Takeaways relating to the newly enacted Russian oil price cap

Background

On June 3, 2022, the EU published a 6th package of sanctions against Russia (Council Decision (CFSP) 2022/884) which imposed, among other restrictions, a partial ban prohibiting EU persons:

• from purchasing, importing or transferring into the EU, directly or indirectly, crude oil and certain refined petroleum products which originate in Russia, or are exported from Russia and the corresponding provision, directly or indirectly, of technical assistance, brokering services, financing or financial assistance or any other services related to this prohibition (article 3m of Regulation (EU) 833/2014).
• These prohibitions do not apply (i) until December 5, 2022 to seaborne crude oil, spot market transactions and execution of existing contracts (ii) until February 5, 2023 to petroleum products.

• from being involved in providing technical assistance, brokering services, financing or financial assistance or any other services (including insurance and reinsurance), including through ship-to-ship transfers, regarding maritime transport of Russian crude oil/petroleum products to third countries (article 3n of Regulation (EU) 833/2014).
• These prohibitions do not apply (i) until December 5, 2022 to the execution of contracts concluded before June 4, 2022, or of ancillary contracts necessary for the execution of such contracts (ii) to 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.

On October 6, 2022, the EU announced an 8th package of sanctions against Russia (Council Decision (CFSP) 2022/1909) introducing, among others, an exemption from the second prohibition under the sixth sanctions package mentioned above, i.e., a prohibition to provide technical assistance, brokering services, financing or financial assistance regarding maritime transport to third countries of crude oil or petroleum products which originate or are exported from Russia, purchased above a pre-established price cap to be determined by the Price Cap Coalition (the "Price Cap").

The G7 countries also agree to adopt the Price Cap. Furthermore, the initial wording of Article 3n has been replaced by a new wording of this article specifying that the new prohibitions provided for are not applicable to the execution of contracts concluded before June 4, 2022 or to the ancillary contracts necessary for the execution of these contracts: until December 5, 2022 for crude oil and until February 5, 2023 for petroleum products.

Taking these rules together, while EU parties will be prohibited from purchasing, importing or transferring into the EU, directly or indirectly, crude oil and certain refined petroleum products which originate in Russia, or are exported from Russia, they may provide technical assistance, brokering services, financing or financial assistance regarding maritime transport to third countries of crude oil or petroleum products which originate or are exported from Russia, provided that such crude oil or petroleum products were purchased at or below the Price Cap.

Some key features of the Price Cap mechanism are as follows.

Definition of "Price Cap"

To date [October 19, 2022], there is no official definition of the Price Cap.

However, we can infer from Regulation (EU) 2022/1904 that the Price Cap corresponds to an amount of the oil price above which all persons are prohibited from providing technical assistance, brokerage services, financing, financial aid in connection with the transportation to third countries of crude oil or oil products.

What (prohibition)

A prohibition to provide technical assistance, brokering services, financing or financial assistance regarding maritime transport to third countries of crude oil or petroleum products which originate or are exported from Russia, purchased above the Price Cap.

Why (purpose)

The Price Cap is part of a coordinated effort among G7 members to reduce oil revenues for the Russian economy while allowing countries dependent on Russian oil to maintain a source of supply.

According to the Preliminary Guidance on Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil published by OFAC on September 9, 2022 (the "OFAC Preliminary Guidance"), the Price Cap policy is intended to achieve three objectives:

• maintain a reliable supply of seaborne Russian oil to the global market;
• reduce upward pressure on energy prices; and
• reduce the revenues the Russian Federation earns from oil after its own war of choice in Ukraine has inflated global energy prices.

Who (target)

As with other EU sanctions, the Price Cap applies to the following parties:

• on board any aircraft or any vessel under the jurisdiction of a Member State;
• to any person inside or outside the territory of the EU who is a national of a Member State;
• to any legal person, entity, or body, inside or outside the territory of the EU, which is incorporated or constituted under the law of a Member State; and
• to any legal person, entity, or body in respect of any business done in whole or in part within the EU.

When (effective date)

According to Regulation (EU) 2022/1904, the prohibitions shall apply as of December 5, 2022, to crude oil and as of February 5, 2023, to petroleum products, which originate in Russia or which have been exported from Russia.

It should be noted that according to Regulation (EU) 2022/1904, the obligation to respect the Price Cap arises at the time of the conclusion of the purchase contract.

How (enforcement)

The EU Council indicated that the application of the Price Cap mechanism would rely on an attestation process that would enable operators in the supply chain of seaborne Russian oil to demonstrate that it has been purchased at or below that Price Cap, although it has yet to issue corresponding detailed guidance. The EU also plans monitor potential circumvention practices of the Price Cap.

On the other hand, OFAC Preliminary Guidance provides that the enforcement of the Price Cap will rely on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that oil has been purchased at or below the Price Cap. Moreover, this recordkeeping and attestation process is designed to create a “safe harbor” for service providers from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the Price Cap due to falsified records provided by those who act in bad faith and make material misrepresentations. OFAC will expect service providers to retain relevant records for five years. OFAC Preliminary Guidance also gave some examples of possible red flags for Price Cap evasion.

Penalties for breaching the Price Cap by a non-EU entity may include prohibition to provide services relating to the transport of crude oil or petroleum products by the vessel carrying the crude oil/ petroleum products.

Amount of the Price Cap

To date [October 19 2022], the amount of the Price Cap has not yet been defined.

However, some trends are emerging. Indeed, Washington-based ClearView Energy Partners has said officials have been talking about a $40-$60 per barrel range for crude. Some other analysts suggested that they the Price Cap could be set around $50 per barrel, according to Energy Intelligence.

Finally, U.S. Treasury Assistant Secretary for Terrorist Financing and Financial Crimes, Elisabeth Rosenberg, mentioned that the price should be set above the marginal production cost of Russia's oil and take into consideration historical prices. Some experts say that this could imply a potential Price Cap of around $60 a barrel, as Russian Urals crude, based off benchmark Brent futures, sold for $50 to $70 a barrel in 2019. Russian government documents identified a marginal crude production cost of $44 per barrel, although some Western officials believe it may be somewhat lower.

Authors

Olivier Dorgans, Partner (Compliance and Internal Investigation); Alexander Dmitrenko, Partner (Dispute Resolution); Paul Charlot, Senior Associate (Compliance and Internal Investigation); Vicki Tang, Associate (Dispute Resolution)