In its efforts to reduce Russian leverage over Europe, the U.S. has enacted legislation imposing sanctions on foreign companies involved in constructing Russian-sponsored gas pipelines in the Baltic and Black Seas.

Introduction

On 20 December 2019, President Trump signed into law the National Defense Authorization Act for Fiscal Year 2020, which, in addition to establishing the Space Force as a sixth branch of the U.S. military, contained several new sanctions bills, causing significant tension between the U.S. and a number of its allies.

One of the most controversial aspects of the new legislation, the Protecting Europe’s Energy Security Act of 2019 (“PEESA”), provides for sanctions to be imposed on non-U.S. persons involved in certain activities with respect to two natural gas pipelines running from Russia: the Nord Stream 2, which runs to Germany and the TurkStream, which runs to Turkey. Each of these pipeline projects is owned by, and will receive natural gas from, Gazprom PJSC, an energy company in which the Russian government has majority ownership.

PEESA has already had intended and unintended effects. The Dutch-Swiss offshore services company, Allseas Group, a major contributor to Nord Stream 2, announced within hours of PEESA’s enactment that it would suspend work on the project. The bill has also flared transatlantic tensions.

This client alert explains the new U.S. sanctions and their effect on non-U.S. companies. It also considers the global impact future development of the targeted pipelines may have.

Sanctions

PEESA requires that sanctions be imposed (unless an exception applies) on non-U.S. individuals and entities (“foreign persons”) determined to have:

  1. sold, leased or otherwise provided vessels engaged in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline project, the TurkStream pipeline project, or any project that is a successor to either of the two projects (each a “Targeted Project” and collectively the “Targeted Projects”); or
  2. facilitated deceptive or structured transactions to provide such vessels for the construction of a Targeted Project.

Such determinations shall be made in a report to Congress by 18 February 2020, and every 90 days thereafter.

The sanctions that must be imposed on foreign persons are as follows:

  1. blocking and prohibiting any transactions in all property and interests in property of the foreign person if the property and interests in property are within the U.S., come within the U.S., or are or come within the possession or control of a U.S. person; and
  2. revoking any current visas and making ineligible for admission into the U.S. or receipt of a visa to enter the U.S. such a foreign person. If the foreign person is an entity, then sanctions will be imposed on the principal shareholders and corporate officers of the foreign entity.

Wind-down period

PEESA provides for a quasi-wind-down period whereby sanctions will not be imposed if the foreign person has, engaged in “good faith efforts to wind-down operations” within 30 days after PEESA’s enactment. However, activities that are not aimed at winding-down operations are currently sanctionable. OFAC FAQ 815.

According to the bill’s sponsor, Senator Ted Cruz and co-sponsor, Senator Ron Johnson, in their 18 December 2019 letter to the Allseas Group chief executive officer, this wind-down period in fact requires immediate action by companies involved in the sanctionable activities. Although most of the recent wind-down provisions have required the sanctionable activities to be halted by the end of the wind-down period, Senators Cruz and Johnson explained that “the consequences of your company continuing to do the work – for even a single day after the President signs the sanctions legislation – would expose your company to crushing and potentially fatal legal economic sanctions” (emphasis in original).

Rigid application of the wind-down period likely reflects the advanced stage of both the Nord Stream 2 and TurkStream pipeline projects. While the 30-day period was included in PEESA when the bill was first introduced in May 2019, completion of both pipeline projects may be just weeks away.

Exceptions and waivers

The following persons or activities are exempt from sanctions under PEESA:

  1. authorized U.S. intelligence, law enforcement and national security activities;
  2. admission of foreign persons into the U.S. if required under the United Nations Headquarters Agreement;
  3. persons engaging in activities intended for the safety of the crew aboard relevant vessels, protection of human life aboard such vessels, or maintenance of vessels to avoid environmental or other significant damage;
  4. persons engaging in activities necessary for or related to the repair of maintenance of, or environmental remediation with respect to, the Targeted Projects; and
  5. importation of goods into the U.S.

The environmental maintenance exception described in paragraph 4 above might have inadvertently created a loophole to the PEESA sanctions. This bill’s effectiveness is predicated on the fact that Russia relies extensively on Western technology for its most complex engineering projects in the petroleum industry. If Russian companies fail to properly build the remainder of the Nord Stream 2 pipeline (1,800 km of the 2,100 km pipeline are complete), companies such as Allseas might still be in compliance with PEESA by fixing the faulty construction and thus preventing environmental damage.

Next steps

It is difficult to know how U.S. international energy policy will follow PEESA, in part due to disagreement in Washington and in part because of the need to assess Russian and German reactions in 2020. The Kremlin has stated that it will be able to finish the Nord Stream 2 pipeline despite the new sanctions. The initial German response to PEESA has consisted mostly of sharp condemnation. The German finance minister described the sanctions as “a serious interference in the internal affairs of Germany and Europe and their sovereignty. We firmly reject this.” One senior German official even called for a European “firewall” against U.S. sanctions and another suggested retaliatory German sanctions against the U.S.-Canada Keystone pipeline system. Despite occasionally acknowledging the dangers of relying on Russian energy, Germany has a strong business interest in ensuring plentiful and cheap gas as industrial feedstock. It will likely not be a partner in further U.S. efforts to hinder the Nord Stream 2 and TurkStream projects.

Regardless of European responses, the U.S. has a variety of tools that it can apply unilaterally to delay contested energy projects. The U.S. could pass contingency sanctions, which would allow the U.S. to penalize the Russian government for actual misuse of the pipelines, rather than attempt to prevent the completion of the pipeline due to concerns over misuse. For example, the U.S. could pass sanctions legislation, or the president could issue executive orders, which put new penalties on the U.S. Department of the Treasury’s shelf to be used immediately upon Russia cutting off or reducing the flow of gas through pipelines to Europe as leverage over a political matter that interests Russia.

A less precise approach would be to simply include harsher Russia-related sanctions in the next U.S. sanctions bill. For example, one bill that on 18 December 2019 was placed on the Senate’s calendar, the Defending American Security from Kremlin Aggression Act of 2019 (“DASKA”), imposes sanctions with respect to investments in Russian-constructed LNG facilities outside of Russia, investments in energy projects outside of Russia in which a Russian person has a significant stake, and the provision of goods, services, financing or other support that furthers Russia’s ability to develop crude oil resources in its own territory. These sanctions mark a significant escalation against Russia and are not related to any specific U.S. concern.

With the enactment of PEESA, the U.S. has created another mechanism with which to increase its influence over European energy affairs and penalize companies with operations that undermine U.S. national security and foreign policy objectives. Consulting international trade and national security lawyers who closely monitor these developments remains of critical importance to U.S. and foreign companies operating in a variety of industries, especially energy and offshore services.