SEC Approves O&G Payment Disclosure Amendment

The U.S. Securities and Exchange Commission (SEC) on Wednesday approved implementation of Section 1504 in the Dodd-Frank Act, requiring oil and gas companies to disclose the payments they make to governments of foreign countries.

SEC commissioners voted 2-1 to require U.S. and international oil and gas companies or subsidiaries listed with the SEC to disclose the payments they make to foreign governments that equal or exceed $100,000 in the most recent fiscal year, including:

  • Taxes
  • Royalties
  • Fees
  • Production Entitlements
  • Dividends
  • Bonuses
  • Infrastructure Improvements

Payment disclosure would be required on a country-by-country and project-by-project basis.

Congress in July 2010 enacted the Dodd-Frank Act with the intent of enhancing transparency of U.S. financial markets to better protect U.S. investors. The amendment to introduce Section 1504 was authored by Senators Ben Cardin (D-Md.) and Richard Lugar (R-Ind.).

However, the SEC held off implementing the requirement for oil and gas companies disclosing payment to allow for comment by industry, academia, investors and the public.

Proponents of the amendment say that full disclosure of company payments to foreign companies will best serve the transparency objectives of the Dodd-Frank Act by requiring full resource disclosure.

"Cardin-Lugar will help combat everything from undisclosed investor risk to tax evasion to corruption," said Heather Lowe, legal counsel and director of government affairs at Global Financial integrity, a research and advocacy organization that supports the measure, in an August 21 statement.

The group estimates that developing countries lose approximately $1 trillion per year to crime, corruption and tax evasion.

However, the American Petroleum Institute (API) on Wednesday said the rule would put U.S. firms at a competitive disadvantage and interfere with ongoing and more effective efforts to increase transparency, such as the Extractive industries Transparency Initiative approach, which requires all oil and gas companies operating in a country to disclose payments to that government.

SEC Commissioner Luis A. Aguilar spoke at Wednesday's meeting in support of the amendment, citing a quote by U.S. Supreme Court Justice Louis Brandeis about sunshine being the best of disinfectants.

"This philosophy of fair and full disclosure is one of the cornerstones of the federal securities framework," Aguilar said, noting that there was no reason for delaying adoption of the rule, which he considered to be in the interest of investors and the public interest.

"U.S. companies have been working to increase transparency for more than a decade using this World Bank and Obama administration backed approach," said API Chief Economist John Felmy in a statement.

"Unfortunately, disclosure would not be a two-way street," Felmy noted. "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."

SEC Commissioner Daniel M. Gallagher voted against approving Section 1504, "despite its good intentions", noting that the analysis was not complete on the economic impact and financial burden it would impose on oil and gas companies.

A number of commentators said being required to disclose payment information would put U.S. oil and gas companies at a competitive disadvantage with the national oil companies of major competitors such as Russia, China, Iran and Venezuela, who do not file annual reports with the SEC and are not having to operate under U.S. regulations.

He noted in the SEC meeting Wednesday that the $100,000 threshold for disclosure requirements excludes nothing.

"The SEC is not the right tool for improving human rights situations in foreign countries," said Gallagher. "We have no reason to think the SEC will succeed in achieving complex foreign policy objectives that have largely failed."

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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