Two-year audit deadline moved to seven years in new model oil contracts

Aug 27, 2023 ExxonMobil, News, Oil & Gas

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Kaieteur News – The government has unveiled a revamped petroleum agreement, which notably extends the period for auditing oil companies’ expenses from two to seven years.

This alteration is anticipated to have a pivotal impact on how the government oversees and verifies expense claims made by these companies, as the two-year deadline that obtains with ExxonMobil’s expenses has already elapsed for that company’s costs incurred between the period 1999 and 2021; those audits are yet to conclude.

Under ExxonMobil’s Stabroek Block Production Sharing Agreement (PSA), there exists a two-year window after the issuance of the company’s expenses for the government to audit the stated costs. Specifically, the agreement delineates that all documents concerning those expenses “shall be maintained and made available for inspection by the minister for two years following their date of issue.” However, in situations where audit issues remain unresolved, the contractor is obligated to retain the documents until a resolution is reached.

In contrast, the newly published contracts pronounce a more extended seven-year period for the government to wrap up its audits. This period is defined as seven years after the expiration of the year to which the audit relates. The revised framework offers auditors more time and latitude to peruse the contractor’s books, accounts, and records.

Worth noting is that this revised model will apply to forthcoming blocks issued by the government and currently existing blocks—with the exception of ExxonMobil’s lopsided Stabroek Block PSA.

The central impetus behind the government’s prerogative to audit expenses from oil companies is rooted in the fiscal architecture of the petroleum agreements in place. Oil companies are entitled to recuperate the expenses they shoulder in developing oil fields.

These companies are then beholden to maintain and furnish the government with records of these expenses, setting the stage for the government’s oversight and verification.

The ramifications of these audits are economically profound. Should oil companies exaggerate costs, it could potentially eat into the government’s revenue pie. This is because, after cost recovery, the residual production is earmarked to be shared between the government and the contractor as profit. Therefore, inflated costs could lead to dwindled profits, thereby diminishing the financial gains for the government and, by extension, the Guyanese people.

This seven-year extension also gives the government more time to enhance the government’s capacity to safeguard Guyana’s interests, ensuring that expense claims are legitimate, and the rightful revenue flows into the nation’s coffers.

The auditing of ExxonMobil’s Stabroek Block expenses has been marred by delays and has become a cause for concern. Initiated in early 2020, the first audit, encompassing costs from 1999 to 2017 that amount to roughly US$1.6B, still remains inconclusive three years on. This audit, initially estimated to span only a few months, has evolved into a prolonged process, involving meticulous scrutiny of expense claims, followed by periods of deliberation between the government’s auditors and the oil company. Instances where auditors could not verify certain costs necessitated further document submissions or explanations from ExxonMobil, thereby extending the audit’s timeframe.

A parallel situation is seen with the second audit, examining costs between 2018 to 2020 amounting to over US$7.3B. Despite being awarded in 2022 with an estimated timeline of three months, this audit remains incomplete more than a year later. Addressing these delays during a recent press conference, Vice President, Dr. Bharrat Jagdeo, attributed them to an iterative process of document submission and review. He discussed the ongoing challenge of obtaining adequate documentation from oil companies and the consequent waiting periods that arise. In response to inquiries about the potential to accelerate these audits, Jagdeo expressed reservations about introducing government political operatives into the auditors’ technical domain.

He confirmed that the prolonging of audits carries financial consequences. With the potential awarding of future audit contracts, it is anticipated that the contracts will stipulate extended periods compared to current audits. This adaptation, while perhaps realistic given recent experiences, will inevitably escalate the costs Guyana incurs when commissioning auditors.

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• agreement, contracts, incurred, Model, petroleum

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