Column 36 published on Friday February 16, concluded the comparison of the 1999 and the 2016 Agreements proper. Today’s column therefore turns attention to the Annexes to the Agreement. Both Annex A and Annex B deal with the Contract Area, Annex A giving a description of the Contract Area while Annex B sets out a map of the Area. The term “Contract Area” in both Agreements is identically defined as the area that would be subject to a Prospecting Licence and a Production Licence.
The 2016 Agreement states that the Contract Area is 26,806 square kilometres while the 1999 Agreement describes it as comprising 60,000 square kilometres, a huge difference. I have written to the Guyana Geology and Mines Commission seeking a clarification on the difference.
Meanwhile it should be noted that an ExxonMobil news Release dated February 8, 2018 gives the gross acres held offshore in Guyana at 11.5 million, which is greater than the Contract Area stated in the 2016 Agreement. The explanation I believe is that the Release seems to make no distinction between acreage in which Esso/Exxon was the original licencee (the Stabroek Block), and where it is not the primary licencee but in which it has an interest (the Canje and the Kaieteur Blocks). Nor does it take account of the percentage shares in the Blocks whether as primary licencee or buy-in. For example, in the Stabroek Block, having sold 55% of its interest to Hess and CNOOC, Esso holds 45% of that Block while in the Canje Block and the Kaieteur Block it acquired interest of 35% and 50% respectively.
In both Agreements, Annex C – Accounting Procedure contains ten sections some of which have been the subject of changes of varying significance. The Annex is referred to in several Articles of the Agreement including Article 23 which requires the Contractor to maintain accounting records in accordance with Annex C.
There has been much discussion concerning the scope and authority of audits under the Agreement. Particular concerns have been expressed over the requirement that the Minister must give ninety days’ notice prior to any audit of the accounts and records of the Contractor and for audits to be undertaken within two years from the end of the accounting year. Article 23 however appears to provide some release from this inhibition by its explicit provision that the Minister’s right to audit the records of the Contractor does not prevent the Government or any of its officers to exercise their statutory right to carry out any audit.
The audit provision is ripe for contention since there is the possibility, if not certainty, of audits by the Guyana Revenue Authority to enable that Authority to determine the amount of Corporation Tax nominally to be paid out of the Government share of profit oil; by the Petroleum Commission once established; and by the Audit Office. These of course are in addition to the audit of the corporate entities engaged in the petroleum operations. Companies have enough issues with an audit by a single auditor let alone by four or five separate auditors, operating under different rules, and applying different sample profiles, materiality levels and audit objectives.
What does appear to be missing is a requirement for the audit of the Operator as opposed to the Contractor. While the Contractor is made up of Esso, Hess and CNOOC/Nexen, the Operator is Esso which is “charged with conducting the day to day activities of the Contractor”. To complicate matters, Esso is the Operator under other Licences as well.
Section 2 of Annex C is titled Classification, Definition and Allocation of Costs, Expenses and Expenditures. Nine categories of Exploration Cost are identified in section 2.1; six categories of Development Cost in 2.2; a broad, catch-all of Operating Costs in 2.3; three categories of Service Costs in 2.4 while section 2.5 provides that the general and administrative costs will be allocated to exploration costs, development costs and operating costs in accordance with standard industry practice, or as agreed with the Minister. An annual overhead charge for services rendered outside of Guyana is set in bands ranging from 5% up to charges of U$5 million to 1% for charges in excess of US$35 million.
Section 3 deals with costs, expenses, expenditures and credits of the contractor. Section 3.1 itemises the costs which are recoverable without further approval of the Minister including all costs attributable to the acquisition, renewal or relinquishment of surface rights acquired and maintained. Minister Trotman has asserted that the controversial signature bonus of US$18 million is non-deductible, without offering any basis in the Agreement. There is no clear exclusion in section 3.3 “Costs not Recoverable under the Agreement” and it does therefore seem that a signature bonus constitutes a legitimate cost of acquiring a surface right.
Section 3.5 deals with: credits under the Agreement including proceeds of any insurance or claim in connection with the Petroleum Operations; revenue received from third parties for the use of property or assets the cost of which has been charged to the accounts; proceeds from the sale of Petroleum Data and the proceeds derived from the sale or licence of any intellectual property the development costs of which have been charged to the accounts.
The 1999 Agreement required the Contractor to prepare a monthly Statement of Expenditure and Receipts under the Agreement but the frequency is now quarterly unless the Minister requests monthly statements in writing.
By way of a general comment, it is noted that omitted from items of credit is any amount received by any of the parties constituting the Contractor for any interest in the Licence sold to another person. The gain is not
treated as a credit, nor is the gain taxable because of the blanket exemption from taxes under the Agreement.
While it is unrealistic to believe that the interest acquired by CNOOC/Nexen and Hess did not involve a significant payment, the audited financial statements of CNOOC report no payment by it to Esso. Correspondingly, the financial statements of Esso show no receipt or credit, a possible explanation for which may lie in the statement in CNOOC’s financial statements that the acquisition of its 20% interest was from ExxonMobil which is not the holder of the 1999 Agreement and Licence. This suggests that the name ExxonMobil is being carelessly used to misrepresent the identity of the true licence part-holder or that ExxonMobil sold a right it did not own! There are no records filed publicly by Hess but if CNOOC’s circumstances applied to Hess as well, it does appear that there may be significant transactions which are not being properly accounted for in the books of the entities making up the Contractor.
Two further points on the financial statements at this stage. The first is that the publicly available audited financial statements of Esso and CNOOC do not reflect the Cost Classification set out in the Petroleum Agreement and should only have been received by the Government with reservation. In fact, it is desirable for and not unusual to have as an Annex to Petroleum Agreements, model statements and reports. This is missing from the 1999 and 2016 Agreements and we can expect lots of inconsistencies and controversy until this is rectified.
The second relates to Esso’s financial statements for the year ended December 31, 2016. Note 1 to those statements gives a limited chronological statement of the company’s identification and activity including its incorporation in The Bahamas and registration in Guyana. The Note goes into some details concerning the 1999 Janet Jagan Agreement; force majeure; an “assignment agreement and a Farm Out Agreement both dated November 6, 2008” with Shell and Shell’s withdrawal therefrom in 2014; and new “farm out and assignment agreements” with Hess and CNOOC. With regard to the latter, the Note adds that “By year-end 2014 Esso Guyana’s interest in the contract area was 45% pending government approval.” The reality is that by December 31, 2016 these “farm out and assignments” were irrelevant and academic, since Hess and CNOOC had by then become full licence holders under the June 27, 2016 Agreement.
Omission or deception
Since there could be no pending approval at December 31, 2016, the Note’s further reference to its (Esso’s) application for a production licence in December 2016, rather than their application, raises the question whether it was acting in concert with the Government which not only concealed but actually denied any 2016 Agreement. Maybe both Esso and the Government rather foolishly thought that the Agreement would never become public. It did, and now ExxonMobil, which has no legal presence in Guyana, will find it hard to dispel criticisms that it has not only imposed a lopsided Agreement on Guyana, but has also engaged in a cozy conspiracy of deception with the Government against the people of this country.
Next week, I will turn attention to that controversial G$92 Billion + bill accepted by the Government as pre-contract costs.