Oil Industry Moves to Block New U.S. Transparency Rules

October 11, 2012
By Carey L. Biron
WASHINGTON, Oct 11 2012 (IPS) - Lobby groups representing the oil industry filed a lawsuit in Washington court on Wednesday that seeks to halt the implementation of a new set of rules requiring U.S.-registered extractives companies to disclose all payments made to foreign governments.
The move drew strong reaction from the bipartisan duo that sponsored the rule, with senators Ben Cardin and Richard Lugar blasting the lawsuit as “expected” and “frivolous”.
“The U.S. economy and our values substantially benefit when our companies are working in oil, gas and mineral-rich states,” Senator Lugar said Thursday. “But the benefits will not be realised if investments serve to entrench authoritarianism, corruption and instability. With oil prices high and volatile, our economy needs more transparent markets, not less.”
The new rule, known as Section 1504, is part of a suite of new economic regulations, passed in 2010, known as the Dodd-Frank Act. Section 1504 was approved in late August by the U.S. government’s primary finance regulator, the Securities and Exchange Commission (SEC), following nearly a year of delay and behind-the-scenes wrangling.
Its passage, by a 2-1 vote, has been seen as an important victory by pro-transparency activists, who suggest that the new rules can help to lift the “resource curse” in some resource-rich, governance-poor developing countries.
“Oil companies and industries lobbied heavily against this provision, and were likely disappointed when the SEC came out with strong final rules,” Jana Morgan, with Global Witness, a watchdog, told IPS. “People have to ask themselves what these oil companies are trying to hide. The oil industry needs to stop supporting secrecy and move towards transparency.”
Section 1504 would require around 1,100 oil, gas and mining companies to disclose payments of more than 100,000 dollars made to foreign governments during the course of developing commercial projects. Supporters say the new rule will cut down on corruption and do more to ensure that U.S. capital does not support fraudulent and authoritarian regimes.
“We are greatly disappointed that the oil industry is trying to use the courts to bully the SEC and push for secrecy in their payments to governments,” Ian Gary, a senior policy manager with Oxfam America, a relief group, said Thursday.
“We call on companies, such as BP, Exxon, Chevron and Shell, who are hiding behind industry associations to do their dirty work while espousing transparency rhetoric, to disassociate themselves from the lawsuit.”
In e-mails to IPS, Chevron stated that it supports the recent litigation, while BP declined to comment.
Undue burden
The American Petroleum Institute (API), which filed the lawsuit (available here and here) together with the U.S. Chamber of Commerce, the country’s largest industry lobby group, and other business groups, is arguing that the SEC failed to carry out a thorough analysis of the costs and benefits of enforcing Section 1504, which it says would place an undue burden on U.S. companies.
Although a new report by the nonpartisan Government Accountability Office found the SEC’s analysis to have been sound, the SEC has conceded that the new rule could cost companies at least a billion dollars at first and up to 400 million dollars thereafter to comply. But the lawsuit says the SEC underestimates these costs, suggesting that the ultimate price for U.S. companies would be far higher due to lost competitiveness.
“American oil and natural gas companies must compete against foreign, state-owned oil companies for access to resources around the world,” Karen Harbert, with the U.S. Chamber of Commerce, said Thursday. “The SEC’s ‘extraction rule’ will require them to turn over their playbooks for how they bid and compete.”
Indeed, disclosing such payments is specifically forbidden in certain countries, and the lawsuit complains that the SEC has included no exemptions for such cases.
According to the API’s president and CEO, Jack Gerard, API member companies “strongly support payment transparency” and have done so “for a decade”. On Wednesday, he touted ongoing efforts to work with the U.S. government in implementing a programme, currently in 36 countries, called the Extractive Industries Transparency Initiative (EITI), which Gerard says “would more effectively increase transparency without harming competitiveness”.
Yet according to Global Witness’s Morgan, the idea that compliance with Section 1504 would be tantamount to giving away company secrets is a “red herring”, as most of these companies are already required to make similar payments disclosure through EITI. “So, it’s blatant hypocrisy for these companies to say they don’t want to reveal payments.”
The difference between these systems is that EITI relies on member countries to provide information, despite the fact that many resource-rich countries – for instance, Angola – are not party to the agreement.
Section 1504, on the other hand, would put the onus on the companies themselves to provide this information, thus offering a much broader reach. (Citing the “hot potato” nature of the lawsuit and indicating that the EITI board is currently split on the issue, an EITI spokesperson declined to comment.)
Confidential disclosure?
Still, API has suggested that the entire rule might not need to be tossed out.
“With reasonable changes, the SEC could have achieved the goal of increased transparency while also remaining faithful to its core mission to protect American investors,” API’s Gerard says. “The rule should allow our companies to report their payments confidentially to the SEC and allow the agency to aggregate that information and publicly report payments by country.”
But Morgan says the idea of confidential disclosure is an “oxymoron”.
She notes that one of the most important reasons for passing Section 1504 was specifically to allow investors to understand the risks of their investments, to know how extractives companies are operating in unstable regions – a sentiment publicly backed by several high-profile investors, including George Soros and Bill Gates.
The rule’s aim is also to allow locals in developing countries the opportunity to hold their government to account for how they’re using money from multinational companies – much of which, watchdog groups say, is siphoned off in resource-rich developing countries before it can be used for development or social expenditure.
But such goals would be undercut by confidential disclosure of payments, which would not offer additional information for use by either investors or local communities.
“Some companies, including Talisman Energy, Statoil, AngloGold Ashanti and Newmont Mining, already disclose payments in every country of operation and in some cases they volunteer this information at a project level,” says Oxfam’s Gary. “If transparency truly hurt their bottom line, they simply wouldn’t be doing it.”
Likewise, Senator Cardin noted Thursday: “Increased transparency will not put companies that comply at a competitive disadvantage but it will reduce the risks for U.S. investors and it will allow citizens in resource-rich countries to hold their leaders accountable.”