Sep 01, 2021 News
– Int’l watchdog says Govts. must show how these exercises benefit citizens
Kaieteur News – Since assuming office on August 2, 2020, the Irfaan Ali led administration has yet to disclose to the citizenry the findings of two crucial audits that were conducted on ExxonMobil’s spending. The first audit was done on the US$460M the American oil giant claimed was expended prior to 2015 for exploration, while the second audit relates to over US$1B in expenses racked up from 2015 to 2017 for the development of the Liza Phase One operations.
While the findings of the audit remain unavailable for public scrutiny, one international watchdog, the Center for Public Integrity (CPI) insists that it is critical for governments to show citizens the extent to which cost recovery audits are successful in helping to save the country millions of dollars.
CPI noted in one of its analysis that this is a common practice when nations undertake cost recovery audits. The transparency group explained that cost recovery is a mechanism, which allows oil companies to recoup their costs directly from a portion of the petroleum produced. CPI was keen to note, that the process however creates strong incentives for oil companies to inflate expenses and in some cases, input costs that are ineligible or have nothing to do with the operations. CPI said this process has been the subject of controversy in many oil-rich countries hence, it is crucial that governments conduct rigorous audits to protect the nation’s revenues from being substantially reduced.
Referencing examples in several counties, CPI was able to show just how much new producers like Guyana can save once these audits are done properly.
Over in Timor-Leste, one of the most oil dependent economies in the world, CPI said petroleum revenues had accumulated at a rate of more than US$250 million per month during the 2007 to 2010 period. However, the money had flowed so fast that for many years, CPI said Timor-Leste devoted little effort to making sure that it received what it was actually owed. What also made matters worse, was the fact that the international accounting firm, Ernest and Young, acted as the independent auditors from 2007-2010 but contested few, if any of the petroleum company expense claims.
Acting on advice, CPI said Timor-Leste subsequently initiated a series of audits covering the years 2005-2010. The first round was a success as it resulted in US$79M being recovered. A second round commenced in 2012, and this time, CPI said the Ministry of Finance there recovered US$400M.
In India, CPI said more than two-dozen oil companies had recovered over US$24.5 billion in inflated expenses in one year (2012). In the wake of this finding, CPI said the Indian government had commissioned a high-level panel to review existing contracts and explore various contract models. CPI said the panel back then concluded that the system of cost recovery “encourages the Contractor to inflate costs, to the detriment of Government’s share in profit petroleum.” Its main recommendation, therefore, was that India should adopt a “new contractual system and fiscal regime…” to overcome the difficulties in managing the cost-recovery mechanism. That recommendation was later taken on board.
Citing another example, CPI said the American state of Alaska provides yet another compelling example of how much countries stand to lose in the absence of audits that would sometimes require legal challenges to secure what rightfully belongs to the people.
According to a separate analysis undertaken in 2003, CPI said Alaska was losing millions of dollars due to inflated and ineligible costs being included in the cost recovery process. In other cases, the nation was simply being robbed its fair share due to various schemes employed by the oil companies. CPI said this led to prolonged and intensive legal action against oil companies that included ExxonMobil.
Over a 17 year period (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 US$217 million to follow-up legal claims against the oil companies. The department was keen to note that while the money may appear astronomical, it was certainly well spent since the litigation resulted in a recovery that totaled US$2.7 billion, almost 13 times what they spent on legal fees.
By 2000, CPI was keen to note that further legal challenges produced an additional US$10.6 billion in revenue. CPI said it is important to note that the figures listed substantially underestimate the scale of abuse that was unearthed during audits and legal challenges. It said many other claims were launched against oil companies by the Alaskan Government but were settled out-of-court and are therefore not public.
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