Analysis

Oil and Gas Industry Loses Latest Round in Battle with SEC

In an attempt to combat corruption in resource-rich developing countries, two years ago Congress ordered U.S. corporations to disclose payments they make to foreign governments for the extraction of oil, gas, and minerals.

As supporters of the law saw it, the lack of transparency had allowed corruption to flourish and an elite few to profit from natural resources that should have benefited entire nations.

But the extractive industries protested that the requirements would damage their business, and they sued to block the rule that the Securities and Exchange Commission wrote to implement Congress’s mandate.

This week, the SEC stood its ground and refused to put the rule on hold while industry groups challenge the agency in court.

Groups representing oil companies and other corporations argued that they were “likely to suffer irreparable harm” if the rule took effect, according to an SEC decision.

The SEC called the industry’s claim “too speculative and unsupported by evidence.”

The agency rejected arguments that the rule would put U.S. businesses at a competitive disadvantage and impose onerous compliance costs. Additionally, the SEC said postponing the rule would not serve the public interest.

“Congress enacted [this law] to advance this country’s interest in promoting accountability, stability, and good governance, among other goals,” the SEC said in an order issued Thursday.

The disclosure rule, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires oil, natural gas and minerals companies that are registered with the SEC to file a new annual form that includes detailed information on payments they make for every extractive project in every country.

“A primary goal of such transparency is to help empower citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources,” the SEC wrote in the final rule this August.

However, the SEC doesn’t have the final word in this matter. The U.S. Court of Appeals in Washington will hear the industry’s case as early as this spring, the SEC order said.

This case is another in a series of corporate attempts to derail unwelcome regulation through legal challenges.

In 2011, the U.S. Chamber of Commerce and Business Roundtable won a court decision overturning rules that would have made it easier for shareholders to replace members of corporate boards. The business groups argued that the SEC did not do enough to analyze the rule’s economic impact.

Likewise in the latest challenge, industry groups’ lawyers argued that the SEC only “paid lip service to the requirement for cost-benefit analysis” in drawing up the rule.

Though the rule was inspired mainly by conditions in developing countries, it could make a difference for taxpayers in the United States.

The U.S. government collects around $10 billion annually from the production of oil and gas on federal lands, according to the Department of the Interior. But the Government Accountability Office and others have raised significant concerns over the years about the government’s collection of oil and gas royalties and the reliability of royalty data.

As recently as last year, an Interior Department official said that his agency’s royalty collection office “has neither the staff nor the resources to do full-blown audits on more than 5 percent of oil and gas leases annually,” according to a report by the Revenue Watch Institute (RWI).

If the SEC’s rule stays in effect, oil and gas companies will be required to hand over data that could help the U.S. government double check royalty payments and hone in on potential problem areas. According to RWI, it will also “provide more information to U.S. citizens on the value of their natural resource assets.”