US, EU and UK Price Caps on Russian Crude Oil and Petroleum Products

Introduction:

The G7 countries + Australia (the Price Cap Coalition) have each imposed wide-ranging sanctions restricting the import of Russian-origin crude and petroleum products into their markets and prohibiting the provision of support services for the maritime transportation of seaborne Russian-origin crude oil and petroleum products globally.

There are limited carve outs to the restrictions for operators whereby the provision of services facilitating the transport of Russian- origin crude oil and petroleum products by sea to and between third countries is permitted only if the oil and petroleum products are purchased at or below the price cap established by the Price Cap Coalition (the Price Cap Scheme). The Price Cap Scheme does not apply to imports of Russian-origin crude oil and petroleum products into the Price Cap Coalition countries and does not override the import restrictions imposed by the individual jurisdictions.

The Price Cap Coalition has set a maximum price of:

• USD60 per barrel for seaborne Russian-origin crude oil:
• USD100 per barrel for "premium to crude" petroleum products, including diesel, kerosene and gasoline; and
• USD45 per barrel for "discount to crude" petroleum products, including fuel oil and naphtha (Price Caps).

The Price Caps are subject to review and amendment by the Price Cap Coalition and are intended to be set at least 5% below the average market price.

The aim of the Price Cap Scheme is to reduce Russia’s oil revenues and ability to fund military activity in Ukraine through inflated global oil prices, whilst enabling oil to continue to flow to the third countries that need it.

The Price Cap Scheme took effect on 5 December 2022 for Russian-origin crude oil and 5 February 2023 for Russian petroleum products. The Price Caps on Russian petroleum products do not apply to products loaded onto a ship before 5 February 2023 and unloaded at the port of destination by 1 April 2023.

The Price Cap Coalition has closely coordinated sanctions measures and the United States (US), European Union (EU) and United Kingdom (UK) have issued separate regulations and guidance on the implementation of the Price Cap Scheme.

The US, EU and UK measures apply to all US, EU and UK persons, but will be of most relevance to those companies involved in the maritime transport of oil (and provision of associated services) and their insurers. In this article, we summarise each of the US, EU and UK measures and provide practical guidance for compliance.

The US

On 8 March 2022, the US banned the importation of Russian-origin crude oil, petroleum, and petroleum fuels, oils and products.¹

As of 5 December 2022, in accordance with a determination issued pursuant to Executive Order 14071, the US prohibits the provision of maritime transport services for Russian-origin crude oil acquired above the Price Caps, including the following services:

• Trading/commodities brokering, including brokering the sale, purchase, or trade of commodities on behalf of other buyers or sellers;
• Financing, including the provision or disbursement of any debt, equity, funds, or economic resources;
• Shipping, including owning or operating a ship, chartering or sub-chartering ships to deliver cargo, brokering between shipowners and charterers and serving as a shipping/vessel agent;
• Insurance, including reinsurance and protection and indemnity (P&I);
• Flagging, including registering or maintaining the registration of a vessel with a country’s national registry of vessels; and
• Customs brokering, including assisting importers and exporters in meeting requirements governing imports and exports.

As of 5 February 2023, US persons are prohibited from providing the above services for petroleum products of Russian origin purchased above the Price Caps.

The US has issued determinations² authorising US persons to provide the abovementioned services if the Russian-origin crude oil or petroleum products are purchased at or below the Price Caps.

The Office of Foreign Assets Control (OFAC) has also issued a Scheme.³

The OFAC guidance provides a table for the purposes of determining if "petroleum products" fall under the "premium to crude" price cap.⁴ These products include gasoline, motor fuel blending stock, gasoil, diesel fuel, kerosene and kerosene type jet fuel and vacuum gas oil.

Products included in "discount to crude" price cap include naphtha, residual fuel oil and waste oils.

The EU

On 3 June 2022 the EU banned the import of Russian-origin crude oil and petroleum products, with certain derogations⁵.

On 6 October 2022, as part of its 8^th sanctions package, the EU adopted amendments to Council Regulation (EU) 833/2014 (the EU Regulation) introducing the legal framework for the Price Cap Scheme⁶ pending the final decision of the Price Cap Coalition that was adopted on 2 December 2022.

As of 5 December 2022 for Russian-origin crude oil, and as of 5 February 2023 for Russian petroleum products, and being transported to third countries, the EU Regulation prohibits the provision of the following:

• Trading and brokering, including brokering, sale and purchase⁷;
• Maritime transportation, including ship-to-ship transfers; and
• Technical assistance, financing or financial assistance and certain other services related to the trading, brokering, or transport.

Following every subsequent amendment to the Price Caps, a 90-day wind down period will apply for the provision of the prohibited services, provided that:

• the provision of the otherwise restricted services is pursuant to a contract concluded before the entry into force of every subsequent amendment; and
• the purchase price did not exceed the Price Caps in force at the time of the conclusion of the contract.⁸

Further, the European Commission (EC) has allowed for the potential extension to the wind down period⁹, stating that, in cases of proven force majeure, the initial 55-day wind down period, which allows petroleum products at sea on 5 February 2023 to be unloaded at the final port of destination until 1 April 2023¹⁰, may be extended until the hindering circumstance ceases to exist.

Annex XXVIII to the EU Regulation provides for two price caps depending on whether the product falls under the "discount to crude" or "premium to crude" category.

The EU Regulation also includes an anti-circumvention clause, by applying a 90-day ban for the provision of the covered services to a vessel transporting Russian-origin crude oil or petroleum products, if the operator knew or had reasonable cause to suspect that such oil or petroleum product was purchased above the Price Caps set on the date of the conclusion of the contract.[11]

The EC has issued to ensure uniform implementation of the measure across the EU.¹²

The EC guidance specifically carves out the provision of bunkering services, vessel and cargo testing and certification services from the scope of the prohibitions.

The UK

As of 5 December 2022, pursuant to amendments to the UK’s Russia (Sanctions) (EU Exit) Regulations 2019,¹³ the UK banned the import into the UK of Russian-origin crude oil and petroleum products.¹⁴

The UK also prohibited the provision of the following related services:

• Technical assistance, including technical support relating to repair, development, production, assembly, testing, use or maintenance, or any other technical service;¹⁵
• Financial services, including banking and other financial services¹⁶ ; and
• Brokering services, including negotiating, facilitating, promoting or providing any wider assistance.¹⁷

In respect of Russian crude-oil and petroleum products originating in or consigned from Russia which are not for import into the UK, the UK has also restricted the following, subject to compliance with the Price Caps:

• Maritime transportation: directly or indirectly supplying or delivering by ship, crude oil (from 5 December 2022) and petroleum products (from 5 February 2023), originating in or consigned from Russia (a) from a place in Russia to a third country, or (b) from one third country to another third country.¹⁸ This prohibition encompasses persons who own, control, charter or operate a ship (a) on which the oil or oil products are transported, and (b) to or from which the products are being transferred; and

• Providing related financial services or funds, brokering services: directly or indirectly providing financial services or funds connected to the above prohibited supply or delivery by ship of Russian-origin or consigned crude oil or petroleum products, from 5 December 2022 or 5 February 2023, respectively.

Guidance¹⁹ issued by the UK Office of Financial Sanctions Implementation (OFSI) specifically carves out the provision of bunkering services and flagging services and registries from the scope of the prohibitions.

The products subject to the "premium to crude" price cap are outlined in Table 2.B of the OFSI guidance and include products such as gasoline, kerosene, jet fuel, medium oils, heavy oils and gas oils. All other products that fall under petroleum products (HS code 2710) not listed in Table 2.B fall under "discount to crude".

If the price paid is below the Price Caps, a General License issued by OFSI²⁰ allows shipments to third countries under defined conditions.

OFSI has also published a number of forms for use in relation to reporting the use of the UK general license, attestation, notification requirements, breach reporting and specific license applications.

Due Diligence – The 3-Tier system

The US, the EU and the UK have each issued guidance on the due diligence that is required from industry participants to be afforded a “Safe Harbor”²¹ in the provision of services relating to maritime transportation of Russian-origin crude oil and petroleum products.

Industry participants are divided into three “Tiers” of “Actors” and are required to conduct a recordkeeping and attestation process to comply with the Price Cap Scheme in good faith.

Each party in the supply chain of Russian-origin crude oil or petroleum products shipped via maritime transport is required to demonstrate or confirm, through the recordkeeping and attestation process, that the Russian-origin crude oil or petroleum products have been purchased at or below the Price Caps.

Tier 1

Actors who regularly have direct access to price information in the ordinary course of business, such as commodities brokers and oil traders.

Traders and commodities brokers must retain documents showing that Russian-origin crude oil or petroleum products were purchased at or below the Price Caps. Such documentation may include invoices, contracts, or receipts/proof of payment.

Tier 2

Actors who are able to request and receive price information from their customers in the ordinary course of business, such as financial institutions, ship/vessel agents, and customs brokers.

Financial Institutions must, to the extent practical, request and retain documents that show that Russian-origin crude oil or petroleum products were purchased at or below the Price Caps.

When not practical to request and receive such information, financial institutions must obtain and retain customer attestations, in which the customer commits that for the service being provided, the Russian-origin crude oil or petroleum products were purchased or will be purchased at or below the Price Caps.

Ship/Vessel Agents and Customs Brokers must request and retain price information (to the extent practical) or a signed attestation from their customers (when direct receipt of price information is not practical).

Tier 3

Actors who do not regularly have direct access to price information in the ordinary course of business, such as insurers, P&I clubs, shipowners, and flagging registries.

Shipowners/Carriers or other carriers who transport cargo (who do not in the ordinary course of business have information regarding the pricing of the underlying cargo) must obtain and retain an attestation from their customer/contractual counterparty regarding compliance with the Price Caps to be afforded the Safe Harbor.

Insurers /Reinsurers/P&I clubs must obtain and retain customer attestations, in which the customer commits that for the service being provided, the Russian-origin crude oil or petroleum products were purchased or will be purchased at or below the Price Caps.

For example, this could be done as a part of the annual insurance policy renewal process or updates to insurance policies. This can also be done through a sanctions exclusion clause written into or already included in policies or contracts.

Flagging Registries must undertake appropriate due diligence and ensure the counterparty provides a signed attestation. For example, flagging registries can require by contract, regulation, or other enforceable means that their customers be de-flagged if they violate the Price Caps.

(Note: Flagging registries are not required to comply with the UK prohibitions).²²

Tier 1 - commodities brokers, traders, importers/refiners
Should retain and share, as needed, documents that show that seaborne Russian-origin crude oil or petroleum products were purchased at or below the Price Caps e.g. Invoices, contracts, receipts

Tier 2 - financial institutions, trade finance, charterer, custom brokers
Request, retain, and share, as needed, documents that show that seaborne Russian-origin crude oil or petroleum products were purchased at or below the Price Caps

Tier 3 - insurers, P&I clubs, shipowners, flagging registries*
Obtain and retain customer attestation in which the customer commits not to purchase seaborne Russian-origin crude oil or petroleum products above the Price Caps

*except in the UK 

The US’s, UK’s and EU’s guidance clarify that service providers are not required to use a particular form of attestation but helpfully include a non-binding example of an attestation letter.

Reporting Obligations:

The US

US persons providing covered services are required not to participate in a transaction which exceeds or seeks to evade the Price Cap Scheme, and report such a transaction to OFAC.²³ Any instance where there is evidence the operators have purchased Russian-origin crude oil or petroleum products above the Price Caps is a violation of the Price Cap Scheme.

To be afforded the "Safe harbor", US service providers must retain relevant records and attestations for at least five years.²⁴

The EU

The EU Regulation does not require operators to report breaches, however the required attestations should be retained to be verified by the national competent authorities during controls or investigations. The EC has clarified that EU operators are expected to retain relevant records for a minimum of five years from the date of transport.²⁵

The UK

Tier 1 Actors are required to report to OFSI each time they undertake an activity purporting to be permitted under the UK General License within 40 days. Where there are multiple activities undertaken within a 30-day period, this may be submitted as one consolidated report.²⁶

Tier 2 and 3 Actors are required to ask and receive confirmation from the Tier 1 Actor that the Tier 1 Actor has reported to OFSI.

Where a Tier 2 or Tier 3 Actor is transacting with a non-UK Tier 1 Actor they do not need to receive confirmation of Tier 1 Actor reporting, but do need to inform OFSI of the activity within 60 days.

Further Guidance for Financial Institutions:

• Financial institutions must comply with the Price Cap Scheme where they have committed their own resources (i.e., grants, loans, guarantees, suretyships, bonds, letters of credit).
• Financial institutions providing transaction-specific trade finance related to the maritime transport of Russian-origin crude oil or petroleum products, or general financing should implement appropriate and reasonable risk-based policies and procedures within their sanctions compliance programs to confirm that the price does not exceed the Price Caps.
• Financial institutions providing trade finance must routinely collect trade documentation to manage financial and compliance risks. Such information may contain trade or transaction information showing the origin of articles, date, and unit price. If obtaining such documentation is not practical in the ordinary course of business, financial institutions must obtain and retain signed attestations from their downstream customers or subcontractors that the Russian-origin crude oil or petroleum products were purchased at or below the Price Caps to be afforded the Safe Harbor.

The US and UK guidance²⁷ publications clarify that processing, clearing or sending of payments is not in-scope of the Price Cap Scheme where the financial institution in question is

• operating solely as an intermediary; and
• does not have any direct relationship with the person providing services related to the maritime transport of Russian-origin crude oil or petroleum products (i.e., the person is a non-account party).

Similarly, the EC (as confirmed by case law and by previous EC guidance) has clarified that ‘financing or financial assistance’ for the purpose of the Price Cap Scheme does not include the processing of payments by a bank (whether as an intermediary or not). However, the Court of Justice of the EU has clarified that the processing of payments in relation to activities, or the export of items, that are prohibited under EU sanctions is forbidden.²⁸

Conclusion:

We recommend that each operator in the oil maritime transport industry follows the relevant guidelines on the Price Cap Scheme implementation, in parallel with stringent record keeping, and develops, implements, and routinely updates their sanctions compliance program to incorporate the specific requirements of the Price Cap Scheme.

Each program should reflect the individual operator’s business model, geographic location, sector and areas of operation including a risk assessment for each transaction, guided by the operator’s internal risk appetite.

Sanctions compliance programs will assist in identifying red flags and any potential sanctions breaches. This includes but is not limited to establishing best practice requirements on setting up contractual monitoring, due diligence, Know Your Customer (KYC) procedures, supply chain monitoring and the ship lifecycle monitoring.

Industry Actors must remain vigilant to identify any existence of red flags early in the process, such as when a customer or counterparty is refusing or reluctant to provide the necessary documentation or attestations, as this may signal issues with compliance or potential circumvention of the Price Cap Scheme.