Accountant Nigel Hinds is wrong on cost recovery

Oct 05, 2018 Letters

Dear Editor,
It was with great concern that I read a letter in the press written by accountant Nigel Hinds stating that oil companies usually carry all the cost invested upfront in the exploration phases, and that the host country should not pay, much less audit those costs.
Since the oil and gas industry is new to Guyana, I like many, am not too familiar with how these things work. So, in trying to understand how cost recovery is applied, I did the most logical thing – google.
Then is when my respect for Nigel Hinds, the accountant, dissipated.
I found out that there are several formulas used around the world regarding how upfront investments in oil exploration is handled. In some cases, the oil company and the government actually split the cost upfront, at the start of exploration. In many of these cases this is done through a national oil company. It is reported that ExxonMobil spent around US$460M in the lead up to the Liza 1 discovery, which includes the cost of drilling that well. Using the spilt option above, Guyana may have had to come up with US$230M or G$48.3B – upfront. Where would this have come from?
Another option outlined in model Production Sharing Agreements, such as the one Guyana has with ExxonMobil and its partners, is for the oil company to pay these costs upfront, then if there is a discovery – usually a big if – the oil company is allowed to recoup that cost over a specified period at a specified rate.
The oil companies come with the expertise and specialized technology and equipment that makes finding the oil and producing it possible. The technology and expertise come at enormous cost, paid for by shareholders. Which business model would therefore allow for all that upfront cost (which the company forfeits if it does not find oil) to be carried by the company in the event of a discovery?
Suggesting that this is the norm is misleading.
Patrick Davis

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