Oil companies pad bills with “inflated and ineligible” costs 87% of the time

May 02, 2018 News

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…Int’l team warns countries to audit all bills received

International organization Publish What You Pay (PWYP), has cautioned that countries should audit all bills submitted by oil companies. The entity’s call in this regard is based on its years of research which shows that “inflated and ineligible” costs are often part of an oil company’s bill more than 87 percent of the times.
Publish What You Pay is the world’s leading coalition of civil society organizations united in the call for a more transparent and accountable extractive sector. With more than 800 members, a global secretariat and 40 national coalitions that span the globe, PWYP has committed to working together to ensure that citizens have a say over whether their resources are extracted, how they are extracted and how their revenues are spent.
The Canada-based organization noted in its latest report that inflating project costs reduces government revenue because it lowers net (after-cost) income upon which profit-based taxes are assessed.
It stated that in some cases, costs claimed are simply ineligible. In extreme cases, which have occurred hundreds of times, false invoices are filed even when no work was actually done. The international organization said that Chile for example, was a major victim of false invoices by companies in the extractive sector.
Publish What You Pay also noted that more commonly, claims are made for costs that should be excluded, but are often not caught by the relevant authorities. It said that case study evidence demonstrates that this includes companies seeking to claim expenses that: were incurred prior to the signing of the contract; were for the personal interests of expatriate employees and families; involved duplicate invoices for goods or services that have already been expensed; and which are clearly ineligible, such as costs related to mergers and acquisitions, or transfers in participating interests.
The report said that oil companies have thoroughly abused Indonesia in this regard which led to that nation ultimately abandoning the use of Production Sharing Agreements and provisions for cost recovery.

The anticorruption agency noted that the revenue impact of accepting ineligible costs is heightened in a production sharing system where the main source of government revenue is their share of overall production (termed “profit oil”). It stated that Profit oil is divided between the company and government only after “cost oil” has been allocated to the company to reimburse eligible project costs.
It said, “Any increase in project costs results in a decrease in available profit oil. Where increased expenses are legitimate, both the company and the government suffer. There is simply less ‘profit oil’ to be shared. But where ineligible or inflated expenses are accepted, the company receives the full value in cost oil rather than only a portion of the value through profit oil.”

With this in mind, Publish What You Pay stressed that any wise Government interested in the prudent management of such a nonrenewable resource would not hesitate to conduct audits on bills submitted by oil companies. It emphasized that the evidence is simply too overwhelming for someone to do otherwise.
PRECONTRACT SCANDAL
Since the citizenry was informed that ExxonMobil submitted a US$460M bill regarding pre-contract costs, one burning question was being asked repeatedly—was this sum verified or audited?
Minister of Natural Resources, Raphael Trotman was challenged to answer same.
The Alliance For Change (AFC) Leader said, “Of course it was. You need to speak to (Commissioner General of the Guyana Geology and Mines Commission) Mr. (Newell) Dennison again, and he will explain.”

The Minister said that it is GGMC which tracks the work programme of companies including expenses.
As recommended by Minister Trotman, Kaieteur News contacted GGMC Commissioner General, Newell Dennison. But his version on the US$460M pre-contract costs is a far cry from what Trotman had to say.
Dennison said, “Put it this way, we were satisfied that the amount that was identified , based on the programmes of work that was done before, up to the point in time when the aligned arrangement was done… we were satisfied that that amount represented the expenditure up to that time.”
Kaieteur News challenged Dennison to say how GGMC “satisfied” itself that the figures were correct.
The GGMC Commissioner General stated, “Because the programmes that were done, there were estimated costs for those programmes (by ExxonMobil).We would have had the work programme that was approved from the time the contract started from 1999 to 2015. So it would have been based on those costs.”
Asked to say if an audit was then conducted on those costs, Dennison said, “We didn’t do an audit; an audit wasn’t done.”
He said that it is not that GGMC took what the company said with blinders on, but, it all seemed “reasonable.”
Kaieteur News then explained to Dennison that his statements contradict that of the Minister who said that the pre-contract costs were verified.
To this Dennison said, “Well that is why I was cautious as to whether I should say anything at all, because verification and satisfaction are two different things. But in terms of an audit, no, an audit was not done.”
Asked if there was any shred of verification of the figures, the Commissioner General answered in the affirmative. He explained that ExxonMobil would have submitted financial statements on the expenditure it incurred on an annual basis.
But when challenged to say if in each year, GGMC sought to verify that the numbers were adding up; that they were not padded, Dennison said, “No, we have never done.” The Commissioner General added, “They (ExxonMobil) would have submitted documents and there would have been accounting documents that were prepared by accountants and submitted saying that yes, these are the expenditures that have been done by such and such and such for the years so, so, so, so, so.”

NOT ADDING UP
While Dennison is convinced that the pre-contract costs are “reasonable”, there are several local critics, who by virtue of their own investigative work, have found that the numbers just aren’t adding up.
With the use of financial statements, Chartered Accountant, Chris Ram was able to show how ExxonMobil’s pre-contract cost opens itself to much question and suspicion.
He noted that ExxonMobil is represented by three companies as the contractor for the Stabroek Block: Esso, CNOOC and Hess. No financial statements can be found here for Hess. Turning to the financial statements of Esso and CNOOC, Ram pointed out a few important figures.
Ram stated that the combined expenditure of Esso and CNOOC at December 31, 2015 was $26B and reported losses of $21B, giving a total of $47B. In United States Dollars, using a $200 rate, Ram said that this gives a total US$245 million, well short of the US$460 million that the Government has accepted in the Agreement with ExxonMobil. To make up the total of US$460 million, Ram said that Hess alone would have had to spend, in contract costs, some US$215 million or approximately $46B.
He said, “That defies logic and credulity. But there is more. It must be a stretch that the pre-contract cost of CNOOC which only entered the sector in Guyana in late 2014 would have incurred greater contract cost than Esso. And an even greater stretch that Hess which signed with Esso in late 2014 would have spent nearly as much as Esso and CNOOC combined.”
Ram continued, “One would recall that Esso signed its first Petroleum Agreement in 1999, 15 years earlier, and it is the company which has been reporting all the oil discoveries. That either CNOOC or Hess which entered the sector in late 2014 would be outspending Esso arouses particular interest…”
Having looked at the available information, the Chartered Accountant said it is hard to avoid the conclusion that the US$460 million cannot be explained on any rational basis. Ram stressed that the only satisfactory and acceptable resolution of this matter is a special audit independently undertaken.

 

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