Oil is dirty. It stinks, in fact. The very smell of crude, in its unrefined capacity, will turn one’s stomach, and exposure over a prolonged period of time is fatal. Similarly the market, which has long poisoned itself by corruption and wheeler-dealing, has struggled to better its image. From the early days of the industry, when pseudo-colonialist William Knox D’Arcy at the Anglo-Persian Oil Company signed poverty-stricken and tribal war-torn Iran up to a long-term contract that would see the country take just 16% of its oil profits, arrangements between governments and international oil companies have at times been shady.
Corruption has become rife in countries reliant on newly-found natural resources and whose economies are less well-developed, according to the Organisation for Economic Co-operation and Development. As drilling and operational licences are awarded, a dash-and-grab for the newly-swilling cash takes place. A recent high profile example took place in Ghana in 2014, when the majority of new licensing rounds at the country’s massive and thought-to-be-lucrative Jubilee oilfield were distributed to a collection of small Nigerian operators with little or no offshore exploration experience. The oil world – and those truly international oil companies interested in the field – raised an eyebrow. Jubilee’s history is littered with similarly curious awards, but that’s what makes it sit in the market so easily.
This came to mind recently when a US anti-corruption rule was struck down by president Trump and congressional Republicans. At the beginning of February, the Congressional Review Act was invoked to alter the Cardin Lugar amendment that requires oil, gas and mining companies listed on US stock exchanges to disclose what they pay to foreign governments. The idea behind the rule was to help expose those foreign leaders and consultants prone to generously skimming from the substantial payments made to their governments over new and existing energy contracts.
It seemed like a sensible piece of legislation. The European Union has a similar disclosure law, as does Canada and a number of other nations, and the Extractive Industries Transparency Initiative, which largely covers similar criteria and is fairly well supported across the industry, is voluntary. With more than 80% of the world’s largest oil and gas firms registered as listed bodies, building a transparency framework around them to combat corruption looked like a decent place to start.
America, US president Donald Trump has said, had “made other countries rich, while the wealth, strength and confidence in our country has dissipated”. From then he started to instigate a number of policies – including dismantling Cardin Lugar – that would encourage a strong foreign and domestic energy strategy. His speech a day after his inauguration at the CIA’s headquarters: The US had “got it wrong” when it left Iraq. “If we kept the oil you probably wouldn’t have Isis, because that’s where they made the money in the first place. But OK, maybe we will have another chance. The fact is we should have kept the oil.”The repeal received widescale backing within the US oil and gas industry, with the American Petroleum Institute and Rex Tillerson, the newly installed secretary of state, its most high-profile proponents. They argued that the rule would put US energy firms abroad at a competitive disadvantage if payments were to be disclosed.
Making the business of oil easier for US companies abroad is central to Trump’s America First Energy Plan, but the decision to abort transparency does anything but that. Good risk managers at US energy firms will know that
Making the business of oil easier for US companies abroad is central to Trump’s America First Energy Plan, but the decision to abort transparency does anything but that. Good risk managers at US energy firms will know that.
The inherent misunderstanding surrounding the Cardin Lugar repeal is the idea that a domestically regulated energy firm operating abroad faces more risk than a firm operating under greater regulatory freedom. Should management believe that corrupt acts abroad are admissible at home, chances are they will occur.
Shareholders care less about the long-term health of a company, and many corporates are all too aware of that. Should management – in the shape of an errant employee or team looking to please in the face of the might of shareholders – offer cash for contracts to high-ranking government officers in corrupt states, the company could become tarred with the same corrupt brush on international markets. It’s a reputational risk that can be as damaging as an oil spill, slipping behind competitors in the technological stakes, or misreporting financials. Poor corporate behaviour of any nature – whether it’s actionable or not by a domestic regulator – spells trouble on every level.
US listed firms will have the exposure to these risks that those trading in other regulated markets – such as the EU or Canada – do not have. Freedom comes at a cost. Just ask those who have been found to be abusing the right.