EITI in the US: why only on federal lands? (Part 1)

The US sign-up last September to the Extractive Industries Transparency Initiative (EITI) was met with widespread acclaim by international civil society groups. But EITI implementation in the US applies only to federally-owned lands, responsible for about 30 percent of oil and gas production, and not private or state-owned areas, where most US oil is produced.

Better transparency in the regulation of extractive industries in federal areas is a good thing, to be sure. But it would be a shame if EITI implementation in the world’s third-leading oil supplier applied to only a minority of its production. This begs the question: does the Department of the Interior (DOI), the federal agency heading up the implementation, have any intention to implement deeper down at the state level and if so, are there any precedents it could follow?

It’s unclear whether the federal government would legally be able to enforce EITI implementation at the state level; my research in this area has been inconclusive. It’s possible that even with the power to enforce, the federal government might choose to consult with the states first, in which case states would presumably have the ability to opt in or out.

It’s also tricky to get a read on the official US position on this issue. Press releases from civil society organizations following the announcement indicated that EITI implementation would only be federal. Even so, in his speech in September, Barack Obama did not explicitly say implementation would remain limited to federal lands; and Washington officials we spoke with earlier this month left open the possibility that it could be expanded to the state level.

The argument for deeper implementation is strong, especially as production shifts away from federal areas toward private and state-owned lands. Since 2000, oil and gas production in federal areas has fallen by over 40 percent, while private and state-owned lands increased production by over 25 percent. In 2010, private and state-owned areas produced about 1.6 billion barrels of oil, compared to 400 million barrels in federal lands and offshore areas. The US collects about $10 billion annually from oil, gas and mineral revenues on federal lands – or about the same as the state of Alaska alone.

Based on the level of activity in the private and state sphere, it would make sense to expand EITI beyond the federal level. Under what model the DOI could do so is another question.

The EITI lacks explicit guidance for the sub-federal implementation of EITI, but there are precedents the DOI could look to. Australia’s implementation of an EITI pilot, commencing on July 1 of this year, will be overseen by a multi-stakeholder group (MSG) comprising seven representatives each from government, industry and civil society. In the government faction, three of the seven representatives will be from state governments. Peru, which achieved EITI compliant status last month, has a different plan. Instead of saving seats on the national MSG for regional government representatives, the federal government has agreed with the governments of two main natural gas and mining regions, Cajamarca and Cuzco, to create separate subnational MSGs composed of representatives relevant to each region’s industry.

Since most EITI countries have their own definition of materiality for subnational revenue streams, there is no one-size-fits-all mechanism to implement EITI at the state level in the US. The DOI will have to develop its own strategy. But this does not need to involve an incursion of federal policy on the state level; it could involve an extension of current principles.

Oil, gas and mining companies already pay two kinds of corporate income taxes in the US: to the federal government for their production on federal lands, and to the states for their activity in private and state-owned areas. Companies also pay severance taxes to the states – levied on natural resources “severed” from the earth – and additional taxes to individual counties in which they operate. This tax infrastructure would not require an overhaul if the DOI can persuade some of the major producing states to implement EITI. If the states agree, both revenue streams paid by corporations – to the federal government and the states – would be subject to EITI reporting standards, rather than just one.

Getting state-level representation on the MSG, as Australia is doing, could be a good place to start. There could be some resistance from the states on this, since state sovereignty, or “states’ rights”, has long been a soapbox issue in the US. But states themselves would benefit from the transparency of EITI-type reporting, considering the clout they would gain by giving taxpayers better access to their accounting.

EITI implementation by the world’s third-leading oil producer is a breakthrough for the rapidly growing global transparency initiative, and could be a game changer for the regulation of extractive industries in the United States. It’s impact might be even greater if federal officials decide to push states to strive for EITI compliance, too.

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