The recently enacted “Countering America’s Adversaries Through Sanctions Act” (hereafter “the Act”) bodes rather significant changes for the Oil and Gas Industry. The changes arise from the Russian Sanctions and the Ukrainian crisis. A review of the initial Executive Order 13662 from September 14, 2014 (Directive 4) versus the provisions of the Act will readily reveal what changes will be in store.
Executive Order 13662
“. . . the following activities by a U.S. person or within the United States are prohibited, except to the extent provided by law or unless licensed or otherwise authorized by the Office of Foreign Assets Control: the provision, exportation, or reexportation, 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 that have the potential to produce oil in the Russian Federation, or in maritime areas claimed by the Russian Federation and extending from its territory, . . . “[Italics emphasis added].
“. . . the directive prohibits the provision, exportation, or reexportation, directly or indirectly, by United States persons or persons within the United States, of goods, services (except for financial services), or technology in support of exploration or production for new deepwater, Arctic offshore, or shale projects—
(1) that have the potential to produce oil;
[Italics emphasis added].
The Act no longer limits “the potential to produce oil” to the Russian Federation or to the maritime area claimed by the Russian Federation. Instead, the Act covers “the potential to produce oil” anywhere in the world. This is likely a recognition that the technological advantage the U.S. has in the areas of deepwater, Arctic offshore and shale projects can only be preserved by protecting the use of the same anywhere in the world. It will no longer be enough to certify that a given company is not involved in projects within the Russian Federation. It will now be necessary to impose checks on Russian national employees to prevent deemed (re)exports from occurring back to the Russian Federation.
The Act’s Scope
“. . . and that involve any person determined to be subject to this Directive, its property, or its interests in property.” “. . . and (2) that involve any person determined to be subject to the directive or the property or interests in property of such a person who has a controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest.”
The Act goes beyond targeting its prohibitions against any designated persons with a controlling interest (>50%) now to a substantial non-controlling ownership interest (defined as ≥ 33%). This will require vetting of JVs and partnerships to check for designated persons under these new parameters.
Other key changes
In addition to the above changes, the Act has required the codification of all key Executive Orders relating to the Russian Sanctions (in effect, making such sanctions mandatory rather than discretionary). The Act also imposes the following Congressional oversight on the President of the United States. Should the President wish to waive the mandatory sanctions, the President must:
1) Provide a written determination that the waiver is in the vital national security interests of the United States or will further the Act’s enforcement, and
2) Provide a certification that the Russian Federation is taking steps to implement the Minsk Agreement and any successor agreements.
Moreover, respecting the energy sector, the Act imposes boundaries on the President’s ability to impose or to lift sanctions on specific producers. To do so, the President must provide notice to the appropriate congressional committees not later than 15 days after imposing new sanctions or where sanctions are to be lifted:
a) A notice of and justification of the termination; and
b) A notice that:
i. the foreign person is not engaging in the activity that was the basis for the sanctions or has taken significant verifiable steps toward stopping the activity; and
ii. the President has received reliable assurances that the foreign person will not knowingly engage in activity subject to sanctions in the future.
Finally, the Act limits investments in certain pipeline projects when a person knowingly makes an investment or sells, leases, or provides to the Russian Federation for the construction of Russian energy export pipelines, goods, services, technology, information, or support where:
1) any of which has a fair market value of $1,000,000 or more; or
2) that, during a 12-month period, have an aggregate fair market value of $5,000,000 or more.
In conclusion, the Act imposes mandatory codification of previously issued executive orders as well as requires Congressional oversight of future Presidential action (be it to impose sanctions or to lift them). It also imposes restrictions on dealings to further certain Russian energy export pipelines. The Congressional intent is clear. In conjunction with the enhancements of Directive 4 noted above, the Act is significantly enhancing the Russian Sanctions. These efforts all appear targeted to ensure the sanctions remain duly in place and with efficacy until meaningful positive change respecting the Ukrainian crisis takes place.