Category: The Road to First Oil

Is expenditure on Esso’s Ogle Office recoverable contract cost?

Introduction

Following a question raised in the National Assembly by Opposition MP Mr. Ganesh Mahipaul, ExxonMobil’s Country Manager Alistair Routledge, emboldened by his increasingly comfortable relationship with the PPP/C, reacted to Mahipaul by declaring that the approximately US$160 million expenditure to build the company’s headquarters at Ogle, East Coast Demerara, would be recovered from oil revenue. Routledge volunteered that “the cost recovery mechanism had been cleared by both the previous and the current administrations”.

If Routledge is right, it means that Guyana will bear 50% of a cost which is not expressly permitted under the 2016 Petroleum Agreement, in the process reducing the country’s share of profit oil. If we can interpret Routledge, the decision on the recoverability of the cost means that both the APNU+AFC Government and the PPP/C Government have yielded to Esso by agreeing that the petroleum operations should bear the whole cost of a building which Exxon would use for its own investment management and administrative purposes as well.

How and when the clearance was arrived at will no doubt remain a secret, as have so many things about the administration of 2016 Petroleum Agreement under both the APNU+AFC and the PPP/C.

Recoverable or not recoverable

The answer to the “how” of the question requires an understanding of the concept of Recoverable Contract Costs, defined in the Agreement to mean “such costs as the Contractor is permitted to recover, as from the date they have been incurred, pursuant to the provisions of Annex C [to the Agreement]”. It also requires an understanding of how costs are classified (section 2 of the Annex) and the kind of authority required for recovery of costs (section 3 of the Annex).

Both sections contain superficially exhaustive lists, but a more granular reading shows that these are not exclusive or exhaustive but are rather terms of expansion such as “including”, “all”, “any other contract costs” and “including but not limited to”. So let us review the authority conferred under section 3 of the Annex to make the building cost recoverable against petroleum operations.

Section 3.1 provides for Costs Recoverable Without Further Approval of the Minister as follows:

Costs relating to Surface Rights; Labour and Associated Labour Costs, including any personal income taxes owing by employees of the parties comprising the Contractor and paid or reimbursed by a Party comprising the Contractor; Transportation; Charges for Services; Material; Legal Expenses; all Training Costs; General and Administrative Costs and Annual Overhead Charge; Pre-Contract Costs; Interest and Financing Costs; and Abandonment Costs.

What does “including any personal income taxes owing by employees of the parties comprising the Contractor and paid or reimbursed by a Party comprising the Contractor” mean? Seems to mean that Guyana bears half the cost of the employees’ taxes which one can say is only half as bad as the Government actually paying the taxes due by Esso, Hess and CNOOC.   

Section 3.2 specifies as Costs Recoverable only with Approval of the Minister beingCommission paid to intermediaries by the Contractor; Donations and contributions to organisations in Guyana; and expenditure on research into and development of new equipment, material and techniques. On the other hand, section 3.4 allows the recovery of “Other Costs and Expensesincurred by the Contractor in the conduct of the Petroleum Operations”, but subject to the approval of the Minister.

The difference between 3.2 and 3.4 is that 3.2 is specific about those costs requiring approval while 3.3 makes costs not otherwise recoverable to be recovered subject to approval of the Minister – a classic case of six of one and half a dozen of the other.

No public disclosure is required anywhere. One therefore fears the private discussions between demonstrably underinformed politicians and avaricious oil companies, enabled by hamstrung and fearful public servants. The opacity of the annual financial statements of the oil companies and the refusal of the PPP/C to establish an independent Petroleum Commission is ominous and not unrelated.

For completeness, section 3.3 specifies costs and expenses which are expressly not recoverable such as arbitration expenses and court fines and penalties.    

Construction of the Head Office

Deductively, the cost to build the Head Office is not recoverable under sections 3.1 and 3.2, leaving 3.4 as the only avenue. The case for a huge capital cost on a building for the exclusive use of one of the contractors to the Petroleum Agreement seems weak and would no doubt require help from the Minister. And as Routledge gloated, both the APNU+AFC and the PPP/C have colluded with Exxon in a procrustean contortion of contract interpretation to serve the oil company’s greed to inflate recoverable cost. The only outstanding question then is the identity of the Minister granting the special approval for “clearing the cost recovery mechanism”. Is it Raphael Trotman under the APNU+AFC Government or Vickram Bharat under the PPP/C?

And the question of the land

Another issue concerning the Head Office relates to the land on which it is being constructed. Esso has sub-leased from Ogle Airport Inc. (OAI), ten acres out of the hundreds of acres of land leased from the Government to OAI for Airport development. There are two “clearances” which were required to make this legally possible. One, OAI needed approval for subletting the land for non-airport purposes and two, by virtue of section 333 of the Companies Act of Guyana, Esso needed a licence, authorised by the President no less, to hold land in Guyana.

Was it President Grainger whose Administration sleep-walked into signing arguably the worst oil contract in the petroleum world in the modern era, or President Irfaan Ally whose PPP/C Government in 2012 birthed the model for the infamous 2016 Petroleum Agreement, and which has failed at every opportunity to protect, promote and defend Guyana’s interests ahead of those of the oil companies? There is no doubt that when it comes to maladministration, negligence, slackness and selling out the people’s patrimony, not even water, let alone oil, separates the PPP/C from the APNU+AFC.   

Next week’s column will join the exchanges on allegations of a foreign currency shortage amidst a petroleum production bonanza in the fastest growing economy in the world.  

Court decision in Glenn Lall’s court challenge to tax provisions in 2016 Petroleum Agreement

Introduction

On 22 February 2023, the Guyana High Court handed down its decision in the action brought by newspaper publisher and crusader Glenn Lall. The action was filed on 22 January 2022 naming the Attorney General as the respondent and essentially sought 17 declarations by the Court that the breadth of concessions granted by then APNU+AFC Petroleum Minister Raphael Trotman not only to the oil companies but to their affiliates, subcontractors and employees of the oil companies and their subcontractors were not permitted by law and were therefore illegal.

On 31 March 2022, Esso applied to be added as a respondent. The optics appear to have been lost on the Government that here it was on the same side of the oil companies fighting a public-spirited private individual citizen who was challenging the Agreement which the PPP/C Government had committed in its 2020 Manifesto to renegotiate. As the case moved to the next stage, the lawyers for both the government and the oil companies raised procedural issues seeking to prevent the case from being heard. The gist of the Attorney General’s response was that the Agreement was a contractual matter falling in the realm of private law. The attorneys for Esso challenged Mr. Lall’s standing to bring the case, his delay in bringing the action, the manner and procedure in which Lall brought his action, and the right of the Court to hear the matter.  

The Judge did not rule on the procedural challenges but rather, called for submissions by all the parties on the procedural and substantive issues, indicating his intention to deal with both sets of matters at one time.   

The Judge compressed the several issues raised by the parties – two procedural and two substantive. 

1. Whether the Applicant has locus standi for the declaratory reliefs prayed for?

In an elegant criticism of the inelegantly worded method by which the action was initiated, the Court noted that the allegation that the Minister with responsibility for petroleum had acted ultra vires of the provision of statue by granting tax concessions, exemptions and waivers to parties other than the oil companies, justified the Court’s intervention. Stating as the correct legal position that Lall’s locus standi only applies if  “he can establish that his rights were either being infringed or threaten with infringement by the defendant”, the Courthowever, exercised its discretion under the Civil Procedure Rules to grant relief which the Court considers just, and that since the application raised matters of a public interest, Lall had the locus standi to bring the matter.

• Whether the delay in filling the applicant was fatal to the Applicant’s case?

While a delay by itself may not justify a refusal by a court to hear a matter, an applicant has to offer an acceptable explanation to justify an unusually long delay, even if that included 15 months during which the Agreement was kept from the public. Lall had proffered that he had relied on the commitment by the PPP/C in its 2020 Manifesto to renegotiate the contract once in Government.

The Court found that the case involved a matter of public interest, well beyond the interest of the litigants and that it had advanced significantly. In declining the Respondent’s application that the matter be thrown out, the Court recognised that the case was the first of a kind in a  new industry registering a phenomenal growth. The Court emphasised that it was for those reasons only that it allowed the extensive delay. .

It could have added that since Lall was not seeking a ruling that would apply retroactively, the oil companies actually benefitted from the delay.

• Whether tax concessions granted under section 51 of the Petroleum Exploration and Production Act, (PEPA) extended to persons other than Licensees?

The Court recognised that the purpose of section 10 of PEPA is to authorise the Minister to enter into Petroleum Agreements, while section 51 is to give the Minister the power to direct that the several tax laws referred to in the section shall not apply to or in relation to the licensee.

It found that the Minister’s powers applied not only to licensees, such as Esso, Hess, CNOOC, but also to their sub-contractors, affiliated companies, and to their expatriate employees under defined circumstances. It further declared that the tax provisions of the Petroleum Agreement are consistent with the words, context and purpose of sections 10 and 51 of PEPA.

• Whether section 49 and 51 of PEPA violate the Financial Administration [and Audit] Act.  

Lall alleged that section 49 of PEPA violated section 6 of the FAA which requires fiscal concessions to be granted only under a Tax Act. The Court did not agree and ruled that the fiscal concessions set out in Article 15 of the Petroleum Agreement were authorised by section 51 of the PEPA and Order No. 10 of 2016 made under section 51. The Court concluded that the power of the Minister was neither abrogated nor diminished by the FAA.

Conclusion

I close with the caveat that the court has not yet issued its judgement in written form and my assessment is based on second-hand information. However, Mr Lall has publicly stated that he proposes to appeal the judgement. I encourage all Guyanese to support his call for changes in certain of the contractual terms to prevent this travesty and disaster being perpetuated until 2056 when the Agreement will finally come to an end.

The PPP/C Government probably considers the results of the case as a success, enabled by and for the benefit mainly of the oil companies. In the process, it has abdicated its responsibility to Guyanese and broke its Manifesto commitment. As if these are not bad enough, it fails to exercise any regulatory oversight over the oil companies with which it now engages in an incestuous and unholy relationship.

The battle might have been lost but the war has to go on. Next week’s column will examine the deductibility of Esso’s Head Office Cost.

Suspension of Guyana by EITI draws the President’s ire

Introduction

President Irfaan Ali was visibly upset by the disclosure in the Stabroek News of Guyana’s suspension from the Norway-based Extractive Industry Transparency Initiative (EITI). The body was formed in London in June 2003 when representatives from governments, companies, industry groups, international and civil society organisations agreed to the EITI principles and establishing the EITI as a multi-stakeholder international group.

A recurring theme of EITI’s principles was accountability and transparency. The objective was to reverse the history and experiences which showed that the benefits of oil, gas and mining activity were not being realised but rather were associated with poverty, conflict and corruption.

EITI’s core values are accountability and transparency, which is mentioned in at least four of the 12 values. Requirement 2.4 of the EITI Standard includes the publication of the full text of contracts and licenses that came into force after 1 January 2021 and their amendments. Further, a regime and embrace of contract transparency, the public availability of all contracts and licenses in force, the disclosure of the policy and legislative framework, and the documentation of any deviations from the disclosure policy are recognised as critical elements of transparency and accountability.

Guyana joined the EITI on 25 October 2017 under the APNU+AFC Government under which the 2017 and 2018 country Reports were submitted to EITI. The 2019 Report was prepared under APNU+AFC Government but submitted under the PPP/C Government.  

Bad signals

The suspension comes soon after the disclosure of a stalled improvement in Guyana’s rating of the perception of public corruption index compiled by the Berlin-based Transparency International; evidence of large-scale cross-border money-laundering which appears to have gone on for several years; and the replacement of Dr. Rudy Jadoopat the head of the Guyana EITI was replaced by Dr. Prem Misir, the current head. While Jadoopat’s contract had come to an end, many in society thought that Misir’s long-standing relationship with the PPP/C had some influence in his appointment.  

Among groups critical of that appointment was Article 13 which called on the civil society representatives on the multi-stakeholder group “to reconsider their participation in the MSG as offering legitimacy to a compromised organisation.” There is no indication at this stage whether Dr. Misir knew of the impending suspension, whether he informed the political directorate and what he did that might have contributed to, or to prevent the embarrassment.   

The President attributed blame for the suspension on named private sector representatives on the MSG. Announcing that his government “stands resolute and strongly behind every single institution that promotes transparency and accountability”, the President vowed to spare no effort in advancing transparency and accountability in everything his government does. He does have an uphill task.

Government record

The Government’s record on disclosure has at best been weak, preferring to keep matters within a very closed group. In respect of oil and gas, oversight is restricted to less than a handful with no independent Petroleum Commission in sight. In fact, the Vice President, the key Government spokesperson on petroleum sought to discredit such commissions by claiming that they are no safeguard against corruption, even telling a journalist that he “can tell [the journalist] about the countries with the worse corruption track records that have Petroleum Commissions that are independent.” There is no report of a follow-up question.

The Vice President also subjected the local transparency body TIGI to a public flaying over a report in which the body had no part. This followed the publication of Transparency International 2022 Corruption Perception Index (CPI) which showed that Guyana’s improvement in the CPI has stalled.  The President has shown an equal reluctance towards transparency, announcing recently that his Government would release the contracts for the Gas-to-Energy project which will cost Guyana mega-US Dollars, “at the appropriate time”. That is not what the EITI principles call for.

The Government is also attracting unwelcome and negative publicity in showing disdain for the Public Accounts Committee of the National Assembly while tolerating a non-functioning Commissioner of Information. An effective and efficient Commissioner of Information would have contributed to an environment of openness and transparency.

While contracts not involving the Government do not attract the EITI framework, individuals and some private sector companies are making a mockery of the Local Content Act and the beneficial ownership declarations under the Companies Act. They are selling their birthright and the country’s interest in some of these local content arrangements.

Foreign diplomats hear and discuss these gratuitous attacks, relaying them back to their own countries where they do not make for positive reading. The Government might think that the attacks make them popular with their supporters and within the Party. Those have their own consequences including breeding the resource curse locally and losing friends internationally.    

Next week we will look at the Court’s decision in the Glenn Lall’s case

There is a precedent for renegotiating the 2016 Petroleum Agreement. Time for this Government to show some spine  

More than three years ago, and even before the first barrel of oil was produced, the 2016 Petroleum Agreement signed by Esso Exploration and Production Guyana limited (Esso) and Hess and CNOOC, its Joint Venture partners, concluded its first renegotiation with the Government of Guyana. The result was a Deed of Amendment (the Deed) signed by the oil companies and President David Granger in his capacity as Minister responsible for petroleum.

Specifically, the Deed amended Section 3.3 of Annex C – Accounting Procedure, to provide expressly that royalty paid by the Contractor under the Agreement would not be recoverable. Those who had argued that royalty was not a recoverable expense must have known of the renegotiation of this provision but never thought it necessary to share that information.

The APNU + AFC Coalition suffered a barrage of criticism for what is often referred to as a lop-sided oil contract. But the Coalition must be given some credit for at least effecting the renegotiation of one element of the Agreement, albeit not a particularly major one. The question inevitably arises why the current Administration keeps repeating the mantra of sanctity of contract, driving fear into Guyanese of the consequence of any attempt at renegotiation. Interestingly, the APNU+AFC’s renegotiation was conducted without a change in circumstances, while the incumbent Administration is adamant that it is powerless to even broach the question with the oil companies.

Putin’s misguided special military operation has dramatically and adversely affected the world economy and has impacted almost every household in the world, including those in Guyana. We now pay substantially more for cooking gas, petroleum, and minibus fares, substantially because of the huge increase in the price of petroleum products. Consequently, the oil companies are making unprecedented profits and are allowed to keep those profits all to themselves and their foreign shareholders. One would expect to see a caring government taking the side of the population, sometimes from two sides – a cap on prices as well as a windfall tax. In Guyana, our Government does the opposite: it takes the side of the oil companies and ignore the plight of the consumers.

But our situation is actually worse than this. The huge spike in fuel prices mean super profits for the oil companies. In theory, the higher profits give rise to higher taxes but under the APNU+AFC contract, it is the taxpayers of the country who are called upon to pay those higher taxes, out of our share of profits from the extraction of our oil. That is almost criminal.

This arrangement, sometimes referred to as “pay on behalf of” is clearly unsustainable. I noted in a recent letter I wrote in the media that the Natural Resources Fund is overstated by tens of billions of dollars. The high profits being earned by Esso and its partners will necessitate an increasing share of our NRF going to pay the taxes of the oil companies. Despite the OECD 15% minimum tax, the American partners under the Agreement will then claim the tax we pay as credits against their home tax obligations.  

The apparent reliance on better contract management in place of reasoned renegotiation may sound good but it seems designed to deceive. It is both the PPP/C and the APNU+AFC that have given Guyana this abominable contract. Contrary to what Vice President Jagdeo said a few nights ago on the Glenn Lall Show, the 2016 Agreement was based on the Robert Persaud – Donald Ramotar 2012 Model. How can we better manage a contract when we know not its origin, its content, or its implications? Indeed, it is still my strongly held view, that Esso was not entitled to a second Agreement. We may not be able to reverse the 2016 Agreement, but that should not mean that we have to prostrate ourselves at the feet of Esso, Hess and CNOOC, as our leaders are doing.  

Let us take the example of the APNU+AFC and demand renegotiation.

EEPGL ignores tax provisions of 2016 Agreement in its 2021 financial statements

Introduction

By a strange coincidence, this 100^th. column features the 2021 financial statements of Esso Exploration and Production Limited, the designated Operator and holder of a 45% interest in the Stabroek Block under the 2016 Petroleum Agreement. Esso signed its first such agreement in 1999 with the PPP/C Government as a sole Contractor and a second in 2016 with the APNU/AFC Coalition with Hess (30%) and CNOOC (25%) as added Contractors. Esso holds the remaining 45%. These percentages do not, however, reflect the relative size and influence of the ultimate international parents of these branches. It is no accident that Steve Coll, chooses as the title of his seminal book on Exxon, Private Empire: ExxonMobil and American Power. Its vast annual revenues exceed the economic activities of the great majority of countries and, with implications for Guyana, ExxonMobil’s sway over politics and security is often considered greater than that of the United States embassy in that country.

As we did last week in the review of Hess Exploration and Production Guyana Limited for which we did a brief review of its ultimate parent, we will comment briefly on some of the salient features of the annual report of ExxonMobil, the ultimate parent of the local branch operating in Guyana. Exxon is a giant compared with Hess. Here are some performance statistics.

Guyana does feature as prominently in Exxon’s report. But all references are positive. Here are a few:

• Guyana contains one of the largest oil plays discovered in the past decade.

• Exploration success continued with additional discoveries increasing the estimated recoverable resource in the Stabroek block.

• Exxon envisions six projects online by 2027, with the potential for up to 10 projects.

Exxon is probably aware that no legal contortion or high price fiddle will allow them another Petroleum Agreement and that by 2026, the Contractors will have to relinquish all areas other than those covered by Production Licenses issued under the 2016 Production Agreement.

Like Hess, Exxon’s taxes also tell an interesting story. Despite 38% of its revenue being derived from the United States, the US made up only 3.29% of the total federal and non-USA paid by Exxon. And of course, nowhere in the report is there any indication that there are cases where the payment is a paper transaction.

Guyana

Income

It has been a bumper year for the Guyana branch with revenue of $254,117 million, a growth of 2.4 times from 2020, compared with a growth in revenue of the international parent of 57%. Given the growth in revenue, it is not surprising that all other indicators were substantial improvements over 2020. For example, production cost represents 10% of revenue in 2021 compared with 14% in 2020; depreciation and amortisation has reduced from 31% of revenue in 2021 to 15%; Administrative expenses from 28% to 7%.

Again, we see how our country’s ineptitude allows the oil companies to make a mockery of best practice in petroleum operations as well as in taxation. Here’s the catch: If the GRA was to disallow the exploration costs as not meeting the income tax test of “wholly and exclusively incurred in the production of income”, the taxable profit will actually increase and the amount of tax represented as paid in Guyana will actually increase.

Although not obvious which line item it is charged to, the financial statements carry a note “The amount of restoration obligation includes costs related to petroleum exploration and production activities for decommissioning of floating, production, storage and offloading facility and reclamation of sites.” Some indication is given, however, in the Statement of Cash Flows which show a non-cash charge of $8,754 million as Other long-term obligation provision which is most certainly the de-commissioning provision. If this is in fact a general provision, it should be disallowed for tax purposes, which accrues to the Company’s benefit.

On the question of tax, Esso is in complete denial. The entire report is silent on tax, either as a note, a charge or deferred tax.

Balance Sheet and Cash Flow

The total assets of the Branch, net of depreciation and write-offs, have moved by $290,259 million to $1,261,733 million. Of this total, Property, Plant and Equipment accounts for $1,211,239 million or 96%. The major additions to this class of assets were $319,678 million in work-in-progress for Wells and facilities and $75,477 million in leased Drill Rig assets. Other significant items of assets are Related party receivable of $11,545 million and Inventory – Materials and Supplies of $27,549 million representing drilling of 2021 exploratory and development wells. There is an amount of $5,587 million of Deferred receivable, representing cash call bookings, net of joint billing costs.

The branch started the year with $4,546 million and ended with $1,092 million, despite a $251,198 million being generated from Operating activities. Lease interest paid amounted to $6,603 million while the principal repayment of lease obligations amounted to $7,236 million.

Committed capital expenditure over the next three years is $235,706 million, compared with $359,941 million stated in the 2020 financial statements. Despite the plans announced in the Parent’s report of several wells, for the next few years, the pattern of expenditure shows capital expenditure commitments as follows:

Next week: a round up and commentary on these financials.