WASHINGTON - The oil industry sued to overturn a U.S. rule requiring companies to report their payments to foreign governments to develop oil and gas fields, arguing the information would provide valuable secrets to competitors.
The Securities and Exchange Commission regulation, mandated by the 2010 Dodd-Frank financial law, aims to help people in oil-rich countries hold their government officials to account for the money the governments receive for oil and mineral rights.
The American Petroleum Institute, the U.S. Chamber of Commerce and two other business groups argued in papers filed in federal court in Washington, D.C., Wednesday that the SEC exceeded its authority when it adopted the final rule in August and that it ignored companies' suggestions for limiting the rule's cost.
The SEC is required by federal law to weigh the costs of its regulations.
"It was a well-intentioned provision in the Dodd-Frank law, but the SEC just overstepped and went well beyond what was necessary to support transparency," said American Petroleum Institute President Jack Gerard. He called the SEC's approach "arbitrary and capricious."
The SEC said in adopting the rule that it recognized "the rules will impose a burden on competition, but we believe that any such burden that may result is necessary in furtherance of" the law's goal.
Eugene Scalia of the law firm Gibson, Dunn & Crutcher LLP, who has racked up multiple victories against the SEC, will argue the oil industry's case.
This represents the third time the business community has turned to Mr. Scalia, a son of Supreme Court Justice Antonin Scalia, for help challenging rules stemming from the Dodd-Frank law. Last month, he won a case overturning new limits on commodity trading that futures regulators said were required by the law.
The Dodd-Frank law requires all U.S.-listed oil and gas companies to disclose each year their royalties, fees and other payments to the U.S. and foreign governments for extracting oil, gas and minerals. A bipartisan group of senators attached the provision to the law, citing concerns about the persistent poverty found in some oil-rich countries, where corrupt officials prevent oil wealth from reaching average citizens.
Under the law, companies must report total amounts paid to a foreign government by payment type and project, and attach electronic tags to the information.
All the major U.S.-listed oil companies already participate in a voluntary project called the Extractive Industry Transparency Initiative that publicizes the industry's payments to 36 countries. But the industry argues that the SEC's rule goes too far.
The companies say it will force them to disclose sensitive information--such as their expected rate of return on a given project--and hand their foreign competitors a tactical advantage the next time they vie for oil rights. Sixteen of the biggest oil companies, including large state-owned competitors outside the U.S., wouldn't have to comply with the law because they aren't listed on U.S. stock exchanges, the American Petroleum Institute said.
"All your competitors will know what your standards are," Mr. Gerard said. "They will know what to do to beat you."
The industry wanted the SEC to require disclosure only at the country level, rather than the level of specific projects. It also asked for an exemption from the reporting requirement when foreign governments prohibit such disclosure.
"Nobody intended for each company to divulge its basic playbook country by country, project by project, year by year," said Karen Harbert, president of the U.S. Chamber's Energy Institute.
The SEC rejected both demands, saying they weren't permitted under the Dodd-Frank law. The regulator didn't define the term "project" in its final regulation but said it believed the law requires companies to go deeper than country-level reporting.
"What the oil companies asked for was a violation of the statute," said Corinna Gilfillan, head of the U.S. office for Global Witness, a human-rights group.
The SEC estimated that complying with the rule would cost companies roughly $1 billion up front and between $200 million and $400 million each year.
Copyright (c) 2012 Dow Jones & Company, Inc.
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