Commodity trading transparency

Shedding light on how oil, gas and minerals are bought and sold

What is commodity trading?

In many countries, products from mining, oil and gas operations are not sold directly to end users, but are traded through intermediaries, including commodity traders. In some cases, the companies extracting resources pay governments for the right to extract resources with physical transfers of oil, gas and minerals (in-kind payments). The state or the state-owned enterprise (SOE) then sells these physical resources, both to commodity trading companies or domestic refineries. In other cases, commodity traders make payments to governments or state-owned companies for their resources in advance (resource-backed loans).   

While these trades represent a vital source of income for many EITI countries, the management and oversight of these transactions has often been opaque.  As of 2019, USD 2.5 trillion in revenues have been disclosed by EITI countries since its inception. Almost half of this revenue is linked to commodity trading. 

For countries to fully account for all revenue received from natural resources, commodity trading transparency is essential. 

Why is commodity trading transparency important?

Commodity trading can be an important source of revenue for governments. The scale of transactions is substantial and often represents a high portion of a country’s export earnings.  

For example, an individual cargo of crude oil can average 900,000 barrels. This quantity is worth USD 36 million at a price of USD 40 per barrel. 

Whenever a government or state-owned enterprise (SOE) receives a share of the state’s production or revenues in kind, two key aspects determine its value to the state. The first is the price and terms of the sale of the commodities. The second is the transfer of the sale proceeds to the budget. Without transparency over these terms, transactions have a high risk of corruption and can lower the budget available for public expenditures.  

Key benefits of commodity trading transparency 

Benefits for citizens 

  • Commodity trading transparency ensures that all parties understand the terms on which trades take place, including the funds available for public expenditures

  • The ability to compare the terms of arrangements increases the ability of anti-corruption agencies, civil society and the media to scrutinise arrangements, giving citizens confidence that their government has secured the best deal.  

  • Transparency complements other information being disclosed by government and state-owned enterprises under the EITI to allow for greater insights into how a country’s natural resources are being bought and sold. 

Benefits for companies 

  • Transparency can enhance the reputation of commodity traders

  • It can increase a company’s social license to operate

  • It opens up the possibility to shape the development of disclosure standards and inform debate in partnership with governments, SOEs and civil society.  

Benefits for governments 

  • Commodity trading transparency can support greater competition

  • It can give governments and state-owned enterprises increased access to capital

  • Enhancing efficiency of state-owned enterprises can increase revenues and ultimately  a government’s share of dividends 

Commodity trading transparency in action

Indonesia - Complementing reforms and public oversight of commodity trading 

In January 2018, Indonesia EITI published a report dedicated to transparency in commodity trading, covering a set of 1,900 oil sale transactions. These were reported at a total value of USD 4.74 billion by the petroleum sector regulator SKK Migas. The disclosures included the volumes sold and revenues received by the state, estimated prices, forex rate, payment receipt date and country of destination. All data points were disaggregated cargo by cargo.  

Additionally, they identified opportunities to improve transparency in the selection of buyers and gas and LNG sales. They also recommended more detailed disclosures to allow the public to better understand whether the government was getting a good deal from its commodity sales.  

Stakeholders such as the Anti-Corruption Commission (KPK) is scrutinising the findings of the report to help them in identifying corruption risks in Indonesia’s commodity trading practices. The report also opened discussions on the importance of disclosing information about Indonesia’s importation of oil. While Indonesia’s civil society is pushing for disclosures of these imports, SOE Pertamina expressed concerns that disclosing data on imports could affect competitiveness. 

Iraq

Iraq has been disclosing information on commodity trading through EITI reporting since 2011. All oil and gas produced in Iraq is the property of the state. The State Organisation for Marketing of Oil (SOMO) sells crude oil to international buyers and remits the proceeds to the Development Fund of Iraq, net of its costs and margins. Natural gas and crude oil earmarked for internal consumption are transferred to other SOEs in charge of transport, refining, distribution, power stations, with only the proceeds of the final sales of refined products remitted to the central treasury.  

Iraq’s EITI Reports covering fiscal years 2009-2015 include reconciliation of oil sales disaggregated by buyer and the four main export destination regions.  The reports also include a description of the sales process, crude oil sale contract template, the buyer selection process and average monthly prices. 

Chad - Understanding the impact of resource-backed loans on future revenues  

The Hydrocarbons Company of Chad (Société des Hydrocarbures du Tchad (SHT) has disclosed detailed information on the sale of its oil to Glencore from 2013 to 2018. For each cargo departing from the Kiribi port, the EITI Reports provide detailed information on the volumes sold, the price, the amount of revenues, the amount deducted to repay government debts and the remaining amount transferred to the treasury.  

EITI Reports show that Chad borrowed USD 600 million in 2013 from an oil trading company, using future oil production as collateral for the loan. In 2014, Chad borrowed an additional USD 1.45 billion from Glencore to be repaid from the government’s share of oil.  The data showed that Chad was using over 90% of its oil revenues to repay the loan in 2015. Following the publication of this information, the government has restructured the deal several times to make its debt payments more sustainable, most recently in the summer of 2018. Continued disclosures such as those found in Chad EITI’s reporting allows the government and civil society to monitor the progression of these loan repayments in the future. 

EITI’s role in commodity trading 

In 2013, the EITI Standard required that first trades between national oil companies and commodity traders be disclosed. The bar has since been raised with an expanded requirement in the 2019 EITI Standard. The Standard requires disclosures by governments including SOEs and encourages disclosures by companies buying oil, gas and minerals from governments or state-owned enterprises. 

A working group has been established to support the targeted effort, consisting of international trading companies, NGOs, and SOE representatives. 

Requirements for EITI implementing countries 

Requirement 4.2  in the EITI 2019 Standard aims to ensure transparency in the sale of oil, gas and minerals by governments. 

According to this requirement, an SOE, government agency or third party appointed by the state must fully disclose the revenues collected from the sale of such resources, whether for export or domestic consumption. In practice, this means SOEs must disclose the volumes of commodities sold and the revenues received, broken down by buyer. The Standard recommends that the type of product, price, market and sales volume are also disclosed.   

Read more about Requirement 4.2 

Reporting guidelines for companies  

The EITI’s reporting guidelines are for use by companies buying oil, gas and minerals from governments. They aim to ensure the consistent disclosure of payments to state or state-owned enterprises (SOEs) where oil, gas or minerals are being sold on behalf of the state, where EITI requirements are applicable and relevant, or where there is commitment to transparency in commodity sales. 

Due to their nature and economic significance, payments to states or SOEs for purchases of commodities provide information on a matter of considerable public interest. Disclosure of the terms of transactions therefore helps to improve transparency and reduce the potential for corruption. 

Reporting guidelines for companies buying oil, gas and minerals from governments

These reporting guidelines are for use by companies buying oil, gas and minerals from governments to inform their disclosures on payments to governments in their own company reports. The guidelines are accompanied by model templates to support reporting companies in deciding on the level of detail of their disclosures.

The commodity trading working group

Since 2015, leading governments, state-owned enterprises, commodity traders and civil society organisations have participated in the EITI multi-stakeholder working group on commodity trading to help the EITI become as effective a vehicle as possible for advancing the broader aim of improving transparency of commodity trading. The working group draws together expertise and guides EITI and host governments implementing the EITI in their efforts to develop and implement disclosure requirements of government owned commodities. 

The working group will continue to develop guidance and offer advice to MSGs in relevant EITI implementing countries and help address practical questions around level of disaggregation, frequency and timeliness of reporting, comprehensiveness, data reliability, format of publication and user-friendliness. It will also consider and directly contribute towards the availability of complementary information in accordance with the EITI Standard and will propose guidance for such contextual information. In doing so, the working group will take into account complementarities between EITI reporting with other sources of data, such as home country regulations or unilateral company disclosures as made by participating companies to the working group.  

The EITI welcomes wide participation in the working group. Participation of commodity trading companies, civil society, host and home countries governments and state-owned enterprises, is essential.