How Wall Street reform could affect Iraq's oil industry

One short clause, inserted late in intense negotiations into a US bill to clean up Wall Street just before the summer break, may be about to transform disclosure and reporting rules for extractive companies around the world.

Section 1504 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, amends the 1934 Securities Exchange Act to require any company with a financial listing from the Securities and Exchange Commission (SEC) to provide a report annually on almost every payment it makes to any government around the world to develop oil, gas, or other natural resource industries. The bill, more commonly known as the Wall Street Reform Act (WSRA) specifies payments by type, such as taxes, royalties and signature bonuses, and also that such payments should be listed project by project.

There is still wide uncertainty about the scope of interpretation of the WSRA, and it will also take time to kick in. The SEC has until March 2011 to publish executive regulations which will determine the parameters of implementation, and oil executives already report intensive lobbying in Washington as the industry makes the case for lighter rather than heavier reporting requirements. The first company reporting round to comply with the new bill won’t be until at least 12 months after the executive regulations, or early in 2012.

Nevertheless, most analysts agree that even the narrowest interpretation of the bill by the SEC will considerably increase reporting requirements, and many companies are already working on compliance strategies.

Iraq as case study

To try and conceptualise it, let us take the case of just one country, Iraq. Preliminary studies show that between half and two-thirds of Iraq’s agreements and joint ventures with international oil companies will probably be exposed to some degree to the new reporting requirements. Although the US bill of course can only affect companies falling under United States jurisdiction, it turns out that because of the global nature of the industry, the USA’s own significant production and its central role in financial markets, a wide range of companies could be exposed in one way or another.

Iraq launched a bold series of auctions to develop its huge oil and gas reserves in early 2009, inviting foreign companies to bid for some of the last un- or underdeveloped super-giant fields such as Rumaila, Majnoon and Zubair in the south, and Kirkuk in the north. Altogether, nearly 80 billion barrels of proven reserves lie in the contract areas. Sixteen international companies were in consortia that won contracts for service agreements tied to the Iraqi government’s ambitious plans to increase production by up to ten million barrels of oil a day by 2016. It is, in fact, the nature of these service agreements, under which the government sells the oil and remits a service fee back to the companies, and their relative transparency, that allows a rough and ready quantification of the impact of the WSRA.

The government published the bids of all the consortia which contain two variables, the production plateau they guarantee to reach in any given field, and the remuneration fee they will accept from the government as their payment. So for example in West Qurna Phase 1, ExxonMobil were part of the consortium that offered 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 can expect to receive about $870 million a year from the Iraqi government as fees under the service contract. Total up all the published figures for production plateaus and fees in all the contract areas, and it becomes possible to form, in purely indicative terms, an estimate of exposure to the WSRA in terms of both dollars and barrels.

There are only two US-headquartered companies among the 16 primary operators, ExxonMobil and Occidental, totalling 19% of fees at production peaks. But there are another five companies which have significant upstream operations in the United States, or significant trading of company shares on US markets via American Depository Receipts (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 these companies’ percentages of participation in the new service agreements together and it comes to more than half the total production and fees envisaged.

The next category down, companies with low exposure, are those with more liquid downstream assets in the USA, or ADRs with light trading volumes, including Gazprom, JapEx, Lukoil, and CNOOC. They total another 14% of foreign company fees at peak production. The last category are national oil companies with effectively no exposure to US regulations – KoGas, TPAO, CNPC, Petronas and Sonangol. They account for the last third of the foreign share in fees. The last 25% of the fees go to Iraqi state company partners in the consortia.

There are various limitations on this methodology. It calculates using theoretical maxima set by the Iraqi government, for example, and not current production levels. It also uses the published figures of fees to be 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. It is not yet clear if all categories of ADRs will fall under the act, or if some non-US firms might choose to delist rather than comply with the act.

Nevertheless it serves as a thought experiment to indicate an order of dimension. It is reasonable to suppose that the proportions of company payments to the government in one form or another will roughly match their share of remuneration fees. Moreover, the proportion of value going to US companies could rise once oil service companies start to support the new service agreements – Schlumberger, Weatherford, Halliburton and Baker Hughes are just some of the early entrants as operations in the south scale up. Contracts already signed total hundreds of millions of dollars.

New dynamics in corporate reporting

The new requirements could also change Iraq’s EITI process which is just getting going. Traditionally, civil society groups have argued that payments should be published disaggregated by company to provide greater transparency, while companies have often said this damaged their commercial interests. ExxonMobil, in particular, is known for its global position against disaggregated reporting, though the company complies when a government implementing EITI decides to go ahead with them. But what will ExxonMobil’s position be now that its own reporting will be disaggregated by the WSRA? Is it possible that the companies may 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, who would continue to lobby for aggregated and lighter reporting requirements?

These are early days. But with up to two-thirds of foreign company involvement now possibly subject to new reporting requirements brought about by domestic US politics, we may only have heard the beginning of the WSRA story in Iraq, as in up to 60 other countries around the world. Section 1504 has all but signed up the entire US extractive industries to a rigorous interpretation of the EITI worldwide.

Category: EITI, Transparency · Tags:

Leave A Comment