On Friday, August 1, 2014, the US Department of Commerce’s Bureau of Industry and Security (“BIS“) issued an advance copy of a final rule amending the Export Administration Regulations (“EAR“) by, among other things, imposing significant new restrictions on exports, reexports, and in-country transfers of certain goods, software, technology, and data for use in Russia’s oil and gas sector related to deepwater, Arctic offshore, and shale exploration and production operations (the “EAR Amendments“). The EAR Amendments are the latest in a broad array of trade and financial sanctions imposed by the United States and its allies on Russian and Ukrainian persons in response to developments in Ukraine. The new restrictions will go into effect when published in the Federal Register, likely on Wednesday, August 6, 2014.
The principal impact of the EAR Amendments is the imposition of (1) a new licensing requirement for the supply of certain goods, software, technology and data (collectively, “items“) for use directly or indirectly in exploration for or production of oil or gas in Russian deepwater, offshore Arctic, or shale projects, and (2) a policy of denial of applications for any item requiring a license to Russia where the item is intended for use directly or indirectly for exploration or production from Russian deepwater, offshore Arctic, or shale projects that have the potential to produce oil.
There is no savings clause. Accordingly, these new licensing restrictions will apply immediately on the effective date to all transactions involving items and activities targeted by these new controls. This includes items en route to a port of export or reexport.
1. Licensing Requirement
New EAR Section 746.5 (entitled Russian Industry Sector Sanctions) requires a license for the export, reexport, and in-country transfer of certain items subject to the EAR (described below) when (i) the exporter, reexporter, or transferor knows or is informed by BIS that those items “will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia,” or (ii) the exporter, reexporter, or transferor is unable to determine whether those items will be used in such projects. Except for defining deepwater projects as those at depths of greater than 500 feet, the EAR Amendments do not clarify the scope of the three types of projects falling under the new restrictions. No license exceptions will be available for any transaction targeted by the new licensing requirement except License Exception GOV (EAR § 740.11(b)).
Items Subject to the New Licensing Requirement
The items targeted by the new licensing requirement are those (i) listed in a new Supplement 2 to EAR Part 746 (as set forth by Schedule B numbers), (ii) classified under currently existing Export Control Classification Numbers (“ECCNs“) 1C992, 3A229, 3A231, 3A232, 6A991, and 8A992, and (iii) falling within the scope of two new ECCNs created by the EAR Amendments, i.e., 0A998 covering oil and gas exploration equipment, software, and data and 8D999 covering software specially designed for the operation of unmanned submersible vehicles used in the oil and gas industry.
These items include, among other things, drilling rigs, parts for horizontal drilling, drilling and completion equipment, drill pipe, casing and tubing, line pipe, subsea processing equipment, software for hydraulic fracturing, high-pressure pumps, seismic acquisition equipment, remotely operated vehicles, expanders, valves, and risers. Notably, many of these items are classified as EAR99.
New ECCNs Created
Potentially challenging for some parties will be new ECCN 0A998, which includes “[o]il and gas exploration data, e.g., seismic analysis data,” and “[h]ydraulic fracturing design and analysis software and data.” Acknowledging that data controlled by ECCN 0A998 fall outside the EAR’s definition of “technology,” BIS notes that “[m]any U.S. companies are hired to provide or analyze seismic or other types of data in order to assist in oil exploration,” and that “this data product obtained through the analysis of raw seismic or other types of data is a commodity sold by companies.” In short, ECCN 0A998 captures data that otherwise fall outside the scope of the EAR for purposes of exports/reexports to countries other than Russia. The EAR Amendments also create new ECCN 8D999. As noted above, ECCN 8D999 controls software specially designed for the operation of unmanned vessels used in the oil and gas industry.
ECCNs 0A998 and 8D999 apply only for purposes of the Russia industry sector sanctions. These ECCNs do not control exports to any other destination.
2. Licensing Policy of Presumption of Denial
The EAR Amendments provide that applications for “any item that requires a license for Russia” will be subject to a presumption of denial “when for use directly or indirectly for exploration or production from deepwater (greater than 500 feet), Arctic offshore, or shale projects in Russia that have the potential to produce oil.” This indicates that the license denial policy will apply not only to the above items subject to the new licensing requirement, as summarized above, but also to any other item that already requires a license to Russia when destined for the targeted end-use.
