The G7 (composed of Canada, France, Germany, Italy, Japan, the UK and the USA), the EU and Australia (collectively, "the Price Cap Coalition") have introduced a cap ("the price cap") on the amount that can be paid for Russian-origin oil transported by sea ("seaborne Russian-origin oil"), in response to ongoing Russian military action in Ukraine. This price cap does not apply to refined products, such as seaborne Russian-origin petrol or diesel, although a separate regime in respect of such products is expected to be implemented in early February 2023.
The price cap took effect on Monday 5 December 2022. There are transitional arrangements for seaborne Russian-origin oil loaded onto ships before 5 December 2022 which will both be delivered and clear customs in a third country by 19 January 2023.
The price cap coincides with the introduction of bans on the import of Russian-origin oil to the UK and EU (although, in respect of the EU, that ban has certain limited exceptions). The USA has maintained a ban on import of Russian-origin oil since 8 March 2022. The price cap has a different focus from the import bans, and targets Russian oil sales to the global market.
The price cap has been set, for now, at $60 per barrel, although that figure will be kept under review to take account of market changes.
How is the price cap being given effect to?
The price cap on seaborne Russian-origin oil is being given effect to by separate legislation in each of the Price Cap Coalition countries, with the exception of EU Member States, in which the price cap is governed by EU law.
While some minor variations exist across the Price Cap Coalition jurisdictions, in broad terms, the price cap makes it illegal to transport Russian-origin oil by sea, or provide certain services in connection with such transport, unless the oil has been purchased at or below the price cap. In the UK, this is given effect to by a General Licence issued by the UK Government which permits the provision of transport and other services in connection with seaborne Russian-origin oil so long as the price cap requirements are complied with. Services captured by the price cap include insurance, re-insurance and other financial services; brokering services and shipping.
Who does the price cap apply to?
The price cap applies to Price Cap Coalition entities and nationals, wherever they are located in the world and wherever they provide services. This characteristic contributes to the price cap's potential global effect.
For example, the price cap would "bite" in a transaction for purchase of seaborne Russian-origin oil for delivery to a non-Price Cap Coalition third country if a proposed insurance provider – for the vessel or the cargo itself – was constituted in the UK, or another Price Cap Coalition country. In those circumstances, the insurance provider could only lawfully provide insurance coverage if the purchase price of the seaborne Russian-origin oil was at or below the price cap.
How is compliance with the price cap to be demonstrated?
For service providers involved with seaborne Russian-origin oil, a key aspect of complying with the price cap regime will be following attestation and recordkeeping requirements set out in guidance.
The US, UK and EU have each published guidance setting out compliance requirements in relation to different "tiers" of industry actors. Those actors deemed to have most access to oil pricing information ("tier 1" actors, such as commodities brokers) have the most onerous obligations. They must obtain and retain a variety of price related-information ("price information"). They must make that price information available to other actors in the seaborne Russian-origin oil supply chain (deemed "tier 2" or "tier 3" depending on their role).
The UK guidance also provides that, if it is not practicable for tier 1 actors to share price information with counterparties, they need to provide a "signed attestation" (a formal document providing assurance of compliance) that the price paid, on a per-barrel basis (i.e. the unit price), did not breach the applicable price cap on the date of the transaction. The UK Government has produced a sample attestation for use in connection with the price cap.
"Tier 2 actors" – those persons and entities defined in the UK guidance as "directly interacting with parties with price information", such as shipping companies which charter vessels, have obligations to share information obtained from tier 1 actors with those further down the chain, known as "tier 3 actors". Tier 3 actors are defined in the UK guidance as those with "no direct access to price information". The UK guidance lists insurance brokers, insurers and ship owners in this category.
The new obligations under the price cap should be regarded as an additional aspect to service providers' existing compliance frameworks. Service providers should continue to carry out sanctions and "Know Your Customer" checks on counterparties to minimise their own exposure to commercial and compliance risks. This is in line with UK, EU and US guidance on the price cap, each of which stresses the importance of appropriate due diligence being carried out.
Service providers may also wish to consider refreshing existing contractual terms in order to obtain additional assurance in relation to price cap compliance from counterparties.
Records demonstrating compliance need to be retained for at least four years under the UK price cap regime, and at least five years under both the EU and US price cap regimes.
The UK has gone slightly further than other Price Cap Coalition countries by imposing additional reporting requirements on tier 1, 2 and 3 actors in connection with the price cap. Key aspects of the reporting requirements include:
- An obligation on UK Tier 1 actors to report to the UK Office of Financial Sanctions Implementation ("OFSI") each time they carry out an activity in connection with any seaborne Russian-origin oil, within 30 days of the activity being carried out. There is provision for consolidated reporting of multiple activities on a monthly basis.
- Tier 2 and 3 actors which transact directly with a UK tier 1 actor must ask for confirmation that it reported to OFSI, in line the above. Where they do not receive this confirmation, the Tier 2 or 3 entity must: (i) inform OFSI of this within 30 days and (ii) withdraw their services as soon as reasonably practicable. There are alternative reporting requirements for tier 2 and 3 actors transacting with non-UK tier 1 actors.
How does the regime apply to other participants in the oil and gas market?
While the price cap targets transport and service providers in respect of seaborne Russian-origin oil, and the tiered system only applies to them, others involved in the oil sector, including producers and E&P entities should ensure they are familiar with the price cap's requirements. This will:
- minimise any risk of them facilitating the circumvention of the cap through their own activities which would itself result in a breach of the price cap regime, and,
- enable them to optimise their due diligence processes in respect of any of their counterparties who are involved in providing services in connection with seaborne Russian-origin oil.
Penalties for breaches of the price cap
Failure to comply with the price cap can have serious consequences for all concerned parties.
In the UK, both individuals and organisations can be subject to enforcement action by OFSI, which can result in publication of the finding of the breach and in the imposition of significant financial penalties. In addition, breaches of the price cap can result in criminal prosecution and conviction under UK sanctions laws, punishable by an unlimited fine (for both individuals and organisations) and/or up to ten years' imprisonment.
Please get in touch if you would like support on how to comply with the price cap, or with other aspects of the Russian sanctions regime.