New US legislation may be about to transform reporting for extractive companies around the world, including Iraq, suggests John West
One short clause, inserted late in intense negotiations into a US bill to clean up Wall Street, may be about to transform reporting rules for extractive companies around the world.
Section 1504 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, signed by President Obama on July 21, requires companies listed by the Securities and Exchange Commission (SEC) to report on almost every payment made to foreign governments to develop natural resources.
The bill, known as the Wall Street Reform Act (WSRA), specifies that payments should be listed project by project.
To get an idea of the potential impact of this new legislation on the international oil companies (IOCs), I conducted preliminary research into just one country, Iraq.
Results suggest that between half and two thirds of IOC activity in Iraq, measured by both oil production and money, could be subject to the new law.
This scale of impact suggests the bill also may change the dynamics around the Extractive Industries Transparency Initiative (EITI) in the country (Iraq signed up as an EITI candidate in 2010 and has until February 2012 to become fully compliant).
It could potentially encourage major US oil firms, which will soon be subject to disaggregated reporting worldwide as a result of the WSRA, to argue for the same reporting burden for all companies alike – i.e. for Iraq to rigorously implement EITI.
If Iraq is anything to go by, similar dynamics might also be triggered by the WSRA in the other 30 countries implementing EITI processes, and more broadly in the 60 countries where hydrocarbons form a significant part of the economy.
Iraq as a case study
Iraq launched a bold series of auctions to develop its reserves in early 2009, inviting foreign companies to bid for some of the last underdeveloped super-giant fields such as Rumaila, Majnoon, Zubair, and Kirkuk.
Sixteen companies were in consortia that won service agreements and it is the nature of these agreements - under which the government sells the oil and remits a service fee back to the companies - and their relative transparency, that allows rough quantification of the impact of the WSRA.
There are various limitations on the methodology which follows.
It calculates using theoretical maxima set by the Iraqi government and not current production levels. It also uses the fees paid by the government to the companies, and therefore not strictly speaking subject to the WSRA, which only requires listing of payments by companies to governments, not the other way round.
Also, it is not yet clear if all categories of ‘American Depositary Receipts’ (which represent shares in non-US firms which trade in US financial markets) will fall under the act. Nevertheless it serves to indicate an order of dimension.
The government published the bids, which contain two variables, the production plateau they guarantee to reach, and the remuneration fee they will accept. So, for example, in West Qurna Phase 1, ExxonMobil led a consortium offering a production plateau of 2.1 million barrels of oil a day and agreed to accept $1.90 a barrel remuneration fee.
ExxonMobil's own share in the consortium is 60%, which means that when production reaches the plateau, the company should receive about $870 million a year.
Total up all the published figures for plateaus and fees in all the contract areas, and it becomes possible to estimate exposure to the WSRA in terms of both dollars and barrels.
There are only two US-headquartered companies among the 16 operators, ExxonMobil and Occidental, totalling 19% of fees at peak. But because of USA's own significant production and its central role in financial markets, it is not only US-headquartered companies but a wide range of other IOCs that could be exposed to the WSRA.
In the Iraqi case, there are another five IOCs with significant upstream operations in the United States, or significant trading of shares on US markets via ADRs, or both – Shell, BP, Total, Eni and Statoil. Shell's US group, for example, accounts for a quarter of its 100,000 employees worldwide and BP's activities in the USA hardly need underlining.
Add in these companies' participation in the new service agreements, and the WSRA could reach more than half the total production and fees.
The next category, companies with low exposure, are those with more liquid downstream assets in the USA, or ADRs with lighter trading volumes, including Gazprom, JapEx, Lukoil, and CNOOC. They total another 14% of fees at peak production.
The last category of foreign companies are those with no exposure – KoGas, TPAO, CNPC, Petronas and Sonangol. They account for the last third of the foreign share in fees. The final 25% of the fees go to Iraqi state company partners in the consortia.
New dynamics in corporate reporting?
Traditionally, in EITI, civil society groups have argued that payments should be published disaggregated by company, while companies have often said this damages their commercial interests.
But what will the position of major companies be now that their own reporting will be disaggregated by the WSRA?
Could the companies divide into two camps: those with heavy exposure to the act demanding disaggregated reporting to re-create a level playing field; and those with light or no exposure lobbying for aggregated and lighter reporting requirements?
There is still wide uncertainty about the scope of interpretation of the WSRA. The SEC has until March 2011 to publish executive regulations, and the first reporting round to comply with the bill will not be until early in 2012.
Nevertheless, most analysts agree that even the narrowest interpretation of the bill by the SEC will considerably increase reporting requirements.
In Iraq, that could represent unprecedented reporting at oilfield level potentially of up to two-thirds of foreign company involvement. Section 1504 of the WSRA may have all but signed up the entire US extractive industries to a rigorous interpretation of the EITI worldwide.
John West advises the UN on EITI and energy transparency issues in the Middle East. More detailed analysis of the impact of WSRA on companies operating in Iraq and elsewhere in the region can be found at www.openoil.net. He can be reached at email@example.com. John originally wrote this article for Critical Resource, which specialises in sustainability and stakeholder issues in the natural resources sector. www.c-resource.com