Awaiting the SEC’s decision on transparency in the extractive industries
| September 20, 2013
Whatever will happen in the next months will probably be a turning point in the history on transparency in the extractive industries. What I am talking about is Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new law will require U.S.-listed oil, gas and mining companies to publish revenue payments to governments such as taxes, royalties and license fees on a country-by-country and project-by-project basis. To be more exact, the U.S. Securities and Exchange Commission (SEC) put the reporting threshold at $100,000 stating that companies must report “any payment (whether a single payment or a series of related payments) that equals or exceeds $100,000” in a fiscal year.
While the original law remains in place, the original implementing rule was put aside according to a decision by a federal district court in July after the American Petroleum Institute (API) filed a legal challenge against the law. The API argued that the requirement to provide financial details for specific projects would give their rivals a competitive advantage. Another key claim by the API was also that local laws in some countries (as in Angola, China, Cameroon and Qatar) ban revenue disclosure and that they should therefore be exempt from reporting payments.
Now in the beginning of September, the SEC announced that it would not appeal the federal court decision, but reissue the implementing rule instead — creating a situation in which the transparency community and extractive industries have started to just hold their breaths and wait and see what will happen.
Well, not exactly. A group of transparency organizations, Members of Congress and investors representing about $5.6 trillion in assets announced that they are calling on the SEC to reissue a strong implementing rule under Section 1504 as soon as possible. And of course, no one expects the oil and gas lobby to just sit around and wait. But the interesting thing is that some anecdotal reference suggests that many insiders actually don't know what is going to happen.
The crux is whether the API appeal is justified, especially when looking at their claim that the rule would provide their competitors with an advantage. A thoughtful guess: not necessarily.
This is mainly because, Dodd-Frank 1504 will affect all companies listed in the U.S., including not only U.S. companies but also their competitors like Shell, BP and the Chinese state-owned company CNOOC, which has been listed on the U.S. stock exchange since February 2001. In fact, it will cover about 29 out of 32 of the major international oil companies, putting 29 of these companies on an equal playing level when it comes to bidding abroad.
True, for this to take hold, these companies have to stay listed. This opens up the interesting question on what the value is for international companies like CNOOC to be listed on the U.S. stock exchange in the first place. If this value is not significant, they could easily unlist themselves, get exempted from Dodd-Frank 1504 and get a competitive advantage. But it is still not clear what this competitive advantage might be.
For instance, members of the API objected to the costs of implementing the law with Exxon stating last year that the legislation would costs it about $50 million. Yet, putting away with the size of the costs (which should be relatively low compared with Exxon's annual profit), these costs will certainly downscale as fix costs are settled and the process becomes a global regular practice.
Another interesting argument that was raised in an article on Fuel Fix was that competitors would find out the details on the bids of U.S.-listed companies and undercut these bids. Yet, apart from the fact that reporting would take place after the companies have already bid for a certain government stake, a lot of the information that is going to be published is already out there according to the transparency initiative Publish What You Pay. For instance, research firms like Wood Mackenzie collect this information on a pay-for-access basis.
If that information is known, why bother? And, finally, let's not forget that Norwegian Statoil already publishes such information and does not seem to have experienced any competitive disadvantage recently.
So what will happen over the next months will surely change the global landscape in the extractive industries, especially with an EU rule similar to Dodd-Frank 1504. That rule is going to be implemented into the national legislation of each EU member state over the coming years, and the U.S. is becoming part of the Extractive Industry Transparency Initiative. Let's wait and see and hold our breaths.
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