EU and UK Publish Further Details Regarding the Implementation of the Oil Price Cap; EU Ninth Package of Sanctions Previewed

EU and UK Publish Further Details Regarding the Implementation of the Oil Price Cap; EU Ninth Package of Sanctions Previewed

December 9, 2022, Covington Alert

Further to our December 2, 2022 alert concerning the G7 price cap on Russian oil, the European Union and United Kingdom have in recent days issued further measures to implement the price cap, and associated guidance. We summarize those recent developments herein.

In addition to the price cap measures, on December 7, 2022 EU Commission President Ursula von der Leyen outlined a ninth package of sanctions against Russia, which the Commission is currently developing. President von der Leyen’s statement indicates that the new package will include (among other features) nearly 200 new asset-freezing sanctions designations, a ban on transactions with the Russian Regional Development Bank, new export controls restrictions (including in relation to electronics and IT components), and mining investment restrictions. The exact scope and timing of the implementation of the ninth package of sanctions remains uncertain.

The EU originally introduced the legislative basis for the price cap on Russian oil and petroleum products as part of its eighth package of sanctions against Russia on October 6, 2022 (the “October 6 Regulations”). (The details of these EU measures are outlined in our October 10, 2022 alert.) The October 6 Regulations did not, however, impose a price cap—rather, they established the legal framework for its future implementation. On December 3, 2022, the Council and the European Commission published two regulations which: (1) introduced the actual terms of the price cap; and (2) amended existing restrictions on the maritime transport of Russian-origin crude oil and petroleum products to third countries, and the provision of related services.

Council Regulation (EU) 2022/2367 introduced various amendments to Article 3n of Regulation 833/2014 (“Regulation 833”), which contains a prohibition on the maritime transport of Russian-origin crude oil and petroleum products to third countries and the provision of related technical assistance, brokering services or financing or financial assistance. The amendments include the following key provisions:

• Article 3n(1), which had imposed a ban on technical assistance, brokering services, or financing / financial assistance relating to the transport of Russian oil or petroleum products, has now been extended to cover services concerning any trading, brokering, or transport activities.
   
  (The EU has retained the pre-existing exemption to the Article 3n(1) prohibitions for the execution of contracts concluded before 4 June 2022, until 5 December 2022 for crude oil and 5 February 2022 for petroleum products.)
   
  The pre-existing prohibition, contained in Article 3n(4), against EU persons engaging in the maritime transport of Russian-origin crude oil (effective December 5, 2022) or petroleum products (effective February 5, 2023) also has been extended to now capture trading, brokering, or transport activities.
• Consistent with the objectives of the price cap, the restriction on the maritime transportation of oil between third countries, and the provision of related services, will not apply to crude oil transactions (as of December 5, 2022) concerning cargoes that are purchased at or below the price cap, which is set at USD 60 per barrel for Russian-origin crude oil. A similar exemption will apply with regard to petroleum products transactions when the petroleum products price cap is implemented (which is anticipated to occur on February 5, 2023).
• The amendments retain, with minor modifications, pre-existing wind-down provisions what will apply to future changes to the price cap, allowing for certain transactions within 90 days of the entry into force of updates to the price cap value.
• The regulation introduces a 45-day wind-down period for vessels carrying Russian-origin crude oil purchased above the price cap if the cargo was loaded onto a vessel at the port of loading prior to December 5, 2022, and unloaded at the final port of destination prior to January 19, 2023.

     
  The EU has retained pre-existing exemptions for the transport of crude oil or petroleum products where those goods originate in a third country and are only being loaded in, departing from or transiting through Russia (provided that both the origin and the owner of those goods are non-Russian), and for activities related to the transactions meeting the criteria set out in Annex XXIX to Regulation 833. (Annex XXIX currently focuses on the transport to Japan of crude oil commingled with condensate, originating from the Russian Sakhalin-2 project, with that exemption set to expire on June 5, 2023.)

• Pursuant to amended Article 3n(7), if a vessel carries Russian-origin crude oil or petroleum products and the operator responsible for the transport knew or had reasonable cause to suspect that such crude oil or petroleum products were purchased above the applicable price cap, EU persons will be prohibited from providing services referred to in Article 3n(1) relating to the transport of Russian-origin crude oil or petroleum products by that vessel for 90 days following the date of unloading of the cargo purchased above the price cap. (The latest amendments thus significantly narrow Article 3n(7)—the original text had not included the 90-day effective period, and the prohibitions on servicing vessels originally were not limited to scenarios where an offending vessel carried Russian-origin cargoes.)
• The regulation also introduces an emergency-related exemption, which allows the transport, trading or brokering of the listed oil and petroleum products beyond the price cap or the provision of technical assistance, brokering services or financing or financial assistance related to the transport, trading or brokering when these are necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment, or as a response to natural disasters.

The regulation notes that the functioning of the price cap mechanism will be reviewed every two months to respond to developments in the market, and will be set at least 5% below the average market price for Russian oil and petroleum products, calculated on the basis of data provided by the International Energy Agency. Any price cap changes will require a unanimous decision of the 27 EU Member States comprising the Council.

Separately, Commission Implementing Regulation (EU) 2022/2368  sets the price cap for crude oil and petroleum oils and oils obtained from bituminous minerals (CN code 2709 00) which originate in or are exported from Russia, at USD 60 per barrel.

In addition to the two regulations, the EU has issued guidance on the oil price cap restrictions. Among other topics, the guidance provides for a recordkeeping and attestation process that allows each party in the supply chain of Russian oil to demonstrate or confirm that the oil has been purchased at or below the price cap. The EU attestation process, similar to the UK attestation process and the U.S. safe harbor mechanism (which we outlined in our previous alert), divides the market into three distinct tiers and imposes different attestation requirements on those in each tier of the supply chain. The EU guidance also makes the following notable points, which are broadly consistent with the U.S. and UK price cap regimes:

• The guidance notes that the prohibition on transporting Russian seaborne oil applies to “all EU vessels, i.e., EU flagged vessels, and also vessels that are owned, chartered and/or operated by EU companies or nationals. This would also cover agents acting on their behalf.”
• The price cap will apply from the receipt Russian-origin cargo on a vessel (including any intermediate trade or ship-to-ship transfers), and will no longer apply after the Russian-origin cargoes have been “released for free circulation in a jurisdiction outside Russia and are consigned to the landed purchaser.”
• The guidance provides details on the method for determining exchange rates for transactions that are not in USD (the oil price cap figure is currently denominated in USD).
• Shipping, freight, customs, and insurance costs are not included in the cap and must be invoiced separately at reasonable commercial rates.
• EU non-preferential rules of origin standards should be used in evaluating whether oil or petroleum products are of Russian origin.
• Russian oil that is mixed with non-Russian oil will be subject to the price cap, except to the extent the Russian content constitutes unavoidable Russian oil residue or a de minimis amount of Russian oil left over from a container or tank.
• When an EU operator without direct access to price information reasonably relies on an attestation, after performing appropriate due diligence, and such an attestation was falsified or provided by illegitimate actors, the EU operator would not be considered in breach of the price cap restrictions provided it has acted in good faith.
• In contrast to the U.S. and UK implementation of the price cap, the EU measures do not require reporting to the EU or EU Member State regulators concerning Russian-oil transactions. However, the guidance notes that “[a]ny tips or information regarding possible circumvention should be actively reported to national competent authorities.”

UK Oil Price Cap Implementation

On December 4, ahead of the oil price cap coming into effect on December 5, UK HM Treasury’s Office of Financial Sanctions Implementation (OFSI) published a number of documents relating to the UK’s implementation of the oil price cap. The documents include the general license required to implement the price cap under UK sanctions legislation (the “Price Cap General License”), a number of further related general licenses, further guidance for industry on the price cap and related requirements (apparently replacing earlier guidance published by OFSI last week), and various ancillary forms related to aspects of the operation of the price cap.

Price Cap General License

As set out in our previous alert, under UK sanctions legislation the oil price cap will be implemented via a General License, which will authorize, providing preconditions are met, transactions relating to the transfer between third countries of oil and oil products sold at or below the price cap that would otherwise be prohibited by UK sanctions restrictions.

The Price Cap General License is now published and is effective from December 5, 2022. The general license sets out requirements relating to price sharing, attestations, reporting and record keeping that were outlined in our prior alert, that are required preconditions upon which use of license depends.

The general license notably contains a number of elements that are inconsistent with, or materially build upon, the guidance published by OFSI last week (as summarized in our prior alert). Of particular note:

• With regard to the attestation process, the general license confirms (as per last week’s guidance) that Tier 2 parties must secure price information and/or attestations from Tier 1 counterparties when engaged in transactions concerning restricted Russian cargo, but adds that when dealing with other Tier 2 or Tier 3 parties, Tier 2 parties must likewise request price information and/or attestations, and conduct appropriate due diligence sufficient to be satisfied that the information provided by counterparties is accurate.
    
  The general license likewise confirms that Tier 3 parties must seek attestations from counterparties, or include contractual safeguards concerning compliance with price cap requirements in commercial documents with counterparties, and must conduct appropriate due diligence to confirm the accuracy of information and/or contractual assurances provided by counterparties.
• With regard to reporting requirements, the general license provides that:
  • Tier 1 parties must report to OFSI activities under the general license within 40 days (the earlier guidance indicated 30 days);
  • With regard to Tier 2 and Tier 3 parties, the general license confirms that when dealing with a UK Tier 1 party, if the UK Tier 1 counterparty does not provide confirmation to the Tier 2/3 party that it has reported transactions to UK HM Treasury as required under the general license, the Tier 2/3 party must report that information to OFSI within 60 days (the earlier guidance indicated 30 days) and “withdraw their services as soon as reasonably practical.”
               
    The general license clarifies, however, that the foregoing requirements do not apply with regard to dealings with non-UK Tier 1 counterparties. When dealing with non-UK Tier 1 counterparties, Tier 2/3 parties do not need to require confirmation that the Tier 1 party has reported transactions to OFSI, but the Tier 2/3 parties must themselves report the transactions in question to OFSI.
               
    The general license, and OFSI guidance, provide further details concerning the sequencing and format of the foregoing reporting processes.

Further General Licenses

OFSI has also published three further general licenses which relate to the implementation of the oil price cap.

• Winddown General License: this license permits, subject to certain reporting and other requirements, the following activities with respect to oil purchased above the oil price cap that was loaded onto a ship prior to 5:01 am GMT on December 5, 2022, and was or will be offloaded at the port of its destination before 5:01 am GMT on January 19, 2023:
  • the supply or delivery of Russian oil or oil products of Russian origin by ship from Russia to a third country, or between third countries;
  • the provision of related services that would be restricted under UK sanctions; and
  • the processing of payments in relation to the foregoing activities by “Relevant Institutions” (i.e., UK-regulated financial institutions and service providers).
• Correspondent Banking and Payment Processing General License: this license permits financial institutions to process, clear or send payments where such activities would otherwise breach the restriction on the provision of financial services and funds relating to the maritime transport of restricted oil and oil products (under section 46Z9C of The Russia (Sanctions) (EU Exit) Regulations 2019), providing the Relevant Institution is operating solely as an intermediary and does not have a direct relationship with the party providing the restricted service.
• Exempt Projects and Countries General License: this license provides that the restrictions under UK sanctions to which the oil price cap relates will not apply with respect to activities undertaken in relation to the following (providing record keeping requirements are satisfied):
  • the supply or delivery by ship of Russian oil originating in or consigned from the Sakhalin-2 Project (an offshore oil and gas project) from Russia to Japan until September 23, 2023;
  • the execution of contracts concluded before June 4, 2022, (or ancillary contracts necessary for the execution of such contracts) for the purchase, import or transfer of Russian oil into Bulgaria until December 31, 2024;
  • where there are no alternative supplies of vacuum gas oil available, the purchase, import or transfer of vacuum gas oil of Russian origin and falling under HS commodity code 2710 into Croatia until December 31, 2023; or
  • the supply or delivery by ship of Russian oil or oil products of Russian origin and falling under commodity code 2709 consigned for a landlocked European Member State (as described in Regulation (EU) 2022/879) if the supply of crude oil by pipeline from Russia is interrupted for reasons outside of the control of the relevant Member State until the date on which the Treasury confirms that such supply has resumed.

Forms and Ancillary Documents

A number of further forms and template documents have also been published in relation to the UK sanctions restrictions relating to the oil price cap. These include:

• forms for reporting the use of the Oil Cap General License and the Winddown General License;
• a form for providing notification to OFSI that a Tier 1 provider has not confirmed compliance with the requirement to report to OFSI use of the Winddown General License;
• a sample attestation form;
• an application form for a specific license in relation to the price cap restrictions regarding an “extraordinary situation”;
• a notification form for reliance on the exception to the price cap restrictions in emergency circumstances; and
• a form for reporting a suspected breach of the price cap restrictions.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions and export controls.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.

Covington is therefore exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on our trade and public policy teams as well as our additional multidisciplinary teams in areas including international arbitration and disputes, cybersecurity, anti-money laundering, corporate restructuring, finance, and insurance.

As the Ukraine crisis evolves, we will continue to monitor developments, including those regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.