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Int’l Group urges Guyana to plug loopholes for abuse between Oil Companies and Sub-Contractors
Kaieteur News – After examining the extent to which many African oil-producing nations have been used and abused by oil companies and their sub-contractors and/or related parties, Oxfam America, a transparency watchdog, says Guyana and other new oil players must take note and urgently implement mechanisms to protect its people.
According to the global research group, all Governments have a right to know how their oil money is being used by companies to cover project costs. Oxfam warned however that companies often seek out varying ways and means to prevent countries and their relevant authorities from knowing too much.
Specifically, Oxfam in a report titled: ‘Examining the Crude Details’ said companies tend to look for loopholes in agreements signed with nation’s or even weaknesses in a country’s legislative framework which they can exploit to keep they are spending hidden from scrutiny.
To lend credence to its argument, Oxfam showed how the hands of Ghana’s Petroleum Commission were tied some years ago when it tried to verify costs charged upon the African country.
Oxfam noted that it is common for drilling rigs to experience mechanical downtime. It said that typically, the drilling sub-contractor must be compensated by the oil operator for non-production time if it exceeds one percent in a given year for example.
The Federation continued, “…Because Ghana’s Petroleum Commission could not access these drilling service agreements, it was unable to confirm in 2015, the terms and conditions of compensation. Assuming a rig is down for 10 percent of the year, at US$100,000 to US$200,000 a day, the cost could be as high as US$7 million.”
The transparency advocate added, “The Commission had no information on the extent to which the companies had been reimbursed for non-production time by the oil operators and if those moneys were unreasonable or inflated.”
To overcome this challenge, Oxfam wrote that the Commission put legal requirements in place that ensures it can approve all sub-contracting agreements. This now protects Ghana from being victims of inflated costs and income cases, fake expenses.
In fact, Ghana moved to strengthen its oil laws in 2016. The law states that where a discovery is declared commercial, the oil company must submit to the Ministry of Energy (in practice, the Petroleum Commission) a plan of development and operation, including detailed information on all proposed expenditures.
The laws categorically state that an oil company cannot proceed without approval from the Petroleum Commission which thoroughly investigates those proposed expenses.
Oxfam was keen to note that the right to pre-approve costs is a valuable opportunity for nations since it allows them to revise or disallow expenditures before they would be incurred. Oxfam said this is a unique opportunity for nations to take advantage of as opposed to trying to find well-hidden inflated bills during the auditing period.
Oxfam said, “While pre-approvals are no substitute for cost auditing, they provide a critical oversight mechanism that may directly control costs as well as supplement the technical expertise required to verify costs. Audits are, by nature, reactive rather than proactive. Hence, a review of planned costs by industry regulators is an important safeguard for government revenues. It should also reduce the workload of auditors, allowing them to focus on the level of costs and relevant tax treatment.”
To prove the usefulness of having legal grounds for pre-approvals, Oxfam said in 2016, Ghana’s Petroleum Commission refused to approve a second floating, storage, and production offshore (FPSO) unit for Tullow Oil.
The Commission said there was no business case for the British company to have another one ordered when it could save costs for the country by utilizing a similar FPSO that was nearby in the same field. This approach saved Ghana US$1B in costs.
Taking the foregoing into consideration, Oxfam America has urged oil producers like Guyana to not only strengthen their legislative framework to guard against cost manipulation but also to ensure they demand the approval of all subcontracting agreements. It said too that nations must establish systems to catalogue the information received so it can be used for risk assessment.
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