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Energy Sanctions: The European Union’s Approach

Jessica Gladstone (Clifford Chance)

Date: 2015

Subject Area: Constitutional and Administrative Law, Construction and Utilities, European Union


Jessica Gladstone presents alternative approaches to energy sanctions in the EU, siting the associated commercial benefits and advice on how to comply in practice.

The European Union’s (the “EU”) imposition of sanctions in response to events in Ukraine over the last 12 months has once again rendered the energy sector a battleground in the implementation of the EU’s foreign policy. In this article we consider the EU’s sanctions regimes against Russia1 (the “Russia Sanctions”) as part of the EU’s wider sanctions context and examine the scope and impact of EU sanctions on the energy industry more generally.2

Of the 33 sanctions regimes that the EU currently has in place, five regimes make specific provision for the energy sector: Russia, Iran, Syria, Iraq, and Somalia. Of these, the most important to the energy sector are the Russia Sanctions and the EU’s sanctions regimes against Syria (the “Syria Sanctions”) and Iran (the “Iran Sanctions”). These regimes have, both separately and collectively, a significant impact on the energy sector.3

Russia Sanctions

Russia’s energy industry not only is extremely important to Russia’s economy but also is vital to the other states that depend on Russia for their national gas supplies. The EU imports approximately one third of its gas from Moscow; and six EU member states4 have been assessed by the European Commission to be almost 100% dependent on Russian gas.5 Russia holds the largest natural gas reserves in the world and is the second-largest producer of dry natural gas. It also is one of the world’s top producers and consumers of electric power and in 2012 was the third-largest producer of liquid fuels in the world, following the United States and Saudi Arabia.6

The EU has introduced its Russia Sanctions through four separate regimes, imposed between March and July 2014, each with its own underlying legislation. Each piece of legislation has been subject to numerous amendments. The result is a complicated patchwork that must be viewed cumulatively to understand the full extent of the sanctions in place.

Each of the regimes seeks to target different groups: Regime I7 targets individuals associated with the former Ukrainian government; Regime II8 targets political figures from Crimea and Russia, members of the Russian military, and companies associated with these figures; Regime III9 targets businesses and entities in Crimea and Sevastopol; and Regime IV10 targets certain Russian industries and imposes trade and financial restrictions.

Of these four regimes, only Regime I (which introduced asset freezes against certain individuals) has left the energy industry relatively unscathed. The remaining regimes have each targeted the energy sector (and other sectors) to varying degrees.

Regime II, like Regime I, introduced asset freezes against certain natural and legal persons. Unlike Regime I however, Regime II has frozen the assets of some energy companies: PJSC Chernomorneftegaz, a Crimean gas company, and Feodosia, a Crimean oil supplier, have been listed. The effect on these companies will have been significant; effectively, no one who has to comply with EU sanctions laws is be able to do business with them. But, serious as these restrictions are for the listed entities, the impact is limited, for the most part, to them alone with little in the way of wider ramifications for the industry generally. The restrictions in Regime III, however, have a much greater impact.

There are four ways in which Regime III affects the energy industry.

First, Regime III prohibits the import of products originating in Crimea or Sevastopol, and the financing or insurance of such imports, into the EU.11 The Crimean peninsula is rich in oil and gas, with several onshore and offshore gas fields and two oil fields. This prohibition extends to the products of these fields such that any persons required to comply with EU sanctions may not import Crimean oil or gas into the EU nor finance or insure such imports.12

Second, Regime III prohibits, in general terms, the trade in certain goods and technology used in the energy sector and in the prospection, exploration and production of oil and gas13 (the “Crimea Energy Goods”).14 The prohibitions relating to these goods are extensive. As well as prohibiting trade in Crimea Energy Goods generally, such that it is prohibited to sell, supply, transfer or export the goods, to any person, or for use, in Crimea or Sevastopol,15 there are various associated restrictions, including relating to the provision of technical assistance, brokering services and financing in respect of the Crimea Energy Goods to persons in, or for use in, Crimea or Sevastopol.

Third, Regime III prohibits the provision of technical assistance, brokering or construction or engineering services directly relating to infrastructure in Crimea or Sevastopol in the energy sector.16

Fourth, and finally, Regime III introduces various investment and finance restrictions the result of which is to stifle the growth of energy businesses in, or involving, Crimea or Sevastopol.

The result of the Regime III restrictions is that whilst it is not impossible, it is certainly difficult for those who comply with EU sanctions laws to continue to carry out any energy business in or with persons from Crimea or Sevastopol.

Regime IV is different in this respect.It is by no means as restrictive as Regime III in terms of what it prohibits. However, it is much broader in scope – its restrictions apply well beyond Crimea and Sevastopol.

Regime IV focuses its restrictions, like Regime III, on a certain set of goods and equipment and, unlike Regime III, it also focuses its restrictions on certain types of energy projects. In this way, the type of prohibitions in place is narrower than the Regime III prohibitions.

Taking the specific energy projects that are targeted first, Regime IV focuses on the following projects: (i) deep water exploration and production, i.e. oil exploration and production in waters deeper than 150 metres; (ii) arctic oil exploration, i.e. oil exploration and production in the offshore area north of the Arctic Circle; (iii) and shale oil projects, i.e. projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing but excluding exploration and production through shale formations to locate or extract oil from non-shale reservoirs (the “Energy Projects”). In addition, Regime IV addresses certain goods and equipment that are suited to the Energy Projects in Russia (the “Russia Energy Goods”). 17

In respect of the Energy Projects, Regime IV prohibits the provision of, directly or indirectly, drilling, well testing, logging and completion services and the supply of specialised floating vessels for Energy Projects in Russia.18

In respect of the Russia Energy Goods, Regime IV restricts, in general terms, trade in Russia Energy Goods such that a prior authorisation must be obtained for their sale, supply, transfer or export for use in Russia.19 Moreover, the legislation is clear that such authorisation is not available where the Russia Energy Goods are destined for one of the Energy Projects.20 There are also associated restrictions, including relating to the provision of technical assistance, brokering services and financing in respect of the Russia Energy Goods to persons in or for use in Russia.21

Finally, Regime IV also introduces various capital markets restrictions, some of which are targeted at the energy industry. Currently, each of Rosneft, Gazprom and Transneft are subject to these restrictions, as are their non-EU subsidiaries (more than 50% owned) and/or those acting on their, or their subsidiaries, behalf.22 As a result, these entities will find it harder to raise funds on the capital markets.

On their face, the EU’s Russia Sanctions are complex. Both the manner and form in which they have been handed down, through multiple regimes each with their own different exemptions, winding-down provisions, and grandfather clauses, and the manner in which they have been targeted, adds to that complexity and means that compliance is difficult to achieve. However, the prohibitions in place are not so extensive as to make doing energy business in or with Russia impossible – and indeed, intentionally so, given Russia’s central role in supplying gas to Europe.

Syria Sanctions

Unlike Regime IV of the Russia Sanctions (but similar to Regime III in respect of Crimea and Sevastopol), the Syria Sanctions23, imposed since January 2012, target all types of energy projects and a broader array of energy goods. Prior to the current conflict, Syria was a leading oil and natural gas producer in the eastern Mediterranean region and its oil sector accounted for nearly a quarter of government revenues.24 The conflict, coupled with broad sanctions on the country’s energy sector, have had a significant affect both in-country and industry wide. Syria’s oil production, which averaged over 400,000 barrels per day (bbl/d) between 2008 and 2010, was less than 25,000 bbl/d in January 2014; exports of crude oil have fallen to nearly zero; and the country is facing supply shortages for some refined products.25

First, and like Regime III of the Russia Sanctions, the Syria Sanctions contain various prohibitions in respect of the products of the energy industry. Specifically, it is prohibited to import into the EU, purchase or transport, crude oil or petroleum products if they originate in Syria or are being exported from Syria.26 It also is prohibited to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance relating to these prohibitions.27 It also is, separately, specifically prohibited to sell jet fuel to Syria.28

Second, the Syria Sanctions prohibit, in general terms, trade in certain goods and technology used in the energy industry. Specifically, the prohibited goods and technology are considered to be essential for the exploration of crude oil and natural gas, the production of crude oil and natural gas, refining and/or the liquefaction of natural gas (the “Syria Energy Goods”).29 The prohibitions relating to these goods are extensive. As well as prohibiting trade in the Syria Energy Goods generally, such that it is prohibited to sell, supply, transfer or export the goods, to any Syrian person, or for use in Syria, there are also various associated restrictions, including relating to the provision of technical assistance, brokering services and financing in respect of the Syria Energy Goods to any Syrian person, or for use in Syria ).30

Third, the Syria Sanctions take steps to prevent new power projects from being developed in Syria such that they prohibit the sale, supply, transfer or export of equipment or technology for the construction or installation in Syria of new power plants for electricity production.31 There also are associated prohibitions relating to the provision of, directly or indirectly, technical assistance, financing or financial assistance, and insurance or reinsurance, in respect of such developments.32

Fourth, the Syria Sanctions introduce various investment and finance restrictions that are designed to apply to any Syrian person, entity or body engaged in the exploration, production or refining of crude oil or the construction or installation of new power plants for electricity production.33

Iran Sanctions

The Iran Sanctions34, imposed since 2012, are the EU’s most extensive sanctions regime currently in place. Iran has the second largest natural gas reserves in the world and the fourth largest proven crude oil reserves. As a result, sanctions affecting the energy sector have a huge impact on Iran and on the industry. By way of example, according to the World Bank, Iran’s exports of crude oil and condensate dropped from 2.5 million bbl/d in 2011 to 1.1 million bbl/d in 2013 because of the U.S. and EU sanctions regimes in respect of oil exports.35 Even after the Iran Sanctions were relaxed slightly following positive progress in the ongoing negotiations regarding Iran’s nuclear capabilities36, it remains very difficult for persons required to comply with EU sanctions laws to do business of any sort with or in Iran and this is especially the case for the energy industry.

First, and as with the Syria Sanctions and Regime III of the Russia Sanctions, the Iran Sanctions contain various prohibitions in respect of the products of the energy industry. Specifically, it is prohibited to import into the EU, purchase or transport, crude oil or petroleum products or petrochemical products or natural gas, if they originate in or are exported from Iran.37 It also is prohibited to swap natural gas which originates in or is being exported from Iran. Moreover, it is prohibited to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance relating to these prohibitions and, in respect of the natural gas prohibitions, providing brokering services is also prohibited.38

Second, the Iran Sanctions, like the Syria Sanctions and Regime III of the Russia Sanctions, prohibit, in general terms, trade in certain goods and technology used in the energy sector and in the prospection, exploration and production of oil and gas. Here, the type of goods that are restricted (the “Iran Energy Goods”) are identical to that which appears in the Syria Sanctions, though the specific lists are likely to differ39 As with the Syria Sanctions and Regime III of the Russia Sanctions, these prohibitions are extensive40 and ensure that those obligated to comply with EU sanctions laws are unable to participate in the trade of Iran Energy Goods in any meaningful way.

Third, the Iran Sanctions contain some restrictions on transport that affect the energy industry such that it is not possible in most circumstances to provide vessels designed for the transport or storage of oil or petrochemical products available to any Iranian person or to anyone if they will use the vessels to transport energy products originating in Iran or being exported from Iran.41

Fourth, again just as with the Syria Sanctions and Regime III of the Russia Sanctions, the Iran Sanctions introduce investment and finance restrictions on certain enterprises involving any Iranian persons engaged in the exploration or production of crude oil and natural gas, the refining of fuels or the liquefaction of natural gas or in the petrochemical industry.42

Fifth, unlike any of the other sanctions regimes, the Iran Sanctions contain restrictions designed to constrain the development by Iran or others on Iran’s behalf of nuclear materials.

Conclusion

As is clear from this short summary of the EU’s key energy sanctions, the Iran Sanctions represent the high-water mark of restrictive measures applicable to the energy industry—the prohibitions are so extensive as to make attempting to do energy-related business in Iran or with Iranian persons almost impossible. The Russia Sanctions demonstrate an alternative approach. Through both geographical and subject matter targeting, the energy sector can, in the main, continue most business in Russia as long as it remains vigilant, and implements appropriate compliance processes and risk assessments, protects itself in its contracts with tailored sanctions clauses and has a system whereby high-risk transactions or other scenarios are elevated for legal attention as soon as they arise. So, while certain political and commercial imperatives are met by the exceptionally targeted approach of the Russia Sanctions, and while there are significant commercial benefits to that approach, such precise measures can be the hardest with which to comply in practice.


1. For the purposes of this article, any references to Russia include its Exclusive Economic Zone and Continental Shelf.

2. The EU is not alone in targeting the energy industry through its use of sanctions. Many of the sanctions that the EU puts in place are mirrored (but not exactly so) by the United States and other countries.

3. The regimes in respect of Iraq and Somalia are relatively limited both in scope and in terms of impact on the energy sector and as such we do not consider them in detail in this article, beyond noting: (a) As regards Iraq: Council Regulation (EC) No 1210/2003 as amended. The only substantive nexus to the energy sector in this regulation is found in Article 2, which requires that the proceeds of all export sales of petroleum, petroleum products and natural gas from Iraq be deposited in the Development Fund for Iraq. (b) As regards Somalia: Council Regulation (EC) No 147/2003 as amended. The only substantive nexus to the energy sector in this regulation is found in Article 3b, which prohibits the import, purchase and transport of charcoal originating from Somalia and the provision of financial assistance relating to the same

4. Bulgaria, Estonia, Finland, Slovakia, Latvia and Lithuania.

5. European Commission,16 July 2009: Commission staff working document–Accompanying document to the Proposal for a Regulation of the European Parliament and of the Council concerning measures to safeguard security of gas supply and repealing Directive 2004/67/EC. Assessment report of directive 2004/67/EC on security of gas supply {COM(2009) 363}

6. U.S. Energy Information Administration, Russia Overview, viewed on 24 March 2015.

7. Council Regulation (EU) No 208/2014 as amended (“Regulation 208”).

8. Council Regulation (EU) No 269/2014 as amended (“Regulation 269”).

9. Council Regulation (EU) No 692/2014 as amended (“Regulation 692”).

10. Council Regulation (EU) No 960/2014 as amended (“Regulation 960”).

11. Regulation 692, Article 2.

12. Generally, EU sanctions apply (i) to all persons within the EU; (ii) to business done within the EU, (iii) to imports to and exports from the EU; and (iv) to actions taken by EU nationals or bodies registered in a Member State of the EU, regardless of the location of the action.

13. Regulation 692, Article 2b(iii) and (iv). The full list of goods is at Annex II of Regulation 692.

14. Regulation 992 differentiates between the “energy sector” and “the prospection, exploration and production of oil and gas to be references to the energy sector” when it considers Crimea Energy Goods. We note this here but, for the purposes of this article, references to the former include the latter.

15. Regulation 692, Article 2b(1).

16. Regulation 692, Article 2c.

17. Regulation 833, Article 3(3). The full list of the Russia Energy Goods is at Regulation 833, Annex II.

18. Regulation 833, Article 3a.

19. Regulation 833, Article 3.

20. Regulation 833, Article 3(5).

21. Regulation 833, Article 4(3).

22. Regulation 833, Article 5.

23. Council Regulation (EU) No 36/2012 as amended (“Regulation 36”).

24. U.S. Energy Information Administration, Syria Overview, viewed on 24 March 2015.

25. Ibid.

26. Regulation 36, Article 6.

27. Regulation 36, Article 6. Note that financial assistance specifically includes financial derivatives.

28. Regulation 36, Article 7a.

29. Regulation 36, Article 8.

30. Regulation 36, Article 9.

31. Regulation 36, Article 12(1)(a).

32. Regulation 365, Article 12(1)(b).

33. Regulation 36, Article 13.

34. There are various sanctions regimes applicable to Iran but for the purposes of considering their effect on the energy industry, Council Regulation (EU) No 267/2012 as amended (“Regulation 267”) is the most relevant.

35. U.S. Energy Information Administration, Iran Overview, viewed on 24 March 2015.

36. In January 2014, pursuant to the Joint Plan of Action agreed to between Iran and the “P5+1” nations in connection with the ongoing nuclear non-proliferation talks, the EU suspended some of its restrictions in respect of Iran on a temporary basis (see Council Regulation 2014/42/EU of 20 January 2014). The suspension initially lasted 6 months but has been extended until 30 June 2015 (see Council Decision 2014/829/CFSP). The amendments were far from comprehensive and the EU’s sanctions regime in respect of Iran remains significant and far-reaching both generally and in respect of the energy sector.

37. Regulation 267, Articles 11, 13 and 14a.

38. Regulation 267, Article 14a.

39. The Iran Energy Goods are listed at Annexes VI and VIA to Regulation 267.

40. Regulation 267, Article 9.

41. Regulation 267, Article 37b.

42. Regulation 267, Article 17.