The Oil and Gas Sector…Joint ministerial committee formed to address cost recovery

Jan 29, 2018 News

– Trotman

By: Kiana Wilburg

A joint ministerial committee has been established to examine matters related to cost recovery. This was recently revealed by Natural Resources Minister, Raphael Trotman.
He was at the time, responding to questions from this newspaper regarding the agency that would be mandated to examine cost recovery claims by ExxonMobil, when training is expected to commence regarding auditing skills and whether government would be contracting the help of international experts for this new field.
It was at this point that the Minister revealed that there is a joint ministerial committee comprising officials from the Ministries of Finance and Natural Resources. He said that one of the co-chairs for the committee is Finance Ministry Budget Director Sonya Roopnauth.
“They are looking at the fiscal and revenue side of things and they are meeting quite often.”
The Minister also noted that the Guyana Revenue Authority and the Bureau of Statistics are involved, along with financial agencies such as the International Monetary Fund (IMF) and the World Bank. Trotman also noted that a team from the World Bank is expected to be here soon.
He added, “I know training has started and workshops are being held. All systems are in place for production to be monitored when it commences in 2020.”

GRA REVIEWS
The Guyana Revenue Authority has commenced the review of cost recovery claims by USA oil giant, ExxonMobil. This was recently confirmed by GRA Commissioner General, Godfrey Statia.
Statia explained that based on the contractual arrangements, ExxonMobil is allowed to recover 75 percent of its costs in a given year. He explained that expenses which are not recovered for that year are carried forward to the following year.
Statia said, “So what you need to do is audit those costs …It is important to do a proper audit because a failure to do so can have implications for the government’s cut of the pie. The higher the expenses, the smaller the take could be, so the audits need to be effective. But we have started the review of the costs incurred thus far by ExxonMobil. The audit of the claims by ExxonMobil started last year.

Natural Resources Minister, Raphael Trotman

“You cannot wait until 2020 or for production to start for you to begin reviewing the costs. Until the Petroleum Commission is set up, GRA will continue to review everything that would be going into cost recovery claims. We are looking after taxes. That is why we are monitoring their expenses…”
He added, “There were a few things which were identified to ExxonMobil regarding their claims and we have asked them some questions on it. We have collected withholding tax and when production comes, corporation tax will kick in but it will be subtracted from Government’s share. Our staff is also being trained in cost recovery. We are at the forefront of it.”

IMF URGES
The International Monetary Fund has also urged the authorities of Guyana to commence auditing of all exploration, development costs by USA oil operator, ExxonMobil. The Fund made this known in one of its recent reports on Guyana’s oil sector. This document was handed over to the government last year.
Elaborating further on the matter, the IMF said that plans to establish a petroleum industry taxpayer unit attached to the large taxpayer office in the Guyana Revenue Authority should be prioritised. The Fund said that this effort is supported by a consultant from the US Treasury office of Technical Assistance.
The IMF said, “It will be important for this unit to start verifying and undertaking audits of cost incurred during the exploration and development phase, which is getting underway now. It would be advantageous to establish close working relations between the GRA and the sector regulators (Ministry of Natural Resources, Guyana Geology and Mining Commission and the prospective Petroleum Commission) to ensure that the limited petroleum sector expertise in government is applied most efficiently.”
The International Monetary Fund said the intention is that the Guyana Revenue Authority will be the single revenue collection agency for the petroleum sector. It opined that this is a reasonable decision given the key role played by the Production Sharing Agreement and the pay-on-behalf arrangement for corporate income tax in existing contracts (this is where the contractor’s income tax obligations are settled from the government’s share of the profit oil). However, given the limited experience in the GRA with petroleum taxation, the IMF said that there is urgency to develop skills in this area.

TANZANIA AND INDONESIA
Kaieteur News had 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. The Chairman 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 a revenue-sharing one. This was because each passing year has seen 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.