U.S. regulators have rejected claims by oil and gas companies that a requirement to disclose payments to foreign governments is so big of a burden that it outweighs a broader goal of choking off corruption in countries where they operate.
The U.S. Securities and Exchange Commission in a 2-1 vote yesterday approved a rule requiring U.S.-listed multinational oil and gas producers such as Exxon Mobil Corp. and Chevron Corp. to report taxes, royalties, bonuses, fees and dividends paid to the U.S. and foreign governments for access to resources.
"The philosophy of fair and full disclosure is one of the cornerstones of the federal securities framework," Commissioner Luis Aguilar said in a statement explaining his support for the rule.
The disclosure requirement for publicly traded companies is embedded in Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For years, human rights groups have pushed for a disclosure requirement that could help chip away at the "resource curse" problem, where corrupt officials in oil and natural gas-rich countries siphon off royalty payments to line their pockets instead of using that money for the public good.
Today, advocates for disclosure say it is particularly important because unconventional energy development is pushing into remote parts of the world, into places like East Africa and Papua New Guinea. Rules governing oil and gas extraction are underdeveloped in the energy frontiers, they say, and limited transparency around contracts shrouds deals between oil producers and host governments in secrecy.
Signed into law in 2010, Dodd-Frank directs the SEC to require U.S.-listed oil, gas and minerals producers to report on a yearly basis "the type and total amount of payments made for each project." The commission took more than two years to sort through conflicting opinions on the definition of an energy project, costs and effects on competition, and whether information given to regulators should be made public. A proposed rule attracted comments from groups and people as disparate as the American Petroleum Institute (API) and lobbyists for member companies and proponents Oxfam America, Publish What You Pay, investor George Soros and Microsoft's Bill Gates.
By the spring, the long delay in issuing a final rule fueled speculation among Capitol Hill sponsors that the SEC was purposely slow-walking the contentious disclosure measure. In March, Sens. Ben Cardin (D-Md.) and Carl Levin (D-Mich.), both advocates of the disclosure rule, met with commissioners to urge them to finalize the rulemaking.
"It appears the commission has largely upheld congressional intent and not caved to industry lobbying," said Ian Gary, senior policy manager for Oxfam America. Gary had not read the full final rule because it was not made public by late in the day, but he said there is continuing concern that the SEC's decision to give companies discretion to determine what constitutes a project under the disclosure rule could be abused.
API, the Washington-based oil industry trade group, reiterated its opposition to the SEC rule. API's chief economist, John Felmy, said public disclosure of payments will shine too much light on U.S. companies' strategies for winning drilling contracts, putting them at a disadvantage against large state-owned oil and gas competitors in China, Russia and Iran that don't have to play by the same rules.
"This unilateral approach to revenue disclosure will harm the U.S. economy," Felmy said. "U.S. firms could lose business, U.S. jobs might not be created, and potential revenue to our government could be lost."
Gas 'project' goes undefined
An analysis by ClearView Energy Partners, which refers to the rule as a "WikiLeaks moment" for oil companies operating overseas, says the rule could "impose very real competitive challenges for U.S. companies." Disclosing secret concessions, leases and production-sharing agreements could lead to bids being undercut by competitors exempt from the reporting requirement, ClearView asserts.
"At the high end," says the analysis, "impact could include having concessions rescinded by host governments made uncomfortable by public knowledge of generous terms."
SEC staff also acknowledged that there could be substantial costs and competitive issues associated with disclosures but noted that no industry analysis put a dollar figure on the impact.
Under the rule, companies must report payments that exceed $100,000. The annual disclosure applies to fiscal years ending after Sept. 30, 2013.
Oil companies pressed the SEC not to go beyond the industry's Extractive Industries Transparency Initiative (EITI), a World Bank-endorsed program that asks companies and governments to report total yearly payments tied to oil revenues. SEC staff said the language in Dodd-Frank required the commission to do more by requiring an expanded breakdown of payments by project and by country. The SEC, however, left it up to each company to define an energy "project."
Advocates of the measure pushed back against the industry's assertions about competition. They argued that a rule applying to companies trading on U.S.-regulated exchanges and a similar rule under consideration in Europe together cover most major foreign producers through their subsidiaries.
Global development groups say payment disclosure would reinforce the Foreign Corrupt Practices Act, which bans companies from bribing foreign officials. Advocates in the investor world contend that creating a better paper trail of payments to governments opens the door to more detailed analyses of political risks faced by oil and gas producers.
"The SEC acknowledged that the disclosure was necessary for investor protection," said Paul Bugala, senior sustainability analyst for Calvert Investments in Bethesda, Md. "We need to begin a new era of transparency in the oil, gas and mining sectors to address those risks."
Chairwoman Mary Schapiro and Commissioner Troy Paredes recused themselves from the proceeding. Commissioner Daniel Gallagher was the single "no" vote. Among other things, he said the SEC should not be in the business of trying to fix social ills through financial regulation.
"Some have pressed the argument that we have no choice here," he said. "To the contrary, I believe we have considerable choice as to how we do nearly everything we do."
Bugala and other supporters said the disclosure requirement falls well within the commission's core responsibility.
"This is a very appropriate role for the SEC to be in," Bugala said. "Protecting investors means promoting disclosure of payments."
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