Unconventional Oil Projects
CAATSA amended Directive 4 under Executive Order 13662, which now imposes two prohibitions on the provision, exportation, or re-exportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects with the potential to produce oil (referred to below as unconventional oil projects), that involve certain Russian energy companies (or any entity 50 percent or more owned by one or more of such entities) – referred to below as a Directive 4 Target.
First, the amended Directive 4 still imposes restrictions in relation to unconventional oil projects that are (i) within Russia (or in a maritime area claimed by Russia), and (ii) in which a Directive 4 Target is involved (“Existing Prohibition”). However, the amended Directive 4 now imposes an additional prohibition on unconventional oil projects where: (i) the project was initiated on or after 29 January 2018; (ii) the project has the potential to produce oil in any location; and (iii) a Directive 4 Target either (a) owns a 33 percent or more interest in the project, or (b) owns a majority of the voting interests in the project (“Additional Prohibition”).
This Additional Prohibition is notable for a couple of reasons. First, the Existing Prohibition focuses on projects within Russia or Russian waters, whilst the Additional Prohibition now potentially applies to unconventional oil projects anywhere in the world. Second, the Existing Prohibition targets unconventional oil projects in Russia “involving” Directive 4 Targets. However, the Additional Prohibition requires a Directive 4 Target to have either an ownership interest of 33 percent or greater, or a majority of the voting interests, in the particular project. As discussed in our previous post, we expect this to result in less non-Russian projects being affected by the new sanctions than originally envisaged by earlier versions of the new sanctions wording, however the implications for non-Russian projects is still significant.
Guidance issued by OFAC provides that ownership stakes of all Directive 4 Targets (including entities caught by the 50 percent rule) will be aggregated when determining whether a project is 33 percent or more owned by a Directive 4 Target, or whether a Directive 4 Target owns a majority of the voting interests in a project. Therefore, if two Directive 4 Targets have a combined ownership interest of 33 percent or more in a non-Russian unconventional oil project, those that need to comply with US sanctions must carefully consider the prohibition in Directive 4.
We identified in our previous post that one of the key issues for the energy sector was the definition of the word “new” (referred to in CAATSA) in relation to the Additional Prohibition. OFAC has clarified that the Additional Prohibition will only apply to projects “initiated” on or after 29 January 2018, and that a project is “initiated” when a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party. This clarification will greatly assist parties with determining whether Directive 4 will impact on their project.
Debt of SSI entities
As set out in our previous post, CAATSA also provided for the tightening of restrictions on the financing of, or transactions in, debt issued by particular entities in the Russian financial services and energy sectors. Such amendments have now been implemented, and OFAC has issued guidance in relation to those amendments. In summary, Directive 1 under Executive Order 13662 (which targets specific Russian financial institutions) has been modified to impose a 14-day maturity limit (previously 30 days) on such debt, and Directive 2 under Executive Order 13662 (which targets specific Russian energy companies), has been modified to impose a 60-day maturity limit (previously 90 days) in relation to such debt. As expected, such amendments will not apply retrospectively. The list of entities determined to be subject to one or more of the directives under EO 13662 can be found here.