Last Monday, voters in Ecuador approved of two referendums to ban oil drilling in the Yasuni nature reserve in the Amazon Basin, and mining in the Choco Andino forest outside Quito, the capital. According to the environmental ministry, one hectare, equivalent to 2.5 acres, in Yasuni has 650 species of trees as well as hundreds of species of animals. Indigenous leaders and environmentalists welcome this development. This was despite warnings from oil and mining groups about billions of dollars in lost income. Petroecuador, the state oil and gas company, has been given a year to end production. See www.reuters.com/article/ecuador-election-environment-idAFL1N3A21L1.
According to Al Jazeera, the Yasuni National Park is the refuge to more than twenty types of endangered mammals; while a single hectare of forest is home to more than 100,000 species of insects. An estimated 80 percent of the species living there are still unknown to scientists. Continued oil extraction would therefore mean those species could be destroyed before they are even discovered. See https://www.aljazeera.com/economy/2014/10/21/ecuadors-thirst-for-oil-threatens-wildlife. The auditing arrangements relating to the 2016 Petroleum Sharing Agreement (PSA) between the Government of Guyana and ExxonMobil’s subsidiaries have generated much controversy over the past few weeks. So far, we have carried three articles on the subject. In today’s article, we revisit the provisions contained in the Agreement and assess the extent to which there has been compliance.
Auditing of the pre-contract costs
Annex C of the Agreement defines pre-contract costs to include contract costs, exploration costs, operating costs, service costs, general and administrative costs, and overhead charges as defined in the 1999 Agreement. Around the same time that the 2016 PSA was signed, the Authorities decided to enter into a bridging deed, linking the 1999 PSA with that of 2016, thereby extending the effective commencement date of the 2016 PSA backwards to 1999. This means that all costs incurred since 1999 are considered recoverable costs. It is, however, unclear what the rationale was for entering into the bridging deed and what the specifics are, since the deed has not been made public.
According to the Annex, the amount of US$460,237,918 refers to costs incurred in petroleum operations pursuant to the 1999 Agreement up to 31 December 2015. 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’. The contract for undertaking the audit was awarded to the UK firm IHS Markit in September 2019 and was to have lasted four months. The purpose was to identify expenses that the auditors consider to have been added in error, do not relate to petroleum operations, or for which there is insufficient evidence and transparency to determine the validity of the expenses. In November 2020, some 14 months after the contract was awarded, the Guyana Revenue Authority (GRA) had stated that the draft report was handed to the Department of Energy to be forwarded to Exxon for its response. The auditors issued their final report to the Government in March 2021. However, the results are yet to be made available to the public. In January 2022, the Minister of Natural Resources told the National Assembly that the audit remained incomplete.
When the Stabroek News raised the matter in April 2023, the Vice President denied that the Government was hiding the report. He contended that ‘the report has been with the staff of the Ministry and with the GRA and all their technical people, for the last several years’. This does not explain why, once the report was issued as a final version, it was not made available to the public in the interest of transparency. That apart, one could legitimately question the involvement of the GRA and whether it acted outside its mandate since the auditing of the pre-contract costs had little to do the operations of the GRA as a revenue assessment and collection agency. It is not a case whereby ExxonMobil’s subsidiaries submitted audited accounts for the purpose of taxation, and GRA has raised certain queries in the course of its examination of those accounts.
It would have been entirely appropriate for the Auditor General to be involved in the review of the audit report of the pre-contract costs, considering his constitutional status and his independence from the Executive Branch of Government; and for his office to be provided with the necessary resources to do so. Why the Audit Office was bypassed remains unclear. Suffice it to state that both the two percent royalty and Guyana’s 50 percent share of profits after a deduction of 75 percent of the value of production, are public revenues that are auditable by the Auditor General who is also the appointed auditor of the Natural Resource Fund.
Following the Vice-President’s denial, GRA issued a statement the next day explaining that the auditors had issued an initial report on 20 March 2020, and what they deemed a final report on 31 July 2020. However, the report did not include Exxon’s response. Thereafter, there were two other iterations of the report between July 2020 and November 2020, again without the written response from Exxon’s subsidiaries. After a review of the various versions of the report, GRA informed the auditors of the following deficiencies:
(a) Absence of recommendations in the report;
(b) Failure to refer to industry standards and good practices for specific findings;
(c) Inaccuracies in the analysis and review of the financial statements;
(d) General inconsistencies and deficiencies; and
(e) Failure to address concerns raised by the
Government’s representatives.
Accordingly, GRA requested the auditors to further revise their report to take into account the above concerns and resubmit it for transmission to Exxon’s subsidiaries by 3 February 2021. As indicated above, the auditors issued their final version of their report in March 2021 which included recommendations. The report was transmitted to Exxon on 2 July 2021. Since then there has been on-going correspondence between the Ministry of Natural Resources, Exxon and the auditors. GRA also indicated that when all the issues are resolved, the findings of the auditors will be released to the public.
Notwithstanding GRA’s explanations, it has been over two years since the auditors issued their final their report, and discussions involving the Ministry, Exxon and GRA are still on-going. However, the fact that no further revisions to the March 2021 report have been made, would suggest that the auditors are standing by their report. The auditors have discharged their responsibilities under their terms of reference, which is to identify expenses that it considers to have been added in error, do not relate to petroleum operations, or for which there is insufficient evidence and transparency to determine the validity of the expenses. Having done so, it was left to the Government to take up the findings of the report with ExxonMobil’s subsidiaries.
The auditors’ report nevertheless found its way to the public via Stabroek News. The following are the key findings, as gleaned from the Executive Summary:
(a) The actual amount claimed as recoverable costs was US$1.678 billion covering the period 1999 to 31 December 2017;
(b) The Government of Guyana has reasonable grounds to dispute $214.4 million or 12.8 percent of the total cost recovery claimed by Exxon’s subsidiaries. This is in addition to certain overhead adjustments made by Exxon’s subsidiary EEPGL and included in the cost recovery amount;
(c) Of the amount of $214.4 million referred to at (b), $34.3 million is considered ineligible, while $180.1 million lack adequate supporting documentation;
(d) Of the total cost recovery expenditure, amounts totalling $1.218 billion, or 73 percent, were incurred between 2016 and 2017;
(e) Since the 2016 PSA does not contain
ring-fencing provisions, the cost recovery amount includes continued exploration and developments costs for all fields within the Stabroek Block;
(f) Almost 50 percent of inter-company charges was included in the cost recovery statement;
(g) The cost recovery statement had limited transparency and fell short of the expected level of accounting documentation;
(h) Despite several requests for clarification in relation to the inter-company charges, EEPGL unable to provide adequate justification for these charges. The auditors have recommended that these should not be included as recoverable costs;
(i) Amounts totalling $31.43 million were included in the cost recovery statement but were not reflected in the main accounting record, the General Ledger. These amounts relate 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 auditors concluded that the validity of these costs for inclusion in the cost recovery statement had not been demonstrated by EEPGL and should therefore be excluded from the statement;
(j) EEPGL confirmed that data prior to 2004 was not available as it was purged in accordance to their internal data retention policies. As a result, a summary of costs incurred during this period was used for inclusion in the cost recovery statement;
(k) EEPGL did not do enough to keep the Government of Guyana appraised of the activities and costs associated with the development.
In particular, the annual work programme and budget submission did not meet expectations, and no justifications were provided at the end of each year for changes in scope or cost overruns. Both of these are requirements in the PSA; and
(l) Insurance certificates were not provided to ensure that full coverage has been maintained throughout the audit period. Although each partner provided coverage for its share of the block interest, only EEPGL has provided premium details and invoices. As a result, the auditors were unable to confirm that Hess and CNOOC were meeting their responsibilities in this regard.
Last week, the Vice-President disclosed that the disputed costs of US$214.4 million have since been reduced to US$11 million after ExxonMobil’s subsidiaries presented additional documentation in support of the related expenditure.
Auditing of post-contract costs
The absence of ring-fencing provisions is a key weakness in the 2016 PSA, according to the IMF. A ring-fencing arrangement ensures that only costs attributable to a particular field are taken into account in the computation of profit oil for that field. Although the Agreement provides for the sharing of profit oil on a field by field basis, it also allows Exxon to allocate cost oil to any field within the contract area, thereby defeating the main purpose of ring-fencing. The IMF had also stated that there are too many loopholes in the PSA, if not plugged, could result in Guyana losing significant amounts of revenue; and strong leadership in government is needed to ensure that the interest of the State is properly safeguarded.
Considering these and other concerns, a comprehensive auditing of the post-contract recoverable costs is of utmost importance, requiring the knowledge, skills and competence of experienced auditors. The audit is necessary to provide the reasonable assurance that expenditures incurred are legitimate recoverable costs in the context of the Agreement; and the amounts involved are reasonable and represent good value for money. This especially so, considering the higher the recoverable costs, the less will be the amount of Guyana’s share of profit that will accrue to it. Section 1.5 of Annex C provides for the auditing arrangements for post-contract recoverable costs for each calendar year. It requires the Minister to give 90 days’ notice of the Government’s intention to undertake the audit which is to be conducted within two years of the close of the year. Once the report is issued, Exxon is required to respond within 60 days. The Minister has a right to carry out further investigation within 60 days of Exxon’s response. If the parties are unable to reach agreement, the Minister’s claim is referred to the sole expert. If the audit claim is not settled, Exxon is entitled to recover the disputed amount pending final resolution of the claim.
As of December 2020 November 2021, the deadline for undertaking the recoverable costs for 2018 had expired, with no auditors appointed. Eleven months later in November 2021, the Government had stated that it was unable to arrange for the audit because it could not identify a strong group of local auditors to undertake the assignment. Faced with criticisms from various quarters, it eventually got its act together and selected a consortium of local auditors to undertake the assignment. The contract was awarded to Ramdihal & Haynes Inc., Eclisar Financial, and Vitality Accounting & Consultancy Inc., with technical support and expert assistance from the international firms of Martindale Consultants Inc. and Squire Paton Boggs. It contract was entered into on 25 May 2022 and was to last for four months, with a commencement date of 29 June 2020. The assignment covered the period 2018 to 2020, and the total recoverable costs was estimated at US$7.3 billion.
During the course of the audit, Mr. Floyd Haynes, the head of the consortium, stressed that the exercise was not a witch hunt but rather one that sought to verify the ‘validity and allowability of claimed costs’ in the context of the PSA. He warned against the expectation that the audit would uncover inflated costs, contending that such expectation needed to be tempered. He further stated that ‘[t]he idea that Exxon has been overbilling and overcharging, is grossly misleading and it is not fair to mislead the public. We don’t know what we will find, but we will ensure that the costs are legitimate and allowable’.
The penultimate statement by Mr. Haynes appears inappropriate in that he was able to draw a conclusion about ‘overbilling and overcharging’ when the audit had not progressed sufficiently for him to make that determination. During the course of an audit, auditors must display a sense of professional skepticism and must not rush to draw conclusions, especially those favourable to the auditee, without first making sure that they have conclusive evidence to support those conclusions. What if it turns out that evidence has been uncovered of overbilling and overcharging? Besides, auditors do not normally make public statements about an audit being undertaken to allow for the audit report to speak for itself. Mr. Haynes also appeared oblivious of the concerns expressed by the IMF.
As of March 2023, the Authorities stated that the auditors have completed their assessment, and the related report was forwarded to ExxonMobil’s subsidiaries for a response which has to be provided within 60 days. It is, however, not clear whether a response was received, and what was the reaction of the Government. According to the subject Minister, if there is any unresolved dispute, the matter is to be referred to the International Centre for the Settlement of Investment Disputes. He also promised to make the report public. Four months on, this is yet to be done. Meanwhile, the audit of Exxon’s recoverable contract costs for 2021 is due to be completed in four months’ time, with no indicator so far as to who the auditors are and whether the assignment has commenced.
