The global nature of the energy industry results in the need for energy companies to have robust sanctions’ compliance frameworks in place to ensure in-depth understanding of international sanctions regimes. In the context of the European Union (“EU”) there has been a growth in implementation of restrictive measures in this sector throughout the course of 2014, particularly in relation to the ongoing political crisis in Ukraine. Energy companies established in the EU, operating anywhere in the world, must be aware of these newly implemented sanctions and the impact they have upon their commercial arrangements.
What are sanctions?
Sanctions and embargoes are targeted restrictions put in place against countries, entities or individuals which have a direct impact on importers and exporters in international trade. Sanctions and embargoes generally take the form of financial restrictions, travel bans and import/export prohibitions or constraints. In the UK, non-compliance with the sanctions regime is a criminal offence subject to imprisonment and/or fines.
In the Ukrainian context, the imposition of restrictive measures, and in particular of measures implemented on 30 and 31 July 2014, will have a significant impact on trade in Russia, Crimea and Sevastopol and a heightened need for caution to be exercised by EU companies with commercial dealings in each of these locations, particularly if such commercial arrangements are in the energy markets.
Why is the energy sector affected?
The EU sanctions restrictions implemented in relation to the Ukrainian situation directly affect the energy industry in a number of ways. In a broad sense, the sanctions raise the following concerns:
- Direct restrictions are in place which prohibit or restrain certain oil and gas activities;
- Direct restrictions are in place which prohibit or restrain export of certain oil and gas equipment and technologies;
The list of sanctioned individuals and entities is constantly expanding, leading to concerns regarding joint venture (JV) partners or supply chain contract partners that appear on sanctions lists or have links to individuals and entities listed.
Restrictions in Russia
On 31 July 2014, the EU imposed restrictions on the export of certain goods and the provision of certain services to Russia. Amongst other controls, Council Regulation No. 833/2014 implements restrictions on the sale, supply, transfer or export, directly or indirectly, of certain technologies for the oil industry. The restricted technologies listed in Annex II of the Regulation are primarily relevant for use in deep water, Arctic and shale oil projects.
The regulation provides that it shall be prohibited for a Member State to grant a licence to sell, supply, transfer or export any of these Annex II technologies if they have reasonable grounds to determine the transaction is for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production and shale oil projects in Russia. Deepwater, Arctic or shale oil projects are not defined in the regulation. In the UK, the Export Control Organisation has indicated that it understands ‘Arctic’ to mean the area north of the Arctic Circle. It is working with the EU Commission and other Member States to reach a common understanding of ‘deep water’, and notes that the United States has defined the term to mean ‘greater than 500 feet.’
An exception applies in relation to the execution of obligations arising from a contract or agreement concluded before 1 August 2014. Licence applicants wishing to rely on this exception must provide a copy of the relevant contract or agreement in support of their licence application in a Member State (to HM Treasury in the UK), but should note that the existence of a relevant contract does not guarantee that a licence will be granted.
The regulation also provides that for any sale, supply, transfer or export of technologies listed in Annex II in relation to circumstances outside the scope of deep water, Arctic or shale projects, it shall be necessary for the exporter to obtain prior authorisation from the competent authority in a Member State. A licence is also required for the provision of technical assistance, brokering services, financing and financial assistance related to the sale, supply, transfer or export of these Annex II technologies to Russia or for use in Russia.
Restrictions in Crimea and Sevastopol
Council Regulation No. 825/2014, introduced on 30 July 2014, prohibits an extensive range of oil and gas activities in Crimea or Sevastopol. Investment in the development of infrastructure in the energy sector in Crimea and Sevastopol, the exploitation of oil, gas or mineral resources in Crimea or Sevastopol and the provision of key equipment and technology related to the energy industry to any person, body or entity in Crimea or Sevastopol is prohibited.
Specifically, energy companies will be affected by the restriction on the acquisition or extension of a participation, including the acquisition of shares and securities, in enterprises in Crimea or Sevastopol engaged in the creation, acquisition or development of infrastructure in energy or the exploitation of oil, gas or mineral resources in Crimea or Sevastopol and the creation of any JV in relation to such exploration.
Exploitation means exploration, prospection, extraction, refining and management of oil, gas and mineral resources and the provision of related geological services, but does not extend to maintenance to ensure safety of existing infrastructure.
Energy companies will also be affected by the prohibition on selling, supplying and/or exporting, directly or indirectly, key equipment and technology listed in Annex III of the Regulation which includes key equipment relating to the creation, acquisition or development of infrastructure in the energy sector and for the exploitation of oil, gas and mineral reserves.
It shall also be prohibited to provide, directly or indirectly, technical assistance relating to any of the restricted goods or technology listed in Annex III, which means a prohibition on the provision of any technical support related to repairs, development, manufacture, assembly, testing, maintenance or any other technical service, including instruction, advice, training and transmission of working knowledge or skills to any person, entity or body in Crimea or Sevastopol or for the use in Crimea or Sevastopol.
Restrictions against individuals or entities
Companies in the EU must also be aware of the ongoing evolving list of sanctioned individuals and entities subject to financial restrictions. The restrictions result in the freezing of all funds and economic resources belonging to, owned, held or controlled by a sanctioned individual or entity, and prohibit funds or economic resources being made available, directly or indirectly, to or for the benefit of those sanctioned.
Energy companies operating in the EU must undertake ongoing and rigorous due diligence and screening to ensure that they become aware if any JV partners or supply chain contractors become listed.
The broad nature of sanctions regimes means that a breach could apply where a resource is supplied further down a supply chain to a designated party where the original supplier ought reasonably to have known that such on-supply might occur. All key JV and supply chain contracts should be reviewed to ensure they have mechanisms in place for termination or suspension in the event that sanctions rules are triggered.
Energy companies are also recommended to implement sanctions compliance policies and training programs to educate employees on the importance of compliance and the key risk areas.