Published Date: 
June, 2019

Transparency in the First Trade

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Contents

1) The case for first trade transparency

2) The EITI Standard and first trade disclosures1

3) Progress in producing countries

4) Commodity traders’ contribution to transparency

5) Next steps for EITI and first trade transparency

 

Executive summary

Ensuring transparency in how resource-rich countries sell their oil, gas and minerals goes to the core of the mandate of the Extractive Industries Transparency Initiative (EITI). In total, USD 2.5 trillion has been disclosed by EITI countries since its inception. Almost half of those revenues are from so-called “first trades” and amount to over USD 1 trillion in revenues disclosed through EITI reporting.

“First trade” describes a situation where a state (or a state-owned enterprise) sells its share of physical resources from its oil, gas and mining sector, usually to commodity trading companies. The terms of this transaction are a matter of public interest and help to create a transparent and open market in which governments, companies and citizens can have confidence. For many countries, this type of transaction represents a significant part of a government’s share of revenues from the extractive sector and commodity traders are a major source of income.

Despite the importance of the commodity trading industry, data on the sector has been scarce and under analysed. This may explain why the industry has been slower in highlighting the enormous financial contribution it has made to developing country economies, far outstripping official aid budgets and on a level if not higher than traditional extractive industries companies. For every dollar Glencore paid in tax to resource-rich countries for their extractive activities in 2017, the company paid five dollars to the same countries to buy their oil.

Amidst growing calls for greater transparency and accountability, the EITI has been working with national governments, state-owned enterprises (SOEs) and commodity traders to disclose first trades. 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. EITI member countries are leading by example and racing ahead through innovative approaches to disclosing more data, supported by national oil and mining companies. Colombia, Ghana, Indonesia, Iraq, Nigeria and Trinidad and Tobago are already routinely disclosing the volumes they sell and values they receive from these sales. Traders are following suit, with Glencore and Trafigura already publishing their payments to governments, and Gunvor has committed to do the same. This has helped enhance their corporate reputation and social license to operate.

In 2015, a multi-stakeholder working group on commodity trading was created to guide the EITI’s work in this frontier extractives transparency issue. Leading governments, state-owned enterprises, commodity traders and civil society organisations are part of the group. Concrete results to date have included an improved and more ambitious disclosure requirement for governments, stateowned enterprises and companies buying oil, gas and minerals from resource-rich countries. Reporting guidance and templates have also been developing and implemented at the country and industry level. At the national level, EITI multi-stakeholder groups have used the working group guidance to improve reporting and inform debate related to the return on the sale of their natural resources. So far, these efforts have led to more granular and detailed disclosures in at least eight EITI countries, allowing stakeholders to understand and explore the way in which these sales are conducted. There is mounting evidence that transparency supports greater competition and that following best practice can result in reputational gains and improved access to capital.

It is widely accepted that further work is needed in improving transparency and accountability in global commodity trading. EITI countries and progressive companies are forging ahead. The rest of the industry needs to catch up. While disclosure requirements in Canada, the EU and other jurisdictions of trading companies may contribute, the EITI’s work on the first trades in resourceproducing countries is essential to shed light on these revenues. Continued engagement from transparency leaders in the commodity trading sector, producing countries and civil society, as well as the financial industry, will be needed to ensure sustained gains from these efforts.