The American Petroleum Institute is pressing an effort it has led to enhance transparency of oil-company payments to host-country governments without compromising expatriate deal-making. International work and disclosures about it both will benefit if the group succeeds.
In July, API and others, including the Independent Petroleum Association of America, won a legal challenge to a US Securities and Exchange Commission requirement that companies in extractive industries disclose payments to foreign-country governments at the project level. The SEC imposed the requirement under Sect. 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Required disclosures
API, IPAA, and two other plaintiffs—the Chamber of Commerce of the United States of America and the National Foreign Trade Council—argued the SEC requirement forced companies to disclose information, such as negotiated license terms, valuable to competitors and not required under Sect. 13(q) of the Securities Exchange Act of 1934. They also argued reporting of the required information would contravene terms of existing contracts with some governments. The US District Court for the District of Columbia agreed, vacating the rule and returning it to the SEC for repair. The SEC decided not to appeal the ruling.
In a Nov. 7 letter to SEC Sec. Elizabeth M. Murphy, two API officials suggested ways to pursue Dodd-Frank transparency goals without creating competitive problems for affected companies. The API officials, Patrick T. Mulva, chairman of the General Finance Committee, and Stephen Comstock, director of tax and accounting policy, described a system for compiling payment information and standardizing project-level information to accommodate the effort. Under their scheme, companies would report payments confidentially to the SEC, which would amalgamate the information before making it public. Information in categories required by the statute still would be published, including type of payment, government payee, and project. It just wouldn't be disclosed for each company making payments.
Standardization of project-level reporting would enable data from different companies to be compiled meaningfully, accommodating variations among companies' views of what constitutes a project. Mulva and Comstock said standardized, project-level information should be comprehensive enough to encompass all activities and localized enough to be relevant to a citizen's own region "without being so granular as to reveal proprietary commercial information."
This approach is sound. It promotes transparency, which is crucial to combating corruption and should be a priority aim of international oil and gas producers. It also preserves competition by allowing companies to protect information valuable mainly to competitors, especially national oil companies.
Critics will say payments should be disclosed at the level of financial accounting, with every dollar traced, every payer and payee identified, and every purpose described. They'll say only that level of disclosure ensures citizens of host countries can hold their governments and visitors properly accountable for transfers of money.
Obviously, transparency increases along with the degree of detail in required disclosures. But there's room for compromise to accommodate business practicalities. Holding governments accountable for their receipts from international investors shouldn't require investors to disclose everything.
Effective boundaries
Mulva and Comstock addressed this issue in their letter. In support of the "compilation model" at the core of their proposal they wrote, "The SEC has stated that Congress's goal in enacting Sect. 13(q) was to 'help empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.' For this purpose, citizens need to know the total amounts collected by their governments." Later in the letter, the API officials warned against pushing transparency too far, saying, "Sect. 13(q) was not established to impose trade sanctions or prohibit legitimate business activities."
Those statements set effective boundaries for an essential effort to improve transparency of international payments. Disclosure should be extensive enough to help citizens track money their governments receive from international visitors. Yet it shouldn't be required in such detail that it damages competition or infringes contracts. The API letter strikes the right balance. The SEC should follow its advice.
