Transparency and Competitiveness

Kyle Isakower
Posted February 1, 2011

Last Friday, API submitted comments on the SEC's proposed rule regarding Disclosure of Payments by Resource Extraction Issuers. The unilateral approach to revenue disclosure proposed by the SEC would give foreign oil and natural gas companies access to confidential, proprietary information that they could use against U.S.-listed companies when competing for crucial energy resources around the globe. Instead, API supports the World Bank-backed Extractive Industries Transparency Initiative approach, which encourages disclosure by all oil and natural gas companies of payments made to foreign governments. To illustrate the potential for competitive harm our letter accompanying the comments included these examples:

Example 1: Country A invites investors to develop its natural resources. Officials from Country A use Section 13(q) disclosures for projects in Country B to determine the rates of return that SEC filers are willing to accept. Country A uses this information to negotiate more favorable terms. The shareholders of SEC filers participating in Country A's projects receive a lower investment return than would otherwise be the case.

Example 2.:AmeriCo, a U.S. company and SEC filer, wishes to pursue Project X in Country B. In order to be economically viable, Project X requires favorable tax and royalty terms. Country B is willing to grant appropriate fiscal relief for Project X, but does not wish the terms to be publicly disclosed because the disclosure would create pressure for Country B to grant comparable terms on other projects. Country B awards Project X to a non-U.S. oil company that is not subject to Section 13(q) disclosure.

Example 3: AmeriCo, a U.S. company and SEC filer, begins acquiring high-potential exploratory acreage on a confidential basis through agents in Country B. The acreage acquisition requires AmeriCo to pay bonuses to local governments. Because AmeriCo must disclose these bonuses, its identity is revealed. A non-U.S. competitor of AmeriCo not subject to Section 13(q) steps into the market and begins bidding for remaining available acreage, driving up AmeriCo's costs significantly. At the same time, the non-U.S. competitor is able to continue acquiring acreage in another part of Country B on a confidential basis.

Example 4: Country A participates in the Extractive Industries Transparency Initiative and supports country-level disclosure of aggregate payment data. For economic, competitive, and foreign policy reasons, Country A considers the specific commercial terms of its agreements to develop natural resources to be state secrets and has accordingly passed laws prohibiting public disclosure of such terms. If the rules implementing Section 13(q) require disaggregated public disclosure of commercially sensitive terms, AmeriCo, a U.S. company and SEC filer, will be unable to bid on projects in Country A. As a result, Country A's resources are developed by national oil companies that are not subject to Section 13(q).

We hope that the SEC can work out the anti-competitive aspects of this statute as it finalizes the rule regarding Disclosure of Payments by Resource Extraction Issuers. And we will continue working with them to do just that.