Jan 01, 2018 News
By Kiana Wilburg
Oil production is expected to get into to full swing by March 2020. That is less than two years away. But even at this point, the Government is yet to point out what ‘specific’ measures are in place to ensure that it can authenticate cost recovery claims by USA oil giant, ExxonMobil.
Kaieteur News had asked President David Granger to provide some details in this regard and he was unable to. The said question was also put to the nation’s point man on oil and gas, Natural Resources Minister, Raphael Trotman.
He, too, is yet to list just two things that are in place to ensure Guyana is not robbed through such claims.
At a recent press conference, Trotman said that the authenticity of cost recovery claims was one of the main discussions he and others had with the International Monetary Fund (IMF) and its experts.
Trotman acknowledged that indeed, several countries around the world; Kenya, Ghana, the USA and Great Britain, have had struggles with ensuring cost recovery is precise and transparent .
The Natural Resources Minister said, “We have turned to some of the best financial experts in the world and they have come, they have done their assessments and they will be guiding us. It is a work in progress and we are doing better by the day.”
When Kaieteur News still insisted on him outlining a few provisions in this regard, he said that the Guyana Revenue Authority was able to garner $900M in taxes due to its attentiveness in this regard.
Guyana’s limited resources will certainly put it at a disadvantage when it comes to verifying the accuracy and reasonableness of cost recovery claims which will be made by ExxonMobil, according to Chartered Accountant and former Auditor General, Anand Goolsarran.
The anticorruption advocate insists that the Coalition Government should consider renegotiating the contract it has with ExxonMobil to allow for a revenue-sharing model to be in place, similar to that which currently exists in Indonesia.
PROFIT VS. REVENUE SHARING
In a profit-sharing arrangement, Goolsarran explained that the oil company uses the revenue derived from production to recover its capital and operational expenditure. This he said is known as ‘cost oil’.
The remainder, known as ‘profit oil’, is split between the government and the company. Goolsarran said that the extent to which countries have a dual arrangement in place (i.e. royalty plus profit-sharing), it stands to reason that royalty rates will be lower than those that receive royalties only.
In Guyana’s case, it is only receiving a two percent royalty.
According to Goolsarran, a key concern relating to profit-sharing arrangements is that profits can vary significantly from year to year. He said that this can be as a result of the unpredictability of prices on the world market and the need to recover the initial investment over a period of time.
On that note, Goolsarran said that countries such as India, Tanzania and Indonesia are experiencing significant difficulties in terms of their ability to independently verify the reasonableness of the expenditure that is charged against revenue to arrive at a profit.
The Chartered Accountant said that given the uncertainty of the extent of profits that is likely to accrue; there are strong arguments for there to be in place, revenue sharing agreements rather than those relating to profit-sharing.
The former Auditor General said that a revenue-sharing agreement provides a guaranteed flow of income to governments once production begins, and can be monitored easily from the government’s perspective.
He said that there will no longer be a need for detailed and independent scrutiny of oil companies’ costs to ensure that only legitimate expenditure is charged against revenue. He said that this is an area that has been the subject to intense disagreements between oil companies and governments.
An additional consideration Goolsarran highlighted is that oil companies can curtail production in anticipation of higher prices in the future, with consequent adverse impact on profits.
He said that it was mainly for these reasons that India has moved away from the profit-sharing model to one of revenue-sharing, based a recommendation of the country’s Auditor General.
Kaieteur News recently carried an article on the Tanzanian experience with ExxonMobil in which it was stated that the country had serious difficulty in verifying how the figure of “cost oil” was arrived at.
Upon examination of the leaked contract with ExxonMobil, the Chairman of the Public Accounts Committee disclosed that there was no “ring fencing” of blocks and that the Production Sharing Agreement contained no provision to guard against the incurrence of costs in one block and recovering them from another profitable block.
The Chairman referred to the writings of Nobel Laureate Joseph Stiglitz who asserted, “The fact that the typical contract allows the oil companies to walk away with the windfall profits suggests that something is wrong with the way these contracts are designed.”
This newspaper also reported Indonesia’s switch from the profit-sharing model to a revenue-sharing one. This was because each passing year has seen a dwindling of the country’s share of profits in the belief that oil companies were inflating their costs.
This was despite the fact that the government-owned entity that manages the oil sector has a staff of 750 professionals and approximately 80% of that staff is involved in the verification of cost recovery claims by oil companies to ensure that they are fair and accurate.
With the aforementioned in mind, the Chartered Accountant insisted that there are limited resources available in Guyana to enable the independent verification of the accuracy and reasonableness of the costs that are chargeable to revenue.
He said it is mainly for this reason that the Government of Guyana should re-negotiate the contract with ExxonMobil to allow for a revenue-sharing model to be in place.
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