By Joseph Williams, Natural Resource Governance Initiative
This post originally appeared on www.resourcegovernance.org on June 13, 2017
Some days are more exciting than others when oil and gas companies disclose the payments they make to governments. We have seen a number of big days like this over the past years.
Statoil became the first company to report under a mandatory payment disclosure regime in early 2015, undermining U.S. oil lobby arguments.
Shell, which had fought so vigorously against project-level payment disclosure laws, published its first payments to governments report under U.K. law in April 2016 and included information on China and Qatar, countries it previously claimed prohibited disclosure.
BP, which had barely published any country specific information (save for seven EITI countries, often with huge time lags), reported on USD 15.2 billion worth of project-level payments in 23 countries in June 2016.
These disclosures were exciting, and staggered. Over the last fortnight, similar reports have poured in.
On 31 May, Italian oil giant ENI published its first report (search for "ENI"). It includes information on payments of nearly EUR 5 billion in 2016 to government entities in 30 countries including Nigeria and the infamous OPL 245 oil block. The lack of any information on China is a concern, though, and requires follow up. ENI’s production in China was 2,000 barrels of oil equivalent per day in 2016. In 2015, where ENI’s production was 3,000 barrels of oil equivalent per day, it made tax payments of EUR 1.4 million according to a voluntary report.
By last Friday, approximately 600 companies (not allowing for duplicates where a consolidated report was filed for multiple companies), had reported under Canada’s Extractive Sector Transparency Measures Act (ESTMA). The reports will take some time to sort through and NRGI is working on this with our partner PWYP Canada. In the meantime, there have been some pleasant surprises.
Chevron has published its report for relevant subsidiaries under Canada’s ESTMA. We expected information related to its operations in Canada to be in this report. Indeed, Chevron’s U.K. subsidiary has reported on its U.K. operations under U.K. law, as is the case with the subsidiaries of other large U.S. companies like ExxonMobil and ConocoPhillips operating in the U.K. What we did not expect to find was Chevron’s Canadian subsidiaries reporting CAD 3.28 billion in payments to Indonesian and Nigerian government entities for projects such as its Rokan PSC in Indonesia or the Agbami field (OML 127/128) in Nigeria due to the way the corporation is structured. While this by no means captures all of Chevron’s payments to government worldwide, it is the first time Chevron has reported under a mandatory disclosure law in some of the key countries for which these laws were intended to increase transparency. Chevron was instrumental in lobbying for the disapproval of an effective transparency rule in the U.S. earlier this year. Today its anti-competitiveness claims look more ridiculous than ever.
CNOOC Ltd agreed to list on the Toronto Stock Exchange as per requirements when it acquired Canadian company Nexen. As a result, CNOOC Ltd has disclosed USD 2.6 billion in payments to government entities in 17 countries. This is the most comprehensive disclosure report we have seen so far by a Chinese state-owned company and puts it far ahead of ExxonMobil and Chevron in terms of the information on payments to governments it makes available to citizens around the world. CNOOC’s disclosures also raise questions as to why its peer Sinopec, which is listed on the London Stock Exchange, has not reported under U.K. law for its Angolan and Chinese operations. In another interesting quirk of these disclosure regimes, CNOOC has also filed its full payments to governments report in open data format (take your pick out of CSV, JSON or XML) with Companies House under U.K. law in order to meet the disclosure obligations of its U.K. subsidiary.
Royal Dutch Shell
To top all of this off, today Shell has published its report on payments to governments in 2016. It is available on Shell’s website, as well as via Companies House in CSV, JSON, or XML format. It is available as a stock exchange announcement, as well. This year, Shell has reported on USD 15 billion in payments made to governments in 31 countries.
This is up from 24 countries last year, partly due to Shell’s acquisition of BG Group (which explains the inclusion of Trinidad & Tobago and Tunisia). It’s a decrease in terms of payments, down from USD 21.8 billion last year. Nigeria is the largest payment recipient at USD 3.6 billion. In Canada, Shell has again reported payments to a number of First Nations entities. Like last year, Shell is actually receiving large tax refunds in the United States (USD 254 million) and the U.K. (USD 142 million). Shell’s project-level data needs careful examination to ensure the company is not aggregating legal agreements together to obscure project level reporting.
Finally, production entitlements account for nearly two-thirds of all payments reported by Shell. This is important. For example, Shell’s report reveals that it made in-kind payments (mainly in the form of production entitlements) totalling 134.2 million barrels of oil equivalent (BOE) in 2016 to at least three government entities in Malaysia, including Petronas, the national oil company. The question then becomes: What is the government doing with these barrels of oil equivalent and who is buying them? It is crucial that the buyers of these in-kind payments and the payments they make to purchase this production are included in these payment disclosure laws given the size of the transactions and their susceptibility to corruption. Thankfully, the launch of an international dialogue looking at this issue is taking place this week at the OECD in Paris to take forward commitments made by major trading hubs such as the U.K. and Switzerland at the 2016 London Anti-Corruption Summit.
A significant reporting shift
We are definitely at an inflection point. In addition to the ESTMA disclosures described above, over 90 companies have reported payment information under U.K. law for 2015. A similar number are reporting for 2016 (Shell’s report is one such disclosure.) In total, over USD 136 billion was paid to governments in 112 countries around the world by companies reporting under U.K. law for 2015. NRGI will detail this more fully in an upcoming report.
I encourage everyone—campaigners, investors, analysts, government official and others—to dive into these reports. The more eyes we have on them, the more likely we will see this transparency lead to empowerment of oversight actors and greater accountability.
There remains much work to be done, including ensuring these reports are more easily accessible; querying the reports with companies; improving the underlying legislation; analyzing them for insights; and using them to bring about accountability more purposefully in countries where accountability is lacking most. Please do get in touch if you would like to be involved with this work.
Joseph Williams is a senior advocacy officer with the Natural Resource Governance Institute (NRGI).
By David Mihalyi, Natural Resource Governance Institute
This post originally appeared on www.resourcegovernance.org on May 15, 2017
Tullow Oil, a U.K.-based company operating mostly in Africa, began voluntarily disclosing payments made to governments four years ahead of the mandatory requirements for EU-based companies.
Accounting for half of the company’s 2016 production, Ghana is important to Tullow. The reverse is also true: Tullow is the operator of Jubilee and Tweneboa-Enyenra-Ntomme (TEN), the country’s major producing oil fields. Tullow’s sustained period of reporting in Ghana and elsewhere provides a unique opportunity to analyze how project developments affect oil company tax payments.
Tullow’s first year of reporting coincides with first oil from the Jubilee field in 2011. Recently released reporting for 2016 corresponds to production at TEN. This six-year span was particularly volatile: Ghana’s oil sector grew rapidly and was hit for the first time by a massive drop in oil price.
So what does the payment data tell us about this period?
NRGI collected and analyzed Tullow’s yearly disclosures across payment types required to be disclosed under EU rules and of relevance to Ghana: license fees, infrastructure payments, royalties and income tax. The payment data confirms some of the textbook features of royalty and tax-based oil and gas fiscal regimes. But it also provides unique insight on the contrary dynamics of a growing sector and dropping prices.
Our analysis excludes payments made to the state-owned Ghana National Petroleum Corporation regarding its approximately 15 percent participating interest in Jubilee and TEN. According to the latest 2014 Extractive Industries Transparency Initiative report and the 2015 Public Interest Accountability Committee report, these payments provided over half of the government's oil revenues. These payments were excluded because Tullow’s reports, unlike those of other companies, such as BP, do not include production entitlements states receive as participants in a project. While Tullow’s disclosure provides highly timely data for six years, its coverage is less comprehensive.
The payment data shows that license fees generate marginal, flat revenues (less than USD 100,000 per year), and payments for infrastructure improvements are also relatively small (USD 2 million to USD 10 million per year). License fees and infrastructure improvement payments represent less than 4 percent of payments disclosed under the rules.
Production entitlements, in this case the royalties (paid in kind), represent over half of the revenues. They have fluctuated considerably, between USD 37 million to USD 87 million annually, depending on the oil price and production volumes.
But it is income tax that by has been most volatile. In 2013 and 2014, it was the largest source of revenues, generating over USD 100 million per year. None was collected in previous years, nor in 2015.
We previously analyzed and attempted to forecast 2015 oil revenues by building a fiscal model for the Jubilee field. Our retrospective analysis, which specifically investigates the drop in corporate taxes, found the international drop in oil prices accounted for some of this fluctuation. However, most of the difference came from deductions against taxable income from Jubilee. From 2010 to 2012, Tullow was recovering its investment in developing the field. Once these costs were recovered, it was paying large corporate tax in 2013 and 2014. But in 2015, Tullow started to offset costs associated with developing TEN against profits made on Jubilee. This led to unforeseen revenues reductions at odds with budgeted figures.
The good news for Ghanaians is that Tullow’s latest disclosure indicates deductions from TEN may have plateaued. Despite oil prices remaining low last year, Tullow reported some, albeit more modest, corporate tax payments in 2016. This indicates Ghana’s oil fields can remain profitable in the current environment and with reduced cost deductions, a relatively larger share of oil proceeds can accrue to the government.
But reasons for caution remain. Jubilee’s offshore platform is undergoing another round of costly repairs. Further TEN investment may come, hinging on an international tribunal ruling in favor of Ghana on maritime boundaries. The Atuabo Gas Processing Plant is being put to test with recent expansion of gas production, which might lead to additional maintenance costs. These potential further investments, though beneficial in the long-run, could again depress tax payments expected over the next years.
There is often a trade-off in the oil sector between increasing short-term tax revenues and attracting further investment. With the help of Tullow's payment disclosures, we can monitor where Ghana stands.
Data covering Tullow payment disclosures for Ghana from 2011 to 2016 can be found here. Additional payment data is available on ResourceProjects.org.
David Mihalyi is an economic analyst with NRGI.
By Jessie Cato, Publish What You Pay - Australia
This post originally appeared on the Devpolicy Blog on May 18, 2017
Tracking Australian mining, oil and gas companies around the world is challenging. Australia has one of the largest global footprints of extractives companies operating abroad. Research by Publish What You Pay (PWYP) Australia and ESG research house CAER in September 2016 found that the 22 Extractives Industries Companies on the ASX 200 had a presence in almost 50 countries. Trying to trace the payments between these companies and the governments of the countries in which they operate is difficult. But it could be done, and reasonably simply, if Australia introduced a mandatory disclosure reporting requirement that legally required ASX listed extractives companies to make public their payments to government in every country in which they operate.
Legislation for mandatory disclosure was introduced in 2013 in the EU, and 2014 in Canada. The reporting requirements in both Canada and the UK have been in effect coming up to one year, and have already shown payments of $150bn to governments of over 100 countries — including to countries recognised as suffering from the ‘resource curse’, and payments to countries where Industry opponents to this legislation challenged their legal ability to report, such as Qatar and China. Even with just a single year data set to work from, civil society is already making use of this information in multiple ways. Some have used it to show how the UK reports are providing a new standardised data source for oil prices, while others are using it for global advocacy.
A case study by PWYP UK used payment data released under the UK legislation from Royal Dutch Shell in Nigeria; BG Group (now part of Shell) and Petrofac in Tunisia; BP and Shell in Indonesia; and Shell and BP in Iraq. PWYP UK then created infographics for 3 countries and a data summary for the fourth which were then shared with the PWYP Coalitions in these countries for their advocacy. It demonstrates how this data can be used by local civil society in their efforts to keep their governments accountable, and the global collaboration this data facilitates.
Ideally, that should be where the discussion stops; that Australia legislates to empower communities where Australian companies operate, and increase fiscal accountability and transparency of Australian companies. Unfortunately, there exist more concerning reasons why Australia requires this legislation. The recent ICIJ report A Fatal Extraction highlighted the high number of deaths linked to Australian extractives companies or operations in Africa. We have seen numerous allegations of corruption and bribery in the sector featuring Australian companies or subsidiaries, and the legal but unethical fiscal deals and tax breaks between Australian companies and African Governments which result in countries losing millions. Mandatory disclosure legislation in Australia wouldn’t automatically solve every single one of these issues, but none of them can ever be sufficiently addressed without it.
Domestically, the recent Petroleum Rent Resources Tax (PRRT) inquiry is a result of civil society organisations finding limited public information, using freedom of information requests to obtain additional data and exposing the declining revenue while Australia is in the midst of an LNG export boom and on the verge of becoming the world’s largest exporter of LNG. Had Australia has a mandatory disclosure regime in place, it would have made this issue more readily identifiable by civil society and the Commonwealth, as the data would have been publicly accessible.
Even if we remove the ethical impetus, there is a strong business case for this legislation. Increased openness in company reporting makes good business sense, it increases social license to operate, makes investment more attractive and complements work towards the emerging global reporting standard. It’s why Canada’s peak mining body, the Mining Association of Canada, was an active advocate for and has remained strongly supportive of this legislation, and also why Australia’s two largest extractive companies, BHP Billiton and Rio Tinto, who are captured by the UK legislation, also publicly state their support.
Of course, there are companies more comfortable in opacity. Introduction of this law domestically will create significant push back from some companies, and the influence and power of extractives industries globally or domestically is not underestimated by anyone. We only have to look to the US to see how the same specious arguments some industry members continually regurgitate to keep their payments overseas secret – arguments civil society and Industry supporters not only dispute, but have proven false – resulted in the equivalent US requirement, the Cardin-Lugar provision, having been vacated as one of President Trump’s first actions.
Australia announced its intention to join the Extractives Industries Transparency Initiative (EITI) in May 2016. EITI is a leading global initiative that aims to increase transparency in the extractives sector through a voluntary domestic reporting system. 51 countries are currently implementing the EITI. EITI is a great step to towards transparency for Australia, and an overdue one for a country that has long been one of the initiative’s largest financial supporters. But for a country with the global presence as large as Australia, it’s not enough. EITI complements mandatory disclosure, but cannot replace it, a position that is supported by the EITI Secretariat. Nor can supporting the development of countries’ natural resources sector be achieved solely through our aid programme. It demands policy intervention and leadership from the Australian Government, and it needs the support of the Australian extractives industry. We cannot continue to claim we are world leaders in mining if we refuse to meet the emerging global standards and do nothing to address our role in the lack of fiscal transparency in the global extractives sector.
As Australia moves towards increasing openness through EITI and by joining the Open Government Partnership, the time is right to discuss a mandatory disclosure reporting regime. Australia has largely benefited enormously from its natural resources, and we have done so in a transparent environment fundamentally free of corruption; we owe it to other countries to allow them the same opportunity.
Jessie Cato is the National Coordinator for Publish What You Pay Australia.
For many us, whom have dedicated years to advocate for the laws that require the disclosure of payments in Canada, the time has come! Reports required to be disclosed in accordance with the Extractive Sector Transparency Measures Act (ESTMA) are piling up, and shortly (May 2017) we expect there to be hundreds and hundreds of disclosures covering countries from every continent. You can explore the reports here.
Reports by Canadian or Canadian-listed extractive companies stand out from their peers in a couple of ways: Firstly, most of the reports will be for mining companies; secondly, many of the companies are small, with just a few projects, and thirdly, Canada has strong project-level disclosure requirements for public mining companies, which means that there will a lot of complementary information available for each mining company/project.
One of the big questions is: what can I do with this data? Well, there are lots of possibilities. Once the reports have all been filed sometime next fall, we will be able to pull it all together into one dataset, so that we can identify trends and aggregate data. However, before this happens, there is an important opportunity to dig into individual company reports.
At Publish What Pay Canada’s retreat this year, this is exactly what we did. Participants attending the retreat were divided into groups and each group was given one of the mining projects below:
Every member of the group was provided with a folder complete with information on their assigned mining project. The information in the folders drew from 5 primary documents types: Investor presentations, mine project webpages, regulatory filings (technical reports, audited financials), and at times external sector specific information, such as EITI reports or data on uranium production and pricing from the World Nuclear Association. The latter was particularly important, because unlike gold, uranium is often sold on long-term contracts with negotiated prices, rather than using a global price.
Participants were asked to look for certain pieces of information, including:
But most importantly, they were asked to determine whether they could conduct a royalty audit. A royalty audit involves comparing the royalties paid with a calculated assumption of what should have been paid. To conduct a royalty audit, one needs access to project-level production, average annual sale price and the royalty rate. Further, the royalty must be production-based.
With one hour to dig deep into the information at hand, participants come up with some interesting results. Below we explore the results from two groups.
The group that analyzed Perseus Mining Company’s project, “Edikan Gold Mine” found that 10% of mining royalties in Ghana are transferred from the central government to local governments and local land-owning authorities. According to the ESTMA report, Perseus paid 17,890,000 Australian dollars /13,856,860.00 USD (given the exchange rate of 0.74425 provided in the ESTMA report) in royalties from July 1st 2015 – June 30th 2016. As a result, 1,789,000AUD/1,385,686.00 USD should have been transferred to local governments and authorities. The group concluded that it would be worthwhile to follow up to see whether the money was transferred and what it was used for.
The group also conducted an audit on the royalties paid by Perseus for the production at the Edikan mine. The royalty audit involved comparing the royalty payment of 13,856,860.00 USD with the royalty payment calculated by the group given annual production, average price, and the royalty rate. All data was found in Perseus annual report.
In this case the calculation relied upon gold sold versus gold produced, although the numbers are very similar. While the group stumbled at first, given the different currencies used in the annual report (USD) and the ESTMA report (AUD), the final royalty audit showed a discrepancy between the royalty payments reported and that revealed through the royalty audit we conducted. The royalty audit revealed a figure 4.5 million USD below that which was reported. It would be worth reaching out to Perseus to better understand why the royalty audit revealed a figure well below what Perseus Mining paid in royalties for the Edikan project in 2015/2016.
Annual gold sales of 153,957 ounces x average annual price 1,224.00 USD/ounce x Royalty rate 5% = 9,442,168.00 USD
The group looking at the Selinsing Mine in Malaysia was able to complete a royalty audit using available information. To conduct the audit the group first had to convert the royalty payment reported in the ESTMA report from Canadian into US dollars. Given that the ESTMA report did not outline the CAD/USD conversion, an average rate for 2016 of 0.75 USD to each 1 CAD was used, thus royalties of 1,150,000.00 CAD became 862,500 USD. Additionally, given that Monument Mining settled a gold forward sale contract in 2015/2016 for 5,000 ounces/gold at $519.00/USD, the group had to calculate and add two different figures for royalties, assuming that royalties were paid in 2015/2016 on the gold forward sale.
Gold Sales 18,150 ounces x 1,157.00 USD/ounce x royalty rate of 5% = 1,049,975.50 USD
Gold forward contract settled for 5,000.00 ounces/gold x 519.00 USD/ounce x royalty rate of 5% = 129,750.00 USD
Total Sum: 1,179725.50 USD
While the group noted that the royalty rate in the ESTMA report were roughly similar to the royalties revealed by the audit, with the exchange rate factored in, there appears to be a discrepancy of over 300,000 USD. Some of this difference may be due to the actual exchange rate, but it would still be worthwhile to question the company about this difference.
Another thing noted by the group was the highly variable corporate expenses charged by the company to the project, ranging from 19% of revenues in 2014 to 9.49% in 2015, to 16.5% of revenues in 2016. The group noted that it would be interesting to further understand why corporate expenses are so high.
Paladin Energy posed a challenge, as the royalty rate applied to the project in Namibia was not publicly disclosed. Research conducted after the group exercise shows that the Langer Heinrich mine may be subject to a 3% royalty rate, however, Paladin reported the project was subject to a 2% royalty in 2006.
Another important point noted in research conducted after the group activity, was that Paladin Energy reported 6,600,000.00 USD in royalties paid to the government of Namibia in their ESTMA report, a figure that is markedly different from that reported in its annual report of 4,982,697.00 USD in royalties to the Government of Namibia for FY 2016 (p.47). Both figures were cited as referring to financial year 2015/2016. This discrepancy merits further discussion with the company.
Given that the royalty rate applied to the project was unclear, the group sought to identify the royalty rate paid by Paladin given production and price. Luckily, Paladin had only one producing property in FY 2016, thus all figures in the annual report reflected production at the Langer Heinrich project. It can be noted that the royalty rate ranged from 2.7 to 3.65% depending on whether it was calculated using the Annual report or the ESTMA report. I will follow up with Paladin to try and understand the discrepancy between the ESTMA report and the annual report and can report back any findings.
Using royalty payment reported in Paladin’s Annual Report
In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/4,982,697.00 = 2.77 % royalty rate
Using royalty payment reported in ESTMA report
In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/6,600,000 = 3.65 % royalty rate
All the groups noted that the exercise was more challenging than anticipated. Moreover, to write up and verify the results took me considerable time, piling back through company reports and taking into account new information not available during the group exercise. That said, royalty auditing is empowering, arming civil society with critical questions which can be asked of governments and companies. Similar, a closer look at each project yielded other questions, which can form the basis of an informed conversation with companies and governments.
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