Before proceeding with today’s article, we would like to offer some brief comments on a letter published in last Saturday’s issue of the Stabroek News. The letter was written by Alex Graham on behalf of VHE Consulting that undertook the audit of Exxon’s post-contract costs and was published under the caption “Goolsarran’s Accountability Watch’s incorrect assumptions and conclusions may have been drawn from an incomplete or parts of the audit report’. Our comments are as follows:
(a) We did mention in our article of 25 March 2024 that we are unsure whether the 55-page document constitutes the full report. In the absence of any information to this effect, we had no alternative than to carry out our review of the document in our possession. If and when the full report is made public, we will revisit the results of our review to determine if there has been any inaccuracy in terms of our analysis and conclusions. It has been almost three years since the audit of the pre-contract costs covering the period 1999 to 2017 was completed but the related report is yet to be made public. So, we are not optimistic that this report will be made public any time soon.
(b) The letter asserts that a qualified and experienced accountant with a background in internal/external auditing needs to be familiar with “cost recovery or contract compliance audits” in order to review the audit report on Exxon’s post-contract costs. Suffice it to state that compliance auditing is an integral part of financial statements audit. In this regard, the external auditor is required to assess, among others, whether the financial statements were prepared in compliance with applicable laws, regulations and circular instructions as well as contractual obligations. This is especially so in relation to IDB and World Bank-funded projects which have significant contractual obligations on the part of Guyana for loans taken from these institutions. In fact, Section 24 (1) of the Audit Act 2004 requires the Auditor General to conduct not only financial and compliance audits but also performance or value-for-money audits. It is therefore incorrect to consider that “cost recovery or contract compliance audits” are separate and distinct from financial statements audits and require different skills.
(c) VHE Consulting were presented with a Cost Recovery Statement in the amount of some US$7.3 billion and were asked to verify whether the transactions comprising this amount were indeed recoverable costs in the context of the 2016 Petroleum Sharing Agreement (PSA). This is in essence a financial statements audit that requires a comprehensive study and understanding of the PSA to ascertain what costs are recoverable and what are not. In 2015, we undertook the four forensic audits on behalf of the Ministry of Finance, notwithstanding that we were not experts in forestry matters, environmental issues, construction management, or investment activities. Our reports are on the Ministry of Finance’s website for all to see.
(d) Following the release of the 2016 PSA to the public, we had written several articles dealing with its contents. We also carried a few articles on oil and gas accounting based on research carried out. It will therefore be incorrect to state that we are not familiar with the contents of the PSA which is the main point of reference in the conduct of the audit by VHE Consulting.
(e) While the Council of Petroleum Accountants Societies (COPAS) provides guidance on accounting issues in the oil and gas industry, one does not need to become a member of COPAS in order to carry out such audit. One doubts whether such guidance conflicts with the International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISAs). That apart, the Authorities have appointed the Guyana Revenue Authority (GRA) as the agency responsible for reviewing the results of the cost recovery audit, but how many at the GRA are members of COPAS? And can the same not be said of IHS Markit, a leading provider of data and analytics, that undertook the audit of Exxon’s pre-contract costs?
(f) To be eligible to sit an examination to become an accredited petroleum accountant under COPAS, one must have a four-year degree with 12 credits in accounting and one year’s experience in the oil and gas industry, or five years’ experience in the oil and gas industry. Once accepted, the candidate is given access to on-line study materials and can take the three-hour examination at any time within two years of registration. Compare this with the several years it takes for one to become a Chartered Accountant. Does it mean that a professionally qualified and experienced accountant who is not an accredited petroleum accountant under COPAS, is not competent enough to comment on the audit report issued by VHE Consulting?
(g) The reaction to our article is not unexpected, considering that VHE Consulting has tendered for the next round of audit covering the period 2021 to 2023. Additionally, in several parts of the report, the auditors have stated that some of the issues would be further examined during the next audit, implying clearly that there is an expectation that VHE Consulting will be reappointed auditors.
In today’s article, we conclude our discussion on the audit report on Exxon’s post-contract recoverable costs for the period 2018-2020 by examining the auditors’ response to the remaining questions posed by the Authorities. We will then draw some final conclusions on the report.
Drilling well and related costs
The question posed was whether the grant of a no objection to drill a well means approval of the related costs to be included in the Cost Recovery Statement and whether spending is approved before or after the incurrence of expenditure. The auditors’ response was that the PSA requires that the Contractor send its annual work programme to the Minister for review and approval and that ‘the specific recoverability of a cost is determined in Annex C’. The auditors, however, did not elaborate on what Annex C says in relation to the question posed, leaving the onus of reader to go through the annex to ascertain the answer to the question.
Duty, fees and other imposts of a minor nature
According to the auditors, immigration fees, work permits, fitness, insurance for vehicle rental, and PPRL/PPL licensing fees are cost recoverable under Article 5.1 (f).
Travel expenses – business/petroleum operations vs personal/pleasure
The auditors indicated that there were more than 1,000 travel expense reports. They stated that they identified ‘many travel expenses that were not for Petroleum Operations or were for corporate expenses, see Exceptions 45 and 46, but we did not see any expense reports for personal or pleasure’. It is unclear from the auditors’ response whether any travel expenses not related to petroleum operations or for corporate business was charged to the Cost Recovery Statement.
Entertainment allowance for EEPGL
The auditors stated that they did not see any travel expense reports that specifically included entertainment. They, however, indicated that there were costs for a “first oil” fireworks show.
Compliance with the income tax law for employees
The Contractor withheld and remitted PAYE taxes on behalf of all employees, both local and expatriate staff. In the case of expatriate employees, salaries were grossed up to ensure that their earnings remained the same had they been working in their country of residence. The auditors concluded that based on various tests carried out, the Contractor has complied with Guyana’s income tax laws as well as the requirements of the PSA.
Medical expense of family/non-workers
The auditors stated that they did not have sufficient invoice details to identify specific individuals receiving medical treatments. The Contractor charged medical costs from SOS International, including those relating to clinic rental, regional medical director, emergency physician, clinical nurses, and ambulance driver, among others. The total costs amounted to approximately $250,000-$300,000, 95 percent of which were charged to the Stabroek Block and hence reflected in the Cost Recovery Statement.
Legal expenses
The auditors indicated that they identified significant legal costs charged that were reflected in the Cost Recovery Statement. While many of these costs were appropriately charged to Stabroek Block, they identified the cost of some legal matters that were not recoverable, as confirmed by Squire Patton Boggs (UK) LLP, acting on behalf of the consortium.
Costs for persons trained by EEPGL.
The auditors stated that they identified approximately US$4.3 million charged to specific training accounts. However, the related invoices did not indicate whether personnel trained were Guyanese or other nationality. In particular, EEPGL sent three Guyanese nationals to ExxonMobil’s Houston, Texas campus for several months of training. EEPGL agreed to grant credit for certain costs incurred.
Surface rights costs
The auditors referred to Annex C of the Agreement which states that surface rights costs are ‘all costs attributable to the acquisition, renewal or relinquishment of surface rights acquired and maintained in force for the Contract Area including any amounts payable pursuant to Article 10 of the Agreement’. They stated that they did not have insight as to why the PSA was drafted with this language but indicated that it is clear such costs would be recoverable.
Disability payments to employees
The auditors stated that they did not identify any disability payments to employees and that it is common industry practice for disability payments to be excluded from the Cost Recovery Statement as they are included in the employee’s benefit package.
Cost of relevant software and hosting networks
The Contractor charged to the Cost Recovery Statement approximately US$2.0 million for PetroLink software for the period 2018-2020. PetroLink software enables drilling data to be captured at the rig and shared in real time to enable monitoring of drilling activity from anywhere. This is in addition to the following: (i) approximately US$1.2 million for NT Computeac laptops and monitors, net shelters, and racks for network equipment; (ii) approximately US$200,000 for Centurion Data services that included network cabling installation and terminations services, fiber optic cable works, and racks and trays for storage of equipment; (iii) approximately US$200,000 for Corva AI LLC analytics software subscriptions which were subscriptions for real time data analytics; and (iv) approximately US$2.2 million for Englobal US Inc. installation and commissioning services of the Liza FPSO’s Universal Master Control System.
Bonuses, relocation allowances, etc.
The auditors stated that they identified approximately $2.0 million in relocation costs, including allowances, moving, storage, and work permits.
Income tax for Contractor’s employees
The auditors quoted the relevant sections of the PSA regarding this matter, in particular Article 15.2 which stipulates income taxes for employees of the Contractor are a recoverable cost.
Cost of disposal of scrap metals, lubricants, etc.
The auditors stated that they did not identify any specific disposal of scrape metal or lubricants and that excess materials are housed in inventory.
Ogle complex
According to the auditors, the Contractor charged 100 percent of the Ogle complex construction costs to date to Stabroek Block and has advised it intends to continue to do so, as discussed in our article of 24 March 2024.
Conclusion
We had stated that we are unsure whether the 55-page report that we were able to access constitutes the full report. The response from VHE Consulting suggests that it is not the full report. Until we are able to have access to the entire report, we stand by our analysis and conclusions as highlighted in our articles of 24 March 2024 and 1 April 2024.
