In our prior post on the Russia sanctions and export of equipment to be used in oil production and exploration in shale, we noted that BIS had not yet weighed in on whether its export ban, like OFAC’s restriction, covered only production and exploration of oil in shale and not production and exploration which went through shale to oil reservoirs below. Well, in fact BIS has also recently updated its FAQs and has reached the same conclusion as OFAC. BIS is to be commended for phrasing its FAQ on this issue in a clear and intelligible way, unlike the cryptic version posted by OFAC.

Q11: When the August 6 rule refers to shale and uses the terms exploration or production in shale, do the restricted end uses apply only to situations, such as fracking, where the hydrocarbon is located in shale formations, or do they also apply to projects involving penetrating a layer of shale to reach a reservoir located below the shale formation? What about projects that involve unconventional methods of extracting oil from shale (e.g., from shale reservoirs or oil shale processing)?

A11: The license requirements of §746.5 of the EAR apply to the specified items when you know that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or are unable to determine whether the item will be used in such projects. Thus, the license requirement applies to exploration for, or production of, oil or gas from a shale formation. The license requirement does not apply to exploration or production through shale to locate or extract crude oil or gas in reservoirs.

You can’t get any clearer than that.

OFAC today released a new FAQ on the Ukraine Sanctions and shale formations. The purpose of FAQs, at least outside the Treasury Department, is to present clear and concise answers to resolve questions that many people might have. OFAC seems to have the idea instead that the FAQs are a place for cryptic and oracular pronouncements to obscure questions.

So let’s play OFAC Jeopardy. I give you the answer and if you can tell me the question you win a free subscription to Export Law Blog:

The prohibitions in Directive 4 under Executive Order 13662 apply to deepwater, Arctic offshore, or shale projects with the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory. The term “shale projects” applies to projects that have the potential to produce oil from resources located in shale formations. Therefore, as long as the projects in question are neither deepwater nor Arctic offshore projects, the prohibitions in Directive 4 do not apply to exploration or production through shale to locate or extract crude oil (or gas) in reservoirs.

Now when you first read this, it seems that OFAC is saying something radical: that the Directive 4, which prohibits exports of goods and services in support of the listed projects doesn’t apply to shale projects unless they are in the Arctic or in deepwater, meaning that the question was “Do the Ukraine sanctions apply to shale projects not located in deepwater or in the Arctic offshore?” Of course, this would be a silly reading and result even by federal regulatory standards. I’m not even sure that there is shale in deepwater or the arctic offshore regions.

But then I figured out the real question. “Do the sanctions apply to oil projects where the oil is underneath a shale formation? Is that a “shale project” under Directive 4?” And the answer is no, shale projects are when you get the oil in shale not under shale. Oh, I see. . .

Now the burning question is this: the recently added section 746.5 of the EAR forbids exports of items with certain ECCNs when the exporter knows that the items “will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia.” Does this rule cover exploration and production of oil under shale formations? Who knows?  UPDATE: BIS now says that its rule covers exploration and production in, rather than through, shale

But this gives us time for one more round of Jeopardy. Alex, I’ll take Regulatory Conundrums for $500. Answer: Because Directive 4 applies to exports by U.S. persons even if the items are not subject to the EAR and 746.5 applies to re-exports by foreign persons of items subject to the EAR.

[Hit the buzzer below to answer!]

Question: If Directive 4 prohibits all exports in support of the forbidden oil projects, why do we need 746.5 which prohibits exports of only certain items in support of the forbidden oil projects.