Fighting Corruption in the Oil and Gas Sector in Uganda

By Samuel Ouga

Recent months have seen two important developments in the global trend towards transparency and accountability in the oil and gas sector. In this piece I will review two pieces of legislation – in the United States and in the European Union – both of which aim to increase disclosure obligations for companies in extractive industries, including the oil and gas sector, in an attempt to prevent bribery and corruption:

• On 22 August 2012, the U.S. Securities and Exchange Commission (the “SEC”) adopted new rules relating to disclosure of payments to governments by “resource extraction issuers” (the “Final Rules”) pursuant to Section 1504 of the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

• On 18 September 2012, the European Parliament’s Committee on Legal Affairs (the “Committee”) voted in favour of proposed EU legislation (the “Draft EU Legislation”) to impose disclosure obligations on large companies involved in extracting oil, gas and minerals and logging . It is anticipated that the Draft EU Legislation will be submitted to MEPs for a European Parliament plenary vote later this year.

These pieces of legislation will especially be of greater value to Africa, where discoveries of valuable natural resources have resulted in grand corruption and conflicts, bred dictatorships and untold suffering of citizens who remain with nothing to show for the discovered wealth in their countries. Global voices calling for greater transparency and accountability are growing stronger.

Countries like Nigeria, Niger, Cameroon, DR Congo and Angola are just some of the examples with huge deposits of Oil and Gas and yet the discoveries have turned out to be a curse to the citizens. Oil drilling goes on at the back drop of massive corruption and deadly conflict.

Ghana on the other hand is a shining example of countries that have taken a bold step on the path of transparency. All documents involving Oil and Gas transactions between government and exploration & production companies are made public and can be accessed by any interested citizen. The government took this move bolster transparency and greater scrutiny by the public. This acts as a safety valve and deters potential corruption by officials involved in the sector.

Uganda, on the other hand after recent discovery of oil, has chosen  a controversial path of secrecy. Uganda has a secrecy clause in the Oil and Gas Production and sharing Agreement (PSA). This has raised lots of public concern over the intention of the secrecy clause as this can be a potential cover for corruption.

The law’s confidentiality clause, limits the amount of information accessible by the public.

The law lacks transparency; it imposes confidentiality on officials working within the sector, even after they leave office, so there is no opportunity for whistle-blowing or for the public to have access to information on, say, production-sharing agreements.

Uganda still hasn’t joined the Extractive Industries Transparency Initiative (EITI), an international scheme that attempts to set a global standard for transparency in oil, gas and mining.

As a member, Uganda and oil companies involved in the country would be required to publish all payments and revenues from the industry.

But Ugandans will now have hopes of accessing information about oil dealings from outside the country. Thanks to the two legislations recently made US Congress and EU Parliament.

The two pieces of legislation from the US and EU reflect the growing international moves to increase disclosure obligations for resource extraction issuers, including oil and gas companies, in an attempt to prevent bribery and corruption.

The Final Rules – Section 1504 of the Dodd-Frank Act

The Final Rules require resource extraction issuers to include in an annual report information relating to any payment made by the issuer (including by any subsidiary or entity controlled by the issuer) equal to or exceeding US$100,000 in any fiscal year to a foreign government or the U.S. Federal Government for the purpose of commercial development of oil, natural gas or minerals.

Companies Affected by the Final Rules

The Final Rules apply to all companies that are reporting companies, both foreign and domestic, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are engaged in the commercial development of oil, natural gas or minerals (“Resource Extraction Issuers”). The “commercial development of oil, natural gas or minerals” includes the activities of exploration, extraction, processing and export and the acquisition of licences for any of those activities, but excludes ancillary businesses such as the manufacturing of equipment used in the commercial development of oil, natural gas or minerals.

Companies like the British Tullow Oil Plc and the French Total E&P will be obligated to make declarations of all their transactions in their respective countries.

Reporting Obligations

The Final Rules provide that any “payment” that is equal to or exceeding US$100,000 made by a Resource Extraction Issuer to a foreign government or the U.S. Federal Government must be reported. “Payment” means any payment that is made to further the commercial development of oil, natural gas or minerals, including taxes, royalties, fees (including licence fees), production entitlements, bonuses, dividends and payments for infrastructure improvements.

The term “foreign government” includes a foreign national government as well as a foreign sub national government, such as the government of a state, province, county, district, municipality or territory under a foreign national government. Notably, however, the Final Rules do not require disclosure of payments made to sub-national governments in the United States, such as states and municipalities, which should reduce the reporting burden for Resource Extraction Issuers that primarily conduct operations in the United States.

Importantly, the Final Rules do not provide any exceptions from the reporting requirements, even for situations in which foreign law or confidentiality agreements prohibit such disclosure. Like in the case of Uganda.

Form of Report

The Final Rules require Resource Extraction Issuers to make disclosures on Form SD no less than 150 days after the end of their most recent fiscal year. Form SD requires disclosure of the following with respect to payments made to a foreign government or the U.S. Federal Government: (a) the total amounts of payments, by category; (b) the currency used to make the payments; (c) the financial period in which the payments were made; (d) the business segment of the Resource Extraction Issuer that made the payments; (e) the government that received the payments; and (f) the project to which the payments relate.

When the Final Rules take Effect

Under the Final Rules, a Resource Extraction Issuer must comply with the reporting requirements of the Final Rules and Form SD for fiscal years ending after 30 September 2013.

The Draft EU Legislation

The Draft EU Legislation aims to require companies involved in the exploration, discovery, development and extraction of oil, natural gas and minerals and in the logging of primary forests to publish, on an annual basis, full information on their payments to national governments on both a project-by-project and country-by-country basis.

Companies Potentially Affected by the Draft EU Legislation

The Draft EU Legislation applies to all EU large companies (whether public or private), to all companies and EU public-interest entities (national public enterprises) whose securities are admitted to trading on a regulated EU market and to all banks and insurance undertakings which are active in the extractive industry (exploration, prospection, discovery, development and extraction of oil, natural gas and minerals), logging of primary forests, banking, construction and telecommunications.

Reporting Obligations

The Draft EU Legislation requires disclosure of payments to any government (including any federal, regional or local authority), including any Member State government, although payments need not be disclosed if a single payment or multiple related payments do not exceed €80,000. Any fines for violations of environmental and remediation laws must also by disclosed, by country.

The Committee deleted a provision in the proposals which would have excluded from the reporting obligation payments made in a country where public disclosure is clearly prohibited by criminal legislation. It also deleted an exemption from reporting information not material to the recipient government.

The amount of each individual payment made to each level of government must be disclosed. Payments in kind must be reported in value and volume.

Implementation of the Draft EU Legislation

The Draft EU Legislation will now be negotiated between the Committee and the Council of the EU, comprising representatives of all 27 Member States. Assuming these two arms of the EU legislature agree a final version of the Draft EU Legislation, it will be submitted to all MEPs for a European Parliament plenary vote later this year and in parallel adopted by the Council. The Committee regards the approved version as giving it a strong negotiating mandate. However, given the difference in approach between the Parliament and the Council (in particular regarding the inclusion of the logging sector, project-by-project reporting and payments to Member State governments and the derogation where publication would be a criminal offence in the country concerned), agreement on a version including all the above amendments may prove unattainable.

Conclusion

There was already some existing regulation in this area before the introduction of this legislation – for example, the rules of the AIM Market of the London Stock Exchange already require resource companies to disclose any payments aggregating over £10,000 made to any government or regulatory authority or similar body in relation to the acquisition or maintenance of its assets as part of the listing process; and the Hong Kong Stock Exchange listing rules for mineral companies include a similar requirement for a mineral company to disclose payments made to host country governments on a country-by-country basis. However, the Final Rules and the Draft EU Legislation go further than such rules – in particular by introducing an ongoing reporting requirement, rather than just an obligation to make disclosure at the time of listing.

Opinions on both the Final Rules and the Draft EU Legislation are strongly divided. In the US, organisations such as the American Petroleum Institute and other industry bodies lobbied strongly against various provisions of the Final Rules, arguing for less detailed reporting requirements, a higher “de minimis” threshold and the application of various exemptions, such as circumstances in which the disclosure of payments is prohibited by local law. However, the SEC strongly rejected such arguments. At the other end of the spectrum, groups such as Transparency International have welcomed the Final Rules, which they believe set an international benchmark for transparency and mark an important step in the fight against corruption in extractive industries.

The Draft EU Legislation has faced similar controversy from campaigners and industry bodies in Europe. It remains to be seen whether the Draft EU Legislation will be approved later this year in its current form, which reflects several aspects of the Final Rules in the US, or whether it will be modified to remove certain of its key provisions and weaken its overall impact.

In practical terms, companies to which either of these pieces of legislation apply will need to implement new systems and financial reporting procedures, if they have not done so already, to enable them to capture the information required to enable them to meet their reporting obligations.

These changes should also be seen as part of a global trend. As noted above, although there was previously some similar regulation, it is likely that there will be more to come in the future from other governments, regulators and stock exchanges around the world – including Australia, Norway and South Korea, where similar legislation is currently under review.

Follow me on Twitter; @ougasam

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3 thoughts on “Fighting Corruption in the Oil and Gas Sector in Uganda

  1. Pingback: Fighting Corruption in the Oil & Gas Sector | Theoilrepublic

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