Hess and CNOOC which together hold 55% of the interest in Guyana’s oil rich Stabroek Block saw profits of $16.1b in 2020 and this means that they would be liable to pay $5.3b in taxes which this country has to meet according to the much reviled 2016 Production Sharing Agreement (PSA).
In his oil and gas series in today’s Stabroek News, commentator Christopher Ram reviewed Hess’s financial statements for 2020 which he had done for CNOOC in the preceding week. Last year was the first full year of oil production for the three partners in the Stabroek Block and the returns for Hess and CNOOC show how lucrative the Guyana oil operations has been for them.
Ram said that Hess’ income statement shows an Income Tax expense of $1,725 million, referring the reader to Note 9 which states that “the Branch is subject to corporate income tax at a statutory rate of 25% (2019: 25%)”. Ram said that tucked away in a note on the branch’s accounting policies, is the statement that under the Petroleum Agreement, certain taxes are settled by the Government on behalf of the Branch. Ram pointed out that the PSA does not use the word “settled”: it provides unambiguously that “the tax assessed will be paid by the Minister”.
According to Note 10 to the financials, the Hess Branch in 2020 sold approximately one million barrels of crude oil to a related marketing subsidiary of its parent, receiving net proceeds of approximately G$7.8 billion, or US$37 per barrel. This, he said, compares with data in the parent company’s annual report which gives the price of Guyana crude of US$46.41 inclusive of hedging, and US$37.40 excluding hedging.
“Since the G$7.8 billion accounts for only 13% of total sales of $59,240 million, the obvious questions are how many barrels in total did the Branch sell and the process for selling the remaining 87% by value”, Ram asked.
He said that the Hess income statement also shows financing cost of $520 million arising from provision for decommissioning, for which new and additional provisions and revisions of $3,514 million were made in 2020. While the $520 million can be traced to the income statement, the category of expense under which the provision for decommissioning is charged is not immediately apparent, Ram added.
“After all these costs are deducted from revenue, the Branch reports net income before taxation of $6,877 million, which but for the Petroleum Agreement would be subject to Corporation tax (25%) and to withholding tax (20%) on the deemed distribution branch profit tax (BPT). A deemed distribution is the balance of profit after the Corporation tax less any re-investment of such profits, subject to the approval of the Commissioner General. In 2020, the Branch’s reinvestment was considerably higher than the balance of profit so that while withholding tax most likely would not apply to year 2020, corporation tax does. It gets a bit tricky here. The Agreement states that such tax must be included in the taxable income of the Contractor, meaning that the $6,877 million has to be treated as if it is a post-tax amount, requiring grossing up”, Ram stated.
He added that the Petroleum Minister, Vickram Bharrat must find, within the next few days, $2,292 million to pay to the GRA the tax owed by Hess for 2020.
“Failure to do so would constitute a breach of the Petroleum Agreement and would also incur late filing penalty (10%) and interest (18% p.a.). Similarly, for CNOOC … the Minister is required to pay to the GRA (Guyana Revenue Authority) Corporation Tax of $3,099 million on the grossed-up value of post-tax profit of $9,298 million earned by it. The total of Corporation Tax to be paid by the Government for CNOOC and Hess earning a total of $16,175 million in 2020 is $5,391 million. Ironically, the tax payable would have been much more but for the liberal accounting applied by the two Branches”, he stated.
Ram will next review the financials of Exxon’s subsidiary, Esso Exploration and Production Guyana Limited, which he says “tell their own shocking story”. Exxon via its subsidiary holds 45% of the Stabroek block.
