Payment Disclosure Could Put O&G Companies at Disadvantage

A stipulation in the Frank-Dodd Act requiring exploration and production (E&P) companies listed on the U.S. Securities Exchange Commission (SEC) to report payments for commercial oil and gas development will put U.S. E&P companies at a financial disadvantage in future bidding on contract work, a spokesperson for the American Petroleum Institute (API) said.

President Obama on Wednesday signed the Dodd-Frank bill, also known as H.R. 4173 or the Wall Street and Consumer Protection Act, which primarily focuses on reforms for the financial services industry.

The legislation also amends the Exchange Act so that the SEC, no later than 270 days after the Dodd-Frank Act is engaged, will require SEC reporting companies to disclose information relating to payments made to foreign governments or the U.S. federal government for the commercial development of oil, gas or minerals resources.

Since SEC-listed companies are mostly American companies and only a few foreign companies, it would put U.S.-based firms at a competitive disadvantage, said API spokesperson Misty McGowen.

"It would not capture payments being made by national oil companies from other countries, and the level of detail required to be reported would allow competitors access to proprietary information when bidding, which they could use to their advantage in contract negotiations," said API spokesperson Misty McGowen.

API does support transparency in disclosure of payments, "but we don't think this level of disclosure is the right way to do things." McGowen said API supports and participates in the Extractive Industries Transparency Initiative, a multi-lateral, international initiative to promote transparency in oil and gas payments.

According to a recent client alert by law firm Pillsbury Winthrop Shaw Pittman, the legislation contains a broad definition of "payment" to include taxes, royalties, fees, production entitlements or any other material benefits the SEC determines is part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.

"The disclosure provided by the resource extraction issuers must include the type and total amount of payments made for each project, the type and total amount of payments made to each foreign government or the federal government and must be submitted in an interactive data format.

"While the exact scope of this provision is subject to the SEC rule-making and enforcement process, it potentially could be quite burdensome and create competitive as well as public relations issues. As a result, resource extraction companies should be prepared to analyze and comment on any implementing rules proposals," Pillsbury Winthrop Shaw Pittman said.

The financial disclosure measure included in the Frank-Dodd Act, sponsored by Barney Frank (D-Mass.) and Chris Dodd (D-Conn.), was based on the Energy Security through Transparency Act (S. 1700) proposed by Sen. Richard Lugar (R-Ind.) and Benjamin Cardin (D-Md.)

Sen. Lugar in a recent speech encouraged other nations worldwide to join the United States by instituting similar requirements for disclosure of financial payments related to oil, gas and minerals development.

Oxfam America, a global humanitarian organization, has said the measure would increase financial transparency in the oil, gas and mining industry and help reduce the corruption, mismanagement, and conflict that are too often associated with natural resources extraction booms.