India considers abolishing Cost Recovery by oil companies

Jan 15, 2018 ExxonMobil, News

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…Govt. audit reveals alarming instances of abuse

By Kiana Wilburg
When oil operators have to recover their expenses, controversy often arises between those entities and the Governments of host countries.
Many oil producing countries like Indonesia and India have experienced such difficulties. Due to oil operators inflating their costs, Indonesia was forced to implement new laws to protect its profits, while India is considering abandoning the entire process.
In short, the abuse by the oil operators when it comes to cost recovery is simply too devastating.

This has been documented at length by the Centre for Public Integrity, an American nonprofit investigative journalism organization. Its stated mission is “to reveal abuses of power, corruption and dereliction of duty by powerful public and private institutions in order to cause them to operate with honesty, integrity, accountability and to put the public interest first.”
In the case of India, CPI said that through the end of 2012, India had allowed more than two dozen oil companies to recover more than $24.5 billion in expenses. Concerns over the scale of these expenses led to the nation’s Auditor General (CAG) conducting a detailed audit of the claims of three companies: Reliance, Cairn and BG, in order to assess whether the “revenue interests of the Government (including royalty and share of profit) were properly protected.”
The audit demonstrated how difficult it can be to conduct effective oversight on extractive sector companies. The request for company documents by State auditors were at first refused on the grounds that they were not relevant for the review of “accounting procedures” and would be needed only for a review of “performance” which was not provided for in the contract.
Documents for most, but not all, of the companies were finally provided more than a year after the initial request only after a direct order from the Minister of Petroleum and Natural Gas. Finally, on completion of the audit, one company claimed that confidentiality provisions in the contracts prohibited the government from sharing the audit even with the Parliamentary Committee responsible for overseeing the petroleum sector.
CPI said that the audit concluded that the existing fiscal regime contained incentives for companies to front-load and inflate the expenses included in their cost recovery claims. Specifically, the audit stated that “it is inconceivable that the private contractor would fail to protect his financial interests, and assess every investment / operational proposal to see whether it would result in incremental revenues for him both in terms of cost recovery and contractor’s share of profit petroleum.”
CPI noted that the auditors also criticised the Oil Ministry for not enforcing the terms of the contracts effectively and for not catching abuses that hurt the state’s share of profit. In the wake of the controversy, the Indian government struck a high-level panel to review existing contracts and explore “various contract models with a view to minimise the monitoring of expenditure of the contractor without compromising, firstly, on the hydrocarbons output across time and, secondly, on the Government’s take.”
The panel concluded that the system of cost recovery “encourages the Contractor to inflate costs, to the detriment of Government’s share in profit petroleum.”
Its main recommendation, therefore, was that India should adopt a “new contractual system and fiscal regime based on a post-royalty-payment revenue-sharing to overcome the difficulties in managing the existing model based […] the cost-recovery mechanism.” (SEE LINK FOR MORE DETAILS: https://cipmoz.org/images/Documentos/Industria_Extrativa/309_Spinformacao_2014_05_en.pdf
COST RECOVERY

Oil production is expected to get into to full swing by March 2020. That is less than two years away. But even at this point, the Government is yet to point out what ‘specific’ measures are in place to ensure that it can authenticate cost recovery claims by USA oil giant, ExxonMobil.
Kaieteur News had asked President David Granger to provide some details in this regard and he was unable to. The said question was also put to the nation’s point man on oil and gas, Natural Resources Minister, Raphael Trotman. He too is yet to list just two things that are in place to ensure Guyana is not robbed through such claims.
At a recent press conference, Trotman said that the authenticity of cost recovery claims was one of the main discussions he and others had with the International Monetary Fund (IMF) and its experts.
Trotman acknowledged that indeed, several countries around the world; Kenya, Ghana, the USA and Great Britain, have had struggles with ensuring cost recovery is precise and transparent.
The Natural Resources Minister said, “We have turned to some of the best financial experts in the world and they have come, they have done their assessments and they will be guiding us. It is a work in progress and we are doing better by the day.”
When Kaieteur News still insisted on him outlining a few provisions in this regard, he pointed out that the Guyana Revenue Authority was able to garner $900M in taxes due to its attentiveness in this regard.
In the eyes of Chartered Accountant and former Auditor General, Anand Goolsarran, 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.
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.

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