Dodd-Frank to impact producers

Our Capital Perspectives article this month (see page 6) discusses the impact the Wall Street Transparency and Accountability Act, more commonly known as "Dodd-Frank," will have on oil and gas producers. In the article, Gordon Allott, president of BroadPeak Partners, makes the argument that the industry should be prepared to weather a major shock. Every trade is now likely to fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) and should be evaluated to determine if it has Dodd-Frank regulatory obligations.

The new law goes into effect on July 14.

On May 19, I attended a presentation by former US Sen. Chris Dodd (D-Conn) in Houston that was part of a program put on by SunGard Global Services in an effort to learn more about the act Dodd co-authored and the implications for the oil and gas industry. SunGard, by the way, is the largest worldwide provider of trading and risk management systems and consulting services, including those designed for commodities and energy trading, and has 20,000 employees in 70 countries. The program was intended to inform Houstonians and others in the energy community as to how the Dodd-Frank Wall Street Reform Act will affect banks, oil and gas companies, utilities, and energy merchants.

If you don't already understand the implications of this law, you had better get up to speed quickly. The CFTC says that all "swap" transactions must be cleared with only a few exceptions, and the definition of "swaps" under Dodd-Frank is expansive. Producers should recognize that they are becoming part of a regulated category and that ANY trade they enter into may have Dodd-Frank implications.

Dodd defended his position to the Houston audience, saying, "I don't know of anybody who thinks we need to go back to the status quo before this bill. We obviously needed transparency in the OTC derivatives market to restore consumer confidence and investor confidence."

Although Dodd-Frank will cover energy trading as well as other forms of trading activity, it was intended mainly to curb what many saw as excesses in the financial services industry in the wake of the 2008 economic crisis and meltdown.

"If we tried to pass this bill today, it wouldn't happen," said Dodd. "It literally took the events of 2007 and 2008 to get it done. In the absence of such a crisis, the bill wouldn't have passed. In fact, the financial services industry wanted more deregulation under threats of leaving the country. I understand they had been making the same threats in Europe."

Dodd went on: "We didn't want Dodd-Frank to be an over-reaction to the crisis as Sarbanes-Oxley had been to the Enron events. However, consumer and investor confidence was devastated – shattered. We needed to restore that, and this legislation was the correct approach."

Before retiring from Congress at the beginning of the year, Dodd said he met with executives from the 13 largest financial institutions in the country in New York City. Only two things came up, he said – executive compensation and the Consumer Protection Bureau. "I met with them for two and a half hours, and this was all they wanted to discuss."

The rising price of gasoline and other fuels has pushed the public to the point of questioning why retail prices are, in their view, excessive. This, in turn, has spurred some members of Congress to convene hearings that suggest that "speculative trading" of crude oil and other energy commodities may be the culprit and why greater transparency is needed.

On May 23, House Ranking Member Elijah E. Cummings released a staff report titled "Real Help for American Consumers: Who's Profiting at the Pump?" The report found that "Addressing excessive speculation offers the single most significant opportunity to reduce the price of gas for American consumers."

According to the report, experts estimate that excessive oil speculation could be inflating prices by up to 30%. Cummings called on Congress to "stand with consumers" and conduct a responsible, bipartisan investigation into the impact of excessive speculation on high gas prices.

Regardless of the impact speculative trading has on retail energy prices, starting July 14, trading transparency and accountability will be significantly enhanced – for better or for worse. It's going to be a whole new ball game for anyone trading energy commodities.

Have an opinion about this? Visit www.ogfj.com to comment.

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