum products to non-G7 and European Union (EU) countries to avoid supply constraints. To implement the price cap in the United States, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued two determinations that prohibit US persons from providing certain services with respect to the maritime transportation of the Russian-origin crude oil and petroleum products unless purchased below the relevant price cap.

Petroleum Products Maritime Services Ban and Price Cap Exception

Similar to its determination banning certain services relating to the maritime transportation of Russian-origin crude oil (Crude Services Ban), OFAC has issued a determination that prohibits US Persons from providing any “Covered Services” with respect to the maritime transportation of Russian-origin petroleum products (Products Services Ban) (with the exception of price-capped trades), including:

• trading/commodities brokering;
• financing;
• shipping;
• insurance, including reinsurance and protection and indemnity;
• flagging; and
• Customs brokering.

Like the Crude Services Ban, the Products Services Ban does not apply (i.e., US Persons may provide such services) if the petroleum products are purchased at or below the applicable price cap (the Price Cap Exception). To take advantage of the Price Cap Exception, US Persons must comply with recordkeeping and attestation requirements, which allow each party in the supply chain to demonstrate the Russian-origin petroleum products have been purchased at or below the applicable price cap. The specific recordkeeping and attestation requirements will depend on the US Person’s role in the supply chain.

The Crude Services Ban went into effect on December 5, 2022, and the Products Services Ban went into effect over the weekend, on February 5, 2023, which coincides with the EU’s ban on the import of Russian-origin petroleum products.

Relevant Products and Price Caps: “Discount to Crude” and “Premium to Crude”

The Products Services Ban provides for two price caps: Anchor $45 per barrel ($45/bbl) for Discount to Crude petroleum products and $100 per barrel ($100/bbl) for Premium to Crude petroleum products are exempt from the services ban. While shipping and insurance are covered services, these costs are not included in the price for purposes of the price cap and “must be invoiced separately and at commercially reasonable rates.” The Premium to Crude price cap covers lighter products, including gasoline, motor fuel blendstock, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil, while the Discount to Crude price cap cover heavier products, including naphtha, residual fuel oil, and waste oil. Specifically, OFAC has identified the particular petroleum products subject to the Premium to Crude price cap by Harmonized Tariff Schedule of the United States (HTSUS) subheadings under HTSUS heading 2710. All other petroleum products listed in HTSUS heading 2710 not otherwise expressly identified as Premium to Crude petroleum products are subject to the Discount to Crude price cap.

Only products that are of Russian origin are covered by the services ban. Once “substantially transformed” outside Russia, those products are no longer considered to be of Russian Federation origin, and thus the price cap no longer applies. While refining typically results in a “substantial transformation,” OFAC says it will only consider blending operations to be substantial transformation if a blending operation results in a tariff shift of the Russian petroleum product (e.g., a change in the applicable Harmonized Tariff code). Thus the new rule requires heightened diligence of country of origin, particularly when dealing with blended products.

What happens now?

Since the implementation of the Crude Services Ban, Russian seaborne trades are reportedly carried out by a growing “shadow fleet” of vessels that operate without western insurance and other maritime services. Meanwhile, the sanctions have brought about re-routing of crude oil flows from Europe to Asia, meaning increased transportation costs for every barrel. This will likely continue for the remainder of 2023, with Russian barrels re-routed to Asia without maritime services from western companies or else subject to compliance with the price cap.

Moreover, the EU import ban that went into effect on February 5, 2023, will require the EU to replace diesel imported from Russia. Although Russia will likely reroute some of this diesel, unlike crude oil, China and India are net exporters of refined petroleum products. This raises the possibility that Russia could decrease or shut down some refinery production, contributing to tightening of the market in diesel, naphtha or other petroleum products.

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