On December 16, 2020, the U.S. Securities and Exchange Commission adopted final rules to require certain publicly reporting oil, natural gas and mineral companies to disclose payments made to the U.S. federal government or to foreign governments for the commercial development of oil, natural gas or minerals.

The SEC originally adopted rules related to this topic in August 2012, but those rules were subsequently vacated by a federal court in July 2013. In June 2016, the SEC issued revised rules; however, those rules were later disapproved by a joint resolution of Congress in February 2017 pursuant to the Congressional Review Act, primarily amid concerns about issuers’ compliance costs and potential competitive harm. In December 2019, the SEC released its third and most recent proposed set of rules, which largely provide the basis for the new final rules described in this update.

Who is Covered by the New Rules?

The rules apply to “resource extraction issuers,” which are companies that are required to file annual reports with the SEC and that engage in the commercial development of oil, natural gas or minerals. The phrase “commercial development of oil, natural gas or minerals” includes, among other things, exploration, extraction, processing, export and other significant activities relating to oil, natural gas or mining.

As a result, the new rules will cover nearly all publicly reporting companies in the U.S. that are engaged in upstream oil and gas activities, as well as some companies engaged in gathering and processing or other midstream activities. Oilfield services companies and companies engaged in downstream activities should be excluded. The rules also cover publicly reporting companies engaged in mining activities.

In an attempt to further clarify which activities are covered by the new rules, the SEC explained that the activities must be directly related to the commercial development of oil, natural gas or minerals, and not ancillary or preparatory to such activities. Companies that only provide products or services in support of exploration, extraction, processing or export of such resources are not covered by the rules. For example, companies that only manufacture drill bits or provide hardware to other companies to explore and extract resources, as well as companies engaged by an operator to provide hydraulic fracturing or drilling services to enable the operator to extract resources, will not be covered by these rules. Marketing and security-related activities are also excluded. 

On the other hand, the rules do apply to companies engaged in processing oil and natural gas, which includes activities such as removing liquid hydrocarbons from natural gas, removing impurities from natural gas prior to transport through a pipeline and the upgrading of bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are either sold to an unrelated third party or delivered to a main pipeline, a common carrier or a marine terminal. For mining companies, processing also includes the crushing or preparing of raw ore prior to the smelting or refining phase.

Finally, the rules contain certain exemptions for smaller reporting companies, emerging growth companies, issuers that have recently completed an initial public offering in the United States, as well as recently acquired companies.     

What Types of Payments are Covered by the New Rules?

A wide range of payments will require disclosure under the new rules. In general, any kind of payment made to a federal or foreign government to further the commercial development of oil, natural gas or minerals will require disclosure. This includes taxes, royalties, fees and bonuses, dividends paid to a government in lieu of production entitlements or royalties, infrastructure payments, community and social responsibility payments and any payments made in-kind in lieu of cash for such listed items. The rules include a de minimis exception for amounts less than $100,000. In addition, although the December 2019 proposed rules included a requirement that aggregate payments for a project must exceed $750,000 before disclosures would be required, that element of the threshold was rejected in the final rules in favor of the flat $100,000 threshold.

What Types of Projects are Covered by the New Rules?

The disclosure of payment information described above is required for each “project” by a company that is subject to the new rules. When disclosing the information for each project, companies will be required to identify (1) the type of resource being extracted, (2) the method of extraction and (3) the major subnational political jurisdiction where the activity is taking place. The rules contain substantial commentary about the scope and limits of each of these disclosure items.

The new rules also provide certain exemptions from disclosure in situations where a foreign law or pre-existing contract prohibits the required disclosure.

How Will these New Disclosures be Made?

The required disclosures will be made annually on Form SD and must adhere to XBRL interactive data format. The Form SD will be due no later than 270 days following the end of an issuer’s most recently completed fiscal year.

An issuer that is subject to similar disclosure requirements in certain foreign reporting regimes may, in lieu of providing a separate report on Form SD, submit the foreign report on Form SD. In that case, the foreign report must comply with additional SEC requirements designed to ensure adequacy of the disclosures made therein. However, the SEC noted that the current resource extraction payment disclosure requirements of the European Union, United Kingdom, Norway and Canada would satisfy the objectives of the rules.

When are the New Rules Effective?

The new rules will be effective 60 days after the publication in the Federal Register; however, the new rules include a two-year transition period. As a result, companies will not be required to comply with the new rules until at least two years after they become effective. For example, if the new rules were to become effective on March 1, 2021, the compliance date for an issuer with a December 31 fiscal year-end would be September 30, 2024 (i.e., 270 days after its fiscal year end of December 31, 2023).

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