Ian first published this piece on the United States Institute of Peace International Network for Economics and Conflict Blog here Buried in the massive Wall Street Reform Act signed into law last summer was a provision that will shed significant light on the financial flows between oil, gas and mining companies – the “extractive industries” […]

Ian first published this piece on the United States Institute of Peace International Network for Economics and Conflict Blog here

Buried in the massive Wall Street Reform Act signed into law last summer was a provision that will shed significant light on the financial flows between oil, gas and mining companies – the “extractive industries” – and host governments around the world. Provision 1504 requires any U.S. or foreign company reporting to the Securities and Exchange Commission (SEC) to disclose the payments they make to host governments on an annual and project-by-project basis. The provision is based upon bipartisan legislation introduced in the Senate in 2009 – S.1700, the Energy Security through Transparency Act – by Senators Richard Lugar (R-IN) and Benjamin Cardin (D-MD).

The provision will cover well known US companies such as Chevron and Exxon, but also many foreign companies including BP, Shell, Total, PetroChina and Petrobras, to name a few. The vast majority of internationally operating oil companies will be covered by the law. In Europe, the European Commission is developing similar legislation, and the French, UK and German governments have been outspoken in their support.

Supporters of the provision, including the 30+ groups in the Publish What You Pay U.S. coalition, point to the many benefits of disclosure – reduced corruption; increased opportunities for citizen oversight of government revenues; improved relations between companies and host communities; and reduced instability in resource-rich states.

The SEC is currently finalizing the rule which will implement this disclosure requirement. In a remarkably open process, the SEC has invited public comment on their draft rule proposal issued at the end of 2010. Dozens of comments from companies, industry groups, NGOs, faith groups, investors and others have poured into the SEC. Investors representing over $1.2 trillion in assets under management have made submissions in support of the draft rule. The Congressional mandate for completion of the final rule was April15, 2011, but the SEC has indicated the rule may not be finalized until late summer.

Standing out among concerns raised by industry is the idea that disclosure of project-level payments from a company to a host government could somehow jeopardize the safety of employees or encourage terrorist acts. Without providing arguments beyond the hypothetical, companies such as Shell, Chevron and Exxon expressed concerns along these lines. Shell, in its submission to the SEC, said payment disclosure “could have unintended consequences in revealing information that terrorists or insurgents might use to target a specific project in order to significantly affect a country’s revenue and thereby destabilize that country’s economy”. Shell went on to say that “there are times when the payment of information would jeopardize the safety and security of a resource extraction issuer’s operations or employees and the rules should provide an exception in those circumstances.” Chevron said in its submission that “detailed disclosure of payments to the government by project would provide organizations with information as to which projects provide the most revenue for the government, inviting actions against those facilities and potential harm to Chevron and national employees.”

Publish What You Pay, in its submission, argued that “the existence of transparency decreases unrest and conflict, and is a contributor to increased stability and safety. We urge the Commission not to consider speculative responses to this question, but rather responses that describe prior incidents of disclosure which directly jeopardized the safety and security of a resources issuer’s operations or employees”. It went on to argue that “it is unlikely that the location or fiscal importance of significant projects would otherwise be unknown to citizens within a country. Investment and energy production are typically activities publicized by governments to gain public favor and attract further investment. In addition, the physical footprint of significant extractive industry projects is highly visible. For example, their associated physical infrastructure, such as wells, mines, pipelines or refineries, can comprise large swaths of land that are likely to be protected by fencing or security forces… This physical footprint can easily be seen by the naked eye, and by using publicly available satellite imagery, such as that provided by Googlemaps … For these reasons, we find it unlikely that project payment disclosure would be determinant in aiding terrorists or insurgents to target a specific project. We believe that secrecy surrounding the flow of money paid in connection with the commercial development of natural resources contributes to the environments in which terrorists and insurgents are able to thrive.”

Companies that already voluntary disclose payment information would appear to agree. Newmont Mining, a large mining company working in places such as Peru, Indonesia and Ghana, Talisman Energy (Canada), Statoil (Norway) and AnglogoldAshanti (South Africa) already disclose payment information – sometimes at the project level – in every country of operation. These companies often say that such transparency improves their operating environment and creates better – not worse – relations with local communities. Newmont publicly endorsed the Energy Security through Transparency Act, saying that the legislation “can help promote increased accountability which is in everyone’s best interests.” In March, at the global conference of the Extractive Industries Transparency Initiative (EITI), Newmont stated that Provision 1504, like the Foreign Corrupt Practices Act decades earlier, is “an enormously valuable protective device”.