U.S. announces record Strategic Petroleum Reserve release; energy-related Russia sanctions updates

On March 31, to address rising energy prices in the U.S. and globally, the Biden administration announced a record release from the Strategic Petroleum Reserve, of roughly one million barrels per day, every day for the next six months.

In addition, more energy-focused sanctions and other measures have recently been announced to respond to continuing turmoil in the global energy landscape, target Russian President Putin’s ability to wage war in Ukraine, and ease the price hikes consumers have seen at the pump. However, even though oil prices have fallen since the early days of the conflict in Ukraine, they remain substantially above pre-conflict levels.

We continue to monitor energy-related developments associated with Russia’s invasion of Ukraine, but this is a continuously changing situation. This update is current as of April 3, 2022.

U.S. approves record releases from Strategic Petroleum Reserve

On March 31 (here), responding to “Putin’s Price Hike” and following the US ban on Russian oil from March 8 (here), the Biden administration announced the largest release of oil reserves in history—an average of one million additional barrels per day for the next six months. The administration also expects allies and partners to take similar actions, although the announcement does not specify which countries may do so.

The announcement also forcefully encourages oil and gas companies to take advantage of drilling permits that are already in place but unused, and calls on Congress to “make companies pay fees on wells from their leases that they haven’t used in years and on acres of public lands that they are hoarding without producing.”

Furthermore, the President calls on Congress to enact his plan to achieve what he describes as “real American energy independence,” by speeding the transition to renewable energy and redoubling efforts towards energy efficiency and further electrification of the economy.

Finally, the administration is directing use of the Defense Production Act to support the production and processing of minerals and materials used in large capacity batteries, including lithium, nickel, cobalt, graphite, and manganese.

Congressional efforts to codify ban on Russian oil and other energy imports

In a related development, the US Congress has moved to essentially codify Executive Order 14066 from March 8 banning Russian oil and natural gas, through HR 6968, the Suspending Energy Imports from Russia Act (here). On March 9, HR 6968 passed the House on an overwhelming bipartisan basis, 414-17.  It has stalled in the Senate because of the Magnitsky Act section that is opposed by certain Republicans, but there are ongoing efforts to move the bill out of the Senate, and action is possible this week.

Energy-related sanctions and other measures ramping up

The United States, EU members, and other partner countries have been ramping up sanctions targeting the Russian energy sector over the past few weeks.  Initial rounds of sanctions avoided targeting Russian gas and oil, which are vital for certain European countries.

However, the US and its allies and partners have started to more directly target the Russian energy sector, which remains a primary means by which the Putin regime is able to fund its war effort in Ukraine. The chilling effects of these sanctions have also put pressure on certain international partnerships and ventures between Russian and Western companies.

Please see our alerts from March 4 (here) and March 10 (here) regarding previous energy-related sanctions from the US, UK, and EU.

Restrictions on investments in Russian energy sector

On March 15, the European Union released a fourth package of sanctions (here) responding to Russia’s military aggression against Ukraine.  Among other things, this package prohibits new investments in the Russian energy sector, with limited exceptions carved out for civil nuclear energy and the transport of certain energy products to the EU.

Switzerland took a similar step on March 25 (here), prohibiting certain support for the Russian energy sector, including the export of goods and services and the provision of loans and other financial support.  The Swiss government asserts that it has now implemented all measures taken in the EU’s fourth package of sanctions.

Russia demands payment for gas purchases in rubles, but with apparent carve-out

President Putin has responded in multiple ways to the sanctions imposed on Russia. Most noticeably for the energy sector, he issued a decree on March 31 (here) demanding payment for natural gas purchases in rubles from certain “unfriendly” countries. Historically, European imports of Russian gas are paid for almost exclusively in euros or dollars; demanding payment in rubles could cause problems for buyers in part because certain Russian banks are blocked from using the SWIFT global payments system.

However, Putin’s decree appears to carve out an exception that may largely nullify the effects of the decree, allowing continued payment in euros and dollars through accounts with Gazprombank, which would in turn convert those currencies into rubles to facilitate payments.

The US sanctions regime also allows the processing of payments for certain energy-related transactions. If both carve-outs remain, then payments for gas purchases by Europe will likely be able to proceed relatively unimpeded.

Responses from the German and Austrian governments

On March 30 (here), Germany and Austria declared an “early warning” level in accordance with Article 11(1) of Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply in Europe (“SoS Regulation”). This came in response to Putin’s declarations that exports of gas under existing contracts could be halted if Western countries refuse to pay in rubles through the above directive. The SoS Regulation defines three levels of escalation: the “early warning” level, the “alert” level and the “emergency” level. The early warning level is triggered if there is concrete, serious and reliable information that an event which is likely to result in significant deterioration of the gas supply situation may occur—in this case Putin’s threat to halt gas supplies if buyers do not pay in rubles.

The declaration of the “early warning” level has no immediate consequences for the gas market as such in these countries. However, the German government has stood up a dedicated crisis management team, and may intervene in gas markets if it escalates to the third level—the “emergency” level.

Additionally, on April 4, the German Minister for Economic Affairs announced that the German energy regulatory authority (the Federal Network Agency, BNetzA) has been appointed as trustee to execute shareholder rights in relation to Gazprom Germania, the holding company of most Gazprom entities operating in the European gas markets. The relevant administrative act was also published on the same day in the German Federal Gazette and is therefore already effective for a period of six months.

Increased U.S. and EU cooperation on LNG

In line with other energy-related collaborative measures, on March 25, the US and EU issued a joint statement on European Energy Security (here), announcing a Task Force on Energy Security that includes representatives from the White House and the European Commission. This task force aims to “terminate EU dependence” on Russian fossil fuels by 2027, and calls for the following:

  • The US will “strive to ensure,” with international partners, additional LNG exports to the EU market of at least 15 bcm in 2022, with additional “expected increases going forward.” Last year, US LNG exports to Europe were over 22 bcm, already a record high (here).
  • The US and EU will also work to reduce the greenhouse gas intensity of new LNG infrastructure, by reducing methane leakage, constructing clean and renewable hydrogen ready infrastructure, and using clean energy to power onsite operations.
  • The US and EU will work to “expeditiously act upon applications” to permit additional LNG capacities, and the European Commission will work with EU member states to “accelerate their regulatory procedures” related to LNG import infrastructure. The EU will take additional measures related to LNG and security of supply and storage.

U.S. Senators introduce bill to ban Russian uranium imports; Putin threatens ban on Russian uranium exports

On March 16, a group of Republican US Senators introduced a bill (here) that would prohibit the import of Russian uranium.  Reports a few days later, on March 21, indicated that Putin is considering a retaliatory ban on exports of Russian uranium to the United States (here).

At this point, it is unclear whether the Republican-backed US Senate bill will advance—without support from Senate Democrats, it is unlikely that this legislation will advance in the near term. It is also unclear whether Putin will follow through with his threat. However, what is increasingly clear is that both governments realize the importance of Russian uranium in the current energy environment.

Actions by energy companies regarding investments in Russian energy

Private and state-affiliated companies have also acted to reduce operations and business relationships with the Russian energy sector. Many of these initial measures were covered in our prior client alert from March 4 (here).

These effects have been felt outside of Western countries as well. For example, according to reports from Reuters on March 25 (here), China’s state-owned oil refinery and gas conglomerate, Sinopec Group, suspended talks on a “major” petrochemical investment and a gas marketing venture in Russia.  This follows reports of the Chinese government urging Sinopec Group and other major energy companies to exercise caution when considering Russian investments and purchases, due in part to current and potential sanctions risks.

Certain Russian energy companies have also announced plans to reduce or withdraw operations in European countries, including Russia’s Gazprom which announced on April 1 that it intends to withdraw from Germany (here).

Next steps

Hogan Lovells’s Energy Practice team advises on the complex and multifaceted implications of these developments to clients across the energy sector. The Energy and International Trade teams are working closely together on these issues.

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, Stefan Schroeder, Mary Anne Sullivan, Ari Fridman, and Rob Matsick.

Contacts
Amy Roma
Partner
Washington, D.C.
Stefan Schroeder
Partner
Düsseldorf
Mary Anne Sullivan
Senior Counsel
Washington, D.C.
Beth Peters
Partner
Washington, D.C.
Anthony Capobianco
Partner
Washington, D.C.
Aline Doussin
Partner
London
Aleksandar Dukic
Partner
Washington, D.C.
Kelly Hardy
Partner
Washington, D.C.
Ajay Kuntamukkala
Partner
Washington, D.C.
Brian Curran
Partner
Washington, D.C.
Stephen Propst
Partner
Washington, D.C.
Ari Fridman
Counsel
Washington, D.C.
Ben Kostrzewa
Registered Foreign Consultant
Hong Kong
Deborah Wei
Senior Associate
Washington, D.C.
Rob Matsick
Associate
Washington, D.C.

 

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