By Ben Geman
Oil industry groups and the U.S. Chamber of Commerce are asking a federal court to overturn new Securities and Exchange Commission rules that will force oil, gas and mining companies to disclose their payments to foreign governments.
The lawsuit, filed Wednesday with the U.S. District Court for the District of Columbia, escalates a battle between industry and human rights groups over controversial transparency rules required under the 2010 Dodd-Frank financial reform law.
The American Petroleum Institute (API), U.S. Chamber and other groups say the regulators failed to justify what they call burdensome rules, and allege they will force companies to publicly disclose sensitive information.
“The rule as written would impose enormous costs on U.S. firms and put them at a competitive disadvantage against government-owned oil giants not subject to the rule,” said API President Jack Gerard in a statement.
The rule forces SEC-listed oil, natural gas and mining companies to reveal payments to governments related to projects in their countries, such as money for production licenses, taxes, royalties and other aspects of energy and mineral projects.
It’s aimed at increasing transparency to help undo the “resource curse,” in which some impoverished countries in Africa and elsewhere are plagued by high levels of corruption and conflict alongside their energy and mineral wealth.
The rules have been championed by an array of anti-poverty and human rights groups, and backers range from Bono to Bill Gates to George Soros.
But the rules have faced pushback from companies including ExxonMobil, Chevron and Shell. The oil industry argues the rule will put SEC-listed companies at a disadvantage when competing against state-owned companies such as Russia’s Gazprom and the China National Petroleum Co.
The lawsuit cites the SEC’s estimate that the rule will bring roughly $1 billion in initial industry compliance costs, and ongoing compliance costs in the $200 million to $400 million range.
“The rulemaking record shows that the costs will actually be far greater, as U.S. oil and mining companies are forced to allow competitors access to sensitive commercial information, and to abandon projects to foreign state-owned companies in countries that forbid the disclosures or that simply refuse to do business with U.S. companies because they do not wish the disclosures to be made,” the lawsuit states.
The lawsuit drew quick criticism from Global Witness, which noted the Dodd-Frank provision “was intended to shine a light on billions in payments to governments from oil, gas and mining companies and to decrease opacity in this industry.”
“Secrecy around payments enables corrupt government officials and political elites to siphon off or misappropriate revenues for personal gain, rather than development. It has been said that 'sunshine is the best disinfectant' – this lawsuit begs the question, what are oil companies trying to hide?,” said Jana Morgan, assistant policy adviser with Global Witness.
The Independent Petroleum Association of America and the National Foreign Trade Council joined the suit against the SEC, which approved the rules in a split 2-1 vote in August.
Gerard said the industry supports transparency, citing work with the Extractive Industries Transparency Initiative (EITI). It’s a voluntary collaboration that brings together nations, companies and nongovernmental groups aimed at ensuring government revenues from energy and mining projects provide public benefits.
“We’ve been working hard to increase transparency for a decade, but this rule could interfere with ongoing efforts by making U.S. firms less competitive against state owned firms in China and Russia that have no interest in transparency,” he said.
But advocates of the rules say the Dodd-Frank law is intended to go further than EITI.
The new lawsuit alleges the SEC’s rule is illegal for several reasons.
The industry groups claim that the regulators “misread” the Administrative Procedure Act by requiring public disclosure of company’s reports.
The lawsuit also claimed the rule is “arbitrary and capricious” because it doesn’t define “project” as activities in a “geologic basin or province.”
“This definition would have protected U.S.-listed companies from potentially billions of dollars in compliance costs, by providing certainty in application and by permitting companies to aggregate innumerable individual payments made under various contracts as long as they all related to extraction of a particular resource in a particular geologic area,” it states.
It also challenges the SEC’s decision not to allow exemptions from the rules when foreign governments bar such disclosure; claims the regulators failed to properly analyze whether the rule creates burdens that are “necessary and appropriate” to further Congress’s goals; and that the SEC’s cost analysis was flawed.
An SEC spokesman defended the regulation.
“While we are still reviewing the suit, we believe our legal interpretation and economic analysis are sound, and we look forward to defending the rule that Congress directed us to write,” SEC spokesman John Nester told The Wall Street Journal.