The foundation is shaking beneath Big Oil’s House of Cards
By Jana Morgan on August 18, 2021
No competitive disadvantage from payment disclosure, says leading natural resource economist
Transparency advocates are fighting to prevent Big Oil from weakening Section 1504 of Dodd-Frank, the landmark oil, gas, and mining payment transparency provision. Section 1504, if properly implemented, will enable citizens to monitor the revenue their governments receive from extractives companies, and help citizens ensure that revenue generated from their countries’ natural resource endowment is put to good use. Before Section 1504 can go into effect, the Securities and Exchange Commission must release an implementing rule. And in order for Section 1504 to work as intended, the implementing regulation must require companies to publicly report their payments for each of their projects. Unfortunately, a few loud voices from Big Oil maintain that project-level payment disclosures would put companies at a competitive disadvantage. However, the global Publish What You Pay coalition, investors, extractive companies and government representatives have argued against this position for years.
Recently, Duke University economist, Dr. Robert Conrad has added his voice to the call for payment transparency. In July, he wrote to the Securities and Exchange Commission (SEC) and dismantled arguments by the American Petroleum Institute (API) that disclosing project-level payments to governments would put companies at a competitive disadvantage. Dr. Conrad, an expert in natural resource economics and public finance, also addressed API’s radical proposal for the SEC to allow companies to disclose payment information anonymously.
While API, the lobbying arm of Big Oil, has made a game of trumpeting the ‘parade of horribles’ that will supposedly result from Section 1504 disclosures, Dr. Conrad finds much more fiction than fact in their assertions.
API Myth #1: Reporting project-level payments, by company, will force companies to reveal commercially sensitive information
Reality Check: This argument has been trotted out by industry time and again, but we have yet to see any credible supporting evidence. According to Dr. Conrad:
“…information at the project level does not require disclosure of…commercially sensitive data…that would place a resource producer…at a competitive disadvantage. […] No contractual relationships with downstream processors are disclosed, the contribution of the project to the overall profitability of the reporting issuers is not disclosed, trade secrets are not disclosed, and techniques related to intellectual property are not disclosed.”
A project-level reporting requirement - similar to mandatory disclosure laws being implemented in 30 other countries - would merely require companies to disclose payments they make to governments, such as taxes, royalties, fees, bonuses and production entitlements.
There is no overlap between the disclosures required by Section 1504 and the commercially sensitive information listed by Dr. Conrad. He goes on to explain why royalty payments, dividends and other required payment categories cannot be used to extract commercially sensitive information.
API Myth #2: Highly aggregated disclosures, where company names remain anonymous, are enough for civil society groups to hold their governments accountable
Reality Check: All evidence points to the contrary. Project payment information, by company, is essential for citizens and governments to determine if they are getting a good deal for their natural resources. Dr. Conrad agrees:
“[Natural resources] are part of a country’s wealth, which, if extracted, is reduced in exchange for financial and other economic benefits as determined by each contract. Knowledge of the payment streams by a particular company and by project are then necessary for resource owners to determine whether the present value of the benefits are at least as great as the capital losses resulting from resource depletion.”
In essence, Dr. Conrad is saying that without company-by-company, project-level disclosure (which he defines as equivalent to a contract), citizens are not only unable to monitor the money paid by companies to their government, but are also unable to determine if the benefits of extraction outweigh the costs. Costs of extraction can include environmental damage, civil unrest, and loss of livelihood. While an influx of natural resource revenue can mean an opportunity for a country to develop, if not closely monitored, it can also (and often does) create a fertile environment for graft, corruption and mismanagement.
Last year, 544 civil society groups from 40 countries wrote to SEC Chair Mary Jo White to ask the SEC to quickly produce a new rule for Section 1504 requiring project-level disclosure by company. You can read more about how citizens in countries like Indonesia, Angola and the Democratic Republic of Congo will use project-level payment information to increase corporate and government accountability here.
API Myth #3: American companies will suffer a competitive disadvantage if required to disclose project-level information – especially when competing with state-owned oil companies
Reality Check: API argues that SOEs will not be required to report their payments, whereby giving them an advantage over U.S. companies. This is simply not true.
First, many SOEs will be required, or are already required, to report their payments. In March, Norwegian state-owned oil giant, Statoil, disclosed all of its payments by project. This year the 28-member states of the European Union began implementing their disclosure laws which cover a number of SOEs, including Gazprom, Rosneft and Lukoil. Once the SEC finalizes the US rule, Petrobras, CNOOC, Petrochina and Sinopec will be covered.
Second, there is no evidence that payment transparency will prevent U.S. companies from winning bids against SOEs or, in fact, any competitors. The fact is that disclosure is not a determining factor in awarding bids. And a majority of the world’s top oil, gas and mining companies will be covered by mandatory disclosure legislation or the Extractive Industries Transparency Initiative (EITI). Advantages afforded to some SOEs come from access to capital from their own governments and the ability to obtain government loans at little or no interest. None of this has anything to do with mandatory payment disclosure.
In fact, many SOEs do not even operate outside of their own borders and are merely fiscal vehicles that allow governments to enter into joint ventures with multi-national oil companies in order to have a controlling interest in projects within a country’s borders. SOEs are not ‘boogie men’, as API would have us believe. Instead, SOEs often partner with major U.S. oil companies, which typically have the capacity and proprietary technology needed to extract oil or minerals in increasingly difficult environments.
Dr. Conrad emphasizes this point in discussing the recent joint venture collaboration between Exxon, Statoil and Russia’s Rosneft in order to develop Arctic reserves:
“The Russian government limited access to Arctic reserves to state companies, but Rosneft found it in its interest to form joint ventures with international entities such as Exxon and Statoil, in part because of their technical knowhow and experience.”
Finally, many companies disagree with API’s contention that transparency will hurt business. In fact, many recognize the business case and have chosen to disclose project payments voluntarily. UK oil company Tullow Oil has disclosed its payments by project for the last three years. In March, Texas oil company Kosmos Energy did the same. These companies have noted that transparency makes good business sense, and is not costly or damaging to their operations in any way.
Some companies have even asked for transparency regulations. Canada’s disclosure law came into effect on June 1, and was the result of collaboration between the Mining Association of Canada, the Prospectors and Developers Association of Canada and Publish What You Pay – Canada to petition the government for the legislation. These associations, which represent more than 1,200 companies, said that transparency would be a boon to business and would allow companies to demonstrate their economic contribution to the countries and communities in which they operate.
Companies like these should be applauded for being a part of a global race to the top, rather than API’s attempt to win a race to the bottom.
If the evidence above is not enough to convince you that API’s arguments are unfounded, I recommend that you read Dr. Conrad’s submission in full. Despite the very best efforts by the American Petroleum Institute, merely repeating the same claims over and over again do not make them true. Laggards in the oil industry have yet to present a compelling case or convincing evidence against public, company-by-company payment disclosure for each project. In contrast, investors and civil society have demonstrated the strong demand and clear need for this type of transparency. The rest of the world has moved forward. API’s continual clinging to weak arguments has only served to needlessly perpetuate uncertainty, while causing the US to lose its position as a leader on extractives transparency.
Jana Morgan is the Director of Publish What You Pay – United States
This blog was originally posted on the PWYP - United States website here.