Introduction
The EU's 14th sanctions package, adopted on 24 June 2024, represents a significant step by the EU in its efforts against Russia and its economy given that for the first time the Union has introduced measures against Russia's lucrative gas sector.
Russian LNG made up around 5 percent of the EU's gas consumption, generating around 8 billion euros in profit whilst it is estimated that about 4-to-6 billion cubic meters (141 billion-212 billion cubic feet) of Russian LNG was shipped to third countries via EU ports last year. Following Russian's invasion of Ukraine, the EU has taken certain measures to reduce its dependency on Russian gas however the transportation and reselling of Russian LNG was not targeted by the Union.
This article will focus particularly on the inclusion of the new Articles 3r and 3u to the text of Regulation 833/2014 (the "Regulation"), which target the purchase, import or transfer and supply and transportation of Russian liquified natural gas (LNG).
The New Article 3r
Paragraph 1 of Article 3r provides that: "it shall be prohibited to provide reloading services in the territory of the Union for the purposes of transshipment operations of liquified natural gas falling under CN code 2711 11 00, originating in Russia or exported from Russia." The EU undertook to define a transshipment operation within article 1 of the Regulation as this shall mean: "(i) ship-to-ship transfer, which is a simultaneous unloading and reloading operation with direct transfer from one liquefied natural gas vessel to another liquefied natural gas vessel; or (ii) ship-to-shore transfer and reloading, which includes activities such as the unloading of liquefied natural gas from a vessel to a terminal tank, the stocking of liquefied natural gas into the tank, and the reloading onto a vessel; those activities can be commercialised as individual services or as bundled services." Consequently, the EU has introduced a ban on the re-export of Russian LNG to third countries via the EU.
Article 3r together with a reading of the definition included in Article 1 indicates clearly that the prohibition of reloading services in relation to transshipment operations of Russian LNG shall be applicable throughout the EU notwithstanding if the vessel is EU or non-EU flagged.
Paragraph 2 of Article 3r further prohibits the provision, directly or indirectly, of technical assistance, brokering services, financing or financial assistance related to the prohibition of paragraph 1.
Paragraph 4 of Article 3r allows for competent authorities to introduce particular rules and guidelines on a national level which rules and guidance "shall include enhanced due diligence requirements in particular for the identification of reloading services provided for the purpose of transhipment operations, taking into account specificities of the national regulatory framework applicable to liquified natural gas facilities, previous business practices of shippers, the time between the unloading and reloading, indications of direct commercial connections between the unloading and reloading, including the purchase of new unloading and reloading services in bundle, and the country of registration of the economic operators involved." The competent authorities must communicate their intention, whether to establish rules and guidelines in terms of paragraph 4 or otherwise, to the Commission by 26 December 2024, latest.
Reporting Obligations: 26 July 2024 and Beyond
Moreover, Article 3r introduces a mandatory reporting obligation on all legal persons which perform unloading operations of liquified natural gas falling under CN code 2711 11 00, originating in Russia or exported from Russia. The persons in question must, by 26 July 2024 and every month thereafter, inform the competent authority of the Member State where they are located of all unloading operations and imports into the Union of Russian LNG which report must also include information on volumes.
It is understood that the EU has undertaken to introduce this measure in order to gather information in relation to Russian LNG with the possible intention of introducing extended and further measures against Russia with respect to its export of gas. This appears to be also reflected in paragraph 10 of Article 3r wherein it is stipulated that the Commission "shall monitor liquefied natural gas flows, markets and prices, Union competitiveness, and the share of Russian liquefied natural gas imports in the total energy imports of the Union. It shall report to the Council in the event of any important developments linked to the prohibitions in paragraphs 1 and 2, and at the latest by 26 June 2025. The Council shall take those reports into account for the review of the restrictive measures."
Derogation
Paragraph 3 of Article 3r allows for a derogation from the general prohibition outlined in paragraphs 1 and 2, the competent authorities may authorise reloading services for the purposes of transshipment operations of Russian LNG where the reloading is necessary for its transport to a Member State and such Member State has confirmed that the transshipment is used to ensure the energy supply in that Member State. The derogation from the general prohibition is intended to be limited in scope as Member States are seeking and have sought to limit their dependency on Russian gas, meaning that such derogations should be limitedly used in practice.
Exceptions
Moreover, the prohibitions in paragraph 1 and 2, i) would not, however, apply to reloading services necessary for the bunkering of liquified natural gas fuelled vessels and ii) shall not apply until 26 March 2025 for the execution of contracts concluded before 25 June 2024.
In addition to the above, Article 3r states that paragraph 2 shall "not apply in the case of a vessel in need of assistance seeking a place of refuge, of an emergency port call for reasons of maritime safety, or for saving life at sea or for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment, or as a response to natural disasters." This latter exemption can be found in a number of other existing provisions and articles of the Regulation, nevertheless it should be noted that the exemption is linked solely to the prohibition of the provision of technical assistance etc.
The New Article 3u
With the introduction of Article 3u the EU has introduced a ban on the "purchase, import or transfer, directly or indirectly, liquified natural gas falling under CN code 2711 11 00, originating in Russia or exported from Russia, through liquefied natural gas terminals in the Union that are not connected to the interconnected natural gas system". It shall also be prohibited to provide directly or indirectly, of technical assistance, brokering services, financing or financial assistance related to the banned services. Nevertheless, the prohibitions shall not apply until 26 July 2024 to contracts concluded before 25 June 2024 or ancillary contracts necessary for the execution of such contracts and shall not affect the supply of liquefied natural gas of Russian origin from the mainland of a Member State to its outermost regions.
It should be noted that this is a targeted measure only affecting specific facilities in certain Member States and should not have any adverse effects on the Union's gas market and on its security of supply, including on available volumes and prices.
Amendments to Article 3a
The EU further introduced an amendment to Article 3a(1) point (a) to include a prohibition with respect to any ongoing projects in relation to LNG production: it shall be prohibited to "acquire any new or extend any existing participation in any legal person, entity or body incorporated or constituted under the law of Russia or any other third country and operating in the energy sector in Russia, including projects under construction for the production of liquified natural gas".
Commentary
The EU has taken a first step, possibly a bold step, in introducing measures with respect to Russian LNG and it is understood that this is just a first step, with further measures to be introduced. Whilst it is still unclear whether the prohibitions will be effective, in light of the new prohibitions Russia now needs to rethink its strategy with respect to transporting LNG through Europe and into other jurisdictions.
These latest restrictions mean that subject persons need to be extremely vigilant to ensure they does not fall foul of the respective articles. In relation to Article 3r, whilst it is yet to be seen whether the competent authority in Malta will be implementing additional rules and guidelines, operators will need to ensure that they carry out appropriate due diligence in relation to cargo to make sure of its origin prior to engaging any services as outlined in the article. Further guidance should be sought in case of doubt or suspicion.
It is pertinent to note that whilst ship-to-ship transfers are explicitly prohibited, services necessary for the bunkering of liquified natural gas fuelled vessels shall be permissible. This would suggest that the EU is still willing to allow necessary and vital services, and is targeting the transportation service of LNG rather than the provisions of all LNG related services.
Additionally, services providers must be mindful of the reporting obligation as imposed by Article 3r which falls due on the 26 July 2024 and every month thereafter in relation to unloading operations of liquified natural gas. The obligation is not cumbersome however this obligation must be met by all persons falling within scope of the EU regulation.
In conclusion, the EU's latest sanction package has introduced further hurdles with respect to transacting with Russian products, particularly LNG, to this end only time will tell whether these will prove to be effective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.