The American Petroleum Institute (API) and a coalition of business groups last week appeared before the U.S. Court of Appeals for the District of Columbia Circuit to challenge the Securities and Exchange Commission's (SEC) implementation of Section 1504 of the Dodd-Frank Wall Street Reform Act, which requires companies registered with the agency to publicly report how much they pay governments for access to oil, natural gas and other minerals.

"This rule damages the competitiveness of American companies and is not the most effective way to increase transparency in business investment abroad. The rule requires business sensitive information to be shared with America's global competitors, giving state-owned companies in China and Russia an advantage since they are not required to disclose similar information," argued API Executive Vice President Marty Durbin. Durbin was tapped last week to take over America's Natural Gas Alliance (see related story).

"This rule will also hurt the millions of Americans who own shares in oil and natural gas companies and will cost jobs and damage America's energy security by making it more difficult for U.S. companies to gain access to resources abroad," he said.

The API, U.S. Chamber of Commerce, Independent Petroleum Association of America and National Foreign Trade Council contend the SEC failed to conduct an adequate cost-benefit analysis of the rule, grossly misinterpreted the Dodd-Frank mandate to make a "compilation" or aggregation of payment information available to the public, and violated the Constitution.

In a lawsuit filed last October, the groups said the rule goes far beyond what Dodd-Frank required (see NGI, Oct. 15, 2012). "Section 1504 requires only that a 'compilation' or aggregation of payment information made by all U.S. companies to each foreign government and federal government be made publicly available. The Commission, however, grossly misinterpreted its statutory mandate to require that each U.S. company publicly file a report on the Commission's online electronic database detailing each payment made to each and every foreign government, for each and every 'project' relating to extractive industry."

The Dodd-Frank final rule cleared the SEC by a narrow vote of 2-1 in August 2012, with then-Commissioner Elisse B. Walter (now SEC chairman) and Commissioner Luis A. Aguilar voting out the rule (see NGI, Aug. 27, 2012). Commissioner Daniel M. Gallagher voted against the rule, saying it would place domestic producers at a "major competitive disadvantage" with state-owned oil companies in China and Russia and other countries. Then-Chairman Mary L. Schapiro and Commissioner Troy A. Paredes recused themselves from the vote.

The rule 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. It 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."

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 said. This would give competitors an upper hand when bidding for energy contracts, the API said. Companies would be required to comply with the new rule for the fiscal year ended after Sept. 30, 2013. The rules would apply to about 1,100 companies. The SEC conservatively estimates that the rule will impose at least $14 billion in costs on American companies and investors, the API said.

The API and other groups have called SEC's rule 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 last 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 department said that 36 countries (in addition to the United States) were already well underway in implementing the EITI.

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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