US Sanctions Get Creative

On August 7th, the US Commerce Department’s Bureau of Industry and Security (BIS) amended the Export Administration Regulations (EAR) (15 CFR §§ 730–780) to include Russia’s offshore Yuzhno-Kirinskoe oil and gas field in the Entity List. The Entity List specifies companies and persons that the government believes “pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States.” The EAR imposes additional licensing requirements on exports, re-exports and transfers to entities and persons on the list.

The Yuzhno-Kirinskoe field, located some 21 miles off the coast of Sakhalin Island in the Sea of Okhotsk, is believed to hold around 636 billion cubic meters of gas and almost 100 tons of gas condensate. Such reserves make it the second largest field on Russia’s continental shelf (after the currently mothballed Shtokman field). The rights to develop the field are held by Russia’s state-controlled Gazprom, and it is part of the resource base underpinning the Sakhalin III project.

Just over one year ago the BIS imposed sanctions on certain segments of Russia’s energy industry, requiring a Commerce Department license when an entity or person exports or transfers an item subject to the EAR and knows that it will be used in exploration for or production of (1) deepwater offshore, (2) Arctic offshore or (3) shale oil or gas deposits in Russia. “Items subject to the EAR” is defined in 15 CFR § 743.3 and includes US origin items, non-US origin items containing more than 25% US-made components and items being transited through the US.

Given that the Yuzhno-Kirinskoe field likely qualified as a “deepwater offshore” deposit, it was probably already covered by the existing EAR regulations (see Gazprom website where it notes that the sea depth where the field is located varies between 360 and 1,050 feet). However, by singling out the Yuzhno-Kirinskoe field and adding it to the Entity List, the BIS is ensuring that all items subject to the EAR (not just those specifically used in the exploration for or production of oil and gas) cannot be used in the development of the offshore field. According to the rule published in the Federal Register, the Yuzhno-Kirinskoe field contains “substantial reserves of oil” and therefore any item exported or transferred to it “present[s] an unacceptable risk of use in . . . exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) locations.”

It’s worth noting that in order to include the offshore field to the Entity List, the BIS had to get a little creative and alter the wording of several EAR provisions. Prior to the August 7th action, only persons and business entities comprised the Entity List. Thus, to add an oil and gas deposit to the list, the BIS had to amend language in 15 CFR § 746.5 to accommodate the inclusion of something that couldn’t be categorized as a person or entity. To do this, the BIS added a prohibition on exports to certain “end-uses,” where previously it mentioned only “end-users.” Additionally, the introductory language to the Entity List itself was broadened to permit the addition of the field under § 746, whereas previously it noted that § 744 was the basis for designation in Entity List. Based on my initial reading of the relevant laws, such actions appear permissible under the EAR. However, I find it interesting that the BIS was willing to do something it had not done before (i.e., add a non-person/entity to the Entity List under § 746) when it appears that the field was likely already subject to EAR licensing requirements.

Ultimately, by adding the Yuzhno-Kirinskoe field to the Entity List, the US government has made it nearly impossible for any company to supply any US-origin or partially US-composed items to the field. Previously, it was possible that firms (and their creative attorneys) could have argued that they had no way of knowing that the items they were supplying would be used for exploration or production activities. It’s not clear exactly what impact (if any) the BIS actions will have on the development of the Yuzhno-Kirinskoe field, which is still several years away from active development. At the very least, however, these latest moves, along with the sanctions imposed at the end of July, are further evidence that US-Russia relations remain in a major rut.

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