-gov’t has kept report hidden for two years
The first ever audit report of the cost claims by ExxonMobil and its partners for 1999 to 2017 found that a whopping 12.8% of its US$1.67b expenses could be disputed by the Guyana Government as they were not allowable or did not have sufficient supporting documentation.
UK firm, IHS Markit’s (IHSM) audit has been kept hidden from public view by the PPP/C government and it is unclear what it has done since March 2021 to challenge the questionable claims by Exxon and partners. Unjust claims would effectively reduce the amount of profit oil available to Guyana.
With an audit recently completed of US$7.3b in expenses for 2018-2020, the government will come under renewed pressure to fight off charges that it has turned a blind eye to excesses by ExxonMobil and its partners.
Among IHS Markit’s audit’s revelations are that some US$214.4M in claims are questionable and recommendations were made that government challenges the claims. In addition, it said that ExxonMobil’s subsidiary here, Esso Exploration and Production Guyana Limited (EEPGL) had not done enough to keep the Guyana Government apprised of the activities and costs associated with the development.
“The Audit has established that GoG has reasonable grounds to dispute US$214.4 million plus overhead adjustments of the costs currently included by EEPGL in the Cost Bank. This amount represents 12.8% of the cumulative cost recovery balance as of Q4 2017 Statement,” the IHS Markit Final Audit Report obtained by the Sunday Stabroek said.
The disputed costs fall into three main categories – Defined Costs for Removal (DCR), Inadequate Supporting Documentation (ISD) and Ministerial Approval Required (MAR). For each the sums were: DCR US$34M, ISP $179.8M and MAR US$0.27M.
“Defined Costs for Removal” amount to US$34.4 million – these costs have either been included in error, are not aligned with PSA (Production Sharing Agreement) provisions, are not related to Petroleum Operations, or are considered to fall outside of industry best practice. “Inadequate Supporting Documentation” accounted for US$179.8 million – these costs suffer from a transparency issue as the cost basis, nature and justification of these costs could not be established with the furnished documentation even after several rounds of documentation requests from the Audit Team. Although these costs may be valid, the GoG has the right to the transparency of how these costs relate to Stabroek Petroleum Operations,” the audit report asserted.
It continues, “Minister Approval required” for US$0.27 million – these costs have been identified as predominantly R&D related costs which require Minister Approval before they can be considered cost recoverable. No evidence of Minister Approval has been provided.”
Explaining the period covered and giving a breakdown of the sums scrutinized, IHS said that it had been engaged by the Government of Guyana (GoG) to independently audit the cost recovery claim submission by Esso Exploration and Production Limited (EEPGL) for the period between 1999 and 2017 within the Stabroek Contract Area that amounts to a total of $1,677,774,727 in accordance with the prevailing Production Sharing Agreement(s).
Objective
The objective of the audit was to evaluate whether the expenditure submitted by the company was in line with the provisions of the PSA and if costs are entitled for cost recovery.
Annex C of the 2016 Petroleum Agreement between the Government of Guyana and EEPGL and partners states that the amount of US$460,237,918 refers to costs incurred in petroleum operations pursuant to the 1999 Agreement up to 31 December 2015. It defines pre-contract costs as contract costs, exploration costs, operating costs, service costs, general and administrative costs, and overhead charges as defined in the 1999 Agreement. The Annex further states that Exxon is to be reimbursed ‘such costs as are incurred under the 1999 Agreement between January 1, 2016, and the effective date which shall be provided to the Minister or on before 31 October 2016 and such number agreed on or before 30 April 2017’.
There is also a bridging agreement that links the 1999 Petroleum Agreement with that of 2016.
A breakdown of the sums and for the periods state that a lump sum amount of $460,237,918 was included within the 2016 Production Sharing Agreement and is referenced as Pre-Contract Costs or for spending from 1999 to 2015. The remaining sums, which accounted for most of the total expenditure was US$1.2B and is referred to Post-Contract Costs and was incurred between 2016 and 2017.
Some 73% of the total sums were incurred for the 2016-2017 period and the audit highlighted the lack of transparency for nearly half of the cost recovery statements for the last quarter of 2017. It is on these grounds that the audit team recommended that government deny its inclusion into the cost bank.
The audit explained that of the amount of US$214.4 million referred to, only US$34.3 million is considered ineligible, while US$180.1 million lacks adequate supporting documentation.
The table below gives a breakdown of the disputed US$214m.
“The Audit Team wishes to highlight that nearly 50% of the intercompany charges being included in the Q4 2017.Cost Recovery Statement have limited transparency that falls short of the expected level of accounting documentation. Even after several requests for further clarification EEPGL has not been able to demonstrate adequate justification for these charges, and therefore the Audit Team recommends that they are reasonably denied for inclusion in the Cost Bank,” the report states.
“During this audit, a total of $31.43 million has been identified as being added to the 2017 Cost Recovery Statement without being recorded in the General Ledger. This sum related to payments made by the Co-Venture partners, many of which were incurred prior to the Co-venture partners being signatories to the PSA. The validity of these costs for inclusion in the Cost Bank has not been demonstrated by EEPGL and should be excluded from the Cost Bank. The Audit Team notes that the treatment of value-add tax (VAT) is aligned with the PSAs and industry standards. No charges for VAT have been included in the Cost Recovery Statements submitted by EEPGL,” it adds.
Noted by IHS was that for the period between September 2000 and November 2008, EEPGL had declared Force Majeure, during which time no in-country activity was conducted by the company.
The report said that limited desk-based reservoir analysis activities continued during this period with minimal costs being recorded and that the activities conducted were appropriate based on the premise that no in-country activities could continue.
EEPGL’s main accounting record or its General Ledger recorded expenditure at the transactional level providing accounting balances, and had costs spread across two
different accounting systems. The report said that the company provided annual extracts in a Microsoft Excel format for each system between 2004 and 2017.
The company also told the auditors that prior to 2004 the same system was not in place and thus not available, as it had been “purged in accordance to their internal data retention policies”. However, the company provided a summary of costs incurred during this five-year period.
Of the US$214M adjustments recommended, the bulk comes from inadequate supporting documentation for an Intercompany General Ledger at US$59.7M and materials where US$40.4M is disputed.
“The Audit Team identified a total (of) US$78.4 million recorded in the General Ledger which the Audit Team believe relate to Intercompany Charges that have not been reviewed as part of the TRIAD review or the Contracts review. The records in the General Ledger records are not always clear with information missing on many entries. The supporting documentation provided lacks details of what the charge relates to or why it applies to the Stabroek block. All suspected Intercompany Charges over US$1,000 have been queried with EEPGL who provided limited additional support documentation. Following review of all available information, the Audit Team do not have sufficient information about transactions amounting to US$59.6 million which should be removed from the Cost Bank,” the report said.
On materials, the audit report explained that it is best practice for an Operator to have the system capabilities and inventory management processes to track inventory across, purchases, warehousing and final use for major items. This was not seen during the review of the company’s books.
“Material transfer recorded in the General Ledger without Vendor details do not provide adequate details, limiting auditability. The Audit Team recommends that EEPGL provide information from samples of the typical global contracts to justify the charges applied to materials in the General Ledger: Vendor Name; Contract (s);Award Recommendation; Invoices,” the report states.
Further, it adds, “The identification of Materials in the General Ledger is not clear and requires considerable analytic effort. Transparency in the records submitted by EEPGL should be improved. During the audit period EEPGL recorded spending of approximately US$40.4 million of materials without any vendor details within the General Ledger. These costs have been identified as material issued from the shore base for use in Petroleum Operations. Justification for the cost of these materials has not been provided and these costs should be removed from the Cost Bank.”
IHS Markit also said that where there were inventory adjustments for which no reasons were provided.
And while the PSA provides for government to be present during materials count, this had not been done from 1999 to 2017.
“There is no transparency for inventory adjustments with no evidence provided of the reasons why the adjustments are necessary. The GoG were not invited to material counts during this period, a requirement in the PSA, and applying inventory adjustments to the General Ledger is not consistent with the method of only applying material costs when material leaves the shorebase,” it said.
The Audit Team recommended that a total of US$349,098 related to inventory adjustments be removed from the Cost Bank as adequate justification for these charges had not been provided.
Of note was that warehousing costs are recoverable in accordance with the 2016 PSA and that during the audit period a total of US$8.35 million has been identified as warehousing costs between 2015 and 2017.
Triad
The report explained that ExxonMobil uses the integrated accounting TRIAD system to capture expenses incurred by Affiliated Companies. Each charge is recorded in TRIAD as “Jobs” which are then charged directly back to EEPGL at cost. The expenses recorded in TRIAD generally include time writing, intercompany and third-party charges, and travel expenses paid by Affiliated Companies.
“The total expenditure recorded in the TRIAD Files, EEPGL provided amounts to US$391 million spread over the Audit period. Around 11.4% of the expenditures recorded in TRIAD have insufficient clarity in the documentation provided to allow full audit tracing and accordingly the Audit Team recommends these costs to be removed from the Cost Bank. These charges cover all categories of expenditures recorded in TRIAD and consists of: Time writing – US$4,450,745; Intercompany – US$34,501,19; Third Party Charges – US$5,705,788; Other Expenses – US$62,912,” the audit said.
Other sums highlighted as disputed include US$29M listed as Co-Venture costs which the audit report explained could not be claimed, given that the period it was stated for did not yet have the co-venturers CNOOC and HESS as EEPGL’s partners on the contract.
“Co-Venture costs identified in the SE&R reconciliation amount to US$31.43 million. Of this total, EEPGL was able provide contracts and invoices for US$2.6 million demonstrating that these expenses were related to Stabroek Petroleum Operations. A further US$28.83 million of this total was incurred prior to the Co-Venturers being signatories to the PSA. No documentation evidence provided to justify a further US$0.95 million of costs which were incurred under the 2016 PSA. US$29.79 million should be removed from the Cost Bank,” the report clarified.
Contract procurement for the Deep Water Champion drill ship was also flagged for inadequate supporting documents with a US$15M figure attached to it. IHS Markit explained that it uses its known ‘Petrodata’ service to track the global rig and vessel market. From its detailed assessment and comparisons globally it said that the contract to procure the services from the Deep Water Champion was not only single sourced but it was done at a higher than global rate. “Deepwater Champion was contracted at a rate higher than the market, US$15,082,260 should be removed from the Cost Bank,” the report stated.
A total of US $13,394,616 should also be removed from the Cost Bank from contracts that were single sourced as justification of the charges has not been provided.
Of the single source procurement awards, EEPGL has not demonstrated the competitiveness of the rates within the contract for contracts with a combined value of US$28,476,876. This amount should also be removed from the Cost Bank.
What the government has done or intends to do with the IHS Markit audit report has not been revealed.
In May of last year, nearly 22 months after the PPP/C took office, the Government signed a deal to audit the US$7.3 billion claimed by ExxonMobil and its partners as post-contract expenses. The deal came after public outrage at intimations from the government that the statutory period for these audits had expired.
The agreement was signed with the RHVE consortium of local accounting firms to the tune of US$700,000 ($150.5 million) to audit Guyana’s 2018-2020 cost oil. The RHVE contract, which has a life of four months, is made up of Ramdihal and Haynes, Vitality Consulting, and Eclisar Financial & Professional Services. The US firms of Martindale Consultants Inc., and Squire Paton Boggs are providing technical support and expert assistance.
