Watching Every Last Cent: New Tools for Monitoring Oil and Mineral Revenues

Posted by WGEI On Aug 31, 2018

Every year, mining, oil and gas companies pay hundreds of billions of dollars to governments around the world. However, many countries rich in natural resources fail to translate this resource wealth into economic growth. Between 2010 and 2015, we estimated that oil produced in developing countries alone amounted to about $1.55 trillion in government revenue. But the secrecy around these deals prevents citizens and regulators from tracking these monies to make sure they are spent on reducing poverty.

Unfortunately, revenue risks in the sector are many. Companies can easily employ various forms of tax avoidance and other tactics to minimize or potentially withhold payments due to the state.  Company payments can be siphoned off as bribes or other illicit flows, completely bypassing government coffers. Once payments have been made to central government, they can also disappear during transfers to subnational governments. Governments must demonstrate to citizens that they are confronting these risks and using all strategies available to avoid revenue leaks and capture all potential revenues due to the state from the sale of scarce natural resources.

Thankfully, global transparency norms are changing and government regulators, such as SAIs, have a new suite of tools to fight for every last cent of their country’s oil and mineral wealth. After almost 15 years, Oxfam and its allies in the Publish What You Pay coalition were successful in achieving a new global norm of oil, gas and mining transparency. Since 2010, payment disclosure laws have been passed in the US, EU, Norway, the UK and Canada, requiring companies listed on stock exchanges (and in some cases incorporated within these markets) to publicly disclose their payments to governments in all countries where they operate. All countries listed (except the US) have enacted their laws, providing regulators with a treasure trove of new data for revenue risk analysis. The Extractive Industries Transparency Initiative (EITI), which is now being implemented by over 50 countries, requires transparency of project payments and receipts, subnational revenue, national oil and mineral company revenue, beneficial ownership and more. For the first time ever, we have access to detailed information regarding some of the most important transactions in the world.

Why is this information unique and why should SAIs care?

In the case of corporate project payment disclosure, the data provides a unique window into project payments by companies for specific contracts, and to specific government entities. Payments are disclosed annually by government entity paid and according to the company contract giving rise to the payment. This allows analysis of the revenue inflows to specific ministries, national oil, gas or mineral companies or subnational governments. In cases where a certain percentage of company project payments must be distributed by law to a subnational government, these disclosures can allow the calculation of the transfer amounts, and comparison to subnational government receipts to identify whether money has disappeared in the transfer. Similarly, payments to ministries and national oil companies can be analyzed in conjunction with budget allocation and forecasting plans for each government institution receiving payments. In cases where a certain oil and mineral project accounts for a large share of a government’s revenue, this data may be of significant value. The information is also unique due to its author – the company department with reporting liability to securities or financial regulators in their home market or financial market. The quality of the data, its authorship, its reporting regularity and the disaggregation of the data are valuable features that make it unique.

Online platforms now exist to make finding these new disclosures easier. This newly available data is now being used in resource rich countries around the globe. One key use of the disclosures is to compare the disclosed payment data with government reports regarding the receipt of funds. In countries implementing the EITI, this payment reconciliation regularly occurs on a project by project basis. However, these new disclosures also provide us with information in non EITI countries.

recent report by Global Witness provides additional guidance on how to use EI company payment data for a range of analyses that can identify red flags, including verifying royalty payments, assessing fair market commodity value, assessing reasonableness of profit taxes or confirming high-risk one-time payments. Indeed, civil society in many countries is undertaking analysis using the newly available project-level disclosures to query government, conduct investigations, inform public debate and demand accountability.

Data at work: Reconciling corporate and government payment data in Uganda’s oil sector

Corporate payment disclosures are particularly helpful in Uganda, where citizens do not have access to such information domestically. Civil society organizations in Uganda were able to use oil company payment disclosures to cross check receipts reported by the Bank of Uganda. Uganda’s Public Finance Management Act created a Petroleum Fund designed to receive all oil-related revenues, and requires the relevant minister to table reports to parliament including “the source of the petroleum revenue”. Therefore, in 2016 for the first time, the Bank of Uganda reported on the source of deposits into the Petroleum Fund. Unfortunately, the fiscal year used by the Bank of Uganda for reporting differs from that of the companies.

Using the available information, civil society groups compared Bank of Uganda disclosures alongside 2015 payment data disclosed by Tullow Oil and French oil supermajor Total. According to their analysis, the government did not report approximately US$14 million in payments disclosed by Tullow and Total. This may have been because the payments were transferred by the Ugandan government into its temporary oil revenue holding account, for which the government did not disclose receipts. Tullow suggested that it may be because the Ugandan government does not consider some of the payment types shown in Tullow’s disclosures to be oil revenues (VAT, withholding taxes, national insurance, etc).

No matter the case, civil society organizations in Uganda used this information later when presenting to the Public Accounts Committee of Parliament during the so-called “Presidential Handshake” controversy. Civil society used this information to argue for more clarity in Petroleum Fund reporting as well as tighter controls regarding all deposits into and withdrawals from the Fund.

Data at work: Evaluating uranium contract negotiation outcomes in Niger

The payment data published by Areva makes possible an initial assessment of the negotiations that took place between Areva and Niger in 2014 when renewing uranium contracts. While civil society hoped to see increased revenues from uranium extraction after this historic agreement, the conclusion is quite clear: the negotiation did not lead to increased payments by Areva to Niger to extract uranium. Nigerien uranium accounts for nearly 30% of the French company’s production but Niger receives only 7% of Areva’s payments to producing countries. The information published by Areva suggests that the new pricing formula applied to the royalty fees could have resulted in a 15 million euros decrease in royalty fees paid to Niger. It also indicates that Areva’s uranium exports from Niger to France could be undervalued compared with prices for Nigerien uranium exports by other companies, which may have reduced Areva’s contributions by between 10 million and 30 million euros in 2015. This information and analysis was recently published in the 2017 report Beyond Transparency: Investigating the New Extractive Industry Disclosures.

From payment to contract disclosure: Seizing new opportunities for accountability

Civil society and other accountability actors such as SAIs can now effectively monitor extractive industry revenue payments to ensure that the maximum amount of revenue is equitably and efficiently returned to the citizenry in the form of high quality public goods and services. However, to analyze payments it is necessary to understand the original terms and fiscal regime agreed upon by the government and company during contract negotiations. Contract disclosure is essential to make full use of payments being disclosed.

For this reason, Oxfam and ally organizations such as NRGI have been advocating for widespread contract disclosure in the global extractive industries. Thanks to these efforts, contract disclosure is an emerging global norm. To date, nearly 1,600 contracts from oil, gas and mining projects in 90 countries are publicly available. Governments are leading the charge as well. Twenty-six (26) countries now have mandatory contract disclosure laws including INTOSAI- WGEI members such as Ghana, Mozambique, Niger, Senegal, Sierra Leone and Tanzania. Contract disclosure in the extractive industries has also been endorsed by the IMF and is required by the World Bank’s IFC and the European Bank for Reconstruction and Development for its private investments in oil, gas and mining.

A significant group of oil and mining majors now support contract disclosure in some form. According to Oxfam’s recently published Contract Disclosure Survey, 18 oil and mining companies have made statements in support of contract disclosure. These include oil companies such as Total, BP, Shell, Equinor (formerly Statoil), Petrobras, Kosmos Energy, Tullow Oil, and mining companies such as BHP Billiton, Rio Tinto, Newmont Mining, Barrick Gold and Vale, among others.

Contract disclosure paired with reports on payments to governments allow for robust analysis of extractive industry activity in a given country. In several countries, Oxfam and ally organizations have used disclosed contracts to undertake economic analysis of a range of projects to assess fiscal regimes, project revenues and highlight risk areas. Recently, Open Oilanalyzed a recently negotiated agreement between ExxonMobil and the government of Guyana. The economic modellinggleaned several important insights including one major conclusion that Guyana’s shares of profits agreed to in the contract is “outlier low.”

With such progress, Oxfam is now focused on getting the data to those who need it most. This data could be incredibly useful to national accountability institutions including SAIs. Alongside civil society, SAIs could benefit from this information for analytical purposes and risk assessments when conducting audits in the extractive industries. In this way, these data sources could supplement nationally available information and provide a credible point of comparison. Oxfam encourages SAIs to make use of these new disclosures as another important tool for ensuring accountability from both companies and governments in resource rich countries.

By Isabel Munilla and Kathleen Brophy – OXFAM America

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