March 14, 2022

Executive Order Targeting Russian Energy Sector Has Immediate Effect on Shipping Industry

Holland & Knight Alert
Sean T. Pribyl | Jonathan M. Epstein | Christopher R. Nolan | Gerald A. Morrissey III | Dariya V. Golubkova

Highlights

  • The White House has launched additional salvos of sanctions against the Russian Federation in response to its continued efforts to undermine the sovereignty and territorial integrity of Ukraine.
  • President Joe Biden's Executive Order (E.O.) targeting the Russian energy sector places prohibitions or restrictions on certain energy-related transactions and imposes primary restrictions that have a far-reaching impact on the energy and marine sectors.
  • Energy and shipping stakeholders should undertake a close review of their current operations, charter parties and supply contracts to assess the extent to which their commercial operations are affected by the new E.O.

In the past week, the White House has launched additional salvos of sanctions against the Russian Federation in response to its continued efforts to undermine the sovereignty and territorial integrity of Ukraine. This Holland & Knight alert focuses on President Joe Biden's new Executive Order (E.O.) targeting the Russian energy sector issued on March 8, 2022. While the energy sector of the Russian Federation economy itself is not subject to comprehensive sanctions, the E.O. places prohibitions or restrictions on certain energy-related transactions under several sanctions authorities. Overall, the E.O. imposes three primary restrictions that have a far-reaching impact on the energy and marine sectors.

First, the E.O. prohibits imports of the following Russian-origin products:

  • crude oil
  • petroleum
  • petroleum fuels, oils and products of their distillation
  • liquefied natural gas
  • coal
  • coal products

Second, the E.O. bans "new" U.S. investment in the Russian energy sector. Guidance published by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) broadly defines "new investment" to include contribution of funds, assets, loans or other extension of credit for a range of activities in or related to Russia including the transport of such energy products. However, the E.O. does not prohibit transactions such as the unwinding of contracts or other business-related activities by U.S. persons to comply with its import ban.

In addition, OFAC has imposed expansive sanctions on persons that operate or have operated in the financial services sector of the Russian Federation economy. To limit the degree to which these financial services sector sanctions may inhibit energy-related transactions, OFAC has issued Russia-related General License (GL) 8A, authorizing U.S. persons to process energy-related transactions involving the sanctioned Russian financial institutions identified in GL 8A.

Energy-related transactions authorized in GL 8A include payments connected with a variety of upstream and downstream activities, including the extraction, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, transport or purchase of energy for import from the Russian Federation to countries other than the United States or for export to the Russian Federation, as well as financing, loading or unloading related to such processes. However, transactions related to new investment in the energy sector in the Russian Federation are not authorized pursuant to GL 8A.

Third, the E.O. prohibits U.S. persons from financing, facilitating, approving or guarantying any of the aforementioned banned transactions (for example, imports or "new" investment).

In parallel, OFAC also published GL 16, authorizing the wind-down of now prohibited activities through 12:01 a.m. EST on April 22, 2022. Also, the E.O. does not prohibit U.S. persons from engaging in transactions to sell or redirect shipments that were laden on or after March 8, 2022, and previously destined for the United States.

Immediate Effect on the Shipping Sector

These types of sanctions have an immediate impact on the international shipping sector in terms of operations, contracts and insurance. By permitting wind-down and redirection of cargos, OFAC and the White House have apparently contemplated the flurry of contractual issues that are arising as impacted shipowners, charterers, operators, suppliers, purchasers, insurers (P&I clubs, reinsurance market, etc.), bunkering firms and financial institutions assess risk and as stakeholders look to sell or redirect shipments. This raises an immediate question of who the potential customers are for these Russian energy products, and although certain transactions are permitted, how much risk — including financial and reputational — will remain after the wind-down period expires.

Impacted stakeholders will be looking for ways to revisit contractual obligations, divert shipments and evaluate exemptions or exceptions to avoid breach of contract claims. As mentioned in a previous Holland & Knight alert (see "U.S. Sanctions on Russia: Impact on Shipping Businesses and Contractual Considerations," March 7, 2022), such analyses will turn on the bespoke language in respective contracts (for example, possible options under "restraint of princes" or force majeure clauses, though parties should tread cautiously as to whether a clause applies to the instant situation). A master's power to refuse entry into a port has been recently addressed in the United States, and it is notable but not determinative. Further, counterparties conscious of the sanctions risk and public opinion may refuse to participate in the transport and sale of Russian energy products, even where such transactions are authorized under OFAC wind-down licenses.

Ports could also be impacted. In terms of compliance, port operators will likely have to assess whether they would run afoul of the newly imposed sanctions if they assist in docking and unloading Russian-origin products. If a port denies entry or refuses to unload a cargo, laytime and demurrage clauses will be impacted and novel liability issues may arise.

Adding to the complexity as to how the E.O. will be enforced is the vetting and screening required to assess what is a "Russian-origin" product, in particular if products have been blended or commingled. Such considerations make due diligence efforts and rescreening of bills of lading and cargo-related documents all the more important. The U.S. Coast Guard and U.S. Customs and Border Protection have not provided any guidance on restrictions concerning the entry to vessels carrying Russian-origin products, but such involvement could include enhanced inspections that in turn could lead to delays. For industry stakeholders entering into new agreements or revisiting existing obligations, there are protective measures that can be employed to account for this likely scenario.

Most Recent Legislation

On March 9, 2022, the U.S. House of Representatives overwhelmingly approved legislation (H.R. 6968) that would ban importation of all products from the Russian Federation classified under Chapter 27 of the Harmonized Tariff Schedule. The banned imports include, inter alia, liquefied natural gas, petroleum oil and coal. While a companion Senate bill is still being drafted, the proposed House legislation allows a 45-day window after the date of the enactment to import otherwise banned products, and notably for shipping contracts, allows certain products to be imported into the U.S. if the importation of such products is pursuant to a written contract or agreement that was entered into before the date of the enactment of the proposed legislation. The broad support for this legislation likely helped sway President Biden's decision to impose sanctions under the executive order.

Other Collateral Consequences

This E.O.'s ban on certain Russian-origin products raises immediate questions as to ensuring U.S. domestic oil supplies. Several considerations are reportedly being floated by U.S. lawmakers and regulators, and some have even raised the talk of imports from countries currently subject to varying U.S. sanctions, such as Venezuela and Iran. Should this progress, industry stakeholders should carefully review what would be permitted under a new E.O. or General License.

Another consideration is the role that the U.S. Strategic Petroleum Reserve (SPR), the world's largest supply of emergency crude oil, could play. The federally owned SPR oil stocks were designed to hold up to 714 million barrels of crude oil in underground salt caverns at four storage sites along the Gulf of Mexico. Generally, the SPR releases of crude oil occur under four conditions: emergency drawdowns, test sales, exchange agreements and nonemergency sales. In response to Russia's invasion of Ukraine, on March 1, 2022, the U.S. Department of Energy committed to releasing 30 million barrels of crude oil from the SPR to ensure an adequate supply of petroleum. This most recent release commitment is the first emergency drawdown since 2011, when International Energy Agency (IEA) members collectively released 60 million barrels in response to disruptions in Libya. In November 2021, the White House announced that the Department of Energy made available releases of 50 million barrels of oil from the SPR to "lower prices for Americans and address the mismatch between demand exiting the pandemic and supply."

Shifts in the oil markets and trading patters could also raise tanker availability and Jones Act concerns. In July and August 2011, the Jones Act was waived during a crisis in Libya to allow foreign tankers to ship oil from the U.S. Additional waivers have been sought, and in some cases granted, in connection with natural disasters affecting fuel supplies. A previous Holland & Knight alert offered insight into how Jones Act requirements can be waived to allow foreign-flag vessels to engage in coastwise trade in generally rare circumstances in the "interest of national defense." (See "Jones Act Waivers Following Natural Disasters," Sept. 1, 2021.)

Conclusions and Considerations

Energy and marine sector stakeholders should undertake a close review of their current operations, charter parties and supply contracts to assess the extent to which their commercial operations are affected by the new E.O. Such a review should include an enhanced rescreening and due diligence check related to origin cargo that could have originated from Russia, to include commingled or blended with Russian-origin product, since OFAC has not offered clarification as what indeed is considered "Russian-origin." Insurers should confirm the same with their shipowner and charterer members, though they are no doubt already taking such measures.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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