U.S. Department of Commerce Implements New Russian Oil and Gas Sanctions

by Morgan Lewis

The sanctions directly affect companies involved in Russia's oil and gas industries by imposing new export license requirements.

On August 6, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published major amendments to the Export Administration Regulations (EAR) that take immediate effect.

The new EAR amendments significantly impact both U.S. and non-U.S. companies active in Russia's oil and gas industries by imposing new EAR export license requirements for Russian trade—regardless of whether or not the Russian party is an Office of Foreign Assets Control (OFAC) Specially Designated National (SDN) or under other OFAC limitations, such as those established by OFAC’s Sectoral Sanctions Identifications List.

These new EAR provisions are in addition to those actions already taken by OFAC. This is important because OFAC sanctions against Ukraine and Russia control the activities of “U.S. Persons” as defined by OFAC to be any U.S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

On the other hand, the new EAR license requirements impact all companies around the world that ship designated items to Russia when such items “are subject to the EAR”—whether or not the shipper is an OFAC “U.S. Person” (as explained below).

This new EAR rule adds EAR section 746.5, titled “Russian Industry Sector Sanctions.” This section imposes a BIS/EAR license requirement on the export, reexport, or transfer (in-country within Russia) of any item subject to the EAR listed in the new Supplement No. 2 and also all of the items specified in EAR Commerce Control List under Export Control Classification Numbers (ECCNs) 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999.

The following ECCNs are now subject to the license requirement of EAR section 746.5 (“ n.e.s.” means “not elsewhere specified”):

  • ECCN 0A998: This is a new ECCN that covers certain specified oil and gas exploration equipment and software. It encompasses oil and gas exploration data, e.g., seismic analysis data, and certain hydraulic fracturing (commonly known as “fracking”) items, including hydraulic fracturing design and analysis software and data. “Data” is a new item category that is now controlled by the EAR and subject to a license requirement, and “data,” as used in ECCN 0A998, is not the same as “technology” as defined in the EAR.
  • 1C992: Commercial charges and devices that contain energetic materials, n.e.s., and nitrogen trifluoride in a gaseous state.
  • 3A229: Firing sets and equivalent high-current pulse generators (for detonators controlled by 3A232).
  • 3A231: Neutron generator systems, including tubes.
  • 3A232: Detonators and multipoint initiation systems.
  • 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.
  • 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.
  • 8D999 (new): “Software” “specially designed” for the operation of unmanned, submersible vehicles in the oil and gas industry.

This new rule also adds Supplement No. 2 to EAR part 746, which identifies more items—with unstated ECCNs—that are now also subject to the new section 746.5 Russian Industry Sector Sanctions in addition to the ECCNs identified above. The items identified in new Supplement No. 2 are set forth as “Schedule B numbers” rather than by ECCNs.

A Schedule B number is a 10-digit commodity classification number administered by the U.S. Census Bureau  for reporting foreign trade. The Census Bureau's Schedule B List 2014 can be found here. The Supplement No. 2 list of items is three pages long and is not included in the Census Bureau’s list. However, it is available on the BIS website.

Items that are now licensable for shipment to Russia 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 new license requirement is triggered when the exporter, reexporter, or transferor knows or is informed that the item will be used directly or indirectly in Russia's energy sector for exploration or production from deepwater (greater than 500 feet), Arctic offshore, or shale projects in Russia that have the potential to produce oil or gas or when the exporter, reexporter, or transferor is unable to determine whether the item will be used in such projects in Russia.

“Arctic” is not defined in the new rule, but one should not assume that it only relates to north of the Arctic Circle. It may mean any waters that lie in the Arctic Ocean or its contiguous seas. “Shale projects in Russia” is also not defined and appears to include exploration or production of oil or gas from shale—whether deepwater or on land anywhere within Russia.

Generally, no EAR license exceptions may overcome these new license requirements. The BIS license review policy for all items that require a license for export to Russia presumes denial when there is potential for use directly or indirectly for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil. There is no stated license policy for items that relate to gas.

Items now subject to the new Russian licensing requirement in EAR section 746.5 are items “subject to the EAR,” which is a well-known term of art as defined in EAR sections 734.3 and 734.4. Although this definition is complex, generally, it means items that are always subject to U.S. export license requirements, regardless of the status of who possesses the item or where the item is located.

In general, the following items are subject to the EAR for purposes of the new Russian license requirements:

  • All items in the United States, including in a U.S. Foreign Trade Zone or moving in transit through the United States from one foreign country to another
  • All U.S. origin items, wherever located in the world, whether in the possession of a U.S. Person or in the possession of a non-U.S. Person
  • Foreign-made commodities that incorporate controlled U.S.-origin commodities of 25% or more by value, wherever located in the world, whether in the possession of a U.S. Person or in the possession of a non-U.S. Person

BIS may inform persons, either individually by specific notice or through amendment to the EAR, that a license is required for a specific export, reexport, or transfer (in-country) or for the export, reexport, or transfer (in-country) of specified items to a certain end-user because, in BIS’s view, there is an unacceptable risk of use in, or diversion to, the activities specified in Russia.

Finally, unlike the recent EU sanctions imposed against Russia, the new EAR rule has no contract sanctity provision for exemption from the mandatory license requirements now in effect related to contracts entered into before August 6, 2014. All shipments captured by the new license restrictions en route to Russia cannot proceed without a license.

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.

© Morgan Lewis | Attorney Advertising

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