R Reporting obligations ecent months have brought two important - PDF document

EXPERT’S James Green – K&L Gates INSIGHT A trend towards transparency – combating corruption in oil and gas R Reporting obligations ecent months have brought two important developments in the global trend towards Tie fjnal rules provide that any “payment” that is equal transparency and accountability in the oil to or exceeding $100,000 made by a resource extraction and gas sector. Tiis article reviews two pieces of issuer to a foreign government or the US Federal legislation – in the United States and the European Government must be reported. “Payment” means any Union – both of which refmect growing international transaction that is carried out to further the commercial moves to increase disclosure obligations for companies in development of oil, natural gas or minerals, such as extractive industries, including the oil and gas sector, in an taxes, royalties, fees – including licence fees, production attempt to prevent bribery and corruption. entitlements, bonuses, dividends and payments for infrastructure improvements. On 22 August, the US Securities and Exchange Commission (SEC) adopted new rules relating to Tie term “foreign government” refers to a foreign disclosure of payments to governments by “resource national government as well as a foreign subnational extraction issuers” pursuant to Section 1504 of the Dodd government, such as a state, province, county, district, Frank Wall Street Reform and Consumer Protection Act municipality or territory under a foreign national – the “fjnal rules” 1 . government. Notably, however, the fjnal rules do A functional board is On 18 September, the European not require disclosure of parliament’s committee on legal one that engages, payments made to subnational afgairs voted in favour of governments in the US, such debates and decides in proposed EU legislation to as states and municipalities, impose disclosure obligations a constructive, which should reduce the on large companies involved in reporting burden for resource amicable and engaging extracting oil, gas and minerals extraction issuers that and logging 2 . It is anticipated manner – and where primarily conduct operations that the draft EU legislation will in the US. be submitted to MEPs for a European parliament plenary vote later this year. Importantly, the fjnal rules do not provide any exceptions from the reporting requirements, even Tie fjnal rules: section 1504 of the for situations in which foreign law or confjdentiality Dodd-Frank Act agreements prohibit such disclosure. Tie fjnal rules require resource extraction issuers to Form of report include in an annual report information relating to any payment made by the issuer (including by any subsidiary Tie fjnal rules require resource extraction issuers to or entity controlled by the issuer) equal to or exceeding make disclosures on form SD no less than 150 days $100,000 in any fjscal year to a foreign government or after the end of their most recent fjscal year. Form SD the US Federal Government for the purpose of requires disclosure of the following with respect to commercial development of oil, natural gas or minerals. payments made to a foreign government or the US Federal Government: the total amounts of payments, Companies afgected by the fjnal rules by category; the currency used to make the payments; Tie fjnal rules apply to all businesses that are reporting the fjnancial period in which the payments were made; companies, both foreign and domestic, under the the business segment of the resource extraction issuer Securities Exchange Act of 1934, as amended, that are that made the payments; the government that engaged in the commercial development of oil, natural received the payments; and the project to which the gas or minerals –“resource extraction issuers” . Tie payments relate. “commercial development of oil, natural gas or minerals” When the fjnal rules take efgect includes the activities of exploration, extraction, processing and export and the acquisition of licences for Under the fjnal rules, a resource extraction issuer any of those activities, but excludes ancillary businesses, must comply with the reporting requirements of the 1 See Exchange Act Release No. 67717 (August 22, 2012), available at http://www.sec.gov/rules/ such as the manufacturing of equipment used in the fjnal rules and form SD for fjscal years ending after fjnal/2012/34-67717.pdf commercial development of oil, natural gas or minerals. 30 September 2013. 2 JURI/7/07694 and JURI/7/07698. Drillers & Dealers October 2012 28

EXPERT’S James Green – K&L Gates INSIGHT Tie American Petroleum Institute and other industry bodies lobbied strongly against various provisions of the fjnal rules. However, the SEC strongly rejected such arguments Tie draft EU legislation Tie committee deleted a provision in the proposals that Tie draft EU legislation aims to require companies would have excluded from the reporting obligation involved in the exploration, discovery, development payments made in a country where public disclosure is and extraction of oil, natural gas and minerals and in clearly prohibited by criminal legislation. It also deleted the logging of primary forests to publish, on an annual an exemption from reporting information not material basis, full information on their payments to national to the recipient government. governments on both a project-by-project and country- by-country basis. Tie amount of each individual payment made to each level of government must be disclosed. Payments in kind Companies potentially afgected by must be reported in value and volume. the legislation Tie legislation applies to all EU large 3 companies Implementation of the legislation (whether public or private), to all companies and EU Tie draft EU legislation will now be negotiated public-interest entities (national public enterprises) between the committee and the Council of the EU, whose securities are admitted to trading on a regulated comprising representatives of all 27 member states. EU market and to all banks and insurance undertakings Assuming these two arms of the EU legislature agree that are active in the extractive industry (exploration, a fjnal version of the legislation, it will be submitted prospection, discovery, development and extraction of to all MEPs for a European parliament plenary vote oil, natural gas and minerals), logging of primary forests, later this year and, in parallel, adopted by the council. banking, construction and telecommunications. Tie committee regards the approved version as giving it a strong negotiating mandate. However, given the Reporting obligations difgerence in approach between the parliament and Tie legislation requires disclosure of payments to any the council (in particular regarding the inclusion of government (including any federal, regional or local the logging sector, project-by-project reporting and authority), including any member state government, payments to member state governments and the although payments need not be disclosed if a single derogation where publication would be a criminal payment or multiple related payments do not exceed ofgence in the country concerned), agreement on a €80,000. Any fjnes for violations of environmental and version including all the above amendments may 3 Exceeding at their balance sheet two of the following criteria: (i) balance sheet total €20m; net turnover €40m; > remediation laws must also by disclosed, by country. prove unattainable. average of 250 employees during the fjnancial year. Drillers & Dealers October 2012 29