The audit report on Exxon’s post-contract costs

Agreement provides for the sharing of profit oil on a field-by-field basis, it also allows ExxonMobil’s subsidiaries to allocate cost oil to any field within the contract area, thereby defeating the main purpose of ring-fencing. The IMF had also stated that there are too many loopholes in the PSA, if not plugged, could result in Guyana losing significant amounts of revenue; and strong leadership in government is needed to ensure that the interest of the State is properly safeguarded. This suggests that the IMF is supportive of a renegotiation of the PSA. The Authorities have, however, refused to go this route although while in Opposition it had agreed to so. This raises the important question as to whose interest is being protected: Exxon or the people of Guyana. It should not be over-emphasised that the natural resources belong to all the citizens of a country, present and future, and should be exploited in a manner that they enjoy the maximum benefit from such resources.

Considering these and other concerns, a comprehensive auditing of the post-contract recoverable costs is of utmost importance, requiring the knowledge, skills, and competence of experienced auditors. The audit is necessary to provide the reasonable assurance that expenditures incurred are legitimate recoverable costs in the context of the Agreement; and the amounts involved are reasonable and represent good value for money. This especially so, considering the higher the recoverable costs, the less will be the amount of Guyana’s share of profit that will accrue to it.

Section 1.5 of Annex C of the PSA provides for the auditing arrangements for postcontract recoverable costs for each calendar year. It requires the Minister to give 90 days’ notice of the Government’s intention to undertake the audit which is to be conducted within two years of the close of the year. Once the report is issued, Exxon is required to respond within 60 days. The Minister has a right to carry out further investigation within 60 days of Exxon’s response. If the parties are unable to reach agreement, the Minister’s claim is referred to the sole expert. If the audit claim is not settled, Exxon is entitled to recover the disputed amount pending final resolution of the claim.

Appointment of auditors

As of December 2020, the deadline for undertaking the audit of the recoverable costs for 2018 had expired, with no auditors appointed. Eleven months later in November 2021, the Government had stated that it was unable to arrange for the audit because it could not identify a strong group of local auditors to undertake the assignment. Faced with criticisms from various quarters, it eventually selected a consortium of local auditors to undertake the assignment. The contract was awarded to Ramdihal & Haynes Inc., Eclisar Financial, and Vitality Accounting & Consultancy Inc., with technical support from two international firms. It was entered into on 25 May 2022 and was to last for four months, with a commencement date of 29 June 2022. The assignment covered the period 2018 to 2020, and the total recoverable costs claimed by Exxon’s subsidiaries was estimated at US$7.3 billion. We had stated elsewhere that, considering the amount of audit work involved in the verification of the recoverable costs, the period allocated for the audit was inadequate.

During the audit, Mr. Floyd Haynes, the head of the consortium, had stressed that the exercise was not a witch hunt but rather one that sought to verify the ‘validity and allowability of claimed costs’ in the context of the PSA. He warned against the expectation that the audit would uncover inflated costs, contending that such expectation needed to be tempered. He further stated that ‘[t]he idea that Exxon has been overbilling and overcharging, is grossly misleading and it is not fair to mislead the public. We don’t know what we will find, but we will ensure that the costs are legitimate and allowable’. Mr. Haynes, however, appeared oblivious of the comments of the IMF referred to above.

A preliminary report was issued on 5 September 2022, and after several rounds of discussions, the report was finally issued on 11 September 2023. It is, however, not clear whether this 55-page document constitutes the full report.

Structure of the report, or a lack thereof

Despite our decades of experience writing audit and other reports as well as reviewing drafts reports, we find it extremely difficult going through this report to identify the findings and recommendations contained therein. Specifically, the report lacked basic structure. There is no table of contents to guide readers through the report; no executive summary; no list of abbreviations; no definition of the technical terms used; and no sections dealing with the terms of reference for the assignment, the scope and methodology used, the auditing standards that were followed in the conduct of the audit, and findings, conclusions, and recommendations, among others. In the circumstances, one had to go through the meticulous and tedious task of sifting through the entire report to ascertain what were the findings and recommendations.

The report is in fact a five-page letter addressed to the Permanent Secretary of the Ministry of Natural Resources, with two appendices covering the rest of the 55 pages. Appendix A, comprising 29 pages, contains eleven items, namely: accounting overview of Exxon’s main subsidiary Esso Exploration and Production (Guyana) Ltd.; drilling and rig overview; labour; allocation methodologies; COVID-19 costs; benchmarking and contracts; capital expenditures (shared costs); taxes; coding; inventory and materials; and Liza FPSO. Also, included in this appendix is an eight-page report on “Stock Verification and Inventory Site Visit”. Appendix B, containing 13 pages, sets out the auditors’ response to 30 sets of questions posed by the Government.

Overall conclusion of the auditors

The report identified amounts totalling US$7.435 billion as “Gross Recoverable Costs” for the period 2018 to 2020. However, there were two items: “Gross Exemptions” – US$64.790 billion, and “Gross Exemptions Granted” – US$10.319 billion, the nature of which as well as their impact on the recoverable costs have not been explained.

The overall conclusion of the auditors is contained on page 2 of the above-mentioned letter in which they stated that in their opinion the amount shown as recoverable costs were in accordance with the Petroleum Sharing Agreement (PSA), except for items discussed in the report.

Appendix A of the report

Most of the contents in this appendix are descriptive in nature and do not reflect actual findings. In relation to ExxonMobil’s main subsidiary, Esso Exploration and Production Guyana Ltd. (EEPGL) where all the recoverable costs are recorded, the auditors stated EPGL’s accounting procedures were ‘extremely tedious, requiring intensive concentration and diligence to understand’. There were more than 180 cost objects (or cost centres), with five levels of sub-categorisation to ascertain the eventual charge or allocation. The auditors have stated the obvious, and it is for the audit team and its team leader to decide on the audit approach needed to be able to draw conclusions about the completeness, accuracy and validity of the amounts shown in the Cost Recovery Statement. In this regard, the International Standards on Auditing provide detailed guidance as to how the audit should be conducted. There was, however, no mention of the use of these Standards.

Additionally, considering the number of transactions that had to be reviewed, a logical approach would have been to use the risk-based approach to auditing. This essentially involves identifying the major risks of the Cost Recovery Statement being overstated, the probability of occurrence, and the related impact. Having done so, the focus of audit examination should be on risks assessed to have medium and high probability of occurrence and the related impact is considered significant. However, as we went through the report, we found no evidence that this approach was adopted.

Under Labour, the auditors referred to EEPGL’s practice of charging an additional percentage for Exxon’s affiliated employees working outside Guyana but temporarily assigned to Stabroek-specific projects. EEPGL explained that a “profit margin” was charged at percentage rates based on the affiliate’s home country tax laws and were therefore recoverable as a “transfer pricing” mechanism. The auditors stated that they believed that these costs were not recoverable. However, they did not quantify the amount involved.

As regards Benchmarking and Contracts, after a review of the detailed procedures as well as an examination of 149 out of 332 contracts, the auditors concluded that: (i) EEPGL has a robust vendor contract bidding processes in place to ensure the vendors undertake their work ‘at competitive rates with adequate technical capabilities, with a prioritization on local Guyana suppliers’; and (ii) EEPGL had ‘extensive processes in place to ensure prices paid were competitive and in accordance with contract terms, resulting in valid and proper charges to the Cost Recovery Statement’.

It is established accounting practice for expenditure of a capital nature not to be charged to final expenditure in the year they incur. Instead, it should be spread over the life of the asset. The auditors, however, noted that expenditure incurred on the new Ogle Office Complex construction, Duke Street office improvements, and Shorebase expansions did not follow this practice, in that, the entire expenditure was reflected as recoverable costs in the year in which they were incurred. The auditors expressed their disagreement with this treatment and stated that ‘allocation of costs should follow operational usage, regardless of the size of the different operations…By charging 100% of the construction costs as incurred, the Contractor is essentially having the Government of Guyana fund the construction of EEPGL’s expansive Ogle office complex; that does not align with usage for Petroleum Operations’. Again, the auditors did not quantify the amount involved in the apparent overcharge.

Regarding taxation, the auditors noted that several third-party vendors included Value Added Tax (VAT) on their invoices, and those amounts were paid by Exxon’s subsidiaries and included in the Cost Recovery Statement. This was despite the fact that the PSA provides for the exemption from such tax. EEPGL explained that the Guyana Revenue Authority (GRA) was yet to issue exemption letters for all vendors. In the absence of such letters, many vendors charged VAT on their invoices The auditors expressed their belief that the VAT amounts should be excluded from the Cost Recovery Statements and that this was a matter that should be resolved between the GRA and the Contractor. The auditors did not quantify the amount involved.

In relation to Stock Verification and Inventory Site Visit, the auditors stated that there was no physical verification of inventory by the various oil blocks. One presumes that the auditors were referring to Exxon’s subsidiaries internal accounting procedures. They also indicated that the audit team could not have carried out such a verification based on the selection of a sample of items, except for one item. This was because the inventory listing was as of 31 December 2020 whereas the exercise was carried out on 25 October 2022. It is unclear whether there was an updated listing that the auditors could have used in their verification exercise. In any event, it is reasonable to assume that most of the items in stock as of 31 December 2020 would have been issued out to production. Therefore, the focus should have been on the materials issued during the period 2018 to 2020, the value of which would have been reflected in the Cost Recovery Statement.

The auditors, however, stated that the documentation and process of transferring materials out of inventory could not be examined, but gave no reasons why this was so. This is a major shortcoming of the audit since the value of materials issued from inventory to production over the period 2018 to 2020 would have constituted a significant portion of the total amount shown in the Cost Recovery Statement.

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