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SEC Adopts Disclosure for Oil, Gas Extraction Payments

August 27, 2012
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In a setback for oil and natural gas producers, the Securities and Exchange Commission (SEC) last week narrowly voted out rules that would force U.S. producers to disclose commercially sensitive information that could put them at a major disadvantage with foreign -owned energy companies.

The final rule, which cleared the Commission by a 2-1 vote, requires producers to disclose in their annual reports information relating to their resource extraction payments, or those of a subsidiary or any other unit under their control, to a foreign government or to the U.S. government for the commercial development of oil, natural gas or minerals. Chairman Mary L. Schapiro and Commissioner Troy A. Paredes recused themselves from voting on the rule, which implements Section 1504 of the Dodd-Frank Wall Street Reform Act.

The rule defines commercial development of oil, gas and minerals to include exploration, extraction, processing and exports, according to the SEC. It would require the reporting of "any payment, whether [it is] a single payment or a series of related payments, that equal or exceeds $100,000 during the most recent fiscal year," said Commissioner Elisse B. Walter, who joined Commissioner Luis A. Aguilar, in voting out the rule.

The types of payments related to commercial development that would need to be disclosed would include taxes, royalties, fees (including licensing fees), production entitlement, bonuses, dividends and infrastructure improvement costs, Walter said. Companies would be required to comply with the new rule for the fiscal year ended after Sept. 30, 2013. However, only partial-year reporting would be required for the first year if a producer's fiscal year begins before Sept. 30, 2013. The rules would apply to about 1,100 companies.

The cost of industry compliance has been projected to range between $44 million and $1 billion. A SEC staff member estimated that it would probably be at the upper end of the range.

The SEC's action will place domestic producers at a major "competitive disadvantage," with state-owned oil companies in China and Russia and other countries, said Commissioner Daniel M. Gallagher, who voted against the rule.

"We recognize that the rule will impose a burden on competition. But we believe that any such burden that may result is necessary," Walter said. The goal "is to help empower citizens of...resource-rich [countries] to hold their governments accountable for the wealth generated by those resources."

The American Petroleum Institute (API) weighed in against the SEC's rule. The agency wants to "require publicly traded energy firms to release commercially sensitive, detailed payment information about every foreign and U.S. project. With a few clicks of a mouse, state-owned foreign firms -- companies like the China National Petroleum Co. and Russia's Gazprom -- could plunder that information, which could help them determine their rivals' strategies and resource levels," said API Chief Economist John Felmy.

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

Felmy called the SEC's action "unnecessary because a structure already exists to provide greater financial transparency, one that's endorsed both by the Obama administration and the World Bank." The Interior Department in late July established a national committee to guide and oversee U.S. implementation of an Extractive Industries Transparency Initiative (EITI), a voluntary global initiative aimed at increasing accountability and transparency in the oil, natural gas and mining industries.

The EITI requires participating countries to disclose to an independent reconciler certain revenues obtained for oil, gas and mining development. It also requires companies to make parallel disclosures regarding payments to the government. The reconciled figures would then be made public. The SEC said its rules were consistent with the EITI, but it added that it believed Congress intended the agency to go beyond the objective of the EITI.

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