Oil and gas companies listed in the United States will be forced to disclose details of payment they make to foreign governments under new rules introduced by the Securities and Exchange Commission yesterday.
The rules mark a major change to the way in which the oil and gas industry will disclose its financial activities around the world. US supermajors including ExxonMobil and Chevron will be affected, as will internationally-headquartered oil companies with listings in the US through the ADR system, including Eni, Shell and Total.
The SEC puts the initial compliance cost to the oil, gas and mining industries at approximately $1 billion, and said ongoing compliance costs would be between $200 million and $400 million. Oil and gas companies will have to deepen their accounting, reporting and compliance practices worldwide.
Introduced late as section 1504 of the Dodd-Frank regulatory reform, which is principally aimed at improving oversight of the US banking sector, the rules aim to curb corruption and allow citizens of foreign countries to better hold their governments accountable to them for the money they receive from oil.
SEC Commissioner Luis Aguilar said the rules would “facilitate transparency through dis-closure” and shine a light on payments to ensure they are used properly. He said the rules are “in the interest of investors and the public interest.”
The rules will require oil and gas companies to provide the following information about payments made to further the commercial development of oil, natural gas, or minerals:
– Type and total amount of payments made for each project.
– Type and total amount of payments made to each government.
– Total amounts of the payments, by category.
– Currency used to make the payments.
– Financial period in which the payments were made.
– Business segment of the resource extraction issuer that made the payments.
– The government that received the payments, and the country in which the government is located.
– The project of the resource extraction issuer to which the payments relate.
The new rules leave the term “project” undefined to provide resource extraction issuers flexibility in applying the term to different business contexts. However, the rule release provides some guidance on the Commission’s view of what a project would be.The SEC voted 2-1 to introduce the rules, which apply to “any payment to further exploration, extraction, processing, and export of oil, natural gas or minerals or the acquisition of a license for related activity.”
“[Dodd-Frank] directeded the Commission to issue these rules requiring companies engaged in the development of oil, natural gas, or minerals to disclose the information annually by filing a new form with the SEC called Form SD,” said an SEC statement. “A resource extraction issuer is required to comply with the new rules for fiscal years ending after 30 Sept 2013. The form must be filed with the SEC no later than 150 days after the end of its fiscal year.”
The American Petroleum Institute, the American oil industry’s lobbying body, said the new measures will hike operating costs and put US listed oil firms at a competitive disadvantage, especially compared to state oil companies which have become increasingly active in pursuing foreign projects.
“Unfortunately, disclosure would not be a two-way street,” said John Felmy, chief economist at the API, said. “State-owned foreign companies would have to reveal nothing and might even be favored for projects in host countries reluctant to have financial information disclosed.”
Oil and gas companies, which lobbied to exempt the requirement where disclosure was prohibited by foreign host governments, could mount a legal challenge against the rules.
The new disclosure requirements, which will see oil companies disclosing any payment or series of payments of $100,000 or more, apply to domestic and foreign companies listed in the US, and to smaller reporting companies that meet the definition of a ‘resource extraction issuer’.
The API lost its battle to have countries where secrecy is required – which generally includes the GCC – from the provision. The rules require the disclosure of taxes and royalties, and also project specific payments, including infrastructure contributions and signature bonuses. The latter two in particular more often than not remain confidential in the Middle East.
“The rules will give foreign oil and natural gas companies access to confidential, proprietary information that they could use against US companies when competing for crucial energy resources around the globe,” says Felmy. “State-owned foreign firms could plunder this information to help them determine the strategies and resource levels of their US rivals.”
The API prefers the Extractive Industries Transparency Initiative (EITI) approach, where all companies in a country must adhere to an international transparency standard if the host government requires it.
The EU is said to be considering similar rules, taking an opportunity for oil companies and the City of London to benefit from regulatory arbitrage. The only alternative available for oil companies will be to go private.
While oil companies have been lauded for improving their financial reporting, doing well in a recent ranking of companies by Transparency International, Norway’s Statoil is the only oil major to use country-by-country reporting.
Oil companies have often been criticised for the opacity of their operations in emerging and frontier economies, including Nigeria, Angola and Equatorial Guinea.
The problems of corruption of small governments faced with huge oil revenues are well established, and the news has drawn praise from human rights activists and social justice groups that insist the added transparency could discourage corruption in these resource-rich countries.
The rules will also affect miners such as Glencore and BHP Billiton, and electronics companies which use rare earth minerals which are prone to sourcing from conflict areas such as the Democratic Republic of the Congo.
