New measures from the US, UK, and EU aim to significantly reduce reliance on Russian energy supplies

On March 8, 2022, the United States, United Kingdom, and European Union announced measures intended to eliminate or reduce their reliance on Russian energy imports. Until now, these countries had largely refrained from directly sanctioning the Russian energy sector, aside from targeted measures related to debt financing and others, as outlined in our prior alert from March 4, 2022, “Summary of new energy-related Russian sanctions and measures.”

This change in policy targeting Russian energy supplies will likely lead to further upward pressure on energy prices in these countries as well as global oil prices. As expected, the US measures are the most comprehensive, as the United States is relatively less reliant on Russian energy supplies compared to the UK and many EU member states.

We continue to monitor energy-related sanctions associated with Russia’s invasion of Ukraine, but this is a dynamic situation that is continuously changing. This update is current as of March 9, 2022.

US announces ban on Russian oil, LNG, and coal

On March 8, President Biden issued the “Executive Order on Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine” (the “Order”, here), banning the import of Russian oil, liquefied natural gas (LNG), and coal to the United States.  In his remarks explaining this decision, President Biden said the US worked in close consultation with its European and other allies in crafting these measures, but that, as a net exporter of energy, the US was uniquely positioned to take these steps. In the days preceding the announcement, lawmakers from both parties strongly urged the Biden administration to adopt this measure.

More specifically, the Order bans the following:

  • Imports into the US of Russian crude oil; petroleum; petroleum fuels, oils, and products of their distillation; LNG; coal; and coal products.

  • New investment in Russia’s energy sector by a US person wherever located, beyond the steps already taken as outlined in our previous alert from March 4 (here). 

    • Relevant investment is defined in Treasury FAQ 1019 (here) as “a transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (not including maintenance or repair) located or occurring in the Russian Federation beginning on or after March 8, 2022.”

    • Also from Treasury FAQ 1019, the Russian energy sector is defined broadly to include “the procurement, exploration, extraction, drilling, mining, harvesting, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, or transport of petroleum, natural gas, liquified natural gas, natural gas liquids, or petroleum products or other products capable of producing energy, such as coal or wood or agricultural products used to manufacture biofuels, the development, production, generation, transmission or exchange of power, through any means, including nuclear, electrical, thermal, and renewable.”

  • Any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this Order if performed by a U.S. person or within the United States.

The Order took effect immediately.  In conjunction with the Order, Treasury released General License 16 (“G.L. 16”, here).  G.L. 16 temporarily authorizes (until April 22) all transactions prohibited by the Order that are ordinarily incident and necessary to the import of the above Russian energy products, pursuant to written contracts or agreements entered into before March 8.

In the fact sheet accompanying the Order (here), the Biden administration acknowledges the rising energy costs to American consumers from these measures and others, offering the following actions and statements in response:

  • Strategic Petroleum Reserve releases. The federal government has committed to releasing more than 90 million barrels from the US Strategic Petroleum Reserve this fiscal year, including an emergency sale of 30 million barrels announced last week.  This emergency release was part of a broader release by member countries of the International Energy Agency (“IEA”), with the other 30 members agreeing on March 1 to release a combined 30 million barrels in addition to the 30 million barrels from the US (here).

  • Restatement of federal policies. While not announcing any additional measures, the fact sheet also states that “[f]ederal policies are not limiting the production of oil and gas.” Instead, US oil and gas production “is approaching record highs,” and “thousands of drilling permits on federal lands” are currently going unused.  The fact sheet also warns against energy companies and financial firms using the invasion of Ukraine for “excess price increases or padding profits.”

  • Transition to clean energy reaffirmed. The fact sheet reiterates the administration’s position on the importance of transitioning to “a clean energy future” and reducing the U.S. “dependency on oil” in the long-term, even while implementing measures in the near-term to facilitate access to oil and gas markets in order to soften the blow on US consumers.

UK announces plan to phase out Russian oil by end of 2022

Certain US allies have simultaneously taken measures targeting the Russian energy sector, including the United Kingdom, which announced (here) that it will phase out all imports of Russian oil by the end of 2022.  The British government will work with companies in a newly-created “Taskforce on Oil” to assist in finding alternative supplies.  The statement said Britain would rely in part on “a diverse range of reliable suppliers” to replace Russian imports, including the Netherlands, Saudi Arabia, and the United States. UK Business and Energy Secretary Kwasi Kwarteng asserted that he was confident the market and supply chains will have sufficient time to adjust to these changes by the end of the year.

The UK also seeks to further reduce its imports of Russian natural gas, although Russian gas supplies already constitute less than 4% of total supply according to the announcement.  Prime Minister Boris Johnson confirmed that the UK plans to release an energy security strategy outlining long-term energy plans, to include domestic supplies of renewables as well as oil and gas.

EU announces plan to reduce dependence on Russian energy

Additionally, the European Commission announced a plan (here) to reduce EU member state dependence on Russian energy supplies, which the plan states “can reduce EU demand for Russian gas by two thirds before the end of the year.”  EU member states receive roughly 40% of their gas from Russian pipelines, including those running through Ukraine.

The plan aims in part to do the following:

  • Diversify gas supplies for next winter and thereafter through increased LNG and pipeline gas imports from non-Russian suppliers

  • Make gas storage changes through a European Commission legislative proposal planned for release in April, for EU gas storage to be filled to at least 90% of capacity by October 1 each year

  • Accelerate the clean energy transition, including by increasing biomethane and renewable hydrogen production and imports

  • Increase energy efficiency, to help reduce fossil fuel use in the residential, commercial, industrial, and power spaces

The EU Commissioner for Energy, Kadri Simson, similarly announced corresponding mitigation measures, including “price regulation, state aid and tax measures to protect European households and businesses against the impact of the exceptionally high prices.”  The EU is providing additional guidance to member states on how to mitigate price impacts to consumers through additions to its ‘Energy Prices Toolbox’ originally released in October 2021 (original fact sheet here).

The IEA also released a timely report this month, “A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas” (here), proposing measures to help reduce European dependence on Russian gas.  These include: directly replacing Russian gas, introducing minimum gas storage obligations, accelerating deployment of wind and solar, maximizing existing bioenergy and nuclear, sheltering vulnerable electricity consumers, accelerating replacement of gas boilers with heat pumps, accelerating efficiency improvements in buildings and industry, encouraging reduced heating use, and diversifying and decarbonizing sources of power system flexibility.

Next steps

Hogan Lovells’s International Trade team regularly advises on EU, US and UK sanctions issues, particularly on complying with fast-changing and complex regulatory and legal obligations.

For a comprehensive overview of the EU, US and UK sanctions landscape, and to monitor the developing world of sanctions laws, visit our Sanctions Navigator, which provides comprehensive information on all key international sanctions regimes and updates on major sanctions developments.

If you have any questions regarding the above or would like specific analysis of any issues, please contact the authors.

 

 

Authored by Beth Peters, Amy Roma, Ari Fridman and Rob Matsick.

 

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