Price Cap for Maritime Transport of Crude Oil of Russian Origin Set and Implemented

The G7 (the United States, Canada, France, Germany, Italy, Japan, and Australia)[1] and the Council of the European Union (“EU”)[2] (collectively, the “Price Cap Coalition”)[2] announced the imposition of a $60 per barrel (“Price Cap”) cap on the price of seaborne crude oil that is produced in or exported from Russia, as reported by Global Dunn.

Price cap 

The Price Cap is implemented as an exception to a general prohibition on providing certain services for the maritime transportation of seaborne Russian-origin oil which had previously been announced or was in effect in some of the Price Cap Coalition member jurisdictions (“Price Cap Programs” or “Programs”).

The Price Cap Coalition itself represents a departure from traditional multilateral institutions (e.g., the UN Security Council), and the simultaneous implementation of the Price Cap Programs across several jurisdictions speaks to the strong alignment amongst the West and its allies against Russian aggression in Ukraine.

The Price Cap Programs are not a monolith, as the three jurisdictions will implement the aligned principles of the Price Cap in slightly different ways, which adds complexity for global compliance.

Readers should be aware that the other Price Cap Coalition members are implementing respective Price Cap Programs as well, which are not addressed in this particular analysis.

Question 1: What are the Price Cap Programs and when do the measures take effect?

The Price Cap Programs are laws and regulations that prohibit the provision of certain services that support the maritime transport of Russian-origin crude oil and petroleum products from Russia to third countries or from a third country to other third countries, unless the oil or petroleum product has been purchased at or below the relevant Price Cap.

The current Price Cap only applies to Russian-origin crude oil and became effective along with the applicable prohibitions on December 5, 2022.

See Question 3 below for detail on the distinction between the products covered under each of these respective price caps and prohibitions.

Following months of volatility in supplies and rising prices in the wake of Russia’s further invasion of Ukraine, the Price Cap Programs establish a framework for the transport of seaborne Russian oil and petroleum products intended to reduce upward pressure on energy prices globally and maintain a stable supply of these products on the global market.

While the Price Cap Programs were conceived as a mechanism to curtail Russia’s ability to generate revenue from the sale of its energy resources, they are also designed to avoid imposing a blanket ban on the provision of all services relating to the transport of Russian oil and petroleum products, which could have far-reaching and unintended consequences on global energy markets as well as on third countries that may already be experiencing economic impact as a result of the war in Ukraine.

The focus of the Price Cap-related restrictions is on maritime transport to third countries, not to the implementing jurisdictions themselves.

While the Price Cap is set in U.S. dollars, purchases of Russian oil and petroleum products in any other currency are also implicated.

The EU has issued specific guidance on the conversion rate to be used.[3] While guidance issued by the European Commission is not legally binding, it is viewed as highly persuasive within the EU, and other members of the Price Cap Coalition may draw upon the EU’s approach.

Shipping, freight, customs and insurance costs are not included in the Price Cap.

These costs should be invoiced separately and at commercially reasonable rates.

Question 2: What are the various implementing laws and regulations of the U.S., EU and UK Price Cap Programs?

Question 3: What products are covered by the Price Cap Programs and when does the Price Cap apply?

The various Price Cap Programs apply to Russian origin crude oil as described by Harmonized System (“HS”) code 2709, and Russian origin petroleum products as described by HS code 2710.  HS codes are administered by the World Customs Organization and are adopted nearly uniformly across all countries.

For Russian crude oil, the Price Cap begins at the embarkment of Russian oil to sea, and lasts until the first landed sale of such oil, after customs has been cleared in a jurisdiction outside Russia. Any intermediary trade at sea as well as all ship-to-ship transfers must also occur at or below the Price Cap.  The Price Cap will still apply if, after clearing customs, the oil is reintroduced into maritime commerce without undergoing origin-changing substantial transformation (as described in greater detail below).

Whether crude oil can be deemed to be of Russian origin will be determined with reference to non-preferential rules of origin. Non-preferential rules of origin are traditional customs rules used to determine the origin of products traded outside the remit of bilateral or multilateral trade agreements. The introduction of the Price Cap Programs has not changed the way in which these rules apply to determine the origin for customs purposes of Russian crude oil and petroleum products. Crude oil will not be deemed Russian origin or be subject to the Price Cap in the following circumstances:

• Substantial transformation: where Russian origin oil undergoes a substantial transformation in a country other than Russia, for example as a result of processing or due to a material stage of manufacturing which alters the key features of the product, it will no longer be deemed Russian origin. Generally speaking, substantial transformation includes refinement, as well as other economically justifiable actions via which the oil becomes a new product (i.e., “with a new name, character and use”) or falls under a different HS code. Merely mixing or blending Russian crude oil with other non-Russian oil is generally not sufficient to constitute substantial transformation. Note that the legal tests and rules governing activities that qualify as “substantial transformation” may vary across the EU, UK and U.S. and may be product-specific.
• De minimis amount: In line with the normal application of non-preferential rules of origin, crude oil originating in a country other than Russia will not be deemed Russian origin merely because it was mixed with a de minimis amount of Russian crude oil by virtue of being transported in a container or tank which previously contained Russian origin crude. An example of a de minimis amount would be an un-pumpable amount of oil (e.g., a “tank heel”) that cannot be removed without causing damage to the container.
• Non-Russian oil transiting through Russia: Crude oil that can be verified as originating from a third country will not be considered Russian origin crude oil subject to the Price Cap even if it is transported through or is departing from Russia. This is consistent with the application of non-preferential rules of origin, as mere transport of goods is not an origin-conferring activity. For example, according to guidance provided by the Price Cap Coalition members, Kazakh origin oil transported through the Caspian Pipeline Consortium or the Atyrau-Samara pipeline is generally not subject to the Price Cap.  However, the EU guidance notes that oil subject to the Price Cap remains so even if mixed with oil which is not subject to the Price Cap, and the Price Cap is to be applied to the relevant proportion of such commingled oil.[17]  Operators may reasonably rely upon a certificate of origin provided in the ordinary course of business, but they must be alert to circumstances that suggest the a certificate has been falsified or is otherwise erroneous.  Note that for this particular exception to apply, the EU and the UK require that the oil being transported through Russia be owned by a non-Russian person.

Question 4: What do the Price Cap Programs prohibit and to whom do the respective prohibitions apply?

The chart below summarizes the key prohibition in the Price Cap Programs:

The U.S. Guidance offers additional detail on the categories of services that are “Covered Services.” This guidance is summarized below:

• Trading/commodities brokering: Buying, selling, or trading commodities directly or brokering such transactions on behalf of others.
• Financing: Any commitment to provide economic resources, such as investments, funds, advances, grants, loans, guarantees or letters of credit.  Note however that the following activities are specifically carved out as not constituting covered financial services:
  • The processing, clearing, or sending of payments by an intermediary bank that does not have any direct account relationship with the person providing the Covered Services; or
  • Foreign exchange transactions and clearing commodities futures contracts.
• Shipping: Owning, operating or chartering a ship to carry cargo or transport freight, as well as brokering such relationships and serving as a vessel agent.
• Insurance: Providing insurance and protection and indemnity (“P&I”) services, whether satisfying claims for property damage or assuming risks of existing insurance policies originally underwritten by other insurance carriers, and providing liability insurance for maritime liability risks associated with the operation of a vessel.
• Flagging: Registering a vessel (including maintaining such registration) with a country’s national registry of vessels. However, de-flagging vessels that are transporting Russian oil above the Price Cap is excluded.
• Customs brokering: Assisting importers and exporters to meet requirements governing imports and exports, excluding legal services or assistance meeting the requirements of U.S. sanctions.

In the EU, Council Regulation (EU) No 833/2014 and European Commission Guidance provide some definitions and explanations related to the scope of prohibited activities:

• Technical assistance: “Any technical support related to repairs, development, manufacture, assembly, testing, maintenance, or any other technical service, and may take forms such as instruction, advice, training, the transmission of working knowledge or skills or consulting services, including verbal forms of assistance.”[28]
• Brokering services: Services related to “(i) the negotiation or arrangement of transactions for the purchase, sale or supply of goods […] or of financial and technical services, including from a third country to any other third country, or (ii) the selling or buying of goods […] or of financial and technical services, including where they are located in third countries for their transfer to another third country.”[29] In the context of the EU Price Cap Program, the European Commission stated that the Price Cap Program applies widely to a range of brokering services  such as “commodities brokering, insurance brokering, customs brokering, [and] ship brokering.”[30]
• Financing or financial assistance: “Any action, irrespective of the particular means chosen, whereby the person, entity or body concerned, conditionally or unconditionally, disburses or commits to disburse its own funds or economic resources, including but not limited to grants, loans, guarantees, suretyships, bonds, letters of credit, supplier credits, buyer credits, import or export advances and all types of insurance and reinsurance, including export credit insurance;” note that “payment as well as terms and conditions of payment of the agreed price for a good or a service, made in line with normal business practice, do not constitute financing or financial assistance.”[31]

Similar to the EU, the UK Russia (Sanctions) (EU Exit) Regulations 2019 and UK sanctions guidance provide definitions of the services caught:

• Financial services: means any service of a financial nature, including (but not limited to) payment and money transmission services, charge and debit cards, travellers’ cheques and bankers’ drafts[32], insurance or re-insurance, and other related services.[33]
• Funds: means financial assets and benefits of every kind.[34]
• Brokering services: means any service to secure, or otherwise in relation to, an arrangement, including involving the selection or introduction of persons as parties or potential parties to the arrangement; the negotiation of the arrangement; the facilitation of anything that enables the arrangement to be entered into; or the provision of any assistance that in any way promotes or facilitates the arrangement.[35]

Question 5: Are there any applicable exceptions or licenses?

Yes, the Price Cap Programs do contain certain exceptions and licenses:

• Russian oil loaded before the Price Cap effective date: Russian oil that is loaded onto a vessel at the port of loading before 12:01 a.m. EST on December 5, 2022 and unloaded at the port of destination before 12:01 a.m. EST on January 19, 2023 is not subject to the Price Cap. This means that providers of Covered Services (in the U.S. terminology), or providers of relevant Ancillary Services (in the UK and EU terminology), can provide such services related to Russian origin crude oil that meets these terms without respect to the Price Cap.
• Sakhalin-2 project: The U.S.,[36] the UK,[37] and the EU,[38] each permit the provision of services related to maritime transportation of Russian origin crude oil originating from the Sakhalin-2 project until September 30, 2023 (U.S. and UK), or June 5, 2023 (EU), as long as such oil is destined solely for importation into Japan.
• Imports into certain EU member states: The U.S.,[39] EU,[40] and UK,[41] each permit the provision of services for maritime transportation of Russian origin crude oil if it relates to permissible importation of such oil into Bulgaria, Croatia, or landlocked European Union Member States, consistent with the terms of pre-existing EU exceptions.
• Processing of payments: The UK issued a General License indefinitely authorizing certain institutions to process, clear or send payments from any person/entity in connection with activities that would otherwise breach the prohibition to provide financial services and funds relating to maritime transportation of certain oil and oil products, subject to certain conditions.[42] As noted above, the U.S. also authorizes similar activities by way of definitional carve out related to what constitutes covered “financial services,” as opposed to using a General License.
• Emergencies: The U.S.,[43] EU,[44] and UK[45] each authorize otherwise prohibited services that are necessary to address vessel emergencies related to crew health or safety or protection of the environment. The exception does not cover the sale of the subject cargo. In the UK, any person purporting to act under this exception must notify OFSI within 5 working days of the act using the appropriate form.[46] In the EU, operators must notify the national competent authority immediately once the event has been identified.
• Specific licenses: The availability of specific licenses for activities not within the Price Cap differ across the three principal jurisdictions. In the U.S., if a provider of Covered Services becomes aware that it is providing a Covered Service for Russian oil purchased above the Price Cap, they must immediately stop providing such services and contact OFAC.  If the U.S. person has complied with the attestation process (described below) and believes that it should continue to provide services despite violations by third parties, the U.S. provider may submit a written application for a specific license, which OFAC will consider on a case-by-case basis.  In the UK, a specific licence may be applied for to deal with an extraordinary situation (one that is unexpected, unavoidable, and not recurring) by filling out the relevant application form and returning it to OFSI.[47] Note that in neither jurisdiction will specific licences be issued retroactively. Note that the EU has not issued any General Licenses.  All the derogations from the prohibitions are contained in the main body of Council Regulation 833/2014.

Question 6: What are the U.S., UK and EU Price Cap Program compliance obligations and diligence expectations (including attestation and reporting requirements)?

Each of the principal jurisdictions has gone to significant lengths to provide tailored compliance and recordkeeping guidance to the various actors within the maritime transportation services supply chain.

Notably, the U.S., UK and EU have each set forth a detailed attestation process by which maritime transportation industry actors can benefit from a “safe harbor” from prosecution arising out of violations by third parties.

Tier 2 actors are those who have direct relationships with Tier 1 actors (e.g., financial institutions engaged in trade finance and charterers).

At each tier, a service provider that obtains price information or, where it is not practical to request price information, obtains an attestation from the tier above it, and otherwise conducts appropriate, risk-based due diligence, will be eligible for the safe harbor and generally will not be the target of an enforcement action.

To qualify for the safe harbor, price information and/or an attestations must be retained for five years.

The table below provides a side-by-side comparison by jurisdiction of the documentary, due diligence and reporting requirements expected of actors within each tier.

OFAC and the HM Treasury have published a sample attestation form, which can be accessed here and here, respectively. The European Commission has published a similar attestation form in its guidance.

Service providers are not required to adopt the exact language provided by the sample attestations in order to be afforded the safe harbor; depending on a service provider’s role in the transaction, they may tailor the sample language based on the availability of information available to them and the identity of their counterparty.

Note that an authorized representative of the customer or counterparty must sign the attestation for it to be effective.

As a general point of compliance, service providers should update their internal procedures and standard forms to incorporate requirements for price information or requests for signed attestations.

Finally, OFAC and OFSI have a wide remit to take actions against those who willfully breach, evade, avoid, cause a violation of, or attempt to violate the Price Cap Program.

Evasive tactics such as using side deals to obfuscate the “real” purchase price paid by an intermediary or the ultimate purchaser may also warrant civil or criminal penalties.[49] Similarly, UK guidance notes that enforcement actions will be taken against those who falsify the information on attestations.

In the EU, national competent authorities in EU Member States are in charge of sanctions enforcement.  As such, they will be in charge of determining whether the Price Cap measures are being circumvented.   In doing so, national competent authorities will consider whether the EU operator took the appropriate steps to ensure compliance with the Price Cap.  It is important to remember that liability for inchoate offences (such as conspiring to commit) or offences of complicity (such as aiding, encouraging, abetting, assisting) take effect through the domestic legal orders of EU Member States. These laws can vary significantly from one EU Member State to another (including on key issues such as jurisdiction or the required mental element).

Conclusion

As is apparent from the above analysis, the U.S., UK and EU Price Cap Programs are quite similar in their focus and applicability from a general sense, but there are nuances among the various Programs which impose slightly different requirements on service providers based on their jurisdiction.

It remains to be seen whether other countries will eventually join the Price Cap Coalition and/or agree to implement similar restrictions in the future, which could create additional complexity in the global energy supply chain where Russian origin oil or petroleum products are involved.

Notably, the level of the Price Cap may not have resulted in as significant an impact as was anticipated prior to its imposition, as the price of Russian Urals crude has been declining since December 1, 2022 through the implementation of the Price Cap on December 5, 2022, and as of the publication of this alert, is already trading below $55 per barrel.

We would expect to see further impact and disruption from the Price Cap Programs if, and likely when, the Price Cap Coalition lowers the Price Cap of $60 per barrel of crude oil in the future.

The higher the global market clearing price for oil is above the Price Cap, the more distortions in the market we would expect to see, along with some potential unpredictable effects including supply challenges, more sophisticated sanctions evasion efforts and networks, or more meaningful push back from Russia. Already the Price Cap has resulted in some unintended hiccups, such as creating a bottleneck of tankers blocked at the Bosphorous and Dardanelles straits by Turkish authorities requiring vessels to produce evidence of proper P&I insurance, even though a significant number of the tankers may not have been transporting Russian origin oil.[51]

Finally, given the global nature of energy markets, there are various other externalities which could affect market prices for crude oil and the effectiveness and implications of the Price Cap, including decisions by OPEC to alter production levels, or other actions affecting the overall supply of oil in the market (for example, OFAC recently issued a license authorizing Chevron to resume extraction and exportation to the U.S. of Venezuelan crude).

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Source: Gibson Dunn

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