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Web Alert: US provides guidance on Ukraine/Russia-related sanctions under the CAATSA

22 December 2017

As previously advised, the US expanded its sanctions against Russia in August 2017. The original article can be viewed here. Some of these sanctions apply to non-US persons and are therefore likely to impact foreign investment in oil and gas projects. 

Since September 2014, US persons have been prohibited from providing goods, services or technology in support of exploration or production from Deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia under Directive 4 (issued pursuant to Executive Order 13662). This Directive targets activities between US persons and individuals/entities named on the US Sectoral Sanctions Identification (“SSI”) List which include Russian banks and oil companies (such as Lukoil, Gazprom, and Rosneft etc).  Entities which are owned 50 percent or more in the aggregate by one or more persons named on the SSI List are also subject to the SSI List restrictions.

On 2 August 2017, The Countering America’s Adversaries Through Sanctions Act (“CAATSA”) came into effect.  Section 223(d) of CAATSA expands the application of Directive 4, so that it prohibits US persons from providing goods, services or technology in support of deepwater, Arctic offshore or shale projects that:

(i) were initiated on or after 29 January 2018;

(ii) have the potential to produce oil anywhere in the world i.e. not just Russia (if the project has the potential to produce gas only, then the prohibition would not apply); and

(iii) involve one or more persons on the SSI List (individually or in the aggregate), who either (a) have a 33 percent or greater ownership interest or (b) own a majority of the voting interests in the project.

US OFAC has clarified that a project is “initiated” when a government formally grants exploration, development or production rights to any party. 

CAATSA has extra-territorial effect (under section 225), as it provides that sanctions can be imposed on a “foreign person” if the US Secretary of State together with the Secretary of the Treasury determine that they have knowingly made a significant investment in a special Russian crude oil project on or after 1 September 2017.  A ‘special Russian crude oil project’ is defined as a project intended to extract crude oil from the Exclusive Economic Zone of the Russian Federation in deepwater (i.e. more than 500 feet deep), Russian Arctic offshore locations or shale formations in the Russian Federation.

It also provides the power to impose sanctions on non-US persons if the US Secretary of State, in consultation with the Secretary of the Treasury, determine that the foreign person knowingly (1) makes an investment that directly and significantly enhances the ability of the Russian Federation to construct energy export pipelines initiated on or after 2 August 2017 or (2) provide goods, services or technology for the construction of Russia’s energy export pipelines where the goods or services etc. have a fair market value of $1m (or $5m in the aggregate over a 12-month period). 

Guidance issued by the US Department of State here and here confirms that:

  • This provision focuses on energy export pipelines that originate in the Russian Federation and transport hydrocarbons across an international land or maritime border for delivery to another country.  Pipelines that originate outside the Russian Federation and transit through the territory of the Russian Federation would not be the focus of its implementation.
  • It does not apply to investments made prior to 2 August 2017. 
  • It does not target investments related to the standard repair or maintenance of pipelines in existence on (and capable of transporting commercial quantities of hydrocarbons) as of 2 August 2017.

Useful web links:

US Treasury Dept

US Treasury Dept, FAQs

Members are reminded of the need to carry out due diligence before transacting any business in jurisdictions subject to sanctions to ensure that the trade or the parties to the transaction are not sanctioned.  We strongly recommend that they should seek legal advice if they have any concerns.