Federal regulators on Wednesday voted to require U.S. companies to disclose what they pay to harvest crude, natural gas and minerals from other countries, delivering a big blow to oil companies that say the mandate will force them to shut down drilling in some areas.
The rule adopted 2-1 by the Securities and Exchange Commission, drew applause from human rights activists and social justice groups that insist the added transparency could discourage corruption in resource-rich countries.
The measure is aimed at preventing graft, exposing bribes and deterring corruption in resource-rich nations where oil and mineral wealth isn’t trickling down.
SEC Commissioner Luis Aguilar said the rule would “facilitate transparency through disclosure” and shine a light on payments to ensure they are properly used. “The final rule … is in the interest of investors and the public interest,” Aguilar said.
Mandated by the 2010 Dodd-Frank financial law but delayed amid intense lobbying, the new rule requires some 1,100 publicly traded oil, gas and mining companies to report payments exceeding $100,000 made to other countries “to further the commercial development” of the host nations’ resources.
The SEC rejected oil companies’ pleas for an exception to reporting payments in countries that have their own laws prohibiting such disclosure, including Qatar, Cameroon, China and Angola. The American Petroleum Institute said that could force oil companies to wind down operations in those countries.
Shell Oil Co. warned last year that without exemptions, the rule could jeopardize its $20 billion in investments in Qatar and China. ExxonMobil also has significant interests in Qatar.
“When operating in these countries we are required to follow all their respective laws and regulations,” Shell said in a letter to the SEC. “Like in the U.S., we are not permitted to pick and choose which laws or regulations to follow.”
Kevin Book, an analyst with ClearView Energy Partners, said the rule “could impose very real competitive challenges for U.S. companies competing globally,” particularly as the negotiate with host governments “made uncomfortable by public knowledge of generous terms.”
But humanitarian activists said the oil industry’s desired exemptions would have gutted the disclosure requirement.
“If they were to grant such an exemption, it might invite regimes to create new transparency prohibitions,” said Ian Gary, senior policy manager for extractive industries with Oxfam America.
Energy industry representatives warned the mandated disclosure — which would not be required for foreign state-owned oil companies or privately held U.S. companies –would give their rivals a competitive advantage.
They unsuccessfully lobbied the SEC for latitude to disclose payments on a country-level basis, rather than for individual projects. Project-specific details could give rivals too much information about where oil and gas companies are targeting their spending, the industry warned.
Although the final rule requires project-level disclosure, it gives companies some latitude to define those projects; the SEC did not lay out a specific definition.
API chief economist John Felmy said that didn’t go far enough.
“The rules will give foreign oil and natural gas companies access to confidential, proprietary information that they could use against U.S. companies when competing for crucial energy resources around the globe,” Felmy said. “State-owned foreign firms could plunder this information to help them determine the strategies and resource levels of their U.S. rivals.”
SEC Commissioner Daniel Gallagher insisted that financial regulation isn’t the right vehicle for “this kind of social policy exercise.”
“I don’t like to see social and foreign policy aims grafted onto securities laws,” Gallagher said.
Social justice groups said the project-level details are needed to ensure foreign officials can’t obscure potentially big payments tied to small endeavors. Without providing a specific definition of covered projects, the SEC may have provided “wiggle room, allowing companies to continue to hide illicit payments,” cautioned Global Witness USA, a pro-disclosure group.
The final rule would set a $100,000 threshold for payments within each fiscal year. Covered payments would include taxes, royalties, fees, production entitlements, bonuses, dividends and the cost of infrastructure improvements.
Under the rule, companies would be able to disclose the payments in a new form filed with annual reports, rather than just “furnished” to the SEC _ a distinction that means private shareholders will have a legal right of action if the reports are wrong.
According to an SEC cost analysis, the mandate will carry an initial price tag of up to $1 billion for all covered companies, plus an additional $200 million to $400 million annually.