On November 20, 2014, the US Department of Commerce, Bureau of Industry and Security (BIS) issued Frequently Asked Questions (FAQs) providing guidance regarding the Russia-related export restrictions that BIS imposed in August and September 2014.  The FAQs provide insight regarding various aspects of the BIS restrictions, including the territorial reach of the term “Russia;” whether the restrictions apply to parts and components of listed items, intra-company transfers of items within Russia, and drilling through shale to reach oil or gas reservoirs; and the applicability of de minimis rules.

Background

On August 6, 2014, BIS issued a final rule amending the Export Administration Regulations (EAR), 15 C.F.R. Parts 730-774, to designate Russia as an embargoed country at Section 746.5.  BIS introduced a license requirement for the export of certain items for oil or gas exploration and production activities involving Russian deepwater, Arctic offshore, or shale, or where the exporter cannot determine the end use.  Covered items included those listed on Supplement No. 2 to Part 746 of the EAR, known as “Schedule B;” items controlled under eight specific Export Control Classification Numbers (ECCNs); and items listed under ECCNs that are controlled for export to Russia.  The restrictions applied to oil and gas projects, with a presumption of license denial for oil projects.  See our previous advisory on these restrictions.

On September 17, 2014, BIS issued a final rule adding Russian energy and defense companies to the Entity List, set forth in Supplement No. 4 to Part 744 of the EAR.  The rule requires a license to export any item subject to the EAR to the listed energy companies where the item is for Russian deepwater, Arctic offshore, or shale oil or gas E & P projects.  A similar restriction applies for exports to listed defense companies, regardless of end use.  Furthermore, BIS amended Section 744.21 of the EAR to require a license to export or reexport certain items to Russia for a military end use or end user.  See our previous advisory on these restrictions.

FAQ Guidance

The FAQs provide a general overview of the existing restrictions and detailed guidance regarding specific points.  This detailed guidance provides several key insights: 

  • Definition of “Russia.”  BIS has defined “Russia” broadly to include its exclusive economic zone (EEZ) and any other territory over which Russia claims sovereignty, sovereign rights, or jurisdiction, provided that the Government of Russia exercises at least partial control over the area or derives economic benefit from it.  This definition of “Russia” to include the EEZ is particularly significant with regard to offshore oil and gas exploration and production, as the EEZ extends 200 nautical miles off the Russian coast.
  • Applicability of restrictions to parts, components, accessories, and attachments.  The FAQs provide that control of items listed in Schedule B extends to parts, components, accessories, and attachments for use in or with those items.  Therefore, they will be subject to restrictions when exported, reexported, or transferred as standalone commodities.
  • Applicability of restrictions to intra-company transfers within Russia, such as transfers of items by oilfield services companies between hubs for use in deepwater, Arctic offshore, or shale projects.  BIS’s guidance on this point is not entirely clear, but arguably it suggests that such intra-company transfers would not be covered.  The FAQs state, without elaboration, that § 746.5 covers in-country transfers, as that term is defined in the EAR.  Interestingly, the definition (at § 772.1) provides that an in-country transfer occurs when there is a shipment “from one person to another person.”  Arguably, this means that intra-company transfers are not covered, so long as there is not a transfer to a different entity. 
  • Definition of “shale project.”  BIS explained that restricted shale projects are those that involve exploration or production from shale formations, such as by fracking.  The restriction does not extend to projects involving penetration through a layer of shale to reach a reservoir.  This is consistent with a similar FAQ published by the US Treasury Department, Office of Foreign Assets Control (OFAC) on November 18, 2014.
  • US person geologists analyzing seismic data outside the United States.  ECCN 0A998 controls the export of seismic data to Russia, and such data is treated as a commodity, rather than technology.  BIS explained that because the data is not considered technology, a US geologist’s analysis of the data outside the United States (such as in Russia) need not be reported as the “commingling” of US-origin technology with foreign-made technology.  However, US persons should be aware of OFAC Directive 4, which restricts US persons from providing any services on deepwater, Arctic offshore, or shale projects involving certain listed companies.
  • Scope of “high pressure pumps” controlled under ECCN 0A998.  The FAQs explain that ECCN 0A998.b.3 controls all high pressure pumps that will be used in Russian deepwater, Arctic offshore, or shale projects, or are for an unknown end use in Russia.  The term is not limited to pumps for fracking operations.
  • Transshipment of controlled items through Russia for use in third countries.  The FAQs provide that transshipment of items controlled under § 746.5 through Russia ispermitted.  Exporters should be aware of any red flags that arise in the transaction.
  • Items already licensed for export.  The FAQs state that items licensed by BIS for export before August 6, 2014, will be subject to § 746.5 if they did not reach the final destination by that date.  Items already in Russia will be subject to restrictions to the extent there are in-country transfers.
  • De minimis rules
    • The de minimis threshold for exports to Russia—that is, the percentage of US-controlled content that renders a foreign-made item subject to the EAR—remains 25%.  This is in contrast with other embargoed countries, such as Iran, for which the percentage is 10%. 
    • Items controlled under § 746.5 should not be included in a de minimiscalculation.  That is because the § 746.5 restrictions are end-use based (i.e., focused on particular Russian energy-related end uses) and not destination-based (i.e., they do not restrict export to Russia for all end uses).  This is consistent with BIS guidance set out at Supplement No. 2 to Part 734 of the EAR.

Conclusion

The BIS FAQs provide valuable insight regarding recent Russia sanctions.  The definition of “Russia” to include the EEZ is especially notable, and will be significant for companies involved in offshore hydrocarbon exploration and production.  BIS’s and OFAC’s clarification regarding the scope of restricted “shale projects” will also be particularly helpful in addressing industry questions.

There are still some aspects of the BIS restrictions that could benefit from further clarification.  For example, the Entity List restrictions apply to exports to any company “controlled” by a company on the Entity List, but the meaning of “control” in this context is unclear.  Furthermore, guidance regarding interpretation of the term “Arctic offshore” would be helpful.