GRA begins audit of US$460M pre-oil costs

-Exxon to submit documents by Sept 21st

ExxonMobil says it will be cooperating with the Guyana Revenue Authority (GRA) in the ongoing audit of its US$460 million pre-contract and cost recovery charges even as the company projects that the Liza-1 oil well development alone will cost approximately US$4.4 billion.

The audit of the pre-contract costs is occurring against the backdrop of growing questions about whether the GRA has the capacity to be undertaking the process and whether the government has formally delegated authority to it for this purpose. Questions have also been raised about why the state audit office is not involved.

“As stated in the contract, the US$460 million are costs incurred from 1999 through 2015. Since then, and through the life of the Liza project, all costs incurred have been and will be submitted to the government,” ExxonMobil’s Public and Government Affairs Officer Deedra Moe told Sunday Stabroek on Friday.

“In total, we estimate the project cost to be approximately [US] $4.4 billion. We have received a letter from GRA and will work with them on their request,” she added, while making clear that the figure was for the Liza-1 development alone.

While the company has submitted precontract and cost recovery charges for the 2016 and 2017, it is unclear what those figures are.

Minister of Natural Resources, Raphael Trotman, whose ministry was responsible for the oversight of petroleum operations up to January of this year, referred this newspaper to Guyana Geology and Mines Commission (GGMC) Chairman Newell Dennison for the breakdown.

However, when contacted by this newspaper, Dennison explained that it was after work hours and he did not have the information at hand.

This newspaper understands that the GRA wants Exxon to give specific breakdowns of the cost recovery charges up to December 31st, 2015 period, for which the US$460 million pre-contract cost is included as a line item. The audit is being undertaken in accordance with the provisions made under Article 23 and Annex ‘C’, and Sections 1.5 and 3.1(k) of the production sharing agreement which government has with Esso Exploration and Production Guyana Limited (EEPGL) and its partners Hess Guyana Exploration Inc. and CNOOC Nexen Petroleum Guyana Limited.

The company has to submit with its schedules, its chart of accounts and trial balances for each year up to the period specified.

Esso has to submit the documents to the GRA by September 21st of this year and has been told that should additional information be required the company will be formally notified.

‘Pretty close’ Chartered accountant and attorney, Christopher Ram, who is credited with the revelation that government had received a signing bonus from ExxonMobil, says that from his analyses of company filings and other documents, “at the very least, the claim of US$460 million is overstated by approximately US$92 million.” Godfrey Statia

Attorney Melinda Janki, one of the lawyers who signed the previous 1999 agreement with the company under the Janet Jagan-led People’s Progressive Party/Civic (PPP/C) government, believes that for the 2016 fiscal year the cost recovery sum is “about US$583 million.” She had told an oil and gas forum at Moray House in May of this year that she was aghast when the new Production Sharing Agreement was signed in 2016, this government allowed the figure to be tied into cost recovery, thus burdening the country with monies for costs that could have otherwise been used for development.

“Again, Minister Trotman has agreed that Guyana will pay this. As at October 7, 2016, the government’s attempt to sell Guyana’s oil has cost Guyana US$900 million,” she said.

“From 8th October onwards, Guyana pays the oil company’s recoverable costs and this appears to be every cost the oil company says they incurred. Exploration and development costs include the cost of every well that was drilled. Just to give you an example [of costs that have to be paid] Guyana pays for well heads, offshore platforms, piers, direct and indirect services, including vehicles, aircraft, power plants, housing , community and recreation facilities. Guyana pays the legal costs incurred by Esso, Hess and Nexen, even the cost of their in-house legal advisers. Guyana pays for expatriate employers to travel to Guyana and rent houses, labour costs, including bonuses the management decides to pay themselves,” she added while urging citizens to read Annexes C and D of the agreement, which lists “pages and pages and pages and pages” of costs that can be recovered”.

ExxonMobil’s Public and Government Affairs Officer would not give a definitive figure of the current claims but believes that that Janki’s and other analysts’ figures are “pretty close”.

“What was in the contract, what was written, the [US$] 460[million] is between 1999 [and] 2015; so that is very clear in the contract. The next part of that, right after in the contract, says you have to capture the cost from January 1st, 2016 to when the contact was actually signed. There is a cost then, before the contract Melinda Janki

was signed, because you still had costs. While we have not released a public number on it, they are calculating that it is about double of what that (US) $460 million is and that is where that [US] $900 million number is coming from; the (US) $460 million plus whatever was spent before that contract was signed,” she said.

“I would have to dig for that because I don’t have the exact number but it is pretty close,” she added when asked for the exact figures. She later stated that the Government of Guyana has those numbers. Conflict Ram does not believe that the GRA has the legal wherewithal to conduct an audit of cost recovery.

“The President [David Granger] and [Minister of State] Mr. [Joseph] Harmon who has now replaced Mr. Trotman as the Minister responsible for the petroleum sector, and [Finance Minister] Mr. Winston Jordan would be wrong to think that the task of auditing of the operations of the agreement can properly, legally and meaningfully be performed by the [GRA]. They must know that the statutory role and function of the GRA are to administer the several tax laws specified in the Revenue Authority Act. It has no jurisdiction over the Petroleum Agreement signed by Trotman under the Petroleum Exploration and Production Act and now falling under Mr. Harmon,” Ram wrote in a letter to this newspaper this week.

“They should know that the GRA cannot even demand returns from the oil companies since the obligation to submit those returns rests with the Minister. The GRA does, however, have the power to audit the respective tax returns under the tax laws to determine whether the return is true and correct in reporting the entirety of the income and that the expenses, deductions and allowances claimed have been wholly and exclusively incurred in the production of that income… I further submit that not only does the GRA not have the power or the duty to undertake any audit outside of the tax laws, but that its attempt to do so would place it in a conflict situation and open itself to challenges by the oil companies,” he added. Christopher Ram

Clarity But GRA Commissioner-General Godfrey Statia disputes Ram’s assertions.

“I need to draw their attention to Section 6.2 of the well-publicized Petroleum Agreement which provides that ‘the Minister of Government may delegate to Other Government entities to perform these or any other duties and the Contractor shall fully comply with such lawful delegation upon ninety (90) days written notice from the date of receipt of such notice. These duties entail reviewing any proposed exploration work programme and budgets presented by the contractor; review any development plan submitted by the Contractor in accordance with an application for a petroleum production licence; ensuring the accounting procedures are followed; ensuring compliance with the provisions of this Agreement, the Petroleum Act and Regulations,’” Statia, who has decades of experience in petroleum accounting, wrote in a letter to this newspaper.

“The GRA, as an agent of the Government for the purposes of tax collection, is therefore acting as a lawful delegate. Further… the Authority has been putting in place the necessary infrastructure and professional staff to deal with this activity,” Statia, an attorney, added.

Statia’s letter suggests that the government has delegated pre-contract cost auditing to the GRA and sources told this newspaper that the decision to audit was made “squarely by the GRA and not any government minister or official because that is not how the agency is run.”

Statia has been putting together a unit since April of this year to deal specially with oil and gas matters and will seek external support if needs be, this newspaper was told.

Satisfied Earlier this year, Trotman said that he was satisfied with the GGMC’s feedback on the US$460 million pre-contract costs, which indicated that it was not excessive and is in keeping with the company’s scope of works over the 17 years of exploratory and seismic works.

GGMC Head Dennison had said then

that typically in accounting arrangements for Production Sharing Agreements, precontract costs represent certain accepted expenditures by the company that have occurred prior to the signing of the agreement. He said that that Exxon has to date submitted the US$460 million invoice for its geological and geophysical costs from 1999 to 2016, the point when the new contract was signed and GGMC will hand over its submissions received from ExxonMobil to the GRA if it is requested to.

The US$460 million will be deducted from the cost oil portion of the equation. A maximum of 75% of revenues will go towards cost oil each year, while the remaining 25% (profit oil) will be split evenly between Guyana and EEPGL.

All accounting in the 2016 agreement falls under Annex C and it is against that annex that GGMC determines what should be cost recoverable, as there are different line items which stipulate what is cost recoverable or what the company would have to ask for based on certain representations. Every year, the company would submit statements stating what its cost recovery was for the specified period.

It is for the technical aspect of the cost recovery verification that US-based chartered accountant and Professor Floyd Haynes recommends that a “multi-disciplinary” auditing team be used.

“A cost recovery audit… is designed to determine the validity, accuracy and legitimacy of claimed costs, and should be undertaken by a multi-disciplinary team with varying expertise to include legal, finance and accounting, petroleum engineers and as well as others,” Haynes states.

“Pre contract costs in the oil exploration business typically fall into two general categories – Finding costs—Cost of Geological and Geophysical (G&G) work; Cost of Licences, Signature bonuses, cost of drilling and exploration—and Development costs—Cost of acquiring, constructing, installing production facilities and drilling development wells. Auditing of these costs is indeed a nontrivial matter. Establishing the veracity of some elements of these costs may be straightforward; however, establishing the same for other cost elements can be very complex and could require Subject Matter Experts (SME) in areas outside those that are required in a traditional financial audit,” he adds.

Statia says that he knows and respects Haynes’ work and that his advice has not fallen on deaf ears since “Floyd understands only too well what is required.”