The Dodd-Frank Threat to U.S. Energy
Aug 21, 2012 -
The following column appeared in the Wall Street Journal on August 17, 2012:
The Dodd-Frank Threat to U.S. Energy
Intrusive new disclosure rules by the SEC would give state-owned oil firms a big advantage in world markets.
By Jack Gerard
In a fragile recovery with 8.3% unemployment, you'd think Congress and government regulators would be concerned about rules that put American firms at a disadvantage. Well, think again.
On Aug. 22, the Securities and Exchange Commission (SEC) will vote on regulations to implement Section 1504 of the 2010 Dodd-Frank financial-reform law. Section 1504 seeks to increase transparency in dealings between private energy companies and foreign governments to protect investors. That's a worthy goal.
The SEC has broad discretion in determining what the disclosure requirement under 1504 will be. Yet indications from meetings with SEC officials are that it may favor a draconian approach that would irreparably harm U.S. oil and natural-gas companies.
The danger arises if publicly traded energy firms are required to release—for public consumption—commercially sensitive, detailed payment information about every foreign project. This means they would have to reveal extensive data, including the names and locations of their most important personnel and capital assets, in addition to how much they pay for licenses, taxes, royalties and other fees.
But the rule would only cover companies listed by the SEC. State-owned multinationals—which constitute the vast majority of energy assets world-wide and own 78% of all oil and natural-gas reserves—will not have to comply. The 16 biggest oil companies in the world do not fall under SEC jurisdiction.
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. Information worth billions of dollars would be just a few mouse clicks away.
Next Wednesday's SEC vote on this matter will have a profound impact on the ability of American oil and natural-gas firms to compete on the international stage. Thousands of jobs, millions in revenues, and billions of investment dollars hang in the balance.
Yet a structure already exists to provide transparency, one that's endorsed both by the Obama administration and the World Bank. It is called the Extractive Industries Transparency Initiative (EITI), and it was launched in September 2002 by then-British Prime Minister Tony Blair. This initiative creates a workable framework for payment disclosures, and the SEC should incorporate its disclosure standards into its rule-making.
Under EITI, energy companies provide information about government payments related to foreign projects. That data is then aggregated and listed on a countrywide basis. Operational details for specific companies aren't publicized, and propriety information is protected. The initiative is already being implemented in the U.S. through the Interior Department. It makes participating governments publicly accountable for how they spend tax dollars. Regulators and average citizens alike are given access to information that can tell them where their money went, how much was spent, and toward what purpose. This information is available on the U.S. Department of the Interior website.
The robust structure of EITI will expose corruption and mismanagement, and also bring more transparency and accountability to these business practices. But it is not so intrusive that it threatens the global competitiveness of U.S. energy companies.
If the SEC moves forward with an intrusive interpretation of Section 1504, companies such as the China National Petroleum Company and Russia's Gazprom wouldn't be forced to disclose important data on foreign payments, but their American competitors would. This competitive disadvantage could likely lead to lost contracts for U.S. energy companies while doing nothing to promote transparency.
It does not have to be this way. The SEC could take an approach that promotes economic growth, requiring companies to disclose only information directly relevant to protecting investors and—before publicizing it—scrubbing away any details that might hurt firms' competitiveness if revealed.
By using EITI as a basis for its Dodd-Frank rule, the SEC can improve transparency in foreign energy payments without putting American oil and gas companies at undue risk. Our economy is still on the mend. Hamstringing the energy sector with costly and intrusive new disclosure rules will reduce jobs and investment.
Mr. Gerard is the president and CEO of the American Petroleum Institute.