On 14 November 2011, the EU expanded its sanctions concerning Syria. The list of prohibited persons was expanded and prohibitions were imposed on the dealings of the European Investment Bank. Unlike the sanctions imposed on the Gaddafi regime (see our article “Libya - Are Sanctions A Proper Basis for Force Majeure Claims?”, dated 20 April 2011), the current Syrian sanctions imposed by the EU have not been mandated by the UN. Even though they are not universally applicable, the United Kingdom has extended the reach of the EU sanctions beyond the borders of the EU to several territories. Furthermore, these sanctions are more targeted than previous sanctions regimes, focusing on key individuals, the Commercial Bank of Syria and, importantly, the Syrian energy industry. For these reasons, European and international companies should consider the prohibitions carefully.

We examine the EU sanctions regime against Syria, how it has been extended to non-EU corporate entities and key issues that companies – and, in particular, energy firms – operating in Syria should consider.

The Sanctions

On 9 May 2011, the EU published Council Regulation No 442/2011, introducing asset freezing measures on certain listed persons associated with violent repression in Syria. Since 9 May, the EU has issued subsequent Council Regulations (set out at the conclusion of this article) expanding the list of entities and persons to whom the asset freezing measures apply and introducing additional prohibitions.

The EU sanctions regime applies to citizens of EU Member States and legal entities that are registered or conduct business within the EU and prohibits them from participating in activities that contravene the sanctions. Such activities may include a parent company funding, engaging in or benefitting from the operations of a subsidiary that contravene the sanctions. In this manner, a corporate parent that is registered or conducting business in the EU could face liability for the operations of a subsidiary that is not directly subject to the EU sanctions.

While setting out the prohibitions, the EU Council Regulation leaves the enforcement of sanctions to the relevant EU Member States. This means that the application of the sanctions regime may vary depending on the EU Member State that enforces the prohibition. The UK, through the Syria (Asset-Freezing) Regulations 2011 (S.I. 2011/1244) (as amended) has provided various penalties for violating the EU sanctions regulations. The UK has also, through the Syria (Restrictive Measures) (Overseas Territories) Order 2011 (S.I. 2011/1678) (the Order), expanded the application of the EU sanctions set out in the Order to legal entities registered in a number of UK overseas territories including, among others, the Cayman Islands, British Virgin Islands and Turks and Caicos Islands (as well as nationals of those UK overseas territories). Accordingly, the EU sanctions may affect a company or a company’s subsidiary registered in those UK overseas territories, regardless of whether the company or any related entity is registered or active within the EU.

Interestingly, the Order is materially different from the current EU Council Regulation. The Order has not been amended since 15 July 2011 and it does not reflect some of the prohibitions included in the most recent amendments to the EU Council Regulation. Additionally, the Order does not include several of the principle exemptions or derogations set out in the EU Council Regulation. In circumstances where a party may be subject to sanctions set out in the Order, one should be aware that the differences between the Order and the EU Council Regulations may significantly effect the application of the sanctions and, if the sanctions do apply, the options available.

Key Prohibitions for the Oil and Gas Industry

In addition to the asset freezing measures and embargoes on certain goods (ranging from firearms to bank notes), the EU sanctions specifically target the export of crude oil from Syria. These prohibitions were motivated by the fact that the vast majority of crude oil exports from Syria have been historically delivered to the EU. To this end, several meaningful prohibitions have been introduced that prevent entities that are subject to the sanctions regime from importing (into the EU), purchasing or transporting crude oil or petroleum products if they originate in, or are exported from, Syria. Entities that are subject to the sanctions also cannot provide financing, either directly or indirectly, for any of these activities.

In addition to these petroleum products prohibitions, investment in the Syrian oil industry is also limited. Entities that are subject to the sanctions regime are prevented from offering loans or credit to, acquiring or extending participation in or creating a new joint venture with a Syrian entity engaged in the exploration, production or refining of crude oil (subject to the exceptions that are referenced below).

Possible Exemptions

The EU sanctions recognise a number of derogations (or, exemptions). As discussed in more detail below, some derogations principally relate to activities with Syrian entities engaged in the exploration, production or refining of crude oil.

In many instances, these derogations must be applied for and are subject to the approval of the relevant national governmental authorities. For instance, where payment is owed from a listed person or entity on the basis of an obligation or contract made before the sanctions regime came into force, the relevant government authority may approve such a payment. In a few explicit instances, obligations arising from contracts signed before the date that the relevant EU Council Regulation came into force may be exempted from the prohibitions without approval of the relevant government authority.

Some derogations are short-term and only exist for certain periods of time. For instance, the ability to make payments through the Commercial Bank of Syria on “trade contracts” (subject to approval of the relevant government entity) closes on 13 December 2011.

Commercial Considerations

Parties are well advised to be cautious in interpreting the effects of these sanctions. The language used in the EU Council Regulation is ambiguous and, potentially, quite broad.

For instance, one of the key prohibitions under the EU Council Regulation No 950/2011 (dated 23 September 2011) prevents “[…] the acquisition or extension of a participation in any Syrian person, entity or body; [or] the creation of any joint venture in any Syrian person, entity or body […] engaged in the exploration, production or refining of crude oil.” However, this prohibition “shall not prevent the extension of a participation, if such extension is an obligation under an agreement concluded before 23 September 2011.”

Production sharing contracts (including, in our experience, production sharing contracts that involve the Syrian Government and Syrian Petroleum Company (SPC)) require that the international oil company (IOC) and the SPC form a joint venture after a commercial discovery is made. However, the declaration of a commercial discovery is typically within an IOC’s control. In the instance of a commercial discovery made after this prohibition came into force, would the formation of a joint venture be considered an obligation flowing from the prior contract or, alternatively, would it be considered the exercise of a new right? The answer likely depends on an informed understanding of the production sharing contract and familiarity with the sanctions regime.

Recent experience advising energy clients on their Syrian operations can clarify the availability of licensed exemptions provided for by the sanctions and allows us to provide informed advice on the risks of doing business there.

Read more concerning our experience Managing Opportunity and Uncertainty in North Africa and the Middle East.

Relevant Legal Instruments

EU Council Regulations

Council Regulation No 1151/2011 (14 November 2011)

Council Regulation No 1150/2011 (14 November 2011)

Council Regulation No 1011/2011 (13 October 2011)

Council Regulation No 950/2011 (23 September 2011)

Council Regulation No 878/2011 (2 September 2011)

Council Implementing Regulation No 843/2011 (23 August 2011) 

Council Implementing Regulation No 755/2011 (1 August 2011) 

Council Implementing Regulation No 611/2011 (23 June 2011) 

Council Implementing Regulation No 504/2011 (23 May 2011) 

Council Regulation No 442/2011 (9 May 2011)

UK Legislation

The Syria (Asset-Freezing) (Amendment) Regulations 2011 (S.I. 2011/2479) (17 October 2011)

The Syria (Restrictive Measures) (Overseas Territories) Order 2011 (S.I. 2011/1678) (13 July 2011)

The Syria (Asset-Freezing) Regulations 2011 (S.I. 2011/1244) (10 May 2011)