Oil companies robbed Republic of Congo US$64M in two years by inflating costs

Sep 25, 2020 News

– enough to lift more than 300,000 Congolese citizens out of poverty

By Kemol King

Former Petroleum Advisor to the Government of Guyana, Dr. Jan Mangal, once told Kaieteur News that the oil industry is a highly corrupt industry at every level because of the billions of dollars involved.

A vessel owned by Total, offshore Republic of Congo

Oil companies tend to do whatever is necessary to maximize the profits to their shareholders, even if it means abusing the ignorance or lack of capacity of their host government.
The Republic of Congo was rudely reminded of this, a decade and a half ago, when it contracted independent firms to audit the costs handed to the government by oil companies, ENI and Total for a total of nine permits. The firms produced 13 audit reports for 2004 and 2005, which showed that the companies had overstated their costs by US$127M.
The Kenya-based charitable organization, Oxfam wrote about this matter in a 2018 report titled: ‘Examining the Crude Details’.
Oxfam said that from combining the 13 reports, it was found that US$15 of every US$100 in declared recoverable costs the auditors worked to verify, were ineligible for recovery, or were excessive.
In production sharing contracts, which utilise the cost recovery scheme, the more oil companies recover, the less the state receives from the profit. This is why the Congolese government saw the audits as necessary.
In this case, had the funds claimed by Total and ENI been correctly stated, the US$127M it recovered would have formed part of the profits. Oxfam said that under a 50/50 profit split between state and contractor(s), the Congolese government lost out on US$63.5M.
It further explained that nine of the 13 reports pertained to 2004, accounting for US$55.3M of the losses to the state.
With such significant value leakage, Oxfam noted that cost audits are a key tool to limiting these occurrences. It said that the lack of capacity of developing country government tend to place them at a disadvantage during contract negotiations, and that cost audits are a mechanism governments can use to mitigate the risks of revenue leakages.
In the case of Guyana, ExxonMobil intends, along with its Stabroek Block partners, to recover billions of US dollars in costs from the development of several oilfields. Its capacity to audit is virtually nowhere. Yet, the country is rapidly approving projects.
The only costs Guyana has started auditing are the US$460M pre-contract costs claimed by Exxon, and noted in the 2016 Stabroek Block agreement for operations during the period 1999-2015.
That audit has been in motion for nine months now by the firm, HIS Markit, with no timeline announced for its completion.
Attorney-at-Law and Accountant, Christopher Ram, had said in 2018 that Exxon’s claim of US$460M is overstated by at least US$92M.
His calculation found that all figures supplied by the companies, even when one allows for all expenses and expenditures, amount to a far cry from the US$460,237,918 that Exxon and its partners, Hess and CNOOC Nexen, are claiming. He had said that it is overstated by “at least” US$92M, because not all expenditure is recoverable as pre-contract costs.
Apart from the pre-contract costs, development costs for Liza Phases One & Two alone are estimated to total US$9.5B.
Rystad Energy recently said that 14 of the following discoveries could be developed by Exxon with total project sanctioning of US$50B. Since it made that announcement, ExxonMobil has made two more discoveries, adding the potential for even more rapid development.
Poised to approve the third development, the Payara project, Government is yet to commit to auditing development costs.

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