Exxon’s auditing deadline & cost recoverable items for review–Energy Dept. Head

Dec 30, 2018 ExxonMobil, News

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In pursuit of a model Production Sharing Agreement (PSA), issues such as auditing deadlines and recoverable costs by oil firms would be reviewed in an effort to ensure that they are in keeping with international best practices.
This was confirmed, yesterday, by head of the Energy Department, Dr. Mark Bynoe.
He was at the time responding to queries on whether these issues would be considered, given concerns raised by international and local anticorruption activists.
Dr. Bynoe said, “What we are seeking to do with the model PSA is not to present an instrument which would necessarily be used as a one-stop shop. What we are seeking to do is to develop a best practice map…
“We are looking to take from global best practices, what is best suited and we negotiate that. What the model PSA would do is to have the best practices incorporated …and provide scope for negotiations going forward.”
Pressed on the issue of the auditing deadline and the cost recoverable items, Dr. Bynoe said, “The Department will look at all global best practices in every respect. So whether it be recoverable costs, whether it be in terms of profit oil and sharing, all of those elements would be looked at.”

AUDITING DEADLINE
In the Production Sharing Agreement signed with oil giant, ExxonMobil, Guyana only has a two-year deadline within which to do cost audits.
But given the nation’s capacity deficiencies, international transparency bodies contend that this timeline should be extended. Specifically making this point is Oxfam America. The entity is a confederation of 20 independent charitable organizations, which seek to fight some of the factors that lead to poverty, one of them being the poor governance of extractive wealth.
Oxfam America noted that the expiration periods for audit rights are set out in petroleum contracts and tax laws. It stressed, however, that these deadlines differ from one country to the next. It noted that in Ghana and Kenya for example, the authorities there retain the right to complete audit companies within seven years.
In Peru, the limit for audits is four years. Even in the USA, the transparency body highlighted that audits are completed within three years.
Oxfam warned, however, that even a three-year deadline is not advisable for developing countries such as Guyana, given the limited financial and human resources that are likely to delay the audit process.
The organization said that it is equally important to keep an eye on record-keeping provisions in the petroleum contracts and tax laws.
It said, “Oil companies should be required to keep all their records in country for easy access by the auditors during the audit period. But once that period expires, it becomes very costly to access records and therefore practically impossible to audit them…”

COST RECOVERABLE ITEMS
Oxfam America has also called for Guyana to urgently modify those costs which oil companies are allowed to deduct.
The transparency body emphasized that there are certain costs which present a greater risk to government revenue, and their eligibility may merit review. In this regard, it sought to warn Guyana’s authorities that the payment of interest on a loan an oil company takes from a related party is one such cost.
The company explained, “Oil and gas projects require significant capital outlays over their life, including the costs of drilling the well and constructing infrastructure to pump and refine the oil. Often, a related party will provide an oil operator with a loan for its project. But the interest rate on that loan is often highly unreasonable…”

Oxfam then cited a case involving Chevron Australia which highlights how companies may use such loan arrangements as a means of shifting profits offshore.
Oxfam noted that in 2017, the Federal Court of Australia upheld a US$340 million tax adjustment levied on Chevron Australia by the Australian Tax Office (ATO). This decision came about after the ATO discovered that a Chevron affiliate in the U.S. state of Delaware set an unreasonable interest rate for a loan to Chevron’s Australian arm.
And that was not the worse part. The court found that the loan was not even a genuine transaction. It was simply used by Chevron Australia to artificially reduce its profits and tax payments in Australia, thereby shifting billions in revenue to its affiliate in Delaware.
Because of the scrutiny meted out by the Australian Tax Office, taxes were adjusted for 2004 to 2008, and the additional revenue of US$340M was recovered from Chevron.
With this as its premise, Oxfam warned that Guyana should not hesitate to review the costs which are eligible for recovery by oil operators.
IMF MAKES CASE
Given the missteps made with the Guyana-ExxonMobil Production Sharing Agreement, several international organizations such as the International Monetary Fund (IMF), believe that the government must now put together a model PSA with the minimum fiscal terms or package to be accepted for future contracts.
It does not believe that the fiscal terms should be negotiated on a case-by-case basis.
The Fund noted that the fiscal package would include the maximum cost recovery ceiling, Government’s share of the profit oil, the tax obligations of the contractor, tax benefits or concessions for the contractor and sub contractors.
The IMF said it is crucial that Guyana decides what is going to be its fiscal package for future contracts. It also highlighted that the laws framing Guyana’s petroleum fiscal regime would have to be amended, since they date back to the 1980s.
According to the IMF, the legislative framework is highly discretionary, leaving key fiscal terms to be defined in PSAs, and lacks provisions for activities other than exploration and production.
The IMF also noted that the fiscal regime was designed at a time when there was little information about the geological prospects in the country, and the authorities were probably interested in attracting investment in exploration activities.
However, given the de-risking of the basin following recent discoveries and the growing interest of international oil companies in Guyana’s petroleum sector, the IMF stressed that the authorities should consider reforming and modernizing the legal and fiscal framework for new investments in the sector.

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