The U.S. financial sector has gone through dramatic changes since the financial crisis four years ago. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act has imposed a variety of new restrictions on the industry.
To this point, however, the energy sector has managed to avoid the harshest rules, managing to secure the so-called end-user exemption for many of the clearing requirements on energy company's use of certain complex financial products.
But Reuters reports that this string of good fortune came to an end late in August with the approval of a new set of rules from the U.S. Securities and Exchange Commission that requires oil and mining companies to carefully detail certain overseas payments.
Insider trading to conflict minerals
The SEC is primarily responsible for regulating the country's massive equities markets to ensure honest reporting and trading standards. It concerns itself primarily with the financial well-being of the U.S. economy and most of its responsibilities under the Dodd-Frank Act concern the operation of the country's markets.
The massive act included a few other measures, though, tacked on later in the process. These included everything from restrictions on the fees charged by banks to process debit card transactions to requirements that companies registered on exchanges in the U.S. certify that they are not using so-called conflict minerals.
These materials – first coming into the public consciousness as "blood diamonds," but actually ranging from gold to tin to tungsten – are often extracted through forced labor and can go to fund warlords in several war-torn countries in central Africa.
Dodd-Frank hopes to curtail this problem, and potentially help contain the violence in this region, by requiring that companies certify that materials that they use are not going to support conflicts.
The New York Times notes that this role puts the SEC in an unfamiliar position of having to enforce humanitarian rules, and, notably, rules that apply to all of the country's roughly 6,000 publicly traded companies.
Complications for oil exploration
U.S. oil companies actually have a strong incentive to want to support stability Africa beyond humanitarian concern, since many of these firms have begun operating in regions nearby. Some oil exploration workers have fallen victim to these conflicts, with several Chinese oil rig workers being rescued at the end of August.
However, The New York Times notes that these companies will also be forced to detail payments they made to foreign governments in an effort to reduce corruption. This will include any payments made in securing oil and gas exploration rights.
While this information should certainly prove useful in discouraging companies from bribing government officials, it will also put American firms at a major disadvantage to foreign firms that do not need to release this information. When making bids on new exploration blocks, other companies will be be able to determine exactly what these firms have spent on other projects, allowing them to tailor bids that could prove more competitive.
"Unfortunately, disclosure would not be a two-way street," John Felmy, chief economist at industry group the American Petroleum Institute, told Reuters. "State-owned foreign companies would have to reveal nothing and might even be favored for projects in host countries reluctant to have financial information disclosed."
The only small victory won by the industry in softening the rules was that they will be able to ignore certification requirements on any recycled materials, which should ease some of the compliance costs.