The Guyana Revenue Authority (GRA) has offered a no-objection to the US$214m in questionable claims by ExxonMobil’s subsidiary, EEPGL in a move that will likely raise the question of arbitration on a matter which is pivotal to whether this country is being denied more profits.
After the damning audit by UK firm IHS Markit was kept from the public for two years, Stabroek News reported on its findings on April 2nd this year. Five months later, after a series of excuses in which it has cited the need for more verification of the IHS Markit findings, the government is still to pronounce on the US$214m which would constitute additional profit to this country once it was disallowed.
Stabroek News has been told that the GRA wrote Minister of Natural Resources Vickram Bharrat last month advising that the audit be finalized and offering a no-objection to the key finding that there was a total of US$214m in questionable expenses. The government would then be expected to formally notify Exxon-Mobil’s subsidiary Esso Exploration and Produc-tion Guyana Limited (EEPGL) and insist that its profit line be credited with half of the questioned figure.
Sources told Stabroek News that the GRA had been first asked in November last year to provide a no-objection to the IHS Markit report but had replied and stated that it was in no position to do this as it was not a party to the discussions and agreements between EEPGL, IHS Markit and the Minis-try of Natural Resources. The GRA never subsequently received any information that would enable it to conduct a review and provide an opinion and this is what led to the letter last month to Bharrat stating that given the time that had elapsed that the audit be finalized and that the finding in relation to the questioned US$214m should stand.
Since the letter was sent, there has been no word from the Ministry of Natural Resources on the matter. The ministry and the government have been accused of being soft on ExxonMobil and the formal position that US$214m was improperly claimed could lead to the US company going to arbitration for a ruling.
The IHS Markit audit was the first ever of the cost claims by Exxon-Mobil and its partners for 1999 to 2017 and found that a whopping 12.8% of its US$1.67b expenses could be disputed by the Guyana Government as they were not allowable or did not have sufficient supporting documentation.
With an audit recently completed of US$7.3b in expenses for 2018-2020, the government will come under renewed pressure to fight off charges that it has turned a blind eye to excesses by ExxonMobil and its partners.
Among IHS Markit’s audit’s revelations are that some US$214.4M in claims are questionable and recommendations were made that government challenges the claims. In addition, it said that ExxonMobil’s subsidiary had not done enough to keep the Guyana Government apprised of the activities and costs associated with the development.
“The Audit has established that GoG has reasonable grounds to dispute US$214.4 million plus overhead adjustments of the costs currently included by EEPGL in the Cost Bank. This amount represents 12.8% of the cumulative cost recovery balance as of Q4 2017 Statement,” the IHS Markit Final Audit Report obtained by the Sunday Stabroek said.
The disputed costs fall into three main categories – Defined Costs for Removal (DCR), Inadequate Supporting Documentation (ISD) and Ministerial Approval Required (MAR). For each the sums were: DCR US$34M, ISP $179.8M and MAR US$0.27M.
“Defined Costs for Removal” amount to US$34.4 million – these costs have either been included in error, are not aligned with PSA (Production Sharing Agreement) provisions, are not related to Petroleum Operations, or are considered to fall outside of industry best practice. “Inadequate Supporting Documentation” accounted for US$179.8 million – these costs suffer from a transparency issue as the cost basis, nature and justification of these costs could not be established with the furnished documentation even after several rounds of documentation requests from the Audit Team. Although these costs may be valid, the GoG has the right to the transparency of how these costs relate to Stabroek Petroleum Operations,” the audit report asserted.
It continues, “Minister Approval required” for US$0.27 million – these costs have been identified as predominantly R&D related costs which require Minister Approval before they can be considered cost recoverable. No evidence of Minister Approval has been provided.”
Explaining the period covered and giving a breakdown of the sums scrutinized, IHS said that it had been engaged by the Government of Guyana (GoG) to independently audit the cost recovery claim submission by Esso Exploration and Production Limited (EEPGL) for the period between 1999 and 2017 within the Stabroek Contract Area that amounts to a total of $1,677,774,727 in accordance with the prevailing Production Sharing Agreement(s).
The objective of the audit was to evaluate whether the expenditure submitted by the company was in line with the provisions of the PSA and if costs are entitled for cost recovery.
Annex C of the 2016 Petroleum Agreement between the Government of Guyana and EEPGL and partners states that the amount of US$460,237,918 refers to costs incurred in petroleum operations pursuant to the 1999 Agreement up to 31 December 2015. It defines pre-contract costs as contract costs, exploration costs, operating costs, service costs, general and administrative costs, and overhead charges as defined in the 1999 Agreement. The Annex further states that Exxon is to be reimbursed ‘such costs as are incurred under the 1999 Agreement between January 1, 2016, and the effective date which shall be provided to the Minister or on before 31 October 2016 and such number agreed on or before 30 April 2017’.
There is also a bridging agreement that links the 1999 Petroleum Agreement with that of 2016.
A breakdown of the sums and for the periods state that a lump sum amount of $460,237,918 was included within the 2016 Production Sharing Agreement and is referenced as Pre-Contract Costs or for spending from 1999 to 2015. The remaining sums, which accounted for most of the total expenditure was US$1.2B and is referred to Post-Contract Costs and was incurred between 2016 and 2017.
Some 73% of the total sums were incurred for the 2016-2017 period and the audit highlighted the lack of transparency for nearly half of the cost recovery statements for the last quarter of 2017. It is on these grounds that the audit team recommended that government deny its inclusion into the cost bank.
The audit explained that of the amount of US$214.4 million referred to, only US$34.3 million is considered ineligible, while US$180.1 million lacks adequate supporting documentation.
