– but audits pre-contract costs at a sloth’s pace
By Kemol King
Despite its under-prepared capacity to efficiently scrutinize costs claimed by oil companies, Guyana has started to rapidly approve field development plans (FDPs) submitted by ExxonMobil which sum up to billions of United States dollars.
No cost audits have been contemplated on the two field developments the country has already approved. Yet, Guyana is on track to green-light a third development, the Payara project, very soon as ExxonMobil has been pressuring the government and threatening to take its investment dollars elsewhere.
The Guyanese public has been made aware that ExxonMobil intends to have Guyana repay every cent it claims it spent to explore and develop the Stabroek Block, with the money gained from the sale of Guyana’s crude. With Guyana’s lack of capacity, if the costs claimed by the company are overstated, Exxon and its partners could walk away with free cash which belongs to the people, but are allowed to slip away by hurrying the political leadership.
Pre-contract cost includes contract costs, exploration costs, operating costs, service costs, and general and administrative costs and annual overhead charge as those terms are defined in the 1999 Petroleum agreement.
ExxonMobil intends to recover hundreds of millions of US dollars in pre-contract costs. So far, the Stabroek Block agreement notes that ExxonMobil intends to recover US$460M in pre-contract costs for operations during the period 1999-2015.
The audit of these costs started in late 2019 by a British firm government hired, called IHS Markit, since Guyana just doesn’t have the know-how to get it done.
Guyana is in the ninth month of the new year, and the audit still isn’t completed, according to Vice President Bharrat Jagdeo.
Attorney-at-Law and Accountant, Christopher Ram, had said in 2018 that Exxon’s claim of US$460M is overstated by at least US$92M. He had challenged the former APNU+AFC Government to justify the figure it agreed to pay.
His calculation found that all figures supplied by the companies, even when one allows for all expenses and expenditures, amount to a far cry from the US$460,237,918 that Exxon and its partners, Hess and CNOOC Nexen, are claiming. He had said that it is overstated by “at least” US$92M, because not all expenditure is recoverable as pre-contract costs.
Ram had posited that Guyana may very well incur more pre-contract costs.
He reminded that the US$460M only accounts for 1999 to 2015. He noted, however, that the contract was revised and signed in late 2016. Ram said that there could be more costs from January 2016 to October 2016 as the agreement stipulates “such cost as incurred under the 1999 Petroleum agreement between January 1, 2016 and effective date [date of contract signing] which shall be provided to the Minister on or before October 3, 2016 and such number agreed on or before April 30, 2017.”
International lawyer, Melinda Janki, had said, “The costs for the whole of 2016 were about US$583M and if you apportion it to October, you get roughly US$400M. Again, Minister of Natural Resources, Raphael Trotman has agreed for Guyana to pay this. As at October 7, 2016, Government’s attempt to sell our oil costs us US$960M.”
MORE EXPLORATION COSTS
ExxonMobil did not stop exploring after the contract was signed. After all, it announced its 18th discovery yesterday. All of the exploration work and other costs incurred over the years from the contract signing date in 2016 to its ongoing drilling operations, which led to those 18 discoveries, have to be recovered.
There’s no telling just how much Exxon will demand, in this regard. In 2018, Exxon’s then Head of Government and Public Affairs, Kimberly Brasington, had given an idea of how the previously claimed costs were arrived at.
Brasington said that approximately $230M was spent drilling the Liza One well and early drilling costs for the follow-on wells.
She said that this included mobilizing and demobilizing the drilling rig, helicopters and supply vessels in addition to drilling the well.
The ExxonMobil official said that approximately $140M was spent shooting the company’s 20,000km seismic campaign over the Stabroek Block. She said that this was ExxonMobil’s largest proprietary seismic campaign.
“It was required because no 3D data existed for the block. The seismic data is what helped us figure out where to drill the wells,” Brasington stated.
Furthermore, the official had said that approximately $65M was spent over many years utilizing Geology and Geo-science experts and engineering teams to identify the potential prospects that the company and its partners wanted to drill and then to design the concept for safe and successful drilling.
Brasington said that just about $25M spent on other costs and overheads, including block rental fees and training payments.
Exxon claims it spent all of that to drill one well, perform a seismic campaign on the entire Stabroek Block, hire technical experts to identify potential prospects, and change. With 18 discoveries on its belt in that block, the company’s demands are expected to meet hundreds of millions of US dollars, if not, billions.
BILLIONS IN DEVELOPMENTAL COSTS
Every discovery can be developed for the oil to be produced and sold. Much of the costs will go to buying a floating vessel to be stationed at the field, and its accompanying development infrastructure.
The initial cost estimates for Liza Phases One and Two – both already approved – total about US$9.7B.
It became concerning when ExxonMobil revised the cost estimates for the Liza Phase One project on multiple occasions. The cost was drastically revised by nearly US$1B over the years.
During Hess’ fourth quarter earnings call for 2019, Chief Executive Officer John Hess had specifically stated, “…Liza Phase One was budgeted at US$4.4 billion gross, including the purchase of the Floating Production Storage and Offloading (FPSO) vessel (Liza Destiny)… We now expect the gross cost for the development to be approximately US$3.5 billion or 21% below the sanctioned estimate.”
The initial estimate was published by ExxonMobil in 2017, and revised a first time in 2018 by US$700M. Hess’ announcement is the second revision, taking the cost down by $200M more. That’s a total reduction of US$900M.
Speaking at a press conference earlier this year, Jagdeo said as Opposition Leader, “If you could make such a [nearly] US$1B error, that is worrying, without oversight from the government.”
Presently, no firm has been hired to audit the billions of dollar in costs that Exxon intends to claim for the Stabroek Block project. But Liza-1 is already on stream, and is set to pump an estimated 450M barrels.
The Liza Phase Two project is estimated to cost US$6B, and that will have to be audited too. It is slated to come on stream in 2022, and will pump an estimated 600M barrels.
Canadian-based engineer, Darshanand Khusial, had noted that there are worrying cost anomalies which exist between the Liza Phases One and Two cost estimates, which must be explained before the Government approves any other project.
The former APNU+AFC Government approved the Liza Phase One project in June 2017, despite there being hundreds of millions of dollars in pre-contract costs to audit.
Then, it approved Liza Phase Two in April 2019, just two years after the first.
Vice President, Bharrat Jagdeo, said during a Monday press conference that the government intends to aggressively pursue costs, as it does not agree that some of the expenditures made out to be cost recoverable, should be so.
Yet, the new PPP/C administration appears ready to further the APNU+AFC’s trend by approving Payara soon, and adding billions in unaudited costs for a government that is unprepared to provide ample scrutiny.
Rystad Energy, an energy research and business intelligence company, projects that ExxonMobil will be able to place one Floating, Production, Storage and Offloading (FPSO) vessel offshore Guyana, every year for the next 10 years. The Norwegian firm projected that, to do so, ExxonMobil would be expending around US$50B in projects over the period. These projects, however, would be subject to government approvals.
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