ExxonMobil and Cost Recovery claims…Guyana’s limited resources will hinder verification of accuracy, reasonableness – Goolsarran warns

Dec 03, 2017 News

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By Kiana Wilburg
Guyana’s limited resources will certainly put it at a disadvantage when it comes to verifying the accuracy and reasonableness of cost recovery claims which will be made by ExxonMobil. This is according to Chartered Accountant and former Auditor General, Anand Goolsarran.
The anticorruption advocate insists that the coalition Government should consider renegotiating the contract it has with ExxonMobil to allow for a revenue-sharing model to be in place, similar to that which currently exists in Indonesia.
PROFIT VS. REVENUE SHARING
In a profit-sharing arrangement, Goolsarran explained that the oil company uses the revenue derived from production to recover its capital and operational expenditure. This, he said, is known as ‘cost oil’. The remainder, known as ‘profit oil’, is split between the government and the company. Goolsarran said that the extent to which countries have a dual arrangement in place (i.e. royalty plus profit-sharing), it stands to reason that royalty rates will be lower than those that receive royalties only. In Guyana’s case, it is only receiving a two percent royalty.
According to Goolsarran, a key concern relating to profit-sharing arrangements is that profits can vary significantly from year to year. He said that this can be as a result of the unpredictability of prices on the world market and the need to recover the initial investment over a period of time.
On that note, Goolsarran said that countries such as India, Tanzania and Indonesia are experiencing significant difficulties in terms of their ability to independently verify the reasonableness of the expenditure that is charged against revenue to arrive at a profit. The Chartered Accountant said that given the uncertainty of the extent of profits that is likely to accrue; there are strong arguments for there to be in place, revenue sharing agreements rather than those relating to profit-sharing.
The former Auditor General said that a revenue-sharing agreement provides a guaranteed flow of income to Governments once production begins, and can be monitored easily from the government’s perspective. He said that there will no longer be a need for detailed and independent scrutiny of oil companies’ costs to ensure that only legitimate expenditure is charged against revenue. He said that this is an area that has been subjected to intense disagreements between oil companies and governments.
An additional consideration Goolsarran highlighted is that oil companies can curtail production in anticipation of higher prices in the future, with consequent adverse impact on profits. He said that it was mainly for these reasons that India has moved away from the profit-sharing model to one of revenue-sharing, based a recommendation of the country’s Auditor General.
TANZANIA AND INDONESIA
Kaieteur News recently carried an article on the Tanzanian experience with ExxonMobil in which it was stated that the country had serious difficulty in verifying the how the figure of “cost oil” was arrived at.
Upon examination of the leaked contract with ExxonMobil, the Chairman of the Public Accounts Committee disclosed that there was no “ring fencing” of blocks and that the Production Sharing Agreement contained no provision to guard against the incurrence of costs in one block and recovering them from another profitable block. Goolsarran referred to the writings of Nobel Laureate, Joseph Stiglitz who asserted that “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.”
This newspaper also reported Indonesia’s switch from the profit-sharing model to revenue-sharing. This was because each passing year saw a dwindling of the country’s share of profits in the belief that oil companies were inflating their costs.
This was despite the fact that the government-owned entity that manages the oil sector has a staff of 750 professionals and approximately 80% of that staff is involved in the verification of cost recovery claims by oil companies to ensure that they are fair and accurate.
With the aforementioned in mind, the Chartered Accountant insisted that there are limited resources available in Guyana to enable the independent verification of the accuracy and reasonableness of the costs that are chargeable to revenue.
He said it is mainly for this reason that the Government of Guyana should re-negotiate the contract with ExxonMobil to allow for a revenue-sharing model to be in place.

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