Jan 21, 2018 News
By Kiana Wilburg
Cost recovery is a fundamental part of all Production Sharing Agreements (PSA). This mechanism allows the operating company to recover costs from the petroleum produced. The operator and the country usually agree on what can be recovered by the oil company from the exploration, development and production stages.
But countries across the world have learnt that cost recovery provides irresistible opportunities for companies to inflate their bill of expenses. Getting a foolproof system to guard against this has baffled even the most developed countries.
In fact, many have sought to do away with the cost recovery mechanism after learning that millions or even billions of dollars more were recovered after intense scrutiny was done on the said claims. India and Indonesia are two fitting examples in this regard.
This has been documented at length by the Centre for Public Integrity, an American nonprofit investigative journalism organisation. Its stated mission is “to reveal abuses of power, corruption and dereliction of duty by powerful public and private institutions in order to cause them to operate with honesty, integrity, accountability and to put the public interest first.”
According to the Centre for Public Integrity, Timor-Leste is one of the many countries that ended up garnering more money from audits on cost recovery claims when compared to the profits they made from the oil and gas sector.
Timor-Leste is the most oil dependent economy in the world. In recent years, petroleum revenues have accumulated at a rate of more than US$250 million per month. The money has flowed so fast that for many years, Timor-Leste devoted little effort towards making sure that it received what it was actually owed.
The international accounting firm, Ernest and Young, acted as the independent auditors from 2007-2010 and, as is common practice, were paid by the oil companies. It is alleged that the accounting company contested few, if any of the company expense claims.
In 2011, Timor Leste decided to take matters into its own hands and initiated a series of tax audits covering the years 2005-2010.
The audit process had an immediate short-term impact on revenues with a reported $79 million being recovered in the first round. The Centre for Public Integrity said that the long-term implications could be even more significant with the government reporting that it is continuing to pursue a further 28 assessments against the oil companies. These amount to billions of dollars in back taxes.
The Centre said that undertaking independent and intense tax audits continue to be a challenge. Formal legal proceedings were required in March 2013 before a petroleum contractor finally agreed to provide documents on which millions of dollars in tax deductions had been based.
But Government tax audits continue to generate results. The Timor Ministry of Finance reported that during 2012 alone it received more than US$400 million from “audit-related activities.” On July 10, 2012, the Council of Ministers confirmed that the government was “engaged in legal action against multinational oil companies Conoco Phillips and others to recover substantial monies it believes are rightfully owed the people of Timor-Leste under legal obligations stemming from production contracts.”
Oil production is expected to get into to full swing, here, 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 pointed out that the Guyana Revenue Authority was able to garner $900M in taxes due to its attentiveness in this regard.
In the eyes of Chartered Accountant and former Auditor General, Anand Goolsarran, 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.
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.
Aug 10, 2022Kaieteur News – Guyana’s Open team defeated Burundi while the Women’s team defeated TimorLeste on Monday in Chennai during the FIDE Chess Olympiad. The Open team comprised of CM Taffin...
Aug 10, 2022
Aug 10, 2022
Aug 10, 2022
Aug 10, 2022
Aug 10, 2022
By Sir Ronald Sanders Kaieteur News – In the first part of this commentary, the conclusion was reached that the great... more
Freedom of speech is our core value at Kaieteur News. If the letter/e-mail you sent was not published, and you believe that its contents were not libellous, let us know, please contact us by phone or email.
Feel free to send us your comments and/or criticisms.
Contact: 624-6456; 225-8452; 225-8458; 225-8463; 225-8465; 225-8473 or 225-8491.
Or by Email: [email protected] / [email protected]