Exxon subsidiary here booked $6.5b loss for 2020

-Ram says income statement bare, contemptuous

Introduction

Esso Exploration and Production Guyana Inc. (Esso), the largest of three partners in the Stabroek Block, with a 45% share under the 2016 Petroleum Agreement, has declared a loss of $6,516 million in 2020. This compares with a profit of $9,298 million earned by the Chineseowned CNOOC (25%), and $6,877 million by the American-owned Hess (30%). Esso was granted an exclusive petroleum exploration licence in 1999 under a pre-discovery Petroleum Agreement over an area of Guyana’s waters that was larger than the entire country. Following the running of the clock, powerful arm-twisting of the GGMC officials and not a little bit of deception by Exxon, Raphael Trotman and the APNU+AFC Coalition Government questionably “renewed” the Agreement over the same area and under the same terms even though the Area had produced at least two known world class discoveries at the time.

In this special Tuesday edition of this column, we review the audited financial statements of Esso for 2020, the first year of oil production in and by Guyana. Like its joint venture partners, Esso was incorporated in a tax haven in The Bahamas on 16 October, 1998 and is registered as an external company in Guyana. The Bahamian company is owned by ExxonMobil Global Holding Investment B.V. of the Netherlands which in turn is owned by the American company ExxonMobil, for several years rated the world’s No. 1 company by revenue. As readers are aware, the financial statements of CNOOC and Hess were reviewed in this column over the past two

Fridays. But first some general comments.

While Article 2 of the Agreement describes Esso as the Operator charged with conducting the day-to-day activities of the three companies, none of the three companies acknowledge this fact or what it means in practice. Perhaps inadvertently, Esso uses the term “joint venturers” even as each of them presents financial statements that differ from each other in principle, content and presentation. The only things they seem to share are a studious avoidance of references to the 2016 Agreement, and financial statements that are intended to disclose as little as possible, if not to mislead.

The next column due this Friday, will identify some of the major issues of substance which define the three entities, or set them apart. For now, however, it seems clear to me that the three entities are not in compliance with the relevant International Financial Reporting Standard (IFRS) governing such operations.

Income Statement

What stands out in the Income statement is that not a single line item of income or expenditure carries a note reference to explain and expand on the numbers. Readers are therefore left to figure out for themselves what comprises these numbers and what they mean. For example, as presented, no transactions are carried out with related parties, production is sold to non-Exxon companies, there is no cost for management support from Exxon and that the only related parties are Hess and CNOOC. If that is not the case, then, again, the financial statements do not comply with IFRS.

The Income Statement is so bare that the reader has no idea of what constitutes Exploration costs ($18,286 million) or the composition of Administrative expenses of $20,829 million. Revenue is reported at $75,429 million and total operating expenditure at $81,945 million leaving a loss for the year of $6,515 million. Interestingly, Exploration costs account for 24% of total income, Depreciation and amortisation accounts for 31.4%, Administrative expenses for 27.6% and Lease interest for 10.3%. The income statement also shows Royalty payment of $2,049 million which translates to 2.7 % of revenue compared with a rate of 2 % under the Petroleum Agreement.

Now, Esso and its partners have a production licence for the Liza One project but it openly charges against production income expenses incurred in exploring in other areas. This is unacceptable by any measure and should be rejected both by those, if any, regulating the oil companies as well as the tax authorities. Indeed, such bare-bone accounting by an international company, coupled with careless (mis) references to “home office” and “head office”, is a measure of the contempt in which Esso holds Guyana, its people and the local accounting profession.

Unlike CNOOC and Hess, Esso, correctly in my view, does not make any provision for deferred tax asset, as the tax value of the loss in future years. Indeed, the word “tax” is not used anywhere in Esso’s financial statements or in the notes thereon.

Balance Sheet and Cash Flow

The total assets of the Branch, net of depreciation and write-offs, have moved by $400,313 million to $971,473 million. Of this total, Property, Plant and Equipment accounts for $866,213 million or 89%. The major additions to this class of assets were $231,353 million in workin-progress for Wells and facilities and $110,320 million in leased Drill Rig assets. Other significant items of assets are Related party receivable of $48,985 million, Trade receivable of $10,917 million and Inventory – Materials and Supplies of $28,501 million representing drilling of 2021 exploratory and development wells. There is an amount of $7,511 million as Deferred receivable as due from cash call bookings, net of joint billing costs.

While there has been a contribution of $436,519 million in equity contribution, some of this was used to reduce amounts owing to related parties of $140,961 million and to finance a receivable in related party of $48,985. Now if this did not come from sales, one is left to guess how it arose in the first place. The company boasts to the public that it pays no interest on capital contributed, but with significant portions of capital expenditure financed by leases, lease interest paid for the year was $7,768 million, up from $345 million in 2019!

Committed capital expenditure over the next three years is $359,941 million while its cash balance at the end of 2020 was a more modest $4,546 million. As these companies race to drill as much as they can, they will encounter a cycle of massive borrowings or/and may have to liquidate assets in other parts of the world to exploit their new crown jewel.

On Friday, the mini-series will do an inter-company comparison of the branches’ 2020 financial statements.