Options for Operationalising Transparency in Commodity Trading Transactions

4. Setting out expectations on payment disclosure by buying companies: Options for host governments and SOEs

Alongside actions that could be taken by home governments, trading hubs, free zones, commodity exchanges and industry associations to operationalise transparency, host governments and SOEs have an important role to play to ensure a level playing field for the disclosure of payments to governments for the purchase of publicly-owned commodities. This may include the adoption of a disclosure policy by host governments and SOEs and the inclusion of specific disclosure obligations in commodity sales contracts. These options are complementary and mutually supportive as a disclosure policy clarifies expectations at the outset, and contractual obligations would reinforce the case for transparency and avoid any subsequent ambiguity.

The EITI has also recognised the importance of transparency measures undertaken at the producer country level. In September 2020, the EITI published specific guidelines for buying companies to encourage increased disclosures under EITI Requirement 4.2(c). The guidelines aim to ensure consistent disclosures of payments to the state or SOEs where oil, gas or minerals are being sold on behalf of the state and where EITI Requirement 4.2 is applicable and relevant, or where there is commitment to transparency in commodity sales.

Consequently, the scope of the EITI Guidelines includes:

“purchases from SOEs in EITI and non-EITI countries1 where the state or SOE have explicitly or publicly stated their support for buyers disclosing information on the selling entity’s sales, have reflected this in their general terms and conditions for the sale of commodities, or where disclosures of volumes and values of sales are already being made in cooperation with the seller” (EITI, 2020[12]).

In order to assist buying companies to comply with disclosure policies adopted by governments and SOEs, the EITI Secretariat maintains a list of SOEs in EITI countries where EITI Requirement 4.2 is applicable, or where the EITI is aware of other factors2 that suggest that disclosure policies exist (EITI, 2020[12]).

The adoption of a disclosure policy by host governments and SOEs can help to clarify expectations at the outset, as buying companies not only become aware of host governments’ and SOEs’ position on transparency of payments, but can also anticipate any future payment disclosure obligations prior to entering into an agreement to purchase publicly-owned commodities.

The inclusion of disclosure obligations in commodity sales contracts can reinforce the objectives set out in the disclosure policy and avoid any ambiguity as to exactly what information is subject to disclosure requirements. Where possible, these disclosure obligations should align with relevant international standards and should consist of model clauses applicable across all contracts to ensure comparability and to reduce the implementation burden for the government and SOEs but also for buying companies.

Adoption of disclosure policy by host governments and their SOEs

Host governments and SOEs may adopt policies that encourage or require buying companies to disclose information on the payments to governments related to commodity trading transactions.

Such policies can contribute to the creation of an environment where expectations around transparency of payments are clarified at the outset and where commodity sales contracts are entered into with the understanding that payments made to governments for the purchase of oil, gas and minerals will be made public. The adoption of a specific disclosure policy can be a catalyst for building the confidence of buying companies with respect to the disclosure of payments.

A clear disclosure policy can also create a level playing field where there are multiple buying companies purchasing commodities in the same producer country, as the policy can act to avoid selective disclosures or inconsistencies between different buyers. The equal treatment of buyers can also contribute to building trust between the buyer and the seller.

Furthermore, the adoption of a disclosure policy by a host government or SOE can also support the implementation of a global standard on payment disclosure or the operation of self-regulatory approaches by creating a consistent regulatory playing field and address any concerns regarding possible conflicting requirements on disclosures between host and home jurisdictions where the home jurisdiction of a buying company mandates sales payment disclosure. For example, the Nigerian National Petroleum Corporation’s model contract for sale and purchase of Nigerian crude oil provides an exception to its confidentiality provisions, where “such data and information must be disclosed pursuant to any rules or requirements of any government or stock exchange having jurisdiction over such party” (NNPC, 2011[38]). In another example, Saudi Aramco’s general terms and conditions for sales and purchases of petroleum products allow for the publication of confidential information where “such disclosure is required by law or by any securities exchange or regulatory or governmental body or fiscal authority having jurisdiction over it, wherever situated” (Saudi Aramco, 2011[39]).

In terms of the implementation of a disclosure policy, host governments considering this option should ensure that such disclosure policies are clearly communicated to buying companies and other stakeholders in advance of adoption, and ideally in advance of the contract or prior to any contractual negotiations. This can help to build support for the policy to ensure that it is adhered to by relevant buyers of commodities. Once a disclosure policy has been adopted, host governments should ensure that the policy is applied consistently to all transactions and to all companies that are purchasing publicly-owned oil, gas and minerals in their jurisdiction. For example, over 50 different buying companies in Iraq have disclosed their payments to governments in accordance with the disclosure policy of the Iraqi Government – see Box 4.1.

A policy on the disclosure of payments to governments from buying companies can be adopted by either the government or the SOE. In cases where the disclosure policy is adopted by the SOE, it may be beneficial for the government to provide public support or affirmation for this policy.

Box 4.1. Disclosure policy in Iraq

In 2008, the Government of Iraq joined the EITI. As part of its implementation of the EITI Standard, the Iraqi government committed itself to publish all revenues from its export sales of crude oil. In addition, the government would also implement a policy to require all buying companies that purchase Iraqi crude oil to participate in the EITI process by disclosing details of their purchase of publicly-owned crude oil from the Iraqi SOE, State Organization for Marketing of Oil (SOMO).

In 2013, Iraq’s 2010 EITI report was released. This report provided details on the sale of Iraqi crude oil to 35 international buyers, and was the first EITI report to include reconciled data on the sale of publicly-owned oil, as Iraq was the first country to require buying companies to disclose cargo-by-cargo data on their purchases in EITI reports. In 2021, Iraq’s 2018 EITI report was released. This report provided details on the sale of 1 116 751 349 barrels of Iraqi crude oil to 54 international companies with a total value of USD 73 408 922 662 (IEITI, 2021[40]).

When the disclosure policy was first adopted, several buying companies indicated a reluctance to disclose this information. However, since 2010 approximately 50 international buying companies and refineries have disclosed details of their purchases of crude oil from SOMO. Subsequently, both the Iraqi authorities and the buyers have noted the positive effect of these disclosures on the reputation of buying trading companies.

Source: (IEITI, 2016[41]), (OECD Development Centre, 2018[42]).

Inclusion of disclosure obligations in commodity sales contracts

An option for SOEs to facilitate increased transparency by buying companies is to include specific clauses in commodity sales contracts that require buying companies to disclose information in respect of their payments to governments.

In this scenario, it is important for SOEs to communicate to potential buyers well in advance of any negotiations or competitive tenders that specific transparency obligations will be set out in the sales contract.

Ideally, SOEs should set out model provisions in their sales contracts to ensure that all buyers are treated equally and that expectations around disclosure obligations are clearly understood prior to entering into the commodity sales contract. The use of model contractual provisions can help prevent the SOE from having to negotiate specific disclosure requirements with each potential buyer, which could lead to a fragmentation of disclosure obligations for different companies, and could increase the compliance burden.

The inclusion of specific clauses in commodity sales contracts requiring buying companies to disclose information on payments to governments may also align with other options for enhanced transparency in commodity trading. For example, if a buying company was required to disclose information on payments to governments as a consequence of legislation enacted by a home government or trading hub, or through obligations imposed by a free zone, commodity exchange or industry association, that company’s domestic obligations would then align with its contractual obligations with the SOE. In Iraq, the model crude oil sales agreement, specially incorporates the EITI framework as a means to give effect to disclosure obligations – see Box 4.2.

Box 4.2. Contractual disclosure obligations in Iraq

In Iraq, a model clause is set out in crude oil sales agreements between the SOE SOMO and buying companies purchasing Iraqi crude oil. Section 1, Article 7 of the Heads of Export Oil Sales Agreement for the [Area] Contract Area Between Oil Marketing Company of the Iraqi Ministry of Oil And [buyer] provides that:

“Without prejudice to the General Terms and Conditions of this agreement, the Second Party will be committed to the requirements of the Extractive Industries Transparency Initiative (EITI) by confirming the price paid for crude oil under this agreement and taking such other reasonable measures as may be agreed between the Parties.”

Source: (Ministry of Oil (Iraq), 2018[43]).

In order to facilitate the uptake of the contractualisation of transparency obligations and to increase the disclosure of information in respect of payments to governments for the purchase of oil, gas and minerals, the EITI is supporting SOEs in reviewing the general terms and conditions of their commodity sales contracts and is providing guidance on the drafting of model disclosure provisions (EITI, 2020[12]).

Notes

← 1.  Non-EITI countries refer to countries that do not implement the EITI Standard.

← 2.  These include: where the government or SOE has stated their support for buying companies making disclosures or have reflected this in the general terms and conditions in their commodity sales agreements; where disclosures are already being made to the public; and where the Secretariat is aware of the existing practice of disclosures of volumes and values of sales by SOEs.