…Finance Minister says this will be looked at later on
By Kiana Wilburg
Many countries have expended billions of dollars fighting legal battles against oil companies which have robbed them of their deserved revenue. In fact, research shows that operators such as ExxonMobil, Shell, Chevron, Repsol and British Petroleum have done this quite often to countries through the cost recovery process.
This procedure allows the oil company to recover moneys expended on an oil project. Once the money has been recovered by the company, whatever is left is deemed as profit to be split with the host country. Therefore, if the cost recovery bill for the operator is exorbitant, then the country will get a smaller slice of its oil pie.
What many international organizations have found over the years, is that oil companies often inflate their cost recovery bills to get a bigger bite of the profits. As a result of such crookish behaviour, countries like Indonesia, Chad and Equatorial Guinea, and the State of Alaska in the United States, were left to expend billions of dollars in the court system to get oil companies to cough up the money they robbed the said nations. These countries would have been able to fight these legal battles since they had set aside funds for such challenges.
But is Guyana paying attention to these lessons? Is it putting aside funds to deal with such challenges with USA oil giant, ExxonMobil?
Answering these questions last night was Finance Minister, Winston Jordan. He told this newspaper that Guyana is still in the early stages of its oil sector and such issues will be looked at later on. He said that priority for the government at this time is getting the right legislation in place for the sector and hiring the needed professionals.
Jordan said, “We are in the early stages. We still have to get certain things in place such as legislation and hiring the right people…Those are priority for us at this point. When those things are in place, we can look at setting up a mechanism that you spoke of.”
CASE OF ALASKA
The American state of Alaska provides a compelling example of the technical challenges of securing the full proportion of revenues owed to the Government. According to an analysis undertaken in 2003, over the 25-year lifespan of the petroleum sector, “one dollar out of every six that Alaska received from its oil development was obtained through legal challenges to the industries original payment.”
The majority (90%) of the petroleum production in Alaska since first exports in 1977 has been controlled by three companies now know by the names British Petroleum, ExxonMobil and ConocoPhillips. Over the first 25 years of production, Alaska received approximately $70 billion in petroleum revenue from royalty payments of 12.5% of the value of the oil, and three principal taxes: corporate income tax, a petroleum production tax, and property tax.
Based on independent analyses and audits, Alaskan officials overseeing the petroleum sector claim that “industry chronically reduced the bases for calculating royalty, severance, and income tax payments by underestimating the market value of a barrel of oil at the point of sale. Overstated pipeline shipping charges (tariffs) had the same result.”
In order to secure what government officials believed to be a fair share of revenues from this petroleum development, they were forced to take prolonged and intensive legal action against the companies. Between 1977 and 1994, the Alaskan Department of Law reported that it had paid contract lawyers and accounting specialists from 30 different companies a total of more than $217 million to fight these matters. The money was well spent. Litigation resulted in additional company payments to government of $2.7 billon.
The issues in dispute were highly technical and in some cases based on a legitimate difference of opinion in the interpretation of complex contractual language and taxation law. But in many cases the differences were based on outright deceit and fraud. By tracking the export and value of each barrel of oil being exported, Alaskan authorities demonstrated that overall revenues were deliberately minimized by misrepresenting the actual sale value of oil and by inflating the costs associated with transporting oil by pipeline and tankers.
By 2000, litigation had produced an additional $10.6 billion in revenue including $6.8 billion in direct payments for taxes and royalties, and an additional $3.8 billion in increased taxes and royalties related to reassessing pipeline transportation costs. This pattern has continued with an additional $1.7 billion in oil and gas settlements over the past decade. The figures listed above substantially underestimate the scale of abuse. Many other claims were launched against companies by the Government but were settled out-of-court and are therefore not public.
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