Oil firms face crackdown over financial secrecy
Data: 3 Nov 2011
In probably the widest crackdown of financial secrecy within the oil, forestry and mining sectors, the European Union last week tabled draft resolutions that require companies from the 27 member bloc to publicly reveal the money they pay to governments – rules that affect firms like Tullow Oil and Total SA.
While the intention of the resolutions is to have mineral firms reveal such payments like royalties, production bonuses and profits, their target is also to unmask crimes such as bribery and tax evasion. European companies will be required to offer a detailed financial breakdown of their payments on a country by country basis, project by project.
This is a radical shift from the consolidated figures that companies usually published. And while publishing such financial materials was earlier confined to only those companies listed on a stock market, this particular set of resolutions covers every European oil and mining firm.
The European Union says the draft resolutions are a crucial step to holding governments and companies accountable to citizens. A statement from the EU notes that “these industries are often associated with a great source of wealth in resource-rich developing countries.
By disclosing payments to governments by the extractive and forestry industries, communities in resource-rich countries would be better informed about government income from licensing such activity and whether the cost to society from losing the natural resource is adequately compensated.”
However, oil, forestry and mining companies operating in countries where it is a crime to reveal such financial transactions will not be affected by these resolutions.
Uganda is yet to put in place an oil law to govern the petroleum sector. The draft Petroleum Bill 2010 that is expected to be tabled before Parliament before the end of the year does not make it criminal for oil companies to publish what they pay to government.
Opportune time?
The EU draft resolutions could not have come at a better time for Uganda. Parliament remains the centre of two parallel oil debates that have shaken the faith of some sections of the public, and wedged a rift within the ruling party. Members of Parliament, three quarters of whom belong to the ruling National Resistance Movement, continue to push the Executive to make public the Production Sharing Agreements it signed with oil companies.
However, the Executive continues to reiterate its position that secrecy clauses within the agreements bar it from making such information public. Uganda has so far discovered 2.5 billion barrels of oil, according to the ministry of Energy and Mineral Development.
International consultants believe Uganda’s oil industry would generate as much as $130 billion before the oil is depleted within three decades.
Allegations that Tullow Oil, listed on the London Stock Exchange, offered millions of Euros as bribes to three top cabinet ministers to influence the completion of its acquisition of Heritage Oil Uganda’s assets has also left Members of Parliament baffled.
Some Members from the ruling party have called on Amama Mbabazi, the Prime Minister; Hilary Onek, the former Minister of Energy and Mineral Development and now the minister of Internal Affairs; and Foreign Affairs minister Sam Kutesa, to step aside for a full investigation into these claims.
Kutesa has already stepped aside, although that was due to a separate investigation into his involvement in the mismanagement of funds for the organization of the 2007 Commonwealth Heads of Government Meeting.
Pressure groups around the world have welcomed the EU’s bold move, which follows a similar legislation in the United States – the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – although that only touched on oil and mining firms listed on US stock markets.
Thing of the past
Speaking to Newsquote, a global online platform for reporters interested in development issues, Eloise Todd, the Brussels Director of ONE, an advocacy organization, said: “The murky deals between extractive companies and despots must become a thing of the past.”
Nele Meyer, the EU Policy Advisor for Amnesty International, said the proposal will help in clearly indentifying who the public should hold accountable in case things go wrong.
“It shows which actors are involved in business operations, can and should be held accountable for negative impact of their business operations, in particular on human rights and the environment. Amnesty International sees this proposal as one of several necessary measures to improve transparency,” she said.
Publish What You Pay, a global coalition of civil society groups, also welcomed the disclosure pointing out that “secrecy in company payments for oil, gas and mineral companies has too often led to corruption, violence and civil war in many countries which are rich in natural resources, while exacerbating poverty by preventing those funds from being invested in basic services like health and education.” PWYP says these regulations, when ratified, will apply to at least 200 listed and 400 large unlisted companies in Europe.
Richard Howitt, a European Member of Parliament, put a financial face to the crime within the global extractives industry, saying: “Extractives worth 1 trillion dollars, too much of their payments made worldwide today are siphoned off – knowingly or unknowingly – into corruption or personal wealth of those at the top.”
It will be interesting to see how these EU rules play out in Uganda, especially where Tullow Oil is in the final stages of completing a farm down of two thirds of its assets to France Oil major Total and Chinese powerhouse CNOOC. It is the latter, to whom these rules will not apply, that makes for an interesting study.
Chinese firms the world over are known for their financial secrecy, a strategy that has played a key role in helping them stay ahead of the competition. If Tullow and Total are required to reveal the nitty-gritty of their payments to government, such information will be valuable to CNOOC, and could play a critical role in determining the power play within Uganda’s oil industry.
Mining companies are expected to make a case against some of these resolutions.
Enforcement costs
Mining firms question whether the costs of enforcing these rules will not outweigh the benefits, and doubt how effective these rules will be to poor countries. Vicky Bowman, the Global Practice Leader at Rio Tinto, a firm that until three years ago owned a vermiculite mine in Uganda, also speaking to Newsquote, said that she did “not expect legislation to cover all of the missing elements.”
She added: “But without this complementary activity by governments, development agencies, companies and NGOs, we will end up with big databases of tax numbers which will have cost EU companies a lot to produce, but we won’t see the desired end result in terms of improved governance, better use of natural resources revenue and sustainable and inclusive growth.”
Bowman said there is a lot of capacity building that needs to be done in poor countries with mineral wealth. She argued for improved tax administration systems, better capacity by local governments to spend the money in the right sectors, and strong civil societies that can hold governments accountable to their citizens.
“What we want is final legislation that’s fit for purpose, where that purpose is promoting good tax governance, accountability, transparency, and the fight against corruption,” she said.
