Exxon deal exposes Guyana to inflated oil and gas projects- Int’l report

Oct 23, 2023 News

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Kaieteur News – An international report compiled by the University of Oklahoma, College of Law Digital Commons has lambasted Guyana’s 2016 Production Sharing Agreement (PSA) with U.S. oil giant ExxonMobil and partners, as the deal allows the oil companies to inflate the cost of projects.

Notably, the country has already signed on to terms such as a meager two percent royalty, 12.5 percent profit share and has waived the payment of taxes by the oil companies and its suppliers. The country also failed to implement a ring-fencing provision to ensure each oil project pays for itself.

In a report published in May 2023, eight specialists, with decades of experience in the sector examined the ‘Evolving Trends in Production Sharing Agreements & Cost Recovery Systems’ of eight oil producing nations, including Guyana- Brazil, Indonesia, Malaysia, Trinidad and Tobago as well as Angola, Ghana and Kazakhstan were also included in the report.

The study found that this country’s contract is disadvantageous to the Government of Guyana since it has the potential for “gold-plating.”

It explained, “Gold-plating refers to attempts by companies to inflate costs through overspending on the oil and gas projects. Companies can be found gold-plating when the fiscal regime gives them an incentive to spend more on capital investment and claim a greater share of project revenues.”

The PSA Guyana signed with Exxon stipulates that a whopping 75 percent of monthly revenues will be recovered by the Contractor as costs, whereas the remaining share will be equally split as profits with the country. Notably, revenue that is not repaid in one month is carried forward to the pursuing month.

The report indicated that a solution to the gold-plating issue is for the host government to carefully monitor the expenditure of the international oil companies. It added, “International oil companies have a greater incentive to gold-plate if they are procuring goods and services from affiliates or subsidiary companies. This can be monitored through a number of mechanisms.”

It was also highlighted that the ExxonMobil oil deal requires government approval of annual work programmes and budgets, however there is uncertainty whether the government is closely checking for these occurrences.

To this end, the report urged, “Close monitoring and auditing of expenses are essential to a successful cost recovery provision under any PSC. The lack of proper audit provisions under the 2016 Guyana-ExxonMobil PSC means that it is difficult for the government to assess the reasonableness of expenditures in an efficient manner.”

Guyana and audits

Presently, Guyana is yet to wrap up an audit of Exxon’s US$1.6B expenses incurred between 1999 and 2017. It was reported that a British auditor, IHS-Markit flagged some US$214M in questionable costs that can be contested by the state. Given the contractual arrangements, Exxon, if it accepts the auditor’s findings- as has been by the government- would be required to return the already recovered sum. It would then be split evenly between Guyana and the company. Should Exxon, however, determine that the costs should remain, it will therefore plunge the situation into arbitration.

In the meantime, another audit, this time of the company’s US$7.3B expenses racked up during the period 2018 to 2020 is also still to be finalized. A local consortium, VHE Consulting which is a registered partnership between Ramdihal & Haynes Inc, Eclisar Financial, and Vitality Accounting & Consultancy Inc., has handed over the report to government. The group was supported by international firms – SGS and Martindale Consultants.

Despite government’s inability to complete timely audits of the oil companies billion-dollar expenses being recovered from Guyana’s oil, it has been granting more and more projects in the Stabroek Block.

Earlier this year Kaieteur News reported that Vice President, Bharrat Jagdeo revealed the PPP/C Government plans to embark on a number of measures that will keep the oil industry on the fast track for a minimum of 15 years.

The official said such an approach would include the timely award of production licences as well as encouraging investment in the sector. Given the pace at which discoveries are being made in the Stabroek Block, and the overall speed of development activities, Jagdeo said it is critical that the government adopts a complementary approach to ensure local and foreign businesses are not left with stranded investments.

 

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• Audit, Contract, costs, ExxonMobil, gold-plating, Inflated

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