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Specifics of ExxonMobil’s cost recovery still to be worked out – Minister Patterson
Public Infrastructure Minister, David Patterson
Many countries have paid a terrible price for failing to make oil contracts with foreign companies available for public scrutiny.
Tanzania is a classic example of this. It was only when the African nation’s Production Sharing Agreement (PSA) was leaked that it learnt the extent to which its people were being robbed based on the tricks used by oil companies to inflate their cost recovery figures.
Guyana’s authorities are yet to put any mechanisms in place to ensure that this country does not repeat Tanzania’s mistakes. This was recently confirmed with Minister of Public Infrastructure, David Patterson, who shares some responsibility for the energy sector.
The Minister said that with regards to the “ring fencing”, (which involves the transfer of incurred costs from one place to another), the Guyana Government would have to ensure that it has adequate mechanisms in place.
Patterson added that the Ministry of Natural Resources has several proposals, including hiring persons to act on behalf of the Government so as to decide with ExxonMobil, what can actually be charged as cost recovery.
He noted, too, that mechanisms to measure the volume of oil extracted as well as the monitoring of the reservoir, has not been worked out as yet.
THE CASE OF TANZANIA
This geologically picturesque nation of Eastern Africa paid highly for keeping a Production Sharing Agreement (PSA) with StatOil of Norway in partnership with ExxonMobil under lock and key.
In fact, it took the efforts of some really brave anticorruption advocates to leak the contract to the Parliament of Tanzania in 2014. It was immediately scrutinized by the Public Accounts Committee (PAC) and the findings were deemed mindboggling.
So damning were the revelations that the PAC Chairman at the time, Zitto Kabwe, did a special case study on the terms agreed to between the Government and Statoil/ExxonMobil. (See full report here: http://www.thecitizen.co.tz/blob/view/-/2433654/data/818193/-/1228yowz/-/ZITTO-PSA-OIL.pdf)
Kabwe stressed that the leak of the natural gas terms agreed with Statoil / ExxonMobil presented a unique opportunity to examine how much more the nation could have benefitted from its considerable natural gas resources.
In his paper, Kabwe assessed the terms of the PSA as well as examined the wider fiscal challenges in the oil and gas sector of Tanzania.
As it relates to fiscal challenges, Kabwe said that Tanzania faced several issues. He said that the nation suffered big time in the determination of Cost Oil/Gas. (Cost Oil simply speaks to the portion of revenue an oil operator is entitled to as compensation for incurred production costs. This is usually outlined in PSAs.) Kabwe noted that the determination of Cost Oil is one of the biggest challenges in developing countries.
In Tanzania, he said that there was no “no ring fencing” of blocks and worse yet, there was no provision to guard against this in the PSA.
The politician said, “This means that costs incurred in one block can be recovered from another block. This is one of the challenges as it is easier for private companies to mount on costs and even declare losses from profitable blocks.”
He added, “From my recollections as PAC Chairman, only four PSAs have been audited in order to verify the costs by investors…”
Even as he examined varying subject areas in his paper, Kabwe made one central point repeatedly—When oil companies end up walking away with the hog of the profits, something is radically wrong.
In this regard, he even quotes American economist, Joseph Stiglitz, who argues a similar point. Stiglitz says, “The fact that the typical contract allows the oil companies to walk away with the windfall profits suggests that something is wrong with the way these contracts are designed.”
Kabwe stressed that after the PAC examined the terms of the StatOil/ExxonMobil agreement, it was nothing but an obvious confirmation of the statement by Stiglitz.
He said that while the conversation on how Tanzania benefits from the PSAs it signs with companies is all possible because of the leak of the natural gas terms, the Parliament will still have incomplete information.
He said that critical decisions are made behind closed doors. And worse, the decisions themselves remain secret.
The politician insists that public access to such agreements will bring accountability to decision makers and thrust them to push for the best deal for their citizens.
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