Preparing for the Oil Price Cap: What We Know So Far

Various reports indicate that the Group of Seven nations (G7) will announce its initial capped price for Russian-origin crude oil transported by maritime means (“seaborne”) this week. The cap will come into effect on December 5, 2022, for crude oil (including condensate) and February 5, 2023, for petroleum products.

U.S. guidance issued on September 9, 2022, and EU and UK regulations issued in October and November 2022 have provided key details that may help companies and financial institutions prepare for compliance and recordkeeping.

Background
As initially announced on September 2, 2022, the G7 is seeking to create a broad coalition of countries that will only permit certain services related to the maritime transportation of Russian-origin crude oil and petroleum products if the products are purchased below an agreed-upon capped price. The cap does not eliminate any existing sanctions imposed by participating countries against Russian oil (such as the U.S. Russian oil import ban). Instead, it seeks to regulate the transfer of Russian oil and petroleum products within the broader market between third-countries, applying pressure on the service providers—banks, insurers, trade finance providers, brokers, and potentially bunkering, port and other services—that often are necessary for seaborne transport of crude oil and petroleum products. Not permitting these services when the price of Russian oil exceeds the price cap will have the effect of prohibiting transactions in such oil.

Although the price cap levels are not yet known, they are expected to be announced soon and will be “based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction.” Once established, the price will be communicated in a “clear and transparent” manner but will be subject to change based on its effectiveness and impact. Earlier commentary by U.S. Deputy Secretary of the Treasury Wally Adeyemo clarified that the coalition of countries “intend to set the price cap above Russia’s marginal cost of production, at a level consistent with prices they have historically accepted.”

The price cap will apply to maritime sales, including sales that relate to the first point of transfer of maritime oil to land. Subsequent sales on land, or sales of Russian oil and petroleum products that are transported exclusively by pipeline, are not subject to the cap (but may be subject to other import bans).

U.S. Guidance
The U.S. Treasury’s Office of Foreign Assets Control (OFAC) published preliminary Guidance on September 9, 2022. The Guidance explores how maritime services providers, financial institutions, insurance providers, and others in the direct supply chain of seaborne Russian oil may comply with the price cap. It explains that due diligence obligations will vary based on tiers of access to information. The obligations include the following:

• Tier 1 actors who have “direct access” to price information, such as refiners or commodities brokers, should retain and share documents that show that seaborne Russian oil was purchased at or below the price cap;
• Tier 2 actors who are “sometimes” able to request and receive pricing information, such as financial institutions, should request and receive such price information. OFAC notes that actors may rely upon customer attestations regarding price when appropriate; and
• Tier 3 actors who do not have access to price information in their ordinary course of business, such as insurance providers, are advised to obtain customer attestations that the oil was not purchases above the cap.

OFAC additionally published a list of red flags and warning signs of actors potentially attempting to circumventing the price cap. These indicators include actors refusing to provide price information, using of abnormal shipping routes, or evidence of deceptive shipping practices.

On October 31, 2022, OFAC published FAQ 1094, which clarified that oil loaded onto a vessel prior to December 5, 2022, will not be subject to the price cap where those shipments are unloaded at the port of destination by 12:01 a.m., January 19, 2023.

Further guidance is expected to accompany the U.S. announcement implementing the price cap. OFAC has stated that implementation will take the form of a directive under Executive Order. In addition, the U.S. Congress continues to consider legislation to tighten and codify the U.S. price cap participation.

Guidance from Partner Countries
Both the European Union and United Kingdom have introduced legislation implementing the oil price cap. This was explored in an earlier blog, found here. On November 14, 2022, the United Kingdom’s Office Financial Sanctions Implementation issued additional guidance on the price cap summarizing its latest actions and its plans establish a new unit to create a licensing and enforcement process for the cap.

The European Commission has announced its intention to publish an outline of the implementing steps to the price cap prior to the meeting of the EU’s energy ministers on November 24, 2022.