BIS Moves into Uncharted Waters with Its Designation of the Yuzhno-Kirinskoye Oil/Gas Field

On August 7, the US Department of Commerce, Bureau of Industry and Security (BIS) designated the Yuzhno-Kirinskoye Field, a Russian oil and gas field located in the Sea of Okhotsk and owned by Gazprom, on its Entity List.  Consequently, a license will be required to export, reexport, or transfer (in-country) to the field any item that is “subject to” the Export Administration Regulations (EAR).  This includes all US-origin items, items within the United States, foreign-made items incorporating greater than a de minimis amount of US content, and certain foreign-made items that are the “direct product” of certain US technology. The BIS designation is notable in that it marks, to our knowledge, the first designation of a particular destination or end use on the Entity List.  This is particularly noteworthy in light of the structure of existing EAR restrictions against Russia. Section 746.5 of the EAR imposes two main restrictions targeting Russia, requiring a license to export, reexport, or transfer (in-country):

• (1) Certain listed items for exploration or production from Russian deepwater, Arctic offshore, or shale oil or gas projects; and
• (2) Any item “subject to” the EAR, where the export, reexport, or transfer is to entities that BIS identifies on the Entity List, and where the item is for use in exploration or production from Russian deepwater, Arctic offshore, or shale oil or gas projects.

Under the first type of restriction above, a license is required to export to Russia specific listed items (such as certain drilling equipment) for the specified end-uses, regardless of the end-user. Under the second type of restriction, a license is required to export any item “subject to the EAR”—for example, a box of pencils—to entities identified on the Entity List, where the items are for use on a Russian deepwater, Arctic offshore, or shale project.  Entities designated on the Entity List include (but are not limited to) Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas, and the restrictions also apply to entities “controlled” by such entities.  It can be challenging for an exporter to identify such “controlled” entities when doing due diligence. By designating the Yuzhno-Kirinskoye Field, BIS has removed any lingering guesswork related to the field—a license now is required to export to the field any EAR-controlled item, including the proverbial box of pencils, for any reason whatsoever.  BIS took this measure because, as it states in the final rule, it determined that:

exports, reexports, and transfers (in-country) of all items subject to the EAR to this Russian field by any person without first obtaining a BIS license present an unacceptable risk of use in, or diversion to, the activities specified in the Russian industry sector sanctions.

Essentially, this means that BIS has determined that any export, reexport, or transfer to this field per se presents an “unacceptable” risk that the item will be used in exploration or production from Russian deepwater, Arctic offshore, or shale.  To accomplish this, BIS amended section 746.7 so that BIS is authorized to designate both end-users and end-uses that present such an “unacceptable” risk.  BIS has determined that the Yuzhno-Kirinskoye Field is such an end-use. Given the challenges exporters face in determining the ownership and control of counterparties in the due diligence context, it is possible that BIS will continue to make such bright-line designations of specific hydrocarbon fields and other “end-uses” going forward.  A recent example of this is found in BIS’s addition to the Entity List of six seaports that it determined to be “operating” in the Crimea region of Ukraine.  Such an approach could provide additional certainty of applicable controls in a not infrequently murky area.