1) How do you think of ‘two hemispheres’ and ‘two energy circles’? Have you seen this trend in energy sector in your country? Since the outbreak of the Russia-Ukraine war, what changes have taken place in state energy structure, import and export sector?
In the Sixth Strategic Energy Plan approved by the Cabinet in October 2021, in order to achieve a 46% reduction in greenhouse gas emissions by FY2030 and carbon neutrality by 2050, securing a stable and inexpensive energy supply is essential for maintaining and strengthening the national strength of Japan. In addition to traditional security ideas such as strengthening relations with resource-rich countries, including Russia, the Japan government aimed to increase energy self-sufficiency by pursuing all possible options. The Japan government had no intention of joining either circle.
On February 24, 2022, Russia's invasion of Ukraine completely changed the global energy landscape. In countries around the world, inflation in the energy sector became prominent, and Japan also faced extremely tense situations in which there was a fear of an energy crisis since the 1973 oil crisis by experiencing tight power supply and demand and soaring energy prices. In the face of such a crisis, it was reminded that Japan's energy supply system is fragile and faces challenges in energy security. The draft of the Basic Policy for the Realization of GX announced by the GX Realization Council in December 2022 states that by maximizing the strengths of Japan and accelerating GX, which will shift the industrial and social structure centered on fossil energy to one centered on clean energy, itself will result in stable energy supply and create new demand and markets in the field of decarbonization, which will lead to the strengthening of industrial competitiveness and economic growth of the Japan economy. Based on this basic policy, the Japan government will submit to the Diet the relevant bills necessary for the realization of GX. In particular, the energy policy aims to promote renewable energy as a major power source and to make good use of nuclear power. Japan experienced the accident at TEPCO's Fukushima Daiichi Nuclear Power Station, so that it is necessary to promote the restart of nuclear power plants with the highest priority on safety while striving to restore public trust to nuclear power plants.
2) Russia is seeking partnership with Asian countries on natural gas trade, dedicated to building a new energy pattern with the East. Along with this trend, what new cooperation opportunities will be brought within the upstream and downstream of the industrial chain in your country (or other countries that you are familiar with)? If our client wants to sign a new contract on new cooperation projects, what legal aspects should they pay attention to?
From the standpoint that the killing of large numbers of innocent civilians by Russian forces in Ukraine is a serious violation of international humanitarian law and a war crime, totally unforgivable and severely condemned, the Japan government has introduced various sanctions against Russia to keep step with the G7 countries.
Japan imports energy resources from various countries, and in particular, about 90% is dependent on the Middle East countries for crude oil imports. In this context, energy cooperation with Russia is important for diversifying Japan's energy supply sources and securing a stable supply from the viewpoint of abundant energy resources and geographical proximity of Russia, and Japan has deepened its wide-ranging cooperative relationship with Russia in the field of energy, from crude oil to renewable energy and nuclear power. Despite sanctions against Russia, the Japan government has declared that it will maintain its interests in projects in Russia, such as Sakhalin 1 and 2 and Arctic LNG2, in view of their importance to energy security.
On the other hand, the Japan government has introduced measures to prohibit new investment in Russia, including in the energy sector, so that Japan companies cannot newly secure and procure upstream and midstream interests in Russia that are involved in development and production.
3) With respect to Russia-related Sanctions
a) With respect to current sanctions in the US, the EU, the UK, and Japan that specifically target the buying and selling or importation of oil, liquefied natural gas, and coal originating from Russian export projects or the chartering or transportation usage of Russian flagged or owned vessels, what are important contractual tools such as force majeure and price review clauses in strategic decision-making?
Typically, force majeure clauses are used in contracts to relieve a party from performance obligations where an event or circumstance has occurred which is beyond the reasonable control of such party and which prevents such affected party from performing its obligations under the contract. In the event that a force majeure event affecting a key obligation is prolonged, contracts may provide for a termination right.
A force majeure clause can be tailored to accommodate particular circumstances that the parties may wish to be included or excluded or may be broader and more general in nature. The important point to note is that force majeure (under common law or civil law governed contracts) is created through contract rather than at common law or codified statute and a party’s ability to claim force majeure depends on the contract wording.
Reliance on a general force majeure clause does not afford the same degree of protection as a standard sanctions clause. In particular, the mere fact that a counterparty has been sanctioned may not be sufficient to invoke force majeure unless the party invoking the force majeure clause show that performance has been prevented. Ultimately much will turn on the wording of the force majeure clause and the facts of each particular case.
b) What are risks relating to the procurement of Russian oil, liquefied natural gas, and coal, including the preparation of clauses to be included in sale and purchase agreements protecting the procurement entity from sanctions liability risk and possible mitigation strategies?
Broadly, US sanctions can be categorised as primary sanctions and secondary sanctions. The sanctions explained earlier are all primary sanctions and apply where there is a “nexus to the US jurisdiction”. On the other hand, secondary sanctions work to prohibit third party, non-US persons from conducting business with entities/jurisdictions that are subject to US sanctions and do not require any US nexus for their application. Secondary sanctions related to Russia primarily consist of the OFAC placing entities on the SDN List. If secondary sanctions apply to a particular transaction (e.g., a transaction with a person on the SDN List), then, even if there is no US nexus (e.g., payment currency is not in US dollars), the transaction could breach US secondary sanctions, and the non-US breaching party may be subject to restrictions in dealing with US entities (e.g., restricted partially or totally from participating in the US financial system).
Assuming that (i) the trading counterparty is not a sanctioned entity (in particular an entity on the SDN list), and (ii) there is no importation of Russian oil, LNG or coal into tany country where the importation of Russian oil, LNG or coal or the entry of Russian vessels is prohibited, there is minimal risk of material sanctions breaches under the laws of the relevant jurisdictions arising simply by virtue of the client engaging in the sale or purchase of Russian oil, LNG a or coal. This is the case regardless of the currency of the transaction (e.g., US dollars).
Practical steps to reduce sanctions risk for new contract: are, among other things, are as follows:
(i) conducting sanctions searches for all potential entities involved in a Russian oil, LNG or coal transaction prior to any formal engagement with the Russian entity to ensure that the entity is not a designated person (and in particular, is not on the SDN List);
(ii) ensuring that the transportation of the Russian oil, LNG or coal cargo will not involve the importation of Russian oil, LNG or coal into any country where the importation of Russian oil, LNG or coal, or the entry of Russian vessels, is prohibited; and
(iii) regularly reviewing sanctions updates in key jurisdictions, which may expand or modify from time to time the scope of sanction restrictions on Russian oil, LNG or coal or Russian vessels.
The client (regardless of whether it is the seller or buyer of Russian oil, LNG or coal) should ensure that its sales and purchase agreement will include standard sanctions clause wording, which reflect (amongst other things) at a minimum:
(a) an obligation on the counterparty to comply with applicable sanction laws of key jurisdictions (e.g., US, UK, EU etc.) while discharging their obligations under the relevant contract;
(b) an express statement that the client is not required to take any action in breach of applicable sanction laws;
(c) a representation and warranty from the counterparty that it is not a sanctioned person, under the control of a sanctioned person or acting for the benefit of a sanctioned person;
(d) an obligation of the counterparty to notify the client if the counterparty is in breach of the representation and warranty at (c), becomes a sanctioned person, or breaches sanction laws (a “Sanctions Breach Event”);
(e) the right of the client to suspend if a Sanctions Breach Event arises and the client’s right to terminate the relevant contract if the Sanctions Breach Event (where capable of cure) is not cured in a timely manner;
(f) an indemnity in favour of the client if a Sanctions Breach Event arises; and
(g) an appropriately board definition of “sanctions” covering key jurisdictions (e.g. US, UK and EU) and also the jurisdiction of the unloading port.
c) In addition, in terms of existing oil and gas trade between your country and Russia, what positive or negative impacts have you experienced? As a lawyer, for client who has already signed oil and gas trade contracts, what suggestions do you have?
In the case of Japan, the existing long-term purchase agreement for Russian LNG by Japan companies can be continued as it is, as the government intends to maintain its interests. Rather, the anxiety is that the Russian government's retaliatory measures against the unfriendly country, Japan will put the counterparty under state control and unilaterally terminate the contract by the counterparty. In the event of a dispute between an investor and a host country, it will be handled under the investor-state dispute settlement procedure (so-called Investor-State Dispute Settlement clause) stipulated in Article 11 of the Japan-Russia Investment Agreement. Under the said article, the dispute shall be resolved amicably as much as possible, but if the dispute is not resolved amicably, it will be referred to mediation or arbitration under the ICSID Arbitration Rules or mediation or arbitration under the UNCITRAL Arbitration Rules.
