ED­I­TO­RIAL Esso’s US$460m pre-con­tract claim

Stabroek News Sunday - - REGIONAL NEWS -

Given the struc­ture of the 1999 and 2016 Pro­duc­tion Shar­ing Agree­ments (PSAs) between the gov­ern­ment and ExxonMo­bil’s sub­sidiary Esso Ex­plo­ration and Pro­duc­tion Guyana Lim­ited (EEPGL), the ex­tent of ben­e­fits to Guyana is sig­nif­i­cantly hinged on the al­low­able ex­penses.

Set­ting aside the pal­try 2% royalty and the price at which the oil will be sold in 2020 and on­wards, the key re­turn to Guyana is the 50:50 share of the profit oil. First, how­ever, the cost oil has to be de­ducted. In any given year, the cost oil could be as high as 75% of the to­tal oil pro­duced and the re­main­ing 25% (cost oil) would be split evenly between Guyana and EEPGL. While the cost oil fig­ure will re­duce grad­u­ally over the pe­riod of pro­duc­tion, in the first years of pro­duc­tion it is likely to be 75%. En­sur­ing that the ex­penses claimed by EEPGL are le­git­i­mate should there­fore be a na­tional pre­oc­cu­pa­tion con­sid­er­ing that it di­rectly im­pacts on how much the coun­try will earn. Guyana is a novice in the oil and gas in­dus­try, ex­em­pli­fied by the pitiable ne­go­ti­at­ing of the 2016 PSA and the fal­ter­ing, sloth­ful steps to­wards estab­lish­ing a com­pre­hen­sive frame­work for oil and gas and in­su­lat­ing it from un­to­ward in­flu­ences. It is also deal­ing with a be­he­moth in EEPGL’s par­ent com­pany, ExxonMo­bil which has had a poor track record in many as­pects of the sec­tor and in var­i­ous ju­ris­dic­tions. The re­cent ques­tions raised about one of its ac­qui­si­tions in Liberia is a case in point.

In these cir­cum­stances, all parts of the na­tion must do their bit in en­sur­ing that ev­ery sin­gle ac­tion of EEPGL’s prin­ci­pals is scru­ti­nised and par­tic­u­larly their claims in re­la­tion to the dis­tri­bu­tion of pro­ceeds. The claim by EEPGL for pre-con­tract costs of US$460m for the pe­riod from the start of its ac­tiv­i­ties here up to De­cem­ber 31st 2015 is a case in point. The num­ber was in­scribed in An­nex C of the 2016 PSA as if it was un­re­mark­able. To put it in some con­text, the US$460m is more than 25 times the size of the con­tro­ver­sial US$18m sign­ing bonus which EEPGL made avail­able to Guyana and which crit­ics have ar­gued is mea­gre com­pared to what should have been paid. The US$460m fig­ure is there­fore not in­con­se­quen­tial and is to be amor­tised over a num­ber of years as part of cost oil – mean­ing that it will be one of those claimed ex­penses which will re­duce pro­ceeds to Guyana.

As the sin­gle largest charge to date to

Guyana from the coun­try’s his­toric oil and gas op­er­a­tions, it be­hoves the Guyana Gov­ern­ment, the oil and gas author­ity - who­ever that may be and when­ever it might be es­tab­lished, the Guyana Rev­enue Author­ity (GRA), the Of­fice of the Au­di­tor Gen­eral and other agen­cies to dis­sect this fig­ure finely. It is un­clear what the Guyana Ex­trac­tive In­dus­tries Trans­parency Initiative is do­ing about this fig­ure and other as­pects of EEPGL’s ac­tiv­i­ties here but it is yet to in­spire con­fi­dence in the pub­lic that it is any type of watch­dog in the in­ter­est of the Guyanese peo­ple.

One per­son who has al­ready done yeo­man’s work as a pub­lic in­tel­lec­tual on the early ac­tiv­i­ties in the oil and gas sec­tor is char­tered ac­coun­tant and busi­ness an­a­lyst Christo­pher Ram. In the 44th in­stal­ment of his oil and gas se­ries in the Stabroek News, he an­a­lysed the fi­nan­cial state­ments lodged at the lo­cal reg­istry by the three sig­na­to­ries to the PSA: EEPGL, CNOOC/Nexen and Hess. It was only re­cently that Hess filed its state­ment. In his anal­y­sis of the fig­ures, Mr Ram es­ti­mated that the US$460m claim of pre-con­tract costs was in­flated by US$92m – or just over six times the ma­ligned sign­ing bonus.

Un­doubt­edly, Mr Ram would be open to dis­pu­ta­tion of his fig­ure and a foren­sic ex­am­i­na­tion of the fi­nan­cials lodged by the three com­pa­nies. This is where oil and gas be­comes real for Guyana and where it is at risk of be­ing duped by its part­ners. On the for­mal pre­sen­ta­tion of the fig­ure – in this case it first ap­peared in the 2016 agree­ment which was hid­den from pub­lic view un­til the gov­ern­ment was forced into re­leas­ing it in De­cem­ber 2017 – it should have been im­me­di­ately sub­jected to ver­i­fi­ca­tion. This wasn’t done and it ap­pears that the Guyana Ge­ol­ogy and Mines Com­mis­sion and the Min­istry of Nat­u­ral Re­sources took the fig­ure to be a rea­son­able rep­re­sen­ta­tion of ex­pen­di­ture by the

three part­ners with­out due dili­gence.

It is un­clear when the GRA will au­dit this US$460m claim but it is pri­mar­ily the gov­ern­ment’s re­spon­si­bil­ity to ver­ify this fig­ure and to re­quest the sup­port­ing doc­u­men­ta­tion from the three com­pa­nies in­volved. Rig­or­ous ex­am­i­na­tion of this fig­ure will not pro­vide a bo­nanza to Guyana but will be an im­por­tant test on two scores. First, it will in­spire pub­lic con­fi­dence in the in­tent of the gov­ern­ment and the scope of its in­sti­tu­tional mech­a­nisms to en­sure that all monies due to this coun­try un­der the PSA are col­lected. Sec­ond, it will alert ExxonMo­bil, EEPGL, Hess and CNOOC/Nexen that the au­thor­i­ties here and civil so­ci­ety will un­re­lent­ingly pur­sue and in­ter­ro­gate all fig­ures supplied and ac­tions im­ple­mented.

Given Mr Ram’s as­ser­tion, the pub­lic ex­pects that both the gov­ern­ment and its part­ners in the PSA will pro­vide ev­i­dence to sub­stan­ti­ate the US$460m charge as­signed to the state even be­fore the first drop of oil has been mar­keted.

In his afore­men­tioned col­umn Mr Ram set out a se­ries of ques­tions which in­cluded:

Was the fig­ure US$460,237,918 set out in the An­nex sup­ported by detailed state­ments by each of the three com­pa­nies?

Was any ver­i­fi­ca­tion ex­er­cise done of the pre­con­tract ex­penses fig­ures and in­for­ma­tion pro­vided? If so, by whom? Was the Au­dit Of­fice asked to ver­ify the fig­ure? Who checked to ver­ify that the sum claimed was con­sis­tent with the rest of An­nex C, in terms of cat­e­gories, al­lowed and not al­lowed etc.?

If there was no ver­i­fi­ca­tion at that stage, why was pro­vi­sion not made for such ver­i­fi­ca­tion at a later date?

These ques­tions are all wor­thy of an­swers and we await the gov­ern­ment’s re­sponse.

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