The RHVE Consortium that undertook the audit of the US$7.3 billion claims by ExxonMobil’s subsidiary for the period 2017 to 2020 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 seen by the Stabroek News states.
This newspaper had earlier reported that the final report for this audit, conducted by the Ramdihal, Haynes, Vitality Consulting, and Eclisar Financial & Professional (RHVE) consortium was handed over to government last month and the challenged amount works out to around 1.3% of the total – much less than the 12.8% in the first audit of the US$1.67 billion by UK auditing firm, IHS Markit.
“We analyzed the Cost Recovery Account charges and credits for validity, propriety, and compliance with the PSA (Production Sharing Agreement) and Annex C. Based on the review, it is our opinion the Cost Recovery Account entries were in accordance with the PSA and Annex C, except for items discussed in the report,” the report says.
Of note too was that, according to the auditors, “EEPGL’s cooperation was outstanding throughout fieldwork,” it adds while noting that it had submitted 187 Information Requests and while some answers took longer to get, all were completed and they were overall, “encouraged by and pleased with EEPGL’s assistance.”
Coming in the wake of the expanding scandal over the illicit bid to reduce the US$214 million disputed figure in the IHS Markit audit, there will be intense interest in determining whether the claimed expenses of ExxonMobil and partners were properly scrutinised in the RHVE audit.
The GRA – as distinct from its functions of examining the tax returns of ExxonMobil and its partners, had declined to participate in a review of the disputed IHS figure as it had not been involved in the process from the start. It is unclear what the GRA’s role will be in relation to the RHVE report on the US$7.3 billion audit.
RHVE said that during the auditing process, EEPGL sought to justify the flagged expenses.
“EPGL 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 in-country personnel are 100 per cent 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% non-recoverable 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 in-country 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 at-cost 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.
Partial credit
The US oil major also granted partial credit but did not explain why full credit was granted.
And when the company trained three local engineers in Houston, it billed to cost recovery much higher affiliate rates instead of the trainees’ salaries.
“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 Stabroek out of each department. “The allocation percentage of each department Cost Object was scrutinized, 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 says.
The auditors also believe, the audit pointed out, that the costs discussed with relation to its Economic Development Center 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.
The government has not stated its position on this report thus far.
