OFAC Issues Additional Price Cap Guidance

On December 30, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control’s (“OFAC”) issued preliminary guidance on the implementation of the price cap policy for Russian-origin petroleum products (the “Petroleum Products Guidance”). The Petroleum Products Guidance is available here.

The U.S. and other countries recently imposed a price cap related to Russian-origin crude oil. We discussed the Russian-origin crude oil price cap in our December 5, 2022 and September 13, 2022 blog posts, and during a recent webinar. Since then, recent media reports suggest that “Russia’s flagship oil is selling at less than half international prices — and way below [the price cap]” as a result of the Russian-origin crude oil price cap.

Now, it appears that the U.S. government is preparing to implement similar prohibitions related to Russian-origin petroleum products in addition to crude oil. We summarize the new guidance below.

Scope of the Russian-Origin Petroleum Products Price Cap

The Petroleum Products Guidance incorporates the definition of “petroleum products” from heading 2710 of the Harmonized Tariff Schedule of the United States, which states: “[p]etroleum oils and oils obtained from bituminous minerals, other than crude; preparations not elsewhere specified or included, containing by weight 70 percent or more of petroleum oils or of oils obtained from bituminous minerals, these oils being the basic constituents of the preparations; waste oils . . . .” Examples of petroleum products include, inter alia, diesel fuel, condensate, natural gas, and naphtha.

The price cap applicable to Russian-origin petroleum products (the “Petroleum Products Price Cap”) will be implemented through a determination issued by the Secretary of the Treasury, in consultation with the Secretary of State, pursuant to Executive Order 14071.

U.S. persons will be prohibited from providing the following categories of services as they relate to the maritime transport of Russian-origin petroleum products purchased above the Petroleum Products Price Cap:

• Trading/commodities brokering;
• Financing;
• Shipping;
• Insurance, including reinsurance and protection and indemnity;
• Flagging; and
• Customs brokering.

These prohibitions will take effect on February 5, 2023. However, pursuant to FAQ 1109, Russian-origin petroleum products that are loaded onto a vessel at the port of loading prior to February 5, 2023, and are unloaded at the port of destination prior to April 1, 2023, will not be subject to the aforementioned prohibitions.

The Petroleum Products Price Cap will apply from the embarkment of maritime transport of Russian-origin petroleum products through the first landed sale in a jurisdiction other than Russia. Thus, once the Russian-origin petroleum products have cleared customs in a jurisdiction other than Russia, the Petroleum Products Price Cap will not apply to any further onshore sale. However, if the Russian-origin petroleum products are taken back out on the water without being “substantially transformed” outside of Russia, the Petroleum Products Price Cap will still apply. Notably, “OFAC does not consider blending operations, including gasoline blending, distillate blending, crude blending, residual fuel oil blending, or other simple blending operations, to be substantial transformation.”

Finally, note that OFAC anticipates amending General License (“GL”) 56 and GL 57 to extend these authorizations to the prohibitions related to Russian-origin petroleum products.

Incorporation of the Russian-Origin Crude Oil Price Cap Guidance

With respect to any issue not specifically addressed in the Petroleum Products Guidance, OFAC incorporates the OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin (the “Crude Oil Guidance”) because “OFAC expects to take a similar approach for Russian petroleum products as it has done for crude oil of Russian Federation origin.” The Crude Oil Guidance is available here.

Notably, OFAC anticipates publishing final, combined guidance for both Russian-origin crude oil and Russian-origin petroleum products prior to February 5, 2023.

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