If you were trying to think up a sure-fire way to undercut the competitiveness of U.S. oil and gas companies, you would be hard pressed to find a more effective method than the one just provided by the Securities and Exchange Commission.
Earlier today the SEC voted new regulations into effect that will significantly disadvantage publicly traded oil and gas companies listed in the United States against our foreign competitors, especially state-owned national oil companies.
The rules are ostensibly designed to promote transparency in the extractives industry, but let’s be perfectly clear about what their results may truly be: lost contracts, lost investment opportunities, and lost jobs for American workers.
Another potential casualty? Transparency itself, as I’ll explain in a moment.
The SEC rules will require private, investor-owned energy companies to publicize the specifics of their commercial contracts with foreign governments. That means revealing data on personnel and capital assets in addition to how much a company has paid for licenses, taxes, royalties and fees. Virtually nothing in the SEC rules is designed to protect confidential information.
These regulations requiring the publication of proprietary business information will apply to companies listed on U.S. stock exchanges, like American-based companies ExxonMobil, Chevron and ConocoPhillips. They will also apply to foreign-based but investor-owned majors like BP and Shell.
But the onerous SEC rules won’t apply to many national oil companies from countries around the world, like China and Venezuela. Many of these companies are far larger than the investor-owned corporations that are commonly tagged “Big Oil.” The new SEC regulations would disadvantage American companies against their Truly Big Oil competitors.
The unfair burden on investor-owned companies
By insisting that private, U.S.-listed companies disclose payments on a project basis (rather than country-by-country), these rules will let competitors know financial terms of their agreements. The perils of such a requirement are obvious.
“Forcing publicly traded companies to release proprietary information about their foreign operations would put them at a serious competitive disadvantage because state-owned firms could plunder that information and determine their rivals’ strategy and resource levels,” American Petroleum Institute CEO Jack Gerard noted last week. “Information worth billions of dollars would be just a few mouse clicks away.”
These rules may also require U.S. companies to cancel contracts that have already been won, since a number of resource-producing nations have laws that prohibit the disclosure of commercial contract details. We haven’t put a precise number on how this might affect ExxonMobil, but there is little doubt that implementation of these rules potentially places shareholder value at risk.
The Securities Exchange Act of 1934 has a provision that would prohibit the Commission from adopting “any such rule or regulation which would impose a burden on competition not necessary or appropriate.” Yet these rules will clearly hurt American companies’ competitiveness. Whether they are necessary or appropriate is doubtful. What is not in doubt is that the role of the SEC is to protect American investors; it certainly is not to disadvantage them in relation to foreign investors and companies.
Additionally, one can be certain that countries wishing to protect specific commercial terms from public disclosure will be encouraged to award concessions to companies not subject to detailed, disaggregated public reporting.
How that serves the ends of increased transparency is beyond me, as contracts are increasingly awarded to foreign companies that are not subject to these disclosure requirements.
A reasonable approach to transparency
Transparency is an important and worthy goal as a means to fight corruption and improve government accountability in developing and developed countries around the world. But there are other, better ways to ensure it than this faulty approach that will only hurt American companies and American workers.
The oil and gas industry is often the largest and most important source of development by far in resource-rich countries. Direct and indirect education, employment and training; domestic supplier development; community investment; adoption of western business ethics and business practices; and, generation of step-changes in government revenues are all normal outcomes from investments the energy sector. These tend to dwarf the economic impact of bilateral foreign aid or humanitarian projects. So anything that makes private companies less competitive will reduce their participation in the sector and reduce the economic benefits and business practice reforms that they bring.
One measure that encourages collaboration among governments, companies, civil society and financial institutions is the Extractive Industries Transparency Initiative (EITI), which is dedicated to strengthening governance by improving transparency and accountability in the extractives sector.
Not only does EITI set forth global principles for companies to report what they pay to governments and for governments to disclose what they receive from companies, it strikes a balance between disclosure and confidentiality. President Obama, in fact, committed the United States to joining EITI just last year.
And it has established a proven record of success since it was launched a decade ago by then-British Prime Minister Tony Blair. There’s no reason to think that the rules passed today will produce a similarly positive outcome, though there is every reason to think they will do tremendous damage to American energy companies and the people they employ.
Yes, transparency is an important and worthy goal, and one we support. But unless transparency is sought in a way that supports fair competition, it would be counterproductive. The EITI approach supports fair competition; the SEC’s approach does not. And under the SEC’s new rules, the U.S. economy will be the real loser.