Guyana’s oil contracts lack provisions to guard against inflated costs

Mar 30, 2018 ExxonMobil, News

…But Liberia ties companies with strict clauses

Any careful assessment of Guyana’s Production Sharing Agreements (PSAs)with ExxonMobil , Tullow Oil, Ratio Oil, Eco Atlantic and CGX, would reveal that there are mechanisms in place for these oil operators to recover their exploration, development and production costs.
But what is lacking in all of these contracts is a single clause that speaks to how the Government of Guyana should deal with inflated costs, once detected by these entities.
While such loose provisions exist, other nations have ensured that the necessary provisions have been taken to guard against inflated costs.
Liberia, for example, is known for its oil rich potential just offshore West Africa. Its oil industry has attracted multinationals such as Chevron and ExxonMobil.
Even though the Government of this English-speaking nation is elated to have the attention of these oil giants, it is by no means an indication that there would be a free for all for those entities as it relates to inflated costs.
In one of its PSAs, Liberia ties ExxonMobil and its other oil partner to a strict set of provisions.
The 2013 Production Sharing Agreement says, “If any such inspection or audit is finally determined to have overstated Petroleum Costs or understated revenue derived from Total Production by more than three percent all costs of the inspection or audit shall be borne or reimbursed by the Contractor and no portion of such costs of inspection or audit may be included in Petroleum Costs. Appropriate adjustments in payments and cumulative recoverable costs shall be made to adjust for all misstatements identified as a result of any such inspection or audit.” (More in this regard on the contract can be seen by following the said link:
(http://www.theperspective.org/2012/block_13_agreement.pdf)).

INFLATED COSTS
At some point, all oil producing nations would have faced issues with inflated costs by operators. As such, strict mechanisms are often put in place to ensure that such abuses are nipped in the bud.
Indonesia is just one nation which ended up taking its mechanisms to the extreme. Not only did it put stronger systems in place but it also moved away from the use of the Production Sharing Agreement model.
Indonesia’s move from Production Sharing Agreements to a new model in January last was long in the pipeline.
In several media reports in that country, the Government of Indonesia said that under cost recovery, contractors inflated costs to increase their share of production, the result being that Government’s share is reduced.
The Supreme Audit Agency of Indonesia found that several oil and gas production sharing contractors inflated their operating costs claims to US$300M. The Agency also noted that many of the costs claimed by the company were not even in keeping with the rules and regulations of Indonesia.
By moving to a gross-split model, the Government argues that contractors are forced to bear the costs of operating themselves. The Government believes that the new method will encourage the oil operators to spend more efficiently since there is no way to recover them.
The Government of Indonesia feels justified in doing away with a cost recovery mechanism for oil operators. The citizens there believe that for too long, they have been abused by oil operators.
The Government also expressed alarm at the fact that in 2016 alone, cost recovery by oil operators climbed up to US$13.9B. This was more than the sector even contributed in non-tax revenues for that year.
Additionally, the Government bemoaned the administrative challenges that came with addressing cost recovery as claimed by companies. In fact, the Government said that the problem with cost recovery is, there have been endless debates as to how much exactly the production costs should be.
The Government said it is not easy to calculate technology costs, especially in cases where only one company has a particular technology.
It was also noted in the Indonesia media that SKK Migas, a government-owned entity that manages the oil sector has a staff of 750 professionals. Approximately 80% of that staff is involved in the arduous task of ensuring that cost recovery claims by company are fair and accurate.
Anticorruption advocates in Indonesia are of the firm view that given its limited audit resources, and benchmarks to evaluate cost claims, the Government’s response to move away from cost recovery as a basis for production sharing is perhaps, a sensible move.