Dodd-Frank Act Predicted to Negatively Affect Oil & Natural Gas Industry

August 23, 2010

An extensive new provision within the Dodd-Frank Wall Street Reform and Consumer Protection Act is targeting the energy industry by requiring increased disclosure of financial data.

Section 1504 of the Act orders the Securities and Exchange Commission (SEC) to develop new mandates for ‘Resource Extraction Issuers’ to disclose all details of any payments made to the United States government, as well as any foreign government, in a commercial oil, natural gas, or mineral business transaction.

The current guidelines state that the disclosure of such financial data is strictly voluntary.  Many companies voluntarily disclose that financial information as part of the Extractive Industry Transparency Initiative, a world-wide standard for transparency within the energy industry.

This broad provision was unexpectedly placed into the bill at the last minute, right before the vote enacting it into law.

The Act describes the commercial development of oil, natural gas or minerals as, “[the] exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity,” with the ultimate determining body being the SEC.

The term, ‘payments’, is defined in the Act as any ‘non-de minimis’ payments made to “further commercial development of oil, natural gas, or minerals.”  This includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits that the SEC determines are part of the “commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.”

With the current wording, the measure would include almost any type of payment a resource extraction company would make to any government for any reason.  Many analysts predict that some companies would have to track and disclose thousands of payments each year.

In addition to the amount of additional resources that firms would have to allocate to track and report these financial transactions, there are also concerns about being mandated to disclose confidential information that could reduce the competitive ability of the industry.  Also, extraction companies are concerned that they would be required to make all of the financial information available to the public through the internet.

The argument is that an unbalanced market would result due to foreign competitors having the ability to know the costs, investments, and lease payments of United States firms without having to comply themselves.

Industry analysts also have considerable speculation as to how the SEC would write the rules, which would not occur until 270 days after the enactment of the law.

There is further conjecture over how companies would have to report payments made under working interest agreements as well as through joint ventures with foreign companies.  Additionally, analysts wonder what financial penalties businesses might be required to pay for a violation of the rules.

United States energy extraction businesses are being encouraged to evaluate their existing internal tracking systems as well as all of their current endeavors that could be affected.