Daily Management Review

Why are US Oil companies afraid of transparency?


There is a growing trend by Governments and NGOs that CSR consist of concrete substantial steps and not just an exercise in window dressing. A consortium of US based organizations have filed a lawsuit against the U.S SEC, which is trying to bring about greater transparency in their working.

Why are US Oil companies afraid of transparency?
2014 saw an important new rule being added by the SEC addressed towards the mining, oil and gas sectors. It corresponds to section 1504 of the Dodd-Frank Act, otherwise known as the Cardin Lugar Amendment. In order to increase transparency in payments to foreign governments over and above $100,000, the rule specifically states that details of all such transaction of this nature are to be maintained separately for further scrutiny.

What becomes lucid is the fact so as to avoid a “resource curse” or in other words government corruption.

In the same year, in October, this rule was challenged in court by a consortium of organizations, namely, the U.S Chambers of commerce, the National Foreign Trade Council, the American Petroleum Institute, and the independent Petroleum Association of America. Their grievance was that when the SEC framed this rule although they had provided suggestions, these were not incorporated. The disclosures that this rule demanded where not only cost prohibitive but more importantly violated their First Amendment Rights.

In its reply to their observations, the SEC fired back stating the fact that the Congress wrote the law and their grievance was nothing but an “an unprecedented attack on a disclosure requirement involving purely factual, non-ideological information that does not implicate any significant First Amendment interests.”

The SEC went on further stating that the companies in question “ignore both that regulated entities are subject to innumerable comparable federal, state and local public reporting requirements and that their novel theory could have wide-ranging and potentially devastating implications for these important government programs.”

Even lawmakers were incensed and jumped into the fray with ex-senator Richard Luger and senator Ben Cardin saying the points raised by this consortium amounted to a direct challenge to Congressional authority and its “ability to insist upon the transparency and integrity of its securities markets to protect investors, as well as its ability to spread the values of transparency and integrity to other countries as a matter of foreign policy judgement.”

Both the SEC and the Congress have made it pretty clear that the non-compliance to the ruling could be of significance importance and could have broader effects beyond just the First Amendment Rights. Here you have companies that supposedly claim to be socially responsible and yet are willing to challenge if not destroy a fundamental legal infrastructure of public disclosure and government oversight - a startling disclosure by itself.

The first bone of contention by the plaintiffs is the fact that the cost of compliance is too great. As per the SEC’s estimates, the cost of compliance to its ruling will be in the range of $44 million to $1 billion while continued compliance will be within $200-$400 million. Although these figures appear to be high, they need to be seen and read in light of their (plaintiff) earnings.

The five biggest SEC-listed oil companies made $90.7 billion in profits in the first three quarters of 2012. This is on top of the incentives and U.S tax cuts they receive amounting to $4 billion a year. Given this scenario the cost of compliance to this statute of law clearly does not seem unreasonable.

With regard to their second argument, they produced a calculation that showed that they would potentially loose upto $12.5 billion because “certain countries’ prohibition on disclosures such as those required by the rule.” Some oil companies also mentioned that their competitors, such as state-owned oil companies, do not disclose the same in their country, thus, the disclosures will make them only lose their competitive edge.

However, they failed to mention that European oil companies are already making such disclosures and this is not having a detrimental effect on their profitability. Norwegian based Statoil has already come out of this lawsuit, preferring dialog with the SEC instead.
Jana Morgan, from Global Witness, an NGO, made a very relevant remark – “What are these companies trying to hide?”
A simple disagreement over the implementation of a statute has now been escalated and looms large with threats that essentially questions Congress and the SEC’s power to regulate and hold corporates accountable to its core stakeholders - the confidence of the investing public.

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