Oil & Gas Alert
August 2010
Authors:
Jeremy A. Mercer
jeremy.mercer@klgates.com
412.355.8249
R. Timothy Weston
tim.weston@klgates.com
717.231.4504
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Drilling for Information: The U.S.
Government Requires Additional, Detailed
Disclosures from Oil, Gas, and Mineral
Developers
Recently, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Law”). Buried in the thousands of pages of
“Wall Street” reforms, this law imposes new mandates on oil, natural gas, and
minerals developers regulated under the Securities and Exchange Commission
(“SEC”) to track and disclose payments made to the Federal Government or foreign
governments for the purpose of “commercial development of oil, natural gas, or
minerals.”
The Dodd-Frank Law applies its disclosure requirements to any oil, natural gas, or
minerals developer that is either (1) a publicly-traded company or (2) a subsidiary of,
or under the control of, a publicly-traded oil, natural gas, or minerals developer
(collectively referred to as a “Resource Extraction Issuer”). The SEC is required to
issue final rules under these provisions, and beginning with the annual report that is
to be filed for the fiscal year that ends one year after the SEC issues those rules, all
Resource Extraction Issuers will be mandated to disclose detailed information about
payments made to the Federal Government or any foreign government for purposes
of the commercial development of oil, natural gas, or minerals.
With the new disclosure requirements not kicking in for some time now, some may
ask whether these requirements are more than a blip on the current radar screen.
However, any Resource Extraction Issuer would be wise to begin planning now for
the impending required disclosures because the broadly-defined terms of the DoddFrank Law and the specific format for the information will require collection and
disclosure of an extensive amount of information in an extremely detailed manner.
First, the Dodd-Frank Law requires disclosure of payments made for the purpose of
“commercial development of oil, natural gas, or minerals,” a phrase that is broadly
defined to cover nearly any aspect of such development, encompassing “exploration,
extraction, processing, export, and other significant actions relating to oil, natural
gas, or minerals, or the acquisition of a license for any such activity, as determined
by the [Securities and Exchange] Commission.” Read literally, this could extend to
lease and royalty payments, permit application fees, and perhaps even payment of
taxes.
Second, the law requires disclosure of payments to the Federal Government or any
“foreign government.” “Foreign government,” though, is defined by the Dodd-Frank
Law to mean not just a foreign government, such as Canada, Dubai, Iraq, etc., but
also “a department, agency, or instrumentality of a foreign government, or a
company owned by a foreign government, as determined by the [Securities and
Exchange] Commission.” So, to determine whether your payments are made to a
foreign government, you now will need to check with the SEC to see whether it has
made a determination that the company or entity qualifies as a foreign government.
Oil & Gas Alert
Third, an expansive definition of “payments”
continues the broad definition pattern of the
Dodd-Frank Law. A “payment” that must be
disclosed is any non-de minimis payment made to
further commercial development of oil, natural
gas, or minerals. The Dodd-Frank Law helpfully,
but again broadly, provides a non-exhaustive list
of items that are included as payments: “taxes,
royalties, fees (including license fees), production
entitlements, bonuses, and other material
benefits” that the SEC “determines are part of the
commonly recognized revenue stream for the
commercial development of oil, natural gas, or
minerals.” Read literally, just about every type of
payment that a Resource Extraction Issuer makes
to a governmental agency or a foreign
government related entity could trigger
disclosure.
Finally, the Dodd-Frank Law provides a detailed
description of the format that the disclosures must
take. The “interactive data format” for the
disclosures requires that a Resource Extraction
Issuer disclose “the type and total amount of such
payments for each project of the resource
extraction issuer relating to the commercial
development of oil, natural gas, or minerals” and
“the type and total amount of such payments
made to each government.” Further, certain
delineated information must be included, with
“electronic tags”: (i) total amount of payments,
by category, (ii) currency in which the payments
were made, (iii) financial period in which the
payments were made, (iv) the business segment
of the Resource Extraction Issuer that made the
payment, (v) the government that received the
payment and the country in which the
government is located, (vi) the Resource
Extraction Issuer’s project to which the payment
relates, and (vii) any other information the SEC
determines “is necessary or appropriate in the
public interest or for the protection of investors.”
If complying with all of the above were not
enough of a challenge, an additional note of
caution is due. The SEC has been directed, “to
the extent practicable,” to make a compilation of
the above information available, on-line, to the
public, which inevitably will include competitors,
investors, and those charged with enforcement of
other laws and regulations, such as the Foreign
Corrupt Practices Act.
While the Dodd-Frank Law is broadly worded
and appears to cover many of the typical
situations, like any law, it isn’t completely
comprehensive in its explanations and guidance.
For example, no definition is provided for
“Federal Government,” leaving one to ponder
whether payments to particular entities, including
American Indian tribes and independent agencies
(such as compact river basin commissions)
affiliated with the U.S. government, trigger
disclosure. Similarly, are payments to a
provincial or state-level government of a foreign
government reportable? What constitutes a “de
minimis” payment? Are permit application fees
included in the scope of “payments”? And, what
if a Resource Extraction Issuer’s contractor (such
as a drilling company) makes certain payments to
a foreign government -- who is required to make
the disclosure? What if the contractor is not a
publicly-traded company?
If you have any of these questions, or others
about the impact of the Dodd-Frank Law on
Resource Extraction Issuers, or questions about
the firm’s Oil and Gas practice group, please
contact one of the authors.
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K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named
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Oil & Gas Alert
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This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
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