Energy Dept. should modify cost recoverable items - Oxfam America

Energy Dept. should modify cost recoverable items – Oxfam America

Nov 23, 2018 News

By Kiana Wilburg

As the newly-established Energy Department pursues the revision of the model Production Sharing Agreement (PSA), it may find it prudent to urgently modify those costs, which oil companies are allowed to deduct. This point was recently made by Oxfam America.
The entity is a confederation of 20 independent charitable organizations, which seek to fight some of the factors that lead to poverty, one of them being the poor governance of extractive wealth.

Director of Power and Money at Oxfam America, Ian Gary

The transparency body emphasized that there are certain costs, which present a greater risk to government revenue, and their eligibility may merit review. In this regard, it sought to warn Guyana’s authorities that the payment of interest on a loan an oil company takes from a related party is one such cost.
The company explained, “Oil and gas projects require significant capital outlays over their life, including the costs of drilling the well and constructing infrastructure to pump and refine the oil. Often, a related party will provide an oil operator with a loan for its project. But the interest rate on that loan is often highly unreasonable…”
Oxfam then cited a case involving Chevron Australia, which highlights how companies may use such loan arrangements as a means of shifting profits offshore.
Oxfam noted that in 2017, the Federal Court of Australia upheld a US$340 million tax adjustment levied on Chevron Australia by the Australian Tax Office (ATO). This decision came about after the ATO discovered that a Chevron affiliate in the U.S. State of Delaware set an unreasonable interest rate for a loan to Chevron’s Australian arm.
And that was not the worse part. The court found that the loan was not even a genuine transaction. It was simply used by Chevron Australia to artificially reduce its profits and tax payments in Australia, thereby shifting billions in revenue to its affiliate in Delaware. Because of the scrutiny meted out by the Australian Tax Office, taxes were adjusted for 2004 to 2008, and the additional revenue of US$340M was recovered from Chevron.
With this as its premise, Oxfam warned that Guyana should not hesitate to review the costs, which are eligible for recovery by oil operators.

CHANGE COST RECOVERY RULES
Also joining the call for Guyana to address issues relating to cost recovery is the International Monetary Fund (IMF).
After a review of Guyana’s accounting annex in its PSA with ExxonMobil, the International Monetary Fund said that there can be opportunities for abuse and profit-shifting activities. The IMF notes that in Guyana’s PSAs, exploration and even development costs can be fully expensed for cost recovery purposes. Moreover, the IMF noted with concern that in any given period, unrecovered costs by ExxonMobil can be carried forward to subsequent periods without any limitation.
Taking this into consideration, the IMF said that the government needs to close fiscal loopholes in existing PSAs and even the model PSA.

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