By Tom Mitro, Co-Director, Global Energy, Development & Sustainability Certificate, University of Houston
The Extractive Industries Transparency Initiative has little impact on the U.S. domestic oil and gas industry but has been transformative in some parts of the world. So why did the U.S. pull out?
Last week, the U.S. government officially withdrew its membership from the Extractive Industries Transparency Initiative (EITI). On the surface, this sounds like another of the Trump administration’s efforts to disentangle the U.S. from costly “bad deals” made through “big government overreach” in trade treaties, climate change agreements, or military and economic assistance whose benefits may not be worth the tradeoffs in costs, troops and economic growth. But that is not the case with EITI.
EITI is a voluntary coalition of 53 countries and more than 80 large corporations (including ExxonMobil and Chevron) plus more than 30 civil society groups and international organizations (like the World Bank) committed to adhering to standards to increase transparency around payments made to governments in oil, gas and mining activities. EITI was designed to serve in lieu of government-imposed requirements. In fact, the American Petroleum Industry successfully argued that by virtue of its member companies’ active participation in EITI, the disclosure requirements mandated by the Dodd-Frank Act were not necessary.
EITI participation carries very little cost, no real downside risk and the potential for great benefits. It has virtually no impact on the operations or profitability of the U.S. domestic oil and gas industry. But not participating in EITI has the potential to destroy U.S. international credibility and leadership on a range of issues.
More on these points later, but a simple example might help explain what EITI is all about. Suppose you make $1,000 per month in rent payments ($12,000 for the year) to your landlord, but your landlord tells you and the IRS that he received only $10,000. Wouldn’t it be worth keeping clear track and regularly comparing the amount of rent paid and received so that you can make sure you don’t overpay on your rent and that the government receives the correct amount in taxes? EITI standards reflect the exact same principle – in this case, the oil, gas and mining companies voluntarily commit to track and disclose the amount of royalties and taxes they pay to various governments, and in turn each participating government agrees to disclose what it has received from the companies. It’s actually quite simple. Why is this so important?
In the U.S., the rights to oil and gas can be owned by individuals, states, tribes or the federal government. These various mineral rights owners receive royalties from the companies that produce the oil and gas. In addition, most state governments are paid “severance” or production taxes based on the value of that production. Such a variety of individuals and government entities benefiting directly from oil and gas production ends up providing a strong degree of checks and balances that ensure that financial benefits are in line with agreements and the law.
But in virtually all other countries in the world, the rights to oil and gas are owned exclusively by the national government, so 100% of these payments are funneled to a single central government entity. Consequently, in the absence of strong democratic countervailing checks and balances, the central government and individual officials grow to be much more powerful, which creates a greater potential for abuse of that power, conflicts of interest and corruption.
One proven way to protect against misuse of those funds is by greater public disclosure and transparency with respect to what was produced and the financial benefits that were derived by the government. Not only does this help reduce corruption, but it helps citizens independently assess whether funds were spent and allocated wisely and equitably – an essential element for any democracy.
Numerous studies have demonstrated that oil and gas and mining have led not to greater prosperity but have instead resulted in less diversified economies, boom and bust cycles, and greater regional and ethnic strife. One of the factors leading to those results has been the corruption that often accompanies the large flows of funds into centralized coffers, which is often enabled by governments and companies agreeing to restrict public information of the amounts involved. Referring to conflicts in Iraq, Syria, Nigeria, South Sudan, Ukraine and the East and South China Seas, Michael Klare, professor of peace and world security studies at Hampshire College, has summed it up: “It would be easy to attribute all this to age-old hatreds, as suggested by many analysts; but while such hostilities do help drive these conflicts, they are fueled by a most modern impulse as well: the desire to control valuable oil and natural gas assets. Make no mistake about it: These are 21st-century energy wars.”
The Extractive Industries Transparency Initiative began in 2003 when members established the first set of principles; and the number of member countries and organizations has grown substantially along with refinement in the standards and disclosures that members pledge to follow. Many member countries long had poor track records for corruption. In order to comply with EITI standards they had to collect and publish detailed data on the moneys received from oil and gas and mining. Member oil and mining companies also began to publish what they paid to those governments as a means of comparing and verifying. Compliance with these mutually agreed standards have made it much more difficult for corruption and its attendant impacts to thrive in many parts of the world.
If reducing corruption contributes to reducing conflict over energy, why wouldn’t the U.S. government and businesses prefer to hire a hundred extra accountants whose impact on reducing corruption and conflict might reduce the need for deploying and potentially endangering hundreds of U.S. troops? Of course, the choices and consequences are not quite as simple as that. So what did the U.S. consider in making its decision to not withdraw?
The coordinating U.S. agency, the Department of the Interior, suggested that EITI disclosures might violate business confidentiality and that some outlying U.S. companies were unwilling to participate. Most feel these issues can be overcome, especially if participants can better understand the public support for doing so and the greater benefits.
Corruption within the U.S. domestic oil and gas industry has not been seen as a significant risk, so U.S. participation in EITI can be viewed as more of an international leadership question rather than necessarily addressing a problem within the U.S. The Office of the Attorney General states, “The U.S. Government has long had a management system featuring numerous controls and protections to oversee natural resource extraction, which helps reduce the risk of corruption.” Inspector General Report on US EITI Compliance
But illustrating the point using a simple example, if you constantly admonish your friends and family for not eating their broccoli while at the same time munching away on a candy bar, then your views on nutrition lose believability. And this quickly erodes the credibility of your counsel and advice on other topics in this example, such as financial matters or family and neighborhood conflicts.
Finding a way to actively participate in anti-corruption initiatives can highlight the U.S. example for the rest of the world and at the same time be good for business. A coalition of ninety-plus institutional investors and pension funds have proactively endorsed the EITI approach as being good for encouraging investment in the oil and gas and mining sectors. So, by withdrawing from EITI the U.S. has yielded an opportunity for influence and leadership in this and other arenas. Now is the time before it’s too late for the U.S. to re-establish a form of leadership and influence that requires no troops, no financial aid, and no sacrifice of economic growth – in short, “an unbelievably good deal”.
Tom Mitro is co-director of the Global Energy, Development and Sustainability Graduate Certificate at the University of Houston and a visiting lecturer at the UH Center for Public History. He spent 30 years in senior international management roles in the oil industry and another decade as an advisor to governments and national oil companies in Africa.