As SEC Delays on Extractive Payments, World Moves Ahead

Five years ago, the Dodd-Frank Act directed the Securities and Exchange Commission to adopt a rule requiring oil, gas, and mining companies to disclose what they pay to governments for extraction rights.

People have been fighting about that rule ever since.

The latest skirmish happened on May 6, when lawyers for the SEC and Oxfam America appeared in federal district court to tussle over when the SEC might finally issue the rule—not to be confused with the agency’s first effort to adopt an extractive payments rule in 2012, overturned in court by a previous lawsuit from the American Petroleum Institute and U.S. Chamber of Commerce. The SEC now says it won’t issue a new version of the rule until 2016; Oxfam’s lawsuit says that deadline is too far off, and the SEC should pick up the pace.

And so it goes for the embattled SEC and its extractive payments rule. Section 1504 of Dodd-Frank requires mining companies to report aggregated project payments exceeding $100,000 made to U.S. and foreign governments for natural resource extraction. Whenever the SEC does draft its final rule, the effort may be complicated by new international requirements and voluntary disclosures already being made, which proponents say provide real-life examples of how the rule could work.

On May 6, lawyers for both appeared in U.S. District Court for the District of Massachusetts to present their oral arguments. Jonathan Kaufman, an attorney for Oxfam America, said the SEC has no valid excuse for delaying the rule any further. He was not persuaded by an argument that the Commission, still catching up on Dodd-Frank mandates and JOBS Act rulemaking, was too busy to prioritize an updated proposal.

“That is not enough to say to a court that they cannot finish this limited rule,” he said. “The question is not whether the SEC is busy, but whether it has to do what Congress told it to do.”

SEC attorneys countered that bringing extractive payments to the top of its agenda would divert resources from equally important work in other rulemaking and enforcement. The new proposal will require a new comment period and accompanying economic analysis, both of which will take time, money, and resources. “We have to come up with something that will withstand scrutiny, because we know there are going to be challenges by either Oxfam or API,” SEC Associate General Counsel Richard Humes said.

Meanwhile …

As companies still wait for a U.S. extractive payments rule, other countries have stepped in with their own. A European Union directive passed in 2013 requires member states to enact their own disclosure rules; Britain was the first country to do so. And where the original SEC rule applied only to listed companies, the EU directive includes large unlisted ones. The EU directive requires companies to report all contracts they sign with governments. Similar requirements are also in various phases of adoption in Canada, Norway, and Australia.

“I would think the more aggregated disclosure would be the path of least resistance for the SEC.”
David Lynn, Partner, Morrison Foerster

How much might the SEC’s revised rule, whenever it finally arrives, mirror international versions? Disclosure proponents hope the SEC will follow their lead and say that path will benefit companies’ compliance efforts.

“If the SEC were to issue a rule modeled on the European Union’s Accounting and Transparency Directive, we would certainly view that as very good and welcome progress,” says Ian Gary, Oxfam’s senior policy manager for extractive industries. “I would also think, from the corporate view, having one standard and working on one reporting template would make compliance much easier for them … I’m sure companies don’t want to have two very different reporting standards and need to file two different reports.”

Conversely, the European Union might view a final, scaled-back rule from the United States as not “equivalent” to the European requirement. That would force SEC foreign filers and other companies to report under both regimes.

The ongoing delay also means the SEC must now consider disclosures some companies already make voluntarily. In March, for example, Norwegian company Statoil, the 11th-largest oil company in the world, disclosed the payments it made to governments in more than 30 countries. Two surprises: The data, detailed in a supplement to its annual report, was at the project level, not aggregated; and it included all countries where Statoil does business.

MAKING THE CALCULATION

The following excerpt summarizes the methodology used in Statoil’s report, which disclosed the sums it paid to governments in 2014 for extraction rights.
Project Definition
Certain payment types are reported by project. A project is defined as the operational activities that are governed by a single contract, license, lease, concession, or similar legal agreements and form the basis for payment liabilities with a government. If multiple such agreements are “substantially interconnected” they may be considered a project. According to the regulation, “substantially interconnected” means that the agreements are governed by a single overarching agreement, that the agreements have more or less identical terms, and that the agreements are geographically and operationally connected.
Payments that are not directly linked to a specific project, but are levied at entity level, will be reported at the level for which the payment is levied. For instance, if a host country levies corporate income taxes at legal entity level and not at project level, we disclose the payment at legal entity level.
Materiality
Payments made as a single payment, or as a series of payments, that equal or exceed Norwegian kroner (NOK) 800.000 during the year, are disclosed. If no payments or only payments below this threshold were paid in a particular country, the country is not displayed in the overview of the projects and payments per country.
Reporting Currency
When preparing the report, payments to governments in foreign currencies (those other than Norwegian kroner) are translated based on the foreign exchange rate at the average annual rate.
Payment Types Disclosed at Project or Legal Entity Level
The following payment types are disclosed for legal entities involved in extractive activities They are presented on a cash basis, net of any interest expenses and whether paid in cash or kind:

Taxes Levied on the income, production, or profits of companies.

Royalties are usage-based payments for the right to use a geographical area for exploration, development, and production and include rental fees, area fees, entry fees, severance tax and concession fees, and other considerations for licenses and/or concessions.

Bonuses are a sum of money to be paid when signing an oil and gas lease, when discovering natural resources, and/or when production has commenced.

Payments for infrastructure improvements, such as building a road or bridge. Such payments are disclosed if Statoil is contractually obligated to build a road.

Host government entitlements are the host government’s share of production after oil production has been allocated to cover costs and expenses under a production sharing agreement.

Shares or other ownership rights to a company or its subsidiaries or closely connected parties that are given to governments for the right to extract oil and gas.

Dividends include payments to governments in lieu of production entitlements or royalties. In this context, dividends do not include payments to governments when a government is a shareholder of the company, as long as the dividend is paid to the government under the same term and conditions as applicable to other shareholders.
Source: Statoil.

The latter details are of particular importance, as they figured prominently in the court case that vacated the SEC’s initial rule. The Chamber of Commerce argued (successfully) that the rule could conflict with local laws overseas in countries where disclosing such payments is illegal, so the SEC had to allow exemptions. Among the countries that prohibit the disclosure of payment information are Angola, Cameroon, China, and Qatar, the Chamber claimed. Absent an exemption in the SEC rule, companies could be forced to withdraw from those countries, losing tens of billions of dollars.

Now Statoil has disclosed its payments in such countries—it had no qualms about detailing project-level expenditures in Angola, for example—with no visible repercussions. “It squashes one of the primary arguments about how the initial rule was written,” Gary says.

Tullow Oil voluntarily released project-by-project disclosures last year and was the first oil company to comply with the new British requirements. Despite its comprehensive disclosures, it hasn’t had that much-feared pushback from other countries, either.

“When we made these payments public for the first time, we didn't hear any feedback from the host countries in which we work,” says George Cazenove, a spokesman for the company. “When we did the same again, and notified them ahead of time, we still did not receive any negative feedback.”

Other Ideas

As the SEC redrafts a new rule, it may also consider some suggestions proposed by the American Petroleum Institute. One API idea: that companies could file payment information confidentially with the SEC, which would then compile the data for public review. This compilation model of disclosure, the API says, is used by other government agencies in cases where revealing individual company information could be commercially harmful and the public need for information can be met with aggregated data.

Reported data could still be sorted and compiled according to each of the principal reporting categories required, which include type of payment, government payee, and project. XBRL tagging could, despite confidentiality, allow interested parties to compile useful research.

“I would think the more aggregated disclosure would be the path of least resistance for the SEC,” says David Lynn, a partner with the law firm Morrison Foerster. He suspects that the SEC is taking its time largely to see how the European disclosure rule works.

“It’s one of these things where everyone has retired to their bunkers and it’s hard to imagine how any kind of consensus gets reached,” he says. “Maybe the SEC was hoping to let the clock run down a little bit more, with the hope that things might change after the election. But there’s no scenario where the SEC can just walk away from it.”