Nord Stream 2 and TurkStream – IG update on new US sanctions

The International Group has released an update on the new US sanctions in relation to pipelines Nord Stream 2 and TurkStream, covered last week in IMN.

Nord Stream is a system of offshore natural gas pipelines from Russia to Germany. It includes two lines running from Vyborg to Greifswald forming the original Nord Stream (NS1), and two lines running from Ust-Luga to Greifswald termed Nord Stream 2 (NS2). NS1 is owned and operated by Nord Stream AG, whose majority shareholder is the Russian state company Gazprom, and NS2 is owned and will be operated by Nord Stream 2 AG, a wholly owned subsidiary of Gazprom.

NS1 was completed in October 2012. Work to lay NS2 took place between 2018 and 2019, but has been disrupted by US sanctions. Prior to the imposition of US sanctions, it had been expected to become operational in mid-2020.

TurkStream is a natural gas pipeline running from Russia to Turkey. It starts from Russkaya compressor station near Anapa in Russia crossing the Black Sea to the receiving terminal at Kıyıköy. Construction on TurkStream started in May 2017 and gas deliveries to Bulgaria via the pipeline began on January 1st 2020.

The US has toughened the sanction provisions targeting the construction of the NS2 and TurkStream pipeline projects and those who provide vessels and services in connection with either project. The recent efforts have focused on two pieces of legislation – the Countering America’s Adversaries Through Sanctions Act (CAATSA) and the Protecting Europe’s Energy Security Act (PEESA). Both acts have the potential to reach the activities of non-US ship owners and others in the marine industry – including insurers.

CAATSA became law in 2017. Section 232 includes a provision that allows  the Administration to target for sanctions certain high-value investments or other transactions related to the construction of Russian energy export pipelines. Section 232 bestows the authority to issue sanctions on the US State Department, in consultation with the US Treasury Department.

The State Department had previously adopted a policy when CAATSA was enacted not to target Russian energy export pipelines for which the project contract was signed on or after August 2nd 2017. This effectively eliminated NS2 and TurkStream from Section 232’s scope.

On July 15th 2020 the State Department announced a change to its policy to clarify that the focus of Section 232’s implementation would be on a wider scope of Russian export energy pipelines. The change in policy now included NS2 and TurkStream.

The International Group  said that the change in policy meant that there was now a potential for sanctions (including being blocked by the US) against a person who sells, leases or provides the Russian Federation with goods or services that meet the fair market value thresholds in Section 232(a) and that directly and significantly facilitate the expansion, construction, or modernization of NS2 or TurkStream.

The monetary thresholds are a fair market value of $1m or more, or an aggregate value of $5m or more over a 12-month period.

IG said that current indications were that the State Department would construe the Section 232 provisions broadly to encompass a wide array of services associated with the construction of NS2. Targeted services would not have to be contracted directly to the Russian Federation to fall within Section 232. As such, providing any type of vessel used in connection with NS2 or TurkStream or providing services to such vessels, including insurance, could expose non-US persons to sanctions under Section 232, regardless of the identity of the contracting counterparty.

IG warned that one should not assume that the fair market value of a provided vessel or service would be limited to an analysis of the price set forth in the applicable contract.

In December 2019 the US enacted PEESA, which came into effect immediately. PEESA essentially mandates the imposition of sanctions against vessels engaged in pipe-laying related to NS2 and TurkStream and on any foreign persons who have knowingly sold, leased or provided those vessels for the construction of such a project, as well as on anyone who had facilitated deceptive or structured transactions to provide those vessels for the construction of such a project.

The types of sanctions authorized by PEESA include blocking a foreign person’s assets that were subject to US jurisdiction and denying visas and entry into the US of a foreign person’s corporate officers and principal shareholders.

IG observed that a group of US senators and congressmen who were “apparently not happy with the lack of sanctions that have been issued under PEESA and the continuation of NS2’s construction” had recently proposed amendments to PEESA. Senate bill 3897 and House bill 7361 propose to enhance and clarify PEESA through the PEESA Clarification Act. Both bills seek to expand the type of activities requiring mandatory sanctions.

In addition to the targeting of pipe-laying vessels, both bills expand PEESA to include the broader category of vessels engaged in “pipe-laying activities.” Such activities include “site preparation, trenching, surveying, placing rocks, stringing, bending, welding, coating, lowering of pipe, and backfilling.”

Both bills also propose a provision which would require sanctions against anyone providing underwriting services or insurance or reinsurance for the vessels described in PEESA.

In their current form, the bills do not include a due diligence exception for underwriters, insurers, and / or reinsurers. Furthermore, unlike CAATSA, PEESA Clarification does not contain a monetary threshold for the imposition of sanctions.

The International Group observed that both bills had bipartisan support among Republicans and Democrats and across the two houses of Congress, but they were still making their way through the respective Senate and House committees. As such it was far from certain if or when the bills might be reconciled and passed by Congress for presentation to the President for signature.

However, IG warned that, if passed, the PEESA Clarification could have significant impacts on non-US vessel owners and operators, and on their insurers. “Among other things, if a vessel is identified in one of the reports to Congress as engaging in “pipe-laying” activities, then the insurer of that vessel may also be identified in the report. Once a company is identified in the report, sanctions are technically mandated under the express language of PEESA Clarification, although it remains to be seen how such provisions will ultimately be implemented if PEESA Clarification is enacted”, IG said.

Shipowners’ Club warned Members that cover might be excluded if vessels were involved in activities that are either unlawful and / or put the Club at risk of breaching sanctions. It said therefore that “members who are contemplating any activity involving or related to the Nord Stream 2 or Turk Stream construction projects should therefore be mindful of the risk that cover exclusions will be triggered”.

Members were “strongly urged to assess and mitigate the risks of entering into contracts on the Nord Stream 2 or Turk Steam construction projects and exercise the fullest possible due diligence to avoid exposure to sanctions or enforcement actions”.

IG said that the more immediate concern for non-US ship owners, insurers and the like was CAATSA’s Section 232. The US State Department made clear on July 15th this year that it would now apply Section 232 to NS2 and TurkStream. “As such, those owning or operating vessels that are used in connection with NS2 or TurkStream or those providing services to such vessels should consider whether their activities might trigger an application of Section 232’s sanction provisions”, said IG.

The International Group expressed its gratitude to Gina Venezia of US lawyers Freehill, Hogan & Mahar LLP in the drafting of this document.

All the group clubs have issued a similarly worded circular to their members.