Tricks oil companies use to rob nations

Dec 25, 2020 News

By Kiana Wilburg

Cost recovery is considered an integral part of production sharing agreements that are signed between governments and oil companies. The mechanism is one that allows oil operators to recoup money spent for activities regarding exploration, development and production of oil and gas resources.

But the process, if not properly scrutinized by governments, is often used by oil companies to rob nations of billions of dollars by inflating costs. In fact, the Centre for Public Integrity (CPI), which researched this matter for decades, has documented many of the ways oil companies go about abusing the cost recovery process.

In some cases, the international watchdog on corruption, said that expenses claimed by oil companies have been found to be simply ineligible. Examples, drawn from actual cases, include companies seeking to claim expenses incurred prior to the signing of the “host government agreement” contract; expenses for personal interests of executives, expatriate employees and families; expenses for the technical training of expatriates; a duplicate invoice for a good or service that has already been expensed; inclusion of expenses such as oil and gas marketing fees, or expenses related to mergers, acquisitions, or transfers in participating interests that are normally deemed ineligible according to the contract.

In other cases, CPI stated that the price of legitimate goods and services are intentionally inflated. The nonprofit organization said this practice, known as transfer mis-pricing or mis-invoicing, is of particular concern for transactions between affiliated companies.

In this regard, it noted for example, one case where offshore drilling work was contracted to another subsidiary of the same parent firm. It said that the invoice ultimately submitted for the work was inflated by 30% beyond what the drilling was actually worth. The 30% in this scenario was recorded as a cost to the project, but is in fact profit for the company. This “profit” is ultimately reported in a low tax jurisdiction – a process known as profit shifting.

Furthermore, CPI said it also found that contracts normally contain clauses requiring that all transactions between affiliated companies are based on international market prices. It stressed however that these provisions are “notoriously difficult to enforce.”

Turning its attention to another controversial category of costs, CPI said that overseas headquarters costs are a legitimate expense but have often been used to inflate project expenses. In most contracts, it said that these costs are supposed to be limited to a small percent of overall project costs.

It also said that countries have to be wary of the interest on the loans taken to finance projects, as these are oftentimes a potential area for abuse. CPI said that many tax regimes put in place limits on the ratio of debt to equity (to avoid what is known as “thin capitalization”). Finally, the nonprofit said that countries should also be wary of invoices submitted for goods that were never actually acquired and for services that were never actually delivered. It has documented hundreds of examples where countries have been duped in this regard.

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