OIL: With two-year deadline… Guyana running out of time to audit Liza One and Two

– will be forced to accept US$10B costs – IMF

The International Monetary Fund (IMF) has warned Guyana since 2016, that one of the most critical challenges it faces is conducting effective cost audits, especially when it is taken into account that the Stabroek Block Production Sharing Agreement (PSA) with ExxonMobil only gives the nation a two-year window to contest unreasonable and/or inflated costs.

With such a timeline, it would mean that the country has to act swiftly or else, those costs as reported by the oil giant would have to be accepted, the IMF cautioned. 

The Liza Phase One Project which was approved in 2016 is said to cost US$3.7B while Liza Phase Two will be approximately US$6B, bringing the total close to US$10B.

In spite of the IMF’s advice to get the audits done as quickly as possible, Guyana is yet to audit a cent expended by ExxonMobil since 2016 for Liza Phase One or Two. To compound this situation is the fact that the PPP/C Administration is expected by month-end to grant approval for ExxonMobil to expend billions of dollars more on another project called Payara. That development is likely to cost another US$6B.

Given the nation’s capacity deficiencies, international transparency bodies have strongly contended that the two year deadline the government has accepted, along with the fact that it can only do one audit per year, is not sufficient. They have stressed that the 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 allowed to be completed within three years.

Oxfam warned 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.

Further to this, 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…”

Oxfam warned that Guyana needs to take the auditing timeline for these costs as a matter of grave concern as it could cost the nation billions more.

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Comments

  • kamtanblog  On September 16, 2020 at 2:15 am

    Catch 22
    Devil you do !
    After audits remedial action are usually “recommendations” !
    In some cases the cost of the audit outweighs the benefits/savings.
    Focus should be more on “production” figures
    relative to market prices obtained.

    Simple Simon says
    If market prices are falling then increased production offset losses.Opec tried to
    control production to increase prices but failed in this endeavour.
    Not to mention productions costs being “fiddled” !

    Renewables will not replace oil but will reduce dependency on oil as energy source.

  • brandli62  On September 16, 2020 at 2:45 am

    This is a very important reminder for the new Guyanese government and requires IMMEDIATE attention!

    I have pointed out in one of my previous comments on the renegotiation of Exxon oil contracts that the audit of Exxon expenditures is absolutely critical. All demands of the Guyanese government towards Exxon that add to the product costs will just delay the time until Guyana is able to share the oil revenues with Exxon. In my opinion, the auditing should be done by an international auditing company, which acts in the interest of the Guyanese government and people. They are more likely to be familiar with all the tricks that oil companies use to charge costs to the oil-producing country. This may extend to covering for inflated wages and bonuses for oil company top management.

    Finally, any new contract has to include a provision that complete audits have to be completed within 5- 7 years instead of the 2 years in the present contracts.

    • kamtanblog  On September 16, 2020 at 3:06 am

      Won’t happen my friend.
      Agree to disagree !

      Most investors expect returns (profit) within 2/3 years. Shareholders also. CEO’s mantra !

      It won’t happen !

      • brandli62  On September 16, 2020 at 3:10 am

        “It noted that in Ghana and Kenya for example, the authorities there retain the right to complete audit companies within seven years.”

        I disagree, Kamtan, there is precedence! It’s a matter of smart negotiation. I am glad to help out, if necessary. 😉

      • kamtanblog  On September 16, 2020 at 3:22 am

        “precedence”
        does not matter to the “mighty” exon !

        Will David slay Goliath ?
        Doubt it !

        Who will bell “exon” !

        Stay safe

        Kamtan

  • Lall Hardeen  On September 16, 2020 at 8:15 am

    Don’t know who the Auditors are. If they have started, what has been accomplished so far? What kind of contract was signed. What are the audit provisions? Most “construction contracts” make provisions for the Contractor to keep cost records for ten years “after the construction is finalized “.
    Where are the records kept and are they available electronically for testing? How is ExxonMobil accounting for the “dry wells “? Who is responsible for interest cost and what is the amortization period of the cost? How about insurance policies? Foreign exchange conversion rates etc.
    Too many questions to go over.
    Guyana needs to put its house in order. Get the audits started and include an apprenticeship program for Guyanese students that want to go into that field.
    We need to analyze the audit provisions and put an audit program in place. Have ExxonMobil separate the costs for easy categorization as to whether to be expensed or capitalized. Put teams together to review these costs. Would be happy to help with the audit program and process, only if apprenticeship for Guyanese is in place.

  • Jacquie  On September 16, 2020 at 3:34 pm

    Guyanese are not stupid people. Why is this allowed to happen ; unless of course people have their hands on the proverbial cookie jar.

  • P N Singh ( Civil & Structural Engineer)  On September 18, 2020 at 3:15 pm

    Prior to Guyana signing the present contract I tried to advise members of the previous Govt. how important it was to get on board companies who are experienced in negotiating contract of this type.Sad to say my advice fell on deaf ears.What an incompetent lot they were.My country has now woken up. Hope it is not too late.

    • brandli62  On September 19, 2020 at 12:43 pm

      As reported in Demerara Waves, September 16, 2020:

      Mr. Jagdeo recalled that Guyana had given ExxonMobil a “liberal contract” because it was strategic to have an American company in Guyana’s Exclusive Economic Zone because it helped to defend our sovereignty.

      If this statement tells it all in my opinion. It is now important that any future production agreements are made under different conditions.

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