On August 6, 2014, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) will publish a final rule implementing a new policy to deny export, reexport, and transfer (in-country) licenses for certain dual-use items for use in Russia’s energy sector that may be used for deepwater, Arctic offshore or shale projects. BIS also added one party – United Shipbuilding Corporation – to the Commerce Department’s Entity List.1 The rule will become effective immediately, and relates to specific classes of products used for oil and gas exploration or production in Russia.
Below is a summary of the final rule, as well as some key takeaways for exporters of affected products used in oil and gas projects.
The Russia Industry Sector Sanctions
The final rule adds a new section 746.5 to the Export Administration Regulations (“EAR”) and amends other sections of the EAR to codify this licensing policy. Pursuant to Section 746.5, a license is now required to export, reexport or transfer (in-country) certain items when the exporter “know[s] that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or [is] unable to determine whether the item will be used in such projects” (emphasis added).
The BIS Rule specifically applies to the following two classes of products: (1) any item subject to the EAR listed in new Supplement No. 2 to Part 746, which includes 52 specific products by Schedule B number; and (2) any item specified in the following Export Control Classification Numbers (“ECCNs”): 0A998,1C992, 3A229, 3A231, 3A232, 6A991, 8A992, or 8D999 (“Restricted Products”).2
BIS provides the following list of illustrative examples of Restricted Products: 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 rule also specifies that no license exceptions can overcome this new license requirement, with the exception of License Exception GOV, which authorizes certain exports and reexports to U.S. and foreign governmental agencies and intergovernmental organizations. Therefore, all Restricted Products within the scope of the final rule will require a BIS license for export or reexport to Russia, even if they had previously qualified for a license exception or were exportable No License Required.
In addition, BIS has imposed a presumption of denial for such license applications when there is a 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. Since this presumption of denial applies specifically to exports for end-use in oil projects, presumably BIS will evaluate license applications related to natural gas projects on a case-by-case basis.
Also, the final rule does not contain a savings clause. Therefore, any Restricted Products currently in transit that would require a license as of August 6 under this new policy may be considered violations if delivered on or after August 6, even if they were originally exported under a license exception or “No License Required.”
As BIS explained when it first announced this policy, although “these sanctions do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country, they make it difficult for Russia to develop long-term, technically challenging future projects.”3
Key Takeaways for Exporters
We recommend that companies exporting items used in the exploration or production of oil or gas immediately assess whether any of the products they export, reexport, or transfer to Russian end-users (or intermediaries with direct or constructive knowledge that the ultimate end-user is in Russia) are Restricted Products that could be used for the types of projects identified in the final rule. If so, the final may rule have a significant impact by simultaneously (1) imposing a BIS licensing requirement for all shipments to Russia, and (2) implementing a presumption of denial for all license applications related to projects that have the potential to produce oil.
The final rule does contain a knowledge requirement. However, if you are unable to determine whether your products are used in the exploration for, or production of, oil or gas in deepwater, Arctic offshore, or shale projects in Russia, the rule requires that such products be considered subject to the licensing requirement. Therefore, exporters may consider seeking end-user certifications or other documentation that their products will not be used for a covered end-use.
As you assess the impact of BIS’s final rule on your business, it is important to bear in mind that the situation in Ukraine is quickly evolving and that it is difficult to predict how this situation will unfold. If the situation continues or escalates, it is possible that BIS will announce further restrictions on exports and reexports to Russia. Fried Frank will continue to closely monitor the situation in Ukraine and the responses by the United States Government and the European Union.