Friday, August 17, 2012
President Obama is urging Congress to approve trade agreements that would put people back to work and energize our nation’s economy. But he also wants to clamp additional taxes on the oil and natural gas industry, partly by eliminating a tax credit for royalties paid to foreign governments. That could send billions of dollars and thousands of jobs to foreign competitors who don’t face similar taxes. Now, the Securities and Exchange Commission (SEC) is on the verge of implementing a provision of the Dodd-Frank financial reform law that would require any oil and natural gas company or hard-rock mineral company to disclose in its annual report payments to the United States and a foreign government. Such payments include taxes, royalties, license fees, production entitlements and bonuses. In other words, the provision covers just about any payments that a company makes in foreign trade. Together, more taxes and government regulations will undercut the U.S. oil and gas industry, one of the few sectors recording major job gains. Experience shows that eliminating tax credits would encourage some companies to outsource their work to countries with lower taxes, and it could also lead to higher prices for gasoline, diesel and other petroleum products. The SEC is scheduled to approve the disclosure provision on 22 August. It requires oil and gas and hard-rock mineral companies to make public a summary of expenses by country and possibly by project. The statement of financial payments must be submitted to the SEC and published in a company’s annual report where it can be accessed by foreign competitors as well as the public at large. This is information that until now was considered confidential and proprietary. The purpose of the disclosure provision is to increase transparency in the oil and gas and hard-rock mining industries. But in practice, it will subject U.S. to a lot of red tape and costly compliance obligations. Never mind that these companies are already subject to the Foreign Corrupt Practices Act that prohibits payments to foreign officials for the purpose of obtaining or retaining business. U.S. energy companies face tough competition from foreign national oil companies that don’t have to comply with such disclosure requirements, and that could put them at a disadvantage when bidding for contracts. State-owned companies such as Saudi Aramco, Russia’s Gazprom and the China National Petroleum Company control 80% of the world’s oil resources. Non-SEC registered companies would have a great advantage in forming joint ventures with national companies that have ready access to capital. The big question is whether the SEC will require disclosure by project. That would harm companies large and small, jeopardizing thousands of jobs, while contributing little information that isn’t already made public under other disclosure requirements. It is bad enough for a government regulation to be inordinately expensive or to be ineffective-it certainly should not be both.