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1Copyright ©2012 Sullivan & Cromwell LLP

United Nations Economic Commission for Europe Expert Group on Resource Classification

Third Session, Geneva 2-4 May 2012

Transparency Imperative

New Disclosure Requirements for Natural Resource Companies

Kathryn A. Campbell

Sullivan & Cromwell LLP


New Disclosures Impacting Oil and Gas and Mining Companies

• Oil and gas and mining companies are the custodians of strategically important natural resources and their operations and activities can have a significant impact on the environment, the economy and people

• Growing emphasis on sustainable development alongside economic growth and prosperity

• Disclosure requirements for reporting companies are putting greater focus on environmental and social responsibility


Recent Events

• Recent major oil spills and gas leaks highlight significant environmental and safety risks

• Emerging importance of unconventional resources has led to a heated debate about the environmental risks associated with extraction methods

• Political tensions and instability in certain oil producing countries have heightened the concerns about the activities of international oil companies in those areas


Environmental Issues

• The SEC has for many years required oil and gas companies to make disclosures about the potential costs of environmental regulation and litigation

• Recently they have directed companies to discuss the potential impact on their business of climate change matters

• the impact of new regulation, particularly greenhouse gas regulation

• the consequences of technical and scientific developments and demand for goods that result in lower GHGs

• the impact of new international standards• the physical impact of climate change


Environmental Issues

• SEC comment letters during 2011 questioned the adequacy of disclosures by oil and gas companies of their oil spill preparedness and the potential changes to business as a result of regulatory and legislative responses to the Deepwater Horizon incident and the impact on liquidity

• The SEC also asked registrants that employ hydraulic fracturing to disclose details regarding the chemicals and processes used, water management, the risks of environmental contamination and steps taken to minimise potential environmental impact

• Companies involved in production from oil sands have provided additional disclosures about the methods employed and the environmental concerns

Continued


Dodd-Frank Disclosure Requirements

• Various new disclosure requirements relevant to the natural resources industry are contained within the recently enacted Dodd-Frank Act, a statute whose main purpose was to address problems in the financial services industry


Payments to Governments by Resource Extraction Issuers

• Dodd-Frank requires that the SEC adopt rules requiring any reporting issuer that engages in the commercial development of oil, natural gas or minerals to disclose any payments made to the U.S. or non-US governments for the purposes of commercial development of oil, natural gas or minerals • The US is one of several countries that supports the

Extractive Industries Transparency Initiative• The EU has proposed similar disclosure requirements


Payments to Governments by Resource Extraction Issuers

• The SEC released its proposals for their rules in January 2011 but has yet to adopt final rules. If adopted as proposed, the rules would require disclosure of the following for each project:• The type and total amount of payments for each project• The type and total amount of payments made to each

government• The total amount of payments by category (taxes, royalties,

fees, etc)• The government that received the payments and the

country in which the government is located• The currency used and the financial period in which the

payments relate

Continued


Mine Safety

• All SEC-Reporting companies that, directly or through subsidiaries, operate a coal or other mine located in the US and otherwise are subject to the US Federal Mine Safety and Health Act of 1977 (the “Mine Act”), are now required to make disclosures regarding mine safety, health citations, imminent danger orders, penalty assessments, mining-related fatalities and pending legal actions

• These new disclosures are to be contained in mine safety reports and filed with each quarterly and annual report

• In 2011 the SEC began to issue comment letters to mining companies about the adequacy of these disclosures seeking addition information about the costs and financial impact of the disclosed violations or compliance programs


Conflict Minerals

• Dodd-Frank requires SEC reporting companies to disclose whether their products use minerals that originated in the Democratic Republic of Congo or its adjoining countries, if those minerals are necessary to the functionality of the products (this includes packaging but not necessarily the tools to manufacture the product)

• “Conflict minerals” currently include gold, tin, tungsten and tantalum which are used in a wide array of products. It could also include any other mineral determined by the US Secretary of State

• If any such products are identified, under the proposed SEC rules the company will be required to conduct a reasonable country of origin inquiry and report to the SEC whether their conflict minerals were sourced from the DRC, adjoining areas or unknown areas – such reports to be audited


Sanctioned Countries

• Although there is currently no specific disclosure rule, the SEC has required non-US companies to provide detailed disclosures of their activities with sanctioned countries even when the company’s activities are not subject to US sanctions

• The SEC has a dedicated office, The Office of Global Security Risk, to monitor whether the filings of public companies includes disclosure regarding global security risk-related issues

• The SEC approaches this from the view that investors should not unwittingly invest in companies doing business with sanctioned countries

• Some states prohibit the investment by their pension funds or state-regulated industries in companies doing business in sanctioned countries


Sanctioned Countries

• Countries primarily focused on: Iran, Syria and Sudan• Legislation is currently pending in Congress which

would require SEC reporting companies to disclose on a quarterly basis each activity engaged in with Iran and Iranian entities

• Many companies which previously reported that they were engaged in activities with Iran, now disclose that this activity has been terminated

Continued


Anti-Bribery

• Anti-Bribery law has been embedded in the US Securities laws since 1977 (“FCPA”)

• Prohibits bribery of “foreign officials” for the purpose of obtaining or retaining business

• One of the most significant areas of SEC enforcement actions in recent years

• Often it is the “books and records” violation (ie failure to accurately account for the payment) that is prosecuted

• Issuers must also maintain a system of internal accounting controls

• Many other jurisdictions have now adopted similar laws


In Summary

• “The most effective sanction in this world . . . is the loss of global investor confidence”

• Forcing companies to be transparent tends to change the way they operate

• The SEC and other regulators are placing greater emphasis on disclosures relating to environmental, social and ethical issues giving investors more information to make investment choices


Source Materials

Payments to GovernmentsProposed SEC Rule: Disclosure of Payments by Resource Extraction Issuers, 75 Fed. Reg. 80,978 (Dec 23, 2010), available at http://origin.www.gpo.gov/fdsys/pkg/FR-2010-12-23/pdf/2010-31943.pdf

For a summary of the proposed U.S. rules governing disclosure of payments to governments, see Sullivan & Cromwell LLP’s publication dated January 6, 2011 available at http://www.sullcrom.com/files/Publication/12937db4-7911-4fff-b4b9-0c10252ee676/Presentation/PublicationAttachment/a4ab257f-947f-43a2-b39b-0e38f6910f79/SC_Publication_Resource_Payments_Disclosure_Requirements.pdf and for a summary of a side-by-side comparison of European Union and United States proposals, see Sullivan & Cromwell LLP’s publication of dated November 17, 2011 at http://home.global.law.sullcrom.com/clientmemodocs/GPM6721.pdf

The European Commission’s proposal to amend the Transparency Directive is available at http://ec.europa.eu/internal_market/securities/docs/transparency/modifying-proposal/20111025-provisional-proposal_en.pdf


Source Materials

Conflict MineralsProposed SEC Rule: Conflict Minerals, 75 Fed. Reg. 80,948 (Dec. 23, 2010), available at http://origin.www.gpo.gov/fdsys/pkg/FR-2010-12-23/pdf/2010-31940.pdf

For a summary of the proposed SEC rules to implement the “Conflict Minerals” disclosure requirements of the Dodd Frank Act, see Sullivan & Cromwell LLP’s publication dated January 6, 2011 available at http://home.global.law.sullcrom.com/clientmemodocs/GPM6591.pdf

Mine Safety

Final SEC Rule: Mine Safety Disclosure (Dec. 21, 2011), available athttp://sec.gov/rules/final/2011/33-9286.pdf

For a summary of the final SEC rules adopted to implement the mine safety disclosure requirements of the Dodd Frank Act, see Sullivan & Cromwell LLP’s publication dated December 29, 2011 available at http://home.global.law.sullcrom.com/clientmemodocs/GPM6744.pdf

Continued


Source Materials

Climate ChangeInterpretive Release: Commission Guidance Regarding Disclosure Related to Climate Change Release No. 33-9106 (February 2, 2010), available at http://www.sec.gov/rules/interp/2010/33-9106.pdf (the “Release”)

For a summary of guidance on disclosure requirements, see Sullivan & Cromwell LLP’s publication dated February 5, 2010 available at http://home.global.law.sullcrom.com/clientmemodocs/GPM6434.pdf

Continued

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