BUSINESS

Energy companies fight rule requiring disclosure of foreign payments

Oil, gas and mining industries are battling a late addition to the 2010 financial reform law that requires energy companies to disclose their payments to foreign governments.

Much of the fight has been played behind the scenes at the Securities and Exchange Commission, which is expected to release a final rule this year requiring disclosure of foreign payments. But calls from industry and human rights groups are going public as the final rule's release looms.

Human rights groups in the Publish What You Pay Coalition have been fighting for years to pass the measure they say will curb corruption in resource-rich impoverished countries.

But U.S. energy companies say the rule would put them at a competitive disadvantage to state-owned companies, such as Russian energy giant OAO Gazprom.

"Those foreign companies could use the detailed disclosures required by the proposed rule to piggyback on the exploration of American companies or to negotiate more favorable terms from host governments," the American Petroleum Institute wrote in Jan. 19 comments to the SEC.

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The mining industry is urging the SEC to write a new rule that aligns with a voluntary global reporting initiative the United States joined last fall.

The SEC has given itself until June to release a final rule -- a time frame that has been delayed twice from the deadline in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On Tuesday, five Senate Democrats -- including one of the original co-sponsors of the Dodd-Frank provision -- urged the SEC to "resist pressure to release a weak rule that does not follow the [law's] clear statutory language and intent."

The rule stems the law's Section 1504, which was added to the bill by Sens. Ben Cardin (D-Md.) and Richard Lugar (R-Ind.).

The provision was spurred by a push that began in the 1990s by human rights advocates for mandatory disclosure of companies' payments that contribute to what the groups call the "resource curse" -- that people from resource-rich countries usually don't get to share the wealth.

Corinna Gilfillan, head of the U.S. office for the group Global Witness, points to Angola and Equatorial Guinea as the "classic examples" of resource-rich countries whose people are impoverished.

"These countries may be rich in natural resources," Gilfillan said, "but the resource doesn't contribute well to development. It is often siphoned off to corrupt regimes who can park the money offshore and just use it to consolidate their power."

Rule spreads wide net

Global Witness helped found Publish What You Pay in 2002 to advocate disclosures of payments to foreign governments by U.S. companies. Doing so, the coalition argued, would create a more stable business environment for companies.

Legislation to require such disclosure was introduced each year in Congress beginning in 2007 with the "Extractive Industries Transparency Disclosure Act." Democratic Rep. Barney Frank of Massachusetts, who would later co-sponsor the Dodd-Frank Act with former Sen. Christopher Dodd (D-Conn.), introduced the original bill.

The version that made it into Dodd-Frank was added as an amendment in conference negotiations without going through committee markups. The SEC issued its proposed rule in December 2010.

In the draft rule, resource extraction companies would be required each year to report all taxes, royalties, fees, production entitlements and bonuses paid to governments. Companies would report both the type and total amount of payments made for each project and to each country.

The mandate would take effect a year after the SEC issues its final rule for companies operating in foreign countries and those operating at home. The domestic requirement is aimed at helping the Department of the Interior keep track of 3,000-plus leases it monitors.

Companies must report in an "interactive data format" that the SEC would compile and post on its website.

According to the nonprofit Revenue Watch Institute, which reports on disclosure matters, the SEC rule would cover 503 companies that represent nearly a third of the extractive-resource sector's global market value.

Among oil and gas companies covered by the rule: Exxon Mobil Corp., Petrochina Co. Ltd., Royal Dutch Shell PLC, Brazil's Petrobras, Chevron Corp., China National Offshore Oil Corp. (CNOOC), ConocoPhillips Co., Halliburton Co., Chesapeake Energy Corp. and Marathon Oil Corp.

Also covered are eight of the world's 10 largest mining companies.

Publish What You Pay has praised the rule, saying it would spur activity in other large extractive markets. Last year, the European Union issued a disclosure proposal very similar to the U.S. rule, but the European Union has gone slightly further in that it requires private companies and the timber industry to comply.

"The signals we're seeing is that the other markets are likely to follow what the U.S. comes out with," said Isabel Munilla, U.S. director of Publish What You Pay. "And so, of course, we would like the U.S. to be in the lead, obviously. And that was the intention of Congress, for the U.S. to lead on this."

But the SEC severely underestimated the cost of its proposed rule, according to extractive companies. In comments submitted last October, Exxon Mobil put its cost of compliance at $50 million. Industrywide, the cost is in the "hundreds of millions of dollars," the company said.

The American Petroleum Institute writes in its Jan. 19 comments that the SEC failed to examine what effects the rule would have on "efficiency, competition and capital formation."

"We don't have exact numbers" on what the rule would cost, said Justin Spickard, API's director of federal relations, "but in many cases it would require a complete overhaul of accounting systems. It certainly would be costly, looking at the contracts that would be lost, the projects that could be lost."

'Heart of the problem'?

The SEC's definition of a project has become one of the main battles over the rule.

Speaking at a December forum in Washington, D.C., Munilla of Publish What You Pay said a project should be defined as "lease, license or other concession level of arrangement, whatever is the legal agreement that gives rise to a payment."

But at the same forum, a representative from mining giant Rio Tinto Group said that the word "project" does not have a finite definition.

"We call a project something in a particular location that's developing a particular resource," said Laurel Green, chief policy adviser of Rio Tinto's external affairs team. "But in fact, a project might constitute tens or hundreds of different licenses."

Veronika Kohler, director of international policy at the National Mining Association, said groups that are calling for a more specific definition of "project" have a "gap in knowledge" of mining companies' daily routines.

In a letter to SEC last March, NMA called on regulators to allow mining companies to define "project" as they define "reporting units" in the financial disclosures they already make.

Spickard of API, on the other hand, appeared to call for an even broader definition of a project, saying that reporting payments on a country-by-country basis "still gets to the heart of the problem." Most importantly, he said, the definition should not require companies to divulge trade secrets.

Other stakeholders have called for the reporting of all projects over a certain price tag.

Bennett Freeman, senior vice president of sustainability research and policy at Calvert Investments Inc., suggested a $1 million minimum at the December forum. Freeman has represented investors in the disclosure battle for the past decade. Transparency, he said, is "the investor's best friend and ally."

"Until the passage of Dodd-Frank and until the rule is completed and the requirements kick in," he said, "we have had inadequate disclosure, inadequate transparency that we need to properly assess those very, very complex, significant factors of risk in our portfolios."

The other major issue in comments filed to the SEC is whether the agency should allow for exemptions to the rule if disclosure is prohibited by the host country's government.

Royal Dutch Shell, for example, told the SEC last August that it was subject to such disclosure prohibitions in China and Qatar, countries where it invests more than $20 billion collectively.

"When operating in those countries we are required to follow all their respective laws and regulations," Shell said. "Like in the US, we are not permitted to pick and choose which laws or regulations to follow."

But in comments filed in December, Publish What You Pay argues the oil and gas industry has yet to provide a legal text that proves industry members face such prohibitions abroad. Shell, the coalition says, provided only a single legal opinion from a Chinese law firm as evidence.

Publish What You Pay also blasted a letter from the Qatari government supplied by Exxon Mobil, which says that Qatar has begun drafting new laws to prohibit "commercially sensitive information." That letter lists examples of such information, none of which is required by Section 1504 of Dodd-Frank.

"The minute they think they can get a loophole, they're going to act on it," Munilla said. "We're just finding that it's a bit of a smoke-and-mirrors thing."

Voluntary reporting

Mining companies are calling for the SEC to scrap its proposal altogether and instead align it with the Extractive Industries Transparency Initiative, a global voluntary reporting scheme that President Obama joined last fall (E&ENews PM, Sept. 20, 2011).

Former British Prime Minister Tony Blair announced EITI in 2002. Since its founding that year, approximately 35 countries have joined and are in varying levels of compliance.

Under the initiative, countries convene groups of stakeholders to come up with disclosure requirements for extractive industries. They follow a general EITI framework but retain control of specifics.

Kohler of the National Mining Association said it makes sense for the SEC to delay its rule and wait for whatever the U.S. stakeholder groups come up with under EITI.

"We would hope one would reference the other, rather than having two systems, one which would deviate from the other, even if inadvertently," Kohler said.

Human rights organizations agree that EITI and the U.S. law should go hand in hand, but they say EITI should come from Dodd-Frank. The global reporting initiative will pick up where Dodd-Frank leaves off, they say, by covering private as well as public companies.

To be sure, many companies are already disclosing their payments.

The Hong Kong Stock Exchange and the Alternative Investment Market of the London Stock Exchange both recently required companies to disclose at the time of listing.

According to Publish What You Pay, U.S. company Newmont Mining Corp., Norway's Statoil ASA, Canada's Talisman Energy Inc. and South Africa's AngloGold Ashanti Ltd. disclose payments on a country-by-country level. Australia's Rio Tinto discloses payments to certain countries.

"Our companies, they see the benefits of operating in these transparent atmospheres," Kohler said, adding that transparency creates a more stable situation in the countries and creates better relationships with local nongovernmental organizations.

But voluntary efforts have not been enough, the rule's supporters say. And though EITI has made progress, groups say it is unlikely that countries known for secrecy surrounding extractive industries --- Angola, Burma, Cambodia, China, Equatorial Guinea, Iran and Russia -- will ever sign onto the initiative.

"We needed this jolt, this catalyst from mandatory disclosure," Calvert Investments' Freeman said.

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