Every Man, Woman and Child in Guyana Must Become Oil-Minded The 1999 and 2016 Petroleum Agreements Compared – Annexes Part 38

Introduction Column 37 which appeared last week dealt with the classification of costs and as indicated there, attention now turns to what Annex C describes as Pre-contract costs. In this regard, a major insertion in the 2016 Agreement which has aroused considerable curiosity relates to an amount of US$460,237,918 by the Contractors for pre-Contract costs incurred under the 1999 Agreement. This is included in section 3.1 of Annex C “Costs Recoverable Without Further Approval of the Minister”. This is also not the entire sum for pre-contract cost but represents only those costs claimed to have been incurred up to December 31, 2015. Additionally, the 2016 Agreement also provides that cost incurred between January 1, 2016 and the Effective date of the Agreement constitute part of the cost of petroleum operations. All that was required in the latter case was for the Contractor to notify the Minister of those costs no later than October 31, 2016. The Minister had six months to agree such costs.

The separation of the two costs suggests that the US$460,237,918 is final while in the case of the costs incurred between January 1, 2016 and the effective date, the time for any challenge was April 30, 2017.

Intersection of law and accounting All companies, whether incorporated locally, or incorporated abroad but registered locally, are required to file an annual report together with financial statements. Such financial statements should provide reliable information for users, including regulators. At a minimum therefore, before accepting the figure of US$460,237,918, Minister Trotman should have verified it to the December 2015 audited financial statements filed with the public authorities. It is difficult to see how this could have been done since the public records show that only Esso and CNOOC had complied with the requirement for the filing of records. What Trotman would have realised was that the other Contractor – Hess Corporation – has never filed a single financial statement or annual report with the Commercial Registry! Surely, this is elementary stuff which requires basic knowledge and common sense.

The 2016 financial statements of Esso reported that in 2014 it had entered into farm-out arrangements with Hess and CNOOC/Nexen and that Government approval was still pending, i.e. two years later. CNOOC reported the relationship differently, describing it as Joint Arrangement. To complicate matters further, Hess which did not make any local filings, reported to its international stockholders that it had acquired a “working interest”, which is another term for farm-out. To add further to the complexity, in 2008, Esso had entered into an Assignment Agreement and a Farm-out Agreements which would have also had financial implications.

Intricacies of accounting What is significant about these differences is that depending on the nature of the arrangements, they require different accounting treatment including how the gain arising from the farm-in, farm-out or sale of a working interest ought to be recognised. A newspaper column is not the place for the intricacies of oil and gas accounting. Suffice it to say that according to CNOOC, its interest was acquired from ExxonMobil and perhaps explains why there is no gain or income reported in the accounting statements of Esso.

The 1999 Agreement required the contractor to bear and pay all contract costs incurred in carrying out petroleum operations, allowing for the recovery of contract cost only from cost oil (sic) as provided in the Agreement. While the definition of “Contract costs” as “exploration cost, development cost, operating costs, service cost, general and administrative costs and annual overhead charge” seems particularly wide, the meaning is restricted to costs incurred in carrying out petroleum operations. That term is defined in the 1999 Agreement to mean “prospecting operations or production operations as defined in the Act”. In turn, “production operations” is defined as “operations carried out for, or in connection with, the production of petroleum” while “prospecting operations” is defined to mean “operations carried out for, or in connection with, exploration for petroleum”.