Guyanese regulators will have power to prevent $$$ cost overruns on 14 new oil blocks but not with Exxon’s Stabroek Block

Apr 25, 2023 News

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Kaieteur News – The Guyana Government is in the process of finalizing two new Production Sharing Agreements (PSAs) which seek to give it more control over the budgets future oil companies will be drafting to explore and possibly produce oil and gas on 14 concessions offshore.

The provisions outline that the contractor/ oil company shall submit to the minister for approval, in accordance with agreed accounting procedures, a budget of the costs to be incurred in the implementation of each work programme, simultaneously with the submission of clear details for the works to be executed.  “The minister will decide on the proposal of budgets simultaneously with the approval of the corresponding work programme. All proposed budgets shall be commercially viable, reasonable and consistent with the requirements of this Agreement, its annexes and Best International Industry Standards and Practices,” the draft PSAs state.

Further, the documents state that the proposed budgets shall be denominated in US Dollars; include a detailed estimate of costs necessary to implement the petroleum operations described in the work programme corresponding to the budget; include a schedule of estimated expenditures of the costs; and specify any assumption or premise on which it is based.

The contractor shall also provide supporting documents for all its cost estimates. Another important requirement the government wants met is for oil companies to ensure that no modifications are made to approved budgets without government’s approval. In fact, Guyanese authorities want to ensure any request for a change to the budget shall contain the reasons for deviations from the costs originally listed in the budget. This would represent a significant step in preventing the use of possible avenues for abuse on the 14 oil blocks, should they all be awarded in the upcoming auction.

In April, a Kaieteur News report exposed that the absence of regulatory oversight or control over costs that can be incurred by oil companies is a real and present danger. Over in the Stabroek Block which holds 11 billion barre

ls of oil resources, the Guyana Government has no power to approve modifications to budgets drafted by ExxonMobil’s affiliate, Esso Exploration and Production Guyana Limited (EEPGL) and its partners which include, Hess Corporation and CNOOC Petroleum Guyana Limited. In fact, these oil companies have enough running room to practically “get away with murder.”

One only ought to reflect on the findings of an ongoing US$1.6B audit to understand the modus operandi of these oil companies.  The audit exercise which is being led by British firm, IHS Markit, has found for example that there are no safeguards in place in the Stabroek Block PSA which would prevent exorbitant cost overruns. In a March 2021 report, the British auditor, IHS Markit highlighted that EEPGL which also operates the block, does not furnish local authorities with detailed budgets for their offshore operations. As a result of this, the auditors said, “There is limited transparency and the ministry (of natural resources)’s ability to monitor and review annual budgets and variances with actual expenditure incurred is reduced.”

As an example, IHS Markit said certain PSAs contain provisions that state overruns in actual expenditures are limited to 10% of the budget. Some provisions also state that operators are prohibited from spending more than a percentage above the work programme and budget without further approval. Some even go a step further to explicitly outline that expenditure incurred without approval or proper justification is not recoverable. The auditors said such provisions allow the host government to maintain project oversight.

The British team noted however that the 2016 PSA Guyana signed with Exxon and partners, does not require such approvals. As a result of this, IHS said EEPGL was able to incur US$330.3 million in cost overruns across 2009, 2010, 2014, 2015, 2017.  The report also noted that EEPGL has not provided justification to changes and cost overruns against the submitted work programme and budget. This newspaper also understands that the annual work programme and budget submitted by EEPGL to regulators does not even conform to international best practices. Furthermore, the plans and budgets do not provide the Government of Guyana with the ability to understand the planned activities or provide any oversight.

Auditors insisted that the work programme and budget should provide details of the activities planned to be undertaken and the resulting cost outlay, ensuring responsible and sustainable development of resources and procurement alignment with in-country value opportunities. Kaieteur News understands that the Guyana team which consists of the Guyana Revenue Authority and the Ministry of Natural Resources is going through the foregoing meticulously with the aim of understanding how such a loophole can be closed.

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• Budgets, Guyana, oil, Production Sharing Agreements (PSAs), Stabroek Block

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