10 February 2021
In the latest of a series of measures targeting China before last week’s transition of administrations, on January 14, 2021, the Trump Administration added China National Offshore Oil Corporation Ltd. (CNOOC) to the US Commerce Department Entity List, imposing comprehensive export control licensing requirement on exports of US goods, technology, and software to CNOOC. In connection with the designation, Secretary of Commerce Wilbur Ross said, “China’s reckless and belligerent actions in the South China Sea and its aggressive push to acquire sensitive intellectual property and technology for its militarization efforts are a threat to US national security and the security of the international community.” The ban primarily targets the upstream oil and gas sector, with an exemption for certain joint ventures in which companies of US allies are participants.
Entity list export and reexport ban
Pursuant to the Export Administration Regulations (EAR), the Bureau of Industry and Security at the US Commerce Department administers controls on the movement of US commodities and technologies around the world. The EAR imposes BIS license requirements for exports and reexports of subject items on the basis of the type of product, the country of export and the reasons for control. On the other hand, a listing on the Entity List imposes comprehensive license requirements applicable to all subject items (regardless of the nature of the product project) for exports or reexports to listed entities due to specific foreign policy or national security concerns. Moreover, many license exceptions available under the EAR are not available for exports to Entity List entities.
Restrictions under the EAR apply to both US and non-US persons and companies. Items “subject to the EAR” include both US- and non-US origin items, whether or not they are identified on the Commerce Control List (CCL), as follows:
- US-origin items (goods, software and technology),1
- items that are located in the US, even temporarily; and
- non-US-origin items that contain more than a de minimis level of controlled US-origin content (for non-embargoed countries, this is 25% US origin content by value).
- Use of the de minimis exemption for technology and software requires one-time reporting to the US Commerce Department.
While the Entity List ban applies only to the named entities, i.e., CNOOC, and does not extend automatically to subsidiaries of listed entities, the export, reexport or transfer of goods, software or technologies to CNOOC affiliates presents a risk of unauthorized diversion to CNOOC in violation of the ban if the exporter knows (or should know) that CNOOC could receive or have access to the items.
Parties desiring to export prohibited items to entities on the Entity List may apply to BIS for a license. Note that there is generally a policy of “presumption of denial” for license applications involving exports to persons on the Entity List, including CNOOC.
Broad exemptions to the CNOOC ban
Importantly, BIS has issued two exemptions to the CNOOC export ban exempting trade in oil and gas commodities and limiting its applicability to CNOOC joint ventures with companies of US allies, as follows:
- Excluded from the ban are exports or reexports of “crude oil, condensates, aromatics, natural gas liquids, hydrocarbon gas liquids, natural gas plant liquids, refined petroleum products, liquefied natural gas, natural gas, synthetic natural gas, and compressed natural gas that are identified under” one of 37 Harmonized Tariff System (HTS) codes.
- Also excluded are “items required for the continued operation of joint ventures (JVs) with persons from countries in Country Group A:1 in supplement no. 1 to part 740 of the EAR not operating in the South China Sea.” Country Group A:1 countries are those countries that participate in the multilateral “Wassenaar Arrangement” on export controls, except for Malta, Russia, and Ukraine. These are presently Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, Spain, South Korea, Sweden, Switzerland, Turkey, the UK, and the US. Exports necessary for the operation of CNOOC JVs (not operating in the South China Sea) with partner companies from these countries are exempt from the ban.
Conclusions
In response to this and other actions, earlier this month China’s Ministry of Commerce (MOFCOM) issued an anti-blocking law that allows Chinese persons to report foreign sanctions actions. The law provides that MOFCOM may provide relief (a Prohibition order) where it is determined that the sanctions constitute an unjustified extraterritorial application of foreign sanctions law.
In spite of the broad exemptions, the US ban promises to be a major compliance headache for global upstream (exploration and production) companies and suppliers. It applies to both US and non-US companies, requiring them to ensure that subject goods, software, and technologies are not transferred directly or indirectly to CNOOC. Companies in the upstream sector will continue to monitor developments closely in anticipation of any interpretations, clarifications, modifications, or revocations of this action that may be forthcoming under the incoming Biden Administration.
Jay Ze, Managing Partner, Eversheds Sutherland
jayze@eversheds-sutherland.com
