Why Dodd-Frank 1504 won’t undermine competitiveness

A recent article in fuel fix has argued that Dodd-Frank 1504 would jeopardize US competitiveness. (Section 1504 of the Dodd-Frank Act, also known as the Cardin-Lugar Amendment, would oblige extractive companies listed in the US to publish their payments on a country-by-country and project-by-project basis for every country where they operate). However the main argument supporting this claim was based on factual inaccuracies.

Here’s an excerpt:

“American energy companies competing against foreign firms for the rights to develop resources must place bids with the governments where those resources exist. The governments in resource rich countries across the world receive numerous bids for projects to develop their various resources and then select the one which benefits them the most. Imagine the disadvantage American companies would face if they were required to reveal the dollar amounts on the bids they were placing.”

Companies not under SEC jurisdiction (i.e. all non-American companies like China’s CNOOC and Venezuela’s Petróleos) could review the bids U.S. firms are placing and tweak their own offers to be slightly better. That is analogous to playing 5-card draw where all of your cards are dealt face up but your opponents’ cards aren’t. The end result means less business for U.S. companies.

1) One of the most irritating mistakes in this article is the constant use of ‘US’ companies rather than companies listed in the US. The difference is massive. All companies listed in the US will be affected by Dodd-Frank 1504, this includes non-American companies such as Shell (Dutch) and CNOOC ltd-Adr (Chinese).¹ In fact, DF 1504 will cover 29 out of 32 of the major internationally operating oil companies.

2) Dodd-Frank 1504 obliges companies to publish payments made, not payments offered or proposed. Therefore the American (listed) companies are not required to reveal their bids. Companies will not be able to “review the bids US firms are placing and tweak their own offers”.

Here are a few additional reasons why competitiveness won’t be destroyed:

Transparent companies win bids – Statoil won major offshore concessions in Angola in 2011 and it is one of the world’s most transparent companies, reporting payments on a country-by-country basis since 2007.²

Information is already out there – Royalty rates and bonus payments are for example often already known within the industry circle. Indeed, research firm’s such as Wood Mackenzie collect this information on a pay-for-access basis.

Even if it wasn’t…. – Companies aren’t chosen purely on the basis of bonus payments or “dollar amounts”. A government’s choice will also be determined by factors based on technical expertise, capital requirements, history etc…

Transparency will be the norm, not the exception – As stated; US stock exchanges cover 29 out of 32 major oil companies, and 80% of major mining companies. The EU – second largest home in the world to extractive companies – is currently discussing transparency legislation which would also oblige companies to report their payments on a country-by-country and project-by-project basis.

Notes

¹ I used Revenue Watch’s Stock Exchange Listing’s calculator to find the examples of companies listed on US stock exchanges.

² Statoil has been reporting each year since 2007:

http://www.statoil.com/annualreport2009/en/financialperformance/positive…

http://www.statoil.com/annualreport2010/en/financialperformance/positive…