Oil and gas audit consortium said to be compiling response to GRA

The consortium of Ramdihal, Haynes, Vitality Consulting, and Eclisar Financial & Professional (RHVE), which conducted the US$7.3 billion cost audit on Esso Exploration & Production Guyana Limited (EEPGL) for 2018-2020 has been sent comments by the Guyana Revenue Authority (GRA) on the findings and is in the stages of responding, according to sources.

RHVE is currently working with the external auditors it had partnered with and is preparing responses, this newspaper understands.

This month also marks three years since the completion by IHS Markit of the first audit of expenses claimed by ExxonMobil and its partners for the period 1999 to 2017, which found that Guyana was owed US$107.2 million, half of the US$214.4 million disputed expenses.

The government had said that it would not pronounce on the audits’ completion as the GRA is the authority vested with responsibility to analyse and advise. Vice President Bharrat Jagdeo reiterated this position two weeks ago, as he pointed to the GRA for an update.

When contacted last week, GRA Commissioner General Godfrey Statia told this newspaper that he had to check on some information and would provide an update soon.

RHVE lead Floyd Haynes told this newspaper that he did not have the authority to speak on the audits.

Stabroek News had reported that the final report for the RHVE audit challenged around only 1.3% of the US$7.3 billion total – much less than the 12.8% in the first audit of the US$1.67 billion by UK auditing firm IHS Markit.

Most of the challenged amount related to smallticket items and expenditure unrelated to oil and gas operations, raising questions about the sampling.

The RHVE audit report had said that the company assigns costs using a complex system and while only a small figure, some expenses were above what they should be and included a transfer pricing percentage.

“EEPGL’s accounting is extremely tedious, requiring intensive concentration and diligence to understand… EEPGL has more than 180 Cost Objects that costs are booked into, with many of those costs then flowing into a second Cost Objects and then further broken down into other tiers. There are several instances where a cost booked into a Cost Object must be traced through five levels of allocations to see the eventual charge or allocation,” the report had stated.

RHVE said that during the auditing process, EEPGL sought to justify the flagged expenses.

“EEPGL insists that all capital costs should be paid 100 per cent by Stabroek even though Kaieteur and Canje Blocks utilise the offices or shorebase or other facility. The rationale offered by EEPGL’s personnel was, “if it wasn’t for Stabroek, ExxonMobil would not be in Guyana… We find that position fatuous and unsupportable,” the report said.

“EEPGL believes all incountry personnel costs are 100 percent chargeable to either Stabroek, Kaieteur, or Canje, or another operation, if any, but that no payroll costs should be allocated as a 100%-corporate cost. We disagree; our position is that a portion of almost all non-operations personnel time, starting with the EEPGL President, should be absorbed by EEPGL as a 100% nonrecoverable cost,” RHVE noted while explaining its justifications in appendices with supporting documents.

And similar to payroll, although to a slightly lesser extent, EEPGL believes costs for almost all incountry activities are recoverable. “We disagree. EEPGL has credited the Cost Recovery Statement for many non-recoverable costs, perhaps knowing an audit would call attention to them, but they did not reverse all that are not recoverable,” the report said.

“ExxonMobil affiliates are required to charge atcost for their services. The rates at which they charge Stabroek are at the rates reported by PricewaterhouseCoopers to be at cost, so those rates are accepted. However, ExxonMobil adds a “transfer pricing” percentage to each Affiliate charge. EEPGL acknowledged this is a “profit margin” component that must be added to the at-cost rates so the affiliate can show a profit in its home country, so the home country has corporate profits to tax. We do not believe that is a recoverable cost,” the auditors contended.

“Another interesting ExxonMobil internal accounting item that results in excess costs charged to the Cost Recovery Account is when three Guyanese local engineers trained for seven months in ExxonMobil’s Houston office. Instead of continuing to charge their actual salaries, as was done before and after the training, EEPGL charged them at the much higher affiliate rates, instead of their actual salaries, which did not change, simply because of internal accounting,” the auditors said.

The audit explained that actual salaries, wages, and benefits of local EEPGL employees are booked directly to a “local” pool Cost Object. The local pool costs are then allocated to various departmental Cost Objects based on headcount, such as drilling, logistics management, geoscience, operations and financial, technical, procurement, general management, public affairs and so forth. Costs for each of these departments are then allocated between block(s), such as Stabroek, Kaieteur, and Canje, based on the respective Cost Object department metric, such as work effort studies, headcounts, time writing hours, or drilling activity.

But the audit noted that “tracking the actual allocation of a specific employee’s time is tedious due to the numerous Cost Objects and allocation levels.”

It said the company’s employee costs are recoverable if the proper amount is allocated to the Stabroek Block out of each department. “The allocation percentage of each department Cost Object was scrutinised, with numerous exceptions in the report for instances where we do not believe 100% of a department’s costs should be charged 100% to Stabroek/Canje/Kaieteur operations, that a portion pertains to corporate and other non-recoverable tasks and responsibilities,” the audit said.

Civil society group, the Oil and Gas Guyana Network (OGGN) had raised questions about the depth of an audit of US$7.3 billion in ExxonMobil expenses for the years 2018 to 2020 but said that even the basic findings warrant a fullscale forensic examination being commissioned by the government.

In a letter to the Stabroek News, OGGN had noted that RHVE with Martindale Consulting and SGS encompassed 260,000 transactions, totaling US$7.3 billion, for the Stabroek Block for the period 2018 to 2020 and was completed in 4 months.

The auditors also believe, the audit pointed out, that the costs discussed with relation to its Economic Development Centre are valid; when they assert “many of the early costs were indeed for petroleum operations.”

Noted also in the audit was that the company would not discuss production figures details with auditors saying that it was not part of cost recovery.

OGGN said that the size of the audit team appeared to be about 12 people – a few members were Guyanese – and it assumed that the Guyanese members had no prior experience in auditing oil and gas transactions.

“It is almost impossible for such a team, in that short time period, to verify 260,000 transactions thus they sampled transactions and ignored small transactions. Where small transactions seem to be anything less than US$1,000. It appears no materiality, an accounting criteria, was formally defined by the auditing team which raises concerns about the quality of the audit. What is not clear is what percentage of the 260,000 transactions were sampled and how many fell into the bucket of too small to audit,” the group said.

OGGN said it was natural that the audit team would focus during those four months on the simpler ‘cake shop’ accounts.