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Crude D'Etat - OFAC Implements Policy & Guidance Relative to Price Caps on Crude Oil Originating from Russian Federation

Washington, D.C. (December 5, 2022) – On November 21, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a determination (the Crude Oil Determination) pursuant to sections 1(a)(ii), 1(b), and 5 of Executive Order 14071 of April 6, 2022 (E.O. 14071, “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression”), that certain “Covered Services” are subject to the prohibitions of E.O. 14071. These prohibitions become effective December 5, 2022.

The Crude Oil Determination

Ostensibly, the Crude Oil Determination prohibits the United States or its citizens from engaging directly or indirectly in the following Covered Services connected to the maritime transportation of crude oil of Russian Federation origin (Russian Oil) for the purposes of exportation, re-exportation, sale, or supply:

  • Trading/commodities brokering;
  • Financing;
  • Shipping;
  • Insurance, including reinsurance and protection and indemnity;
  • Vessel flagging; and
  • Customs brokering.

However, the prohibition of these Covered Services does not apply where the transaction remains at or under the relevant price cap as determined by the Department of Treasury (Price Cap) as published in the Federal Register.

Effective November 5, 2022, the Department of Treasury has issued a subsequent determination confirming that the Price Cap will be set at $60 per barrel.

OFAC Guidance

Navigating these newly price-capped waters will require precision to avoid potential OFAC sanctions enforcement. As such, OFAC has provided guidance (the OFAC Guidance), which provides more granular definitions of the Covered Services and how the Price Cap applies to such transactions. In short:

  • Covered Services are prohibited by U.S. entities when Russian Oil exceeds the Price Cap;
  • Russian Oil is so designated when it is sold by a Russian entity for maritime transport;
  • After Russian Oil has cleared customs in another jurisdiction and been substantially transformed (i.e. refined and more than simply blended such that it loses its identity as crude oil and becomes a new product having a new name, character, and use) or sold ashore, the Price Cap no longer applies;
  • However, the Price Cap will apply if the Russian Oil is then re-exported without first being substantially transformed.

As those waters are also likely choppy, OFAC has also provided certain Safe Harbor exceptions from sanctions enforcement for certain U.S. service providers who may have inadvertently engaged in potentially sanctionable activity but otherwise act in good faith with due diligence, recordkeeping, and attestation process responsibilities.

Those responsibilities are commensurate with a service provider’s respective level of classification established by OFAC, which fall among three tiers: Tier 1 Actors, who regularly have direct access to price information in the ordinary course of business; Tier 2 Actors, who less frequently receive price information from their customers in the ordinary course of business; and Tier 3 Actors, who do not have direct access to price information in the ordinary course of business. Regardless of classification, any service provider engaging in Covered Services must retain relevant records for five years pursuant to 31 C.F.R. § 501.601 in order to receive the benefit of Safe Harbor protections.

Licenses – Granted and Possible

Finally, OFAC has maintained that it can make certain, limited authorizations for entities to operate, notwithstanding the Crude Oil Determination. To date, OFAC has granted three of these licenses:

  • General License 55 – authorizes transactions related to crude oil originating from the Sakhalin-2 project, provided that it is solely for transport and importation into Japan. ·
  • General License 56 – authorizes certain, limited transactions for Bulgaria, Croatia, or a landlocked Member State of the European Union.
  • General License 57 – authorizes transactions that are ordinarily incident and necessary to address vessel emergencies related to the health and safety of the crew or environmental protection.

Key Takeaways

U.S. entities and persons who may be dealing with Covered Services on or after December 5, 2022 should carefully assess whether those transactions will comply with the Crude Oil Determination and the $60 per barrel Price Cap threshold. This holds true regardless of whether they are directly involved or are downstream within that transport chain. Further, appropriate recordkeeping and attestation processes should be put into effect to obtain the benefit of Safe Harbor protections from sanctions enforcement efforts in the event that a transaction is inadvertently non-compliant.

Please contact a member of Lewis Brisbois’ Ukraine Conflict Response Team if you have any questions about these latest OFAC determinations and for assistance in assessing your risk posture relative to any Covered Services.

Author:

Michael Ferragamo

Editors:

Jane C. Luxton, Managing Partner,

Andrew Pidgirsky, Partner

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