Esso’s US$460m pre-contract claim

Given the structure of the 1999 and 2016  Production Sharing Agreements (PSAs) between the government and ExxonMobil’s subsidiary Esso Exploration and Production Guyana Limited (EEPGL), the extent of benefits to Guyana is significantly hinged on the allowable expenses.

Setting aside the paltry 2% royalty and the price at which the oil will be sold in 2020 and onwards, the key return to Guyana  is the 50:50 share of the profit oil. First, however, the cost oil has to be deducted. In any given year, the cost oil could be as high as 75% of the total oil produced and the remaining 25% (cost oil) would be split evenly between Guyana and EEPGL.  While the cost oil figure will reduce gradually over the period of production, in the first years of production it is likely to be 75%.  Ensuring that the expenses claimed by EEPGL are legitimate should therefore be a national preoccupation considering that it directly impacts on how much  the country will earn. Guyana is a novice in the oil and gas industry, exemplified by the pitiable negotiating of the 2016 PSA and the faltering, slothful  steps towards establishing a comprehensive framework for oil and gas and insulating it from untoward influences. It is also dealing with a behemoth in EEPGL’s parent company, ExxonMobil which has had a poor track record in many aspects of the sector and in various jurisdictions. The recent questions raised about one of its acquisitions in Liberia is a case in point.

In these circumstances, all parts of the nation must do their bit in ensuring that every single action of EEPGL’s principals is scrutinised and particularly their claims in relation to the distribution of proceeds. The claim by EEPGL for pre-contract costs of US$460m for the period from the start of its activities here up to   December 31st 2015  is a case in point. The number was inscribed in Annex C of the 2016 PSA as if it was unremarkable. To put it in some context, the US$460m is more than 25 times the size of the controversial US$18m signing bonus which EEPGL made available to Guyana and which critics have argued is meagre compared to what should have been paid. The US$460m figure is therefore not inconsequential and is to be amortised over a number of years as part of cost oil – meaning that it will be one of those claimed expenses which will reduce proceeds to Guyana.

As the single largest charge to date to Guyana from the country’s historic oil and gas operations, it behoves the Guyana Government, the oil and gas authority – whoever that may be and whenever it might be established, the Guyana Revenue Authority (GRA), the Office of the Auditor General and other agencies to dissect this figure finely. It is unclear what the Guyana Extractive Industries Transparency Initiative is doing about this figure and other aspects of EEPGL’s activities here but it is yet to inspire confidence in the public that it is any type of watchdog in the interest of the Guyanese people.

One person who has already done yeoman’s work as a public intellectual on the early activities in the oil and gas sector is chartered accountant and business analyst Christopher Ram. In the 44th instalment of his oil and gas series in the Stabroek News, he analysed the financial statements lodged at the local registry by the three signatories to the PSA: EEPGL, CNOOC/Nexen and Hess.  It was only recently that Hess filed its statement. In his analysis of the figures, Mr Ram estimated that the US$460m claim of pre-contract costs was inflated by US$92m – or just over six times the maligned signing bonus.

Undoubtedly, Mr Ram would be open to disputation of his figure and a forensic examination of the financials lodged by the three companies. This is where oil and gas becomes real for Guyana and where it is at risk of being duped by its partners. On the formal presentation of the figure – in this case it first appeared in the 2016 agreement which was hidden from public view until the government was forced into releasing it in December 2017 – it should have been immediately subjected to verification. This wasn’t done and it appears that the Guyana Geology and Mines Commission and the  Ministry of Natural Resources took the figure to be a reasonable representation of expenditure by the three partners without due diligence.

It is unclear when the GRA will audit this US$460m claim but it is primarily the government’s responsibility to verify this figure and to request the supporting documentation from the three companies involved. Rigorous examination of this figure will not provide a bonanza to Guyana but will be an important test on two scores. First, it will inspire public confidence in the intent of the government and the scope of its institutional mechanisms to ensure that all monies due to this country under the PSA are collected. Second, it will alert ExxonMobil, EEPGL, Hess and CNOOC/Nexen that the authorities here and civil society will unrelentingly pursue and interrogate all figures supplied and actions implemented.

Given Mr Ram’s assertion, the public expects that both the government and its partners in the PSA will provide evidence to substantiate the US$460m charge assigned to the state even before the first drop of oil has been marketed.

In his aforementioned column Mr Ram set out a series of questions which included:

Was the figure US$460,237,918 set out in the Annex supported by detailed statements by each of the three companies?

Was any verification exercise done of the pre-contract expenses figures and information provided? If so, by whom?

Was the Audit Office asked to verify the figure?

Who checked to verify that the sum claimed was consistent with the rest of Annex C, in terms of categories, allowed and not allowed etc.?

If there was no verification at that stage, why was provision not made for such verification at a later date?  

These questions are all worthy of answers and we await the government’s response.