Last week, the EU decided to maintain in force its sanctions against Russia, including the sanctions targeting Russia’s energy sector.
The sanctions were adopted on July 31, 2014—by Council Regulation 833/2014 (the Regulation)—and extended on September 12, 2014. As described in more detail in our recent client alert, the Regulation imposes a licensing requirement for the sale, supply, transfer, or export of “technologies” listed on Annex II to the Regulation to any party in Russia or for use in Russia. Annex II contains a broad range of pipes, casings, tubings, and other tools and equipment used in oil and gas exploration and production activities. The licensing requirement applies regardless of the end-use of those items.
In parallel, the Regulation requires licenses for the provision of technical assistance, brokering services, financing or financial assistance relating to the items listed in Annex II to Russian parties or for use in Russia. Importantly, Member States authorities may not grant licenses if there are reasonable grounds to determine that the sale, supply, transfer or export of the technologies is for use in connection with a project pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, unless a given transaction is required under a contractual obligation that was concluded prior to August 1, 2014.
In addition to the above-mentioned restrictions, the Regulation prohibits the direct or indirect provision of services necessary for deep-water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, including (i) drilling, (ii) well testing, (iii) logging and completion services, and (iv) supply of specialised floating vessels. The prohibition is without prejudice to the execution of an obligation arising from a contract or a framework agreement concluded before September 12, 2014, or ancillary contracts necessary for the execution of such contracts.
The Regulation has not been phrased in the clearest of terms and the industry has been struggling with the interpretation of the various restrictions. As an example, while the export restrictions in the Regulation refer to “technologies,” Annex II lists only hardware. Further, the Regulation does not define the terms “Arctic,” “deepwater” or “shale.” Likewise, the Regulation does not explain the scope of the drilling, well testing, logging or completion services or how to interpret the terms “specialised floating vessels.” There has also been a lot of confusion relating to the licensing process, in particular regarding the scope of the licenses, the competent authorities within each Member State, the forms that companies have to complete, and the supporting documentation that they have to provide to the authorities. While some Member States have issued guidance on those points, the guidance has been significantly delayed and does not address all questions posed by the industry. The European Commission’s guidance on the interpretation of the Regulation—expected in November—will hopefully provide more answers.
The EU sanctions have been imposed in close cooperation with the United States and since their imposition have been followed by a number of additional countries, including Norway. The sanctions are reported to have a significant effect on the energy industry. Most EU-based companies with operations in Russia had to reassess their Russian operations, with some companies significantly limiting their operations or even exiting the Russian market. EU-based exporters decreased sales to Russia, with German exporters reportedly decreasing their Russian sales by over 26%. Russian companies, including Rosneft, have sought financial support from the Russian state to cover losses caused by the international sanctions and the falling price of oil. And energy executives have said that the sanctions would eventually lead to less investment in Russian oil production, which would likely damage long-term supplies of oil, despite the U.S. shale boom.
While the EU sanctions are under a constant review, the European Council recently decided to maintain them in place. As a result, the EU sanctions will continue to impact the energy industry for the coming months.