House and Senate pass NDAA bills that include expanded U.S. sanctions on Nord Stream 2 pipeline construction and State Department expands CAATSA Section 232 guidance on export energy pipelines

On July 23, 2020, the U.S. Senate passed its version of the National Defense Authorization Act for fiscal year 2021 (NDAA) which includes an amendment that expands sanctions in connection with the Nord Stream 2 and TurkStream pipeline projects.  The amendment is based on a bill previously introduced by Senators Ted Cruz (R-TX) and Jeanne Shaheen (D-NH) entitled, the “Protecting Europe’s Energy Security Clarification Act of 2020”, which sought to clarify and expand existing U.S. sanctions under the Protecting Europe’s Energy Security Act of 2019.

Last year, the Protecting Europe’s Energy Security Act of 2019, enacted as part of the National Defense Authorization Act (NDAA) of 2020, implemented sanctions targeted at Allseas, the Swiss-Dutch company that had been laying the Nord Stream 2 pipeline.  Shortly after the NDAA was enacted in December 2019, the company suspended its activities, leaving six percent or around 100 miles (160 km) of pipeline to be completed.  Reports indicate that Russia has taken steps to continue construction of the pipeline, prompting Members of Congress to take further action.  The House passed its version of the FY 2021 NDAA with a similar amendment introduced by Rep. Ruben Gallego (D-AZ) on July 21.

Expanded U.S. Sanctions on Nord Stream 2 and Second Turkstream Pipeline

The NDAA amendments to the Senate and House versions of the NDAA aim to deter banks and other institutions from providing services or facilities for vessels that engage in pipelaying activities in connection with Nord Stream 2 or the second TurkStream pipeline project.

Although the Senate and House amendments differ in certain respects, both amendments authorize sanctions on foreign persons that the Secretary of State, in consultation with the Secretary of Treasury, determines have knowingly “facilitated selling, leasing, or providing” vessels that engage in “pipelaying activities” in connection with the construction of the Nord Stream 2 pipeline project, the second TurkStream pipeline project, or any project that is a successor to either project.  “Pipelaying activities” include “site preparation, trenching, surveying, placing rocks, stringing, bending, welding, coating, lowering of pipe, and backfilling.”

The legislation authorizes sanctions on foreign persons determined by the Secretary of State to have knowingly:

• provided underwriting services or insurance or reinsurance for vessels engaged in the construction of the pipeline projects; or
• provided services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of such vessels; or
• provided services for the testing, inspection, or certification necessary for, or associated with the operation of, the Nord Stream 2 pipeline. (Note the House amendment does not include this provision.)

Updated Guidance on Section 232 of the Countering America’s Adversaries Through Sanctions Act (CAATSA)

Separately, on July 15, 2020, the Department of State published updated guidance on Section 232 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which authorizes the imposition of sanctions on companies supporting Russian export energy pipelines.  The updated guidance eliminated the exemption for Nord Stream 2 and the second line of TurkStream.  Investments or other activities related to these Russian energy export pipelines could potentially become subject to U.S. sanctions under CAATSA.

Prior to July 15, 2020, guidance from the State Department published in October 2017 had limited the focus of Section 232 to contracts for Russian energy export pipeline projects that were signed on or after August 2, 2017 (the date CAATSA took effect).  Contracts that were signed prior to August 2, 2017, which included certain contracts and agreements for Nord Stream 2 and the second TurkStream line, had been exempted.

The revised guidance expands the agency’s interpretation of potentially sanctionable actions and clarifies “that the focus of implementation will include Russian energy export pipelines such as Nord Stream 2 and the second line of TurkStream.”  Specifically, the guidance deletes portions of its prior guidance that limited the focus of implementation of Section 232 to Russian energy export pipeline projects for which a contract was signed on or after August 2, 2017.

Additionally, the State Department deleted portions of its prior guidance stating that investments and loan agreements made prior to August 2, 2017 would not be subject to Section 232.  The State Department has clarified that it intends to apply Section 232 to such investments and loan agreements in the updated guidance.  The State Department will interpret the term “investment” broadly as a “transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise.”

Investments or other activities related to the standard repair and maintenance of pipelines that were in operation and capable of transporting commercial quantities of hydrocarbons before August 2, 2017 do not fall within the scope of sanctionable activities under Section 232.  However, since the Nord Stream 2 pipeline or the second TurkStream line were not in operation then (and are still being built), maintenance activities with respect to those pipelines could be subject to sanctions, in addition to other activities supporting the construction and financing of the pipelines.

The updated Section 232 sanctions took effect on July 15, 2020.  The State Department will not impose sanctions for activities undertaken pursuant to a written contract or written agreement entered into prior to July 15, 2020 that was consistent with the public guidance in effect prior to July 15, 2020 as long as reasonable steps are being taken to wind down the operations, contracts, or other agreements as soon as possible.  The updated guidance does not grandfather contracts or other agreements signed prior to July 15, 2020.