Category: The Road to First Oil

Token GRA tax receipt helps Hess avoid paying taxes in the US

Introduction

In this Part 99, we address our attention to the 2021 audited financial statements of Hess Exploration and Production Guyana Limited (the branch) which despite its name, is in fact a branch of a Cayman Islands incorporated subsidiary of the American oil major Hess Corporation headed by John Hess. Of the heads of the three contractors under the 2016 Petroleum Agreement, Mr. Hess is by far the most open, even garrulous, when it comes to Guyana. But not without reason.

Guyana is the jewel in Hess’ crown, its cash cow, its redemption and its future. From ground zero two years ago, Guyana accounted for more than 25% of the Corporation’s global crude oil production in 2021, even as Hess has seen its North American production decline by more than 20% between 2019 and 2021. And of the Corporation’s gross and net undeveloped acreage, Guyana represents 45.9% and 43.7% respectively while 25% of the proved reserves of crude oil and condensate the Corporation is situate in Guyana.

Malaysia and JDA: Malaysia – Thailand Joint Development Authority.

That elusive tax

The taxation information is at once revealing and a vindication of the fears of commentators. The Statement of Consolidated Income shows a tax charge of US$600 million but that includes the amount of US$113 million “paid” by the Government of Guyana on behalf of the local branch for which Hess gets a token receipt. In a discussion on taxes, the Report informs the reader that the tax charge in 2021 was “primarily due to higher pre-tax income in Libya and Guyana”. The report also shows that income tax attributed to Guyana and Libya accounted for 92% of the taxes shown as a charge in Hess’ report for 2021. It is unclear whether the amount of US$436 million shown as paid in Libya in 2021 was a paper transaction as is the case with Guyana but given Libya’s sensible and logical position with oil companies, it is unlikely that that country’s political leaders would be as shamelessly obsequious to the oil companies as leaders Guyana and its leading politicians have always been. 

It would be ironic but not surprising if, in the near future, the lion’s share of taxes payable in the Hess world comes from Guyana! Note 15 to the Report leaves no room for speculation or deduction – Hess paid no taxes in its home country from which it derives two-thirds of its crude oil production! Yet the oil companies are willing to argue in the Guyana courts that if they have to pay tax in Guyana, their business will suffer.

But things are so good for John Hess and the shareholders that in his letter to them he confidently predicted that all four of the Corporation’s production assets would be free cash flow generative in 2022 and is positioned to grow its cash flow at a “compound rate of 25% per year out to 2026”. It only gets better: with Liza Phase 2 beginning production in February 2022, at capacity, Hess is expected to add more than $1 billion of net operating cash flow annually, having repaid the remaining $500 million of its term loan; distributed a 50% increase in quarterly dividend; and committed to return up to 75% of its adjusted free cash flow annually to shareholders by increasing dividends and accelerating share repurchases.

And to think that Hess has less than one-third interest in the Stabroek Block. But Hess, and even more so Exxon, enjoy such confidence and respect of this country’s Government and the Opposition that they are proud to boast of their cooperative relationship with the oil companies and defend the iniquitous contract.  

Let us now turn to the financial statements of the Guyana branch in which all figures in Guyana Dollars, unless otherwise stated.

Table of Income Statement

Crude contract, crude share  

Using information in the Hess Corporation’s report on average price earned from Guyana crude, the branch sold approximately 11.4 million barrels in 2021, compared with about 6.1 million barrels in 2020. The financial statements of the branch state that it had no related party transactions in 2021, suggesting that those who direct the sale of the branch’s production bypassed the Group’s marketing subsidiary and chose other outlets to sell its share of profit oil and recoverable costs.

From the $163,474 million, deductions are made for Cost of Sales $28,222 million (17% of sales revenue) and Depreciation, depletion and amortisation (DPA) of $20,918 million (13% of sales revenue), leaving a gross margin of $114,334 million or a staggering 70%. A separate note shows that cost of sales is made up of production expenses of $25,635 million, royalty of $$3,923 million and change of inventory of $1,337 million. Royalty as a percentage of sales works out at 2.40%, compared with 2% provided under the Petroleum Agreement. The DPA is made up of $20,874 million in respect of development assets, representing approximately 5% of development assets, and $44 million on Leasehold assets, representing 4% of those assets.

Note 5 states that additions to Property, plant and equipment include the impact of new provisions and revisions for decommissioning obligations.

Deductions are also made for General and Administrative expenses of $10,859 million, up from $4,292 million in 2020, and include pre-development costs of future projects, and Exploration expenses of $4,609 million, up from $1,360 million, suggesting multiple cases of the productive operations carrying the cost of exploration activities. This violation of accounting, taxation and petroleum principles activities would not be tolerated anywhere except Guyana.

The insane Petroleum Agreement

The income statement also shows financing cost of $822 million, up from $520 million in 2020, a sum which also appears in the note on provisioning in the balance sheet. After all these costs are deducted from revenue, the Branch reports net income before taxation of $98,013 million (2020 – $6,877 million), which but for the Petroleum Agreement would be subject to Corporation tax (25%) and to withholding tax (20%) on the deemed distribution branch profit tax (BPT). A deemed distribution is the balance of profit after the Corporation tax less any re-investment of such profits, subject to the approval of the Commissioner General.

The Agreement also states that such tax must be included in the taxable income of the Contractor, meaning that the $98,013 million has to be treated as if it is a post-tax amount, requiring grossing up.

Since the Agreement exempts the oil companies from the BPT, the Branch then deducts the 25% from the profit, or $24,503 million, (2020 – $1,725 million) as though it is an actual sufferance rather than a benefit to be grossed up under Article 15.4 of the Petroleum Agreement. Hess the parent then gets a double benefit by claiming it as overseas tax paid in its US financial statements.

Using its own brand of phoney accounting which treats a benefit as a charge, Hess records a Net Income after tax of 45%, instead of 70%.

Balance Sheet

The total value of assets of the Branch at yearend was $$679,631 million ($469,363 million) of which Property, plant and equipment accounted for 92%, with the remainder spread fairly evenly over cash, receivables and advances to operator (Esso). At December 31, the amount of such advance was $14,834 million while Trade and other payables of $31,346 million, (2020 – $14,879 million) “mainly relate[d] to amounts owing to [Esso]”.   

The Branch’s cash resources stood at $17,260 million, a substantial increase from the $66 million at December 31, 2020, while its commitments for capital expenditure on the Stabroek Block was “approximately $607,000 million (US$2,900 million), up from G$544,000 million (United States Dollars: $2.6 billion), “to be incurred over the next several years”. 

Conclusion

As it was in 2020, the financial statements reveal very little by way of disclosure. Readers are no better informed of what makes up exploration, operating costs, and the less significant general and administrative. Even the most ordinary company in Guyana produces financial statements that are more informative, reader-friendly and superior to those of Hess’ Guyana branch. What is particularly noticeable, is that the financial statements of the Hess branch are neither consistent with those of its parent abroad or of any of its joint venture partners locally.

Next week’s column will feature the financial statements of Esso Exploration and Production Guyana Limited.   

CNOOC Bare-bones Financial statements – 2021

Introduction

Last week’s column began a short series on the 2021 financial performance of the three companies – Esso, Hess and CNOOC – which hold 45%, 30%, and 25% respectively of the highly productive Stabroek Block, a find which has placed Guyana on the world’s petroleum map. CNOOC is the newest participant in the arrangement, having paid ExxonMobil in 2014 to acquire a 25% working interest in the Block as a “non-operated joint venture partner”. Why and how CNOOC could pay Exxon rather than the Guyana entity which held the licence is something which no one has yet been able to explain. What this shows is how naïvely reckless Guyana has been in dealings with Esso and why Exxon is seen as dishonest, exploitative, and contemptuous of Third World countries.   

CNOOC, like its other two partners, is a branch of a company incorporated outside of Guyana and traces its parent to the People’s Republic of China.

The company reported net income before income taxes of $84,472 million, an increase of 808.5% over 2020 on Net Sales of $127,494 million, which grew by a more modest 207.8%. The Branch reports expenditure on exploration activities of $3,623 million which runs counter to its self-description as a “non-operated joint venture partner”, reflecting the absence of ringfencing in the Agreement and the failure by the government to grant unconditional production licences, at best gross irresponsibility on its part.  

Operating costs of $18,570 million was 14.5 % of revenue down from 40.7%, showing the impact of oil price on the performance of oil companies and more so the bonanza which oil companies are reaping.

Then the Statement gets more interesting. Form the net income, the Statement shows a deduction of $21,118 million as Deferred income tax which it does not and will never pay, despite the rather misleading statement in the notes that it is “subject to the Guyana income tax act.” That nonsensical position is further maintained with the statement that at the end of 2021, the company had a deferred tax liability of $16,439 million “as it is probable that future taxable amounts will be paid”!

The giveaway however is in the Cash Flow Statement in which the identical amount deducted in the income statement – $21,118 million – is added back as a non-cash tax benefit! In other words, instead of deducting the $21,118 million, that amount, which represents the tax which the Government will have to pay to the GRA on behalf of CNOOC, that sum should be added to the amount reported by the company, giving a true net profit of $105,590 million.  

Turning to the Statement of Financial Position, total assets is made up mainly of Property, Plant and Equipment of $626,531 million, of which $497,995 million is invested in Development Assets, $125,136 million in Exploration and Evaluation Assets and $400 million is in Office Equipment and Others.

Capital Expenditure in 2021 was $191,570 million, an increase of 40% over the amount expended on capital expenditure in 2020. The expenditure incurred in 2021 was considerably less than the amount contracted, but not provided for at December 31, 2020. The company’s balance sheet shows an amount of $53,539 million provision for Decommissioning and restoration, an increase of $14,174 million which again is a strange item given that CNOOC self-describes as “non-operated joint venture partner”.

Unlike its two co-venturers, CNOOC maintains no inventory. It continues to sell its share of the oil lifts to an affiliate in Singapore on a cargo-by-cargo basis. Despite this arrangement the company owes its related parties more than $400,000 million, the terms and conditions of which, including interest, are not stated.  

Unlike its co-venturers as well, the company’s financial statements do not disclose any royalty payment to the Government which seems to violate Extractive Industry Transparency Initiative (EITI) requirements.

Conclusion

As it was in 2020, the financial statements reveal very little by way of disclosure. Readers are no better informed of what makes up exploration, operating costs, and the less significant general and administrative. Even the most ordinary company in Guyana produces financial statements that are more informative and reader-friendly that CNOOC’s.

CNOOC, the smallest of the three contractors in the Block recorded a NET profit in 2021, inclusive of the non-cash tax benefit of some $105,590 million before writing off any prior year losses. By contrast, the revenue earned by the Government from its share of profit oil is $74,479 million GROSS.

Next week’s column will feature the financial statements of Hess. 

Exxon and partners made more money than God …. er Guyana

It is more than five months since the 96^th. column was published on January 22^nd. of this year. That column summarised the court action brought by citizen Glenn Lall seeking declarations against the tax provisions contained in the 2016 Petroleum Agreement. The respondent named in the action was the Attorney General. But Exxon, which is the largest investor and the Operator (Co-ordinator) in the Stabroek Block could not leave the matter to be settled between a Guyanese and his Government. It sought the Court’s permission to be joined in the action with the unpleasant consequence that the case is now Esso and the Government of Guyana vs. a citizen of Guyana.  

In seeking to convince the Court of its right to be joined in the action, Esso declared that the Petroleum Agreement was “solemnly negotiated with the Guyana Government” and that certain fiscal arrangements made the various Projects “financially feasible and commercially viable.” Solemn for Esso includes bullying GGMC Head Newell Dennison on a trip to the Exxon Campus in Texas which has been repeatedly commented on in my writings on oil and gas, and the arm-twisting of then Natural Resources Trotman’s Ministry into the signing of the 2016 Agreement, so well documented in the Clyde & Company report on the circumstances surrounding the signing of the Agreement.  

It is unfortunate that senior members of the current Administration seem unmindful of the experience of Dennison or the damning indictment of the APNU+AFC in the Clyde & Co. report, regardless of the fact that it involved a major heist of the country’s natural resources by Exxon and its partners.

The citizenry had long lamented the damage which Trotman and the Granger Administration had caused Guyana, through one of the most lopsided petroleum agreements of the modern age.

The extent of that damage has manifested itself in the audited results of the performance of the three members of the Consortium – Esso, Hess and CNOOC – in 2021. They not only show exactly what Esso means by “financially feasible and commercially viable” but also that there is neither shame nor limit to the greed of Esso and its partners. To put it in a nutshell, or rather a simplified Table, Esso and its partners made more money in 2021 from the Stabroek Block than all the money raised by the whole of the Government in 2021, including its takings from oil. Not by a few millions but by billions. The following two Tables put it more starkly than any column can.

Oil Companies income

Table of Income Statements

A brief comment on the item Tax Credit in the Table above. Article 15.4 of the Petroleum Agreement requires that the tax liability computed under the Income Tax Act and the Corporation Tax Act to be paid to the GRA on behalf of the oil company and that “such sum will be considered income of the oil company. The income statements of Hess and CNOOC state that they are subject to Corporation Tax without disclosing that the payment is to be made by the Government of Guyana and that the amount of the tax paid by the Government is considered income of the company! Esso’s financials are simply silent on taxation altogether.

Current year profits would attract tax credits of $78,638 Mn. so that the total earned by the oil companies would be $391,191 Mn, or the equivalent of $1,862 Mn US Dollars, reduced by any set-off of losses. There is however, another unknown element: the tax laws require branches of overseas companies to pay income tax withholding tax of 20% of the after-tax income, other than in the reinvestment in fixed assets or short-term securities. I think that that would more than compensate for any adjustments to the tax credit for prior years unrecovered costs or accumulated losses.  

It would be interesting but unduly optimistic to learn from the Government the exact amount included in the Certificate of Taxes paid issued to the three oil companies under section 15.4 of the Petroleum Agreement.

Government Revenue

Now let us see what Guyana received in the same year from two sources – the National Budget and the Natural Resource Fund.

As noted in the Table above, the total Government revenue in 2021 was $351,544 Mn. of which 76% came from tax revenues and 24% from oil revenues. Some brief points of analysis.

1. Inclusive of tax credits, the oil companies netted in 2021 from their Guyana operations, a total of $393,191 Mn. while the Government earned a gross sum of $351,544 Mn.

• Exclusive of tax credits, the three oil companies earned $314,553 Mn. from petroleum operations while the Government earned in Profit Share $74,479 Mn., a ratio of 4.22: 1.

• The earnings of the three oil companies from petroleum operations were 3.7 times the earnings of the Government from those operations, inclusive of Royalties.

• Part of the disparity in points 2 and 3 is attributable to the recovery of previous years expenses which have now been recovered in full. So much for all the talk about risks and the uncertainties associated with extended timelines. Those expenses were always magnified to justify the give away of the patrimony.  

• The 2016 Petroleum Agreement provides for a 50-50 split of net revenue, between the Government and the Oil Companies. The Consortium is entitled to 50% of Profit Oil and the Government to the remaining 50%. Yet, the Government’s share of Profit Oil is comparable to that of CNOOC which has a 25% interest in the Consortium!   

• It is unknown in recorded history where three companies of a single country accounted for more revenue than the entire Government of that country in any single year.

Conclusion

President Biden said that Exxon is making more money than God. I am not sure about God but what is true is that locally, Exxon and its two partners have made more money net, than their host country was able to earn gross.

Next week we will start reviewing the financials of each of the three companies. That will allow for a more detailed analysis of the income of each of those companies, including any unrecovered costs.

January 21, 2022

Businessman and Newspaper Publisher Mr. Glenn Lall has filed an action in the Guyana High Court challenging key provisions of the 2016 Petroleum Agreement between the Government of Guyana and Esso Exploration and Production Guyana Limited, CNOOC Petroleum Guyana Limited and HESS Guyana Exploration Limited. Mr. Lall, who has waged a crusade against the Agreement, and more recently has been campaigning for an increase from 2% to 50% in the royalty paid on production, is asking the Court to declare a number of the provisions of Article 15 (the Taxation Article), including the following, to be unlawful, null, void and of no legal effect:

• Those granting tax concessions to Affiliated Companies of Esso, Hess and CNOOC. 

• Those granting tax concessions to Sub-Contractors of Esso, Hess and CNOOC.

• The one granting exemption from personal income tax the income earned by expatriate employees of Contractor, Affiliated Companies or Non-Resident Sub-Contractors who are in Guyana for one hundred eighty-three (183) days or less in any tax year. Lall is also claiming that such exemption violates the Constitution of Guyana and the Prevention of Discrimination Act. 

• The provision of the Agreement requiring the Minister responsible for Petroleum to pay the taxes of the oil companies.

• The section 51 of the Petroleum Exploration and Production Act powers to grant the concessions that the Agreement confers.  

• The Petroleum Exploration and Production Act is not a tax Act and any tax waivers, concessions and remissions would run afoul of the Financial Administration [and Audit] Act.

Mr. Lall is also asking the Court to declare as unlawful Order 10 of 2016 which sought to ratify the concessions granted under the Petroleum Agreement. Through his lawyer Mr. Mohamed Ali, Lall is arguing alternatively, that even if the Order is valid, it only applies to holders of licences under a Production Sharing Agreement.

The respondent in the matter is the Attorney General although it is likely that the three oil companies will apply to be joined in the action. The current Government of Guyana which inherited the Agreement from its predecessor has publicly defended the Agreement on the grounds of sanctity of contract. That principle is now being challenged by a more fundamental one: legality, and in one issue, constitutionality.   

This case is only about the tax provisions in the Agreement – not the Agreement as a whole. The basic structure of the Agreement will not be affected even if the Application is successful. Given the centrality of the tax provisions to the Agreement as a whole however, if the Application succeeds, every player in the Agreement – the Government, the oil companies, the sub-contractors and expatriates – will be affected, although the precise dollar impact is indeterminable and the variables too numerous to identify.

Identified below are some of the direct consequences.   

Affiliated Companies and sub-contractors will be directly affected by the following three provisions:

1. Payments to them during the exploration phase for contract work will now attract the 10% withholding tax under section 10 B of the Corporation Tax Act. Since the withholding is creditable against the eventual liability for that year, the consequence is temporal.

• Withholding tax under the Income tax which is now exempt will now become payable on interest, dividends, deemed dividends, remittances of actual and deemed profits.

• Income earned during the exploration phase by Affiliated Companies and sub-contractors who are in Guyana for less than 183 days in any tax year which is now exempt from tax will become taxable.

Expatriates

Expatriate employees of the oil companies, their Affiliated Companies and of Non-Resident Sub-Contractors who are physically present in Guyana for one hundred eighty-three (183) days or less in any tax year whose income is now exempt from tax will become taxable.

The Oil Companies

Apart from facing higher costs from Sub-Contractors, the Oil Companies become subject to:

1.  Withholding tax under the Income Tax Act becomes payable on interest, dividends, deemed dividends, remittances of actual and deemed profits.

• Perhaps most significantly, they will also have to bear the taxes payable by them on their share of Profit Oil.

This is hugely consequential both for the oil companies and the Government. In 2020, Esso reported a loss while its two partners Hess and CNOOC reported total profits of $16,175 million. At the standard applicable rate of corporation tax, and without any tax adjustments for timing differences or losses, those two companies alone would have to pay approximately $4,000 million and a further 20% on branch withholding tax on their after-tax profit, less any amount re-invested. To put it another way, if instead of having the Government pay its taxes, the oil companies now have to pay taxes like the average taxpayer, they would be paying tax at the combined rate of as much as 40% of taxable income. Contrast this with the current regime under which the Government pays the taxes for the oil companies but issues to them a certificate that they have paid taxes in Guyana.

Conclusion

Should the Court rule that the tax Article is indeed unlawful, this would have a huge impact on the economics of the Agreement and result in significantly higher revenues to the country. We can expect the oil companies to fight to protect what then Leader of the Opposition Bharrat Jagdeo described in the NCM as a “contract that would harm us for decades into the future”, accusing the APNU+AFC as having “sold our patrimony”. Logically, the Government should see this case as offering some re-balancing of the Agreement in favour of the people. Its response this time would be particularly interesting.

Finally, the granting of the Application would affect the holders of all similar Agreements. They too will be watching carefully.   

This Article was Published on the 30 July, 2021

The Natural Resource Fund Act is not in operation

Introduction

Thirty months after its passage and assent by President Granger in January 2019, the only thing active about the Natural Resource Fund Act is that it continues to generate controversy. The Act was passed during the lame duck post-NCM administration, a session boycotted by the PPP/C which had successfully brought the No Confidence Motion.

Economist and SN Columnist Dr. Tarron Khemraj recently took the Government to task for its apparent preference for the model of National Oil Fund of Kazakhstan: a country described in a 2020 Freedom House report as a “consolidated authoritarian regime”, where freedom of speech is not respected and whose electoral laws do not provide for free and fair elections. To give some perspective however, that country’s SWF was inspired by Norway’s experience and is therefore not without any redeeming merit.

Oil and Gas Columns 57 and 58 in fact discussed in some detail the concept of the Natural Resource Fund, Guyana’s version of a Sovereign Wealth Fund. Then Finance Minister Winston Jordan was keen to emphasise in the parliamentary debate on the NRF Act that its drafting benefitted from expert international assistance and that it faithfully observed what are referred to as the Santiago Principles which “promote transparency, good governance, accountability and prudent investment practices whilst encouraging a more open dialogue and deeper understanding of SWF activities”.   

There is no argument either about the two most important functions of SWFs: their role in the stabilisation of key macroeconomic variables and the long-term investment of accumulated public savings. About this there should be no real dispute. Nor should the broad objectives be in dispute either: as a savings and investment mechanism; to facilitate diversification and thus avoid the Dutch Disease; and to allow a controlled flow of cash from natural resources into the national budget. As an earlier column had noted, SWF’s have the potential of growing into Sovereign Development Funds. But whether Guyana will ever get there is another matter, based not only on the volatility of oil prices or investment yields but also on the country’s politics which is always partisan and rarely national.

One year after the PPP/C regained power on August 2, 2020 and more than two years after its assent by then President Granger, the Natural Resource Fund Act is not in operation since no date has been appointed bringing it into operation. There is therefore there is no effective or legal requirement that the oil money or any part of it should go into the Account being held in the Federal Reserve Bank of New York. Such a vacuum is dangerous, irresponsible and raises some grave questions.

The Government has three principal options when it comes to the Act – appoint a date bringing it into operation, repealing it with no immediate replacement, or, to give effect to its own preference, repealing and replacing it with a Kazakhstan -type Act. Having not brought the Act into operation for an entire year, it is difficult to see the Government doing so now. And in any case, doing so has implications and consequences: not only to acknowledge and validate an “unlawful Act”, but agreeing to its restrictions on expenditure, which Governments generally regard with disfavour.    

The second option is not only not practical but is likely to cause some concern among the international community. If the Act is repealed with no replacement, the proceeds of royalty and profit oil would go straight into the Consolidated Fund, ready to be spent. That would defeat the whole purpose of inter-generation equity, a foundation principle of Sovereign Wealth Fund. That leaves us with the third option. But that can prove to be a political minefield. There is little in the country that passes for an opposition but Guyanese take their patrimony seriously and for a sizable part of the population oil has now replaced the Kaieteur Falls as our iconic national symbol – for better or worse.

This places the Government in a quandary. It cannot for much longer delay action on the Natural Resource Fund Act which it may want to think is really unlawful, having been passed by a lame-duck Parliament which it felt compelled to boycott. But there is another reason why the Government may not want this Act. Its expenditure controls are considered too restrictive. The President and the Vice-President have already signaled their disfavour with the Act and their preference for the Kazakhstan Model which many argue is too permissive and gives the politicians too much control. To date, the Government has not done any major acts of commission to arouse the ire and anger of the public at large. Having deprived the PPP/C of power for five months, the political opposition lost much credibility, with the corresponding gain going to the PPP/C.

That derived goodwill to the PPP/C is not however inexhaustible. The NRF Act is not only for a single party or a single generation. This contemporary generation owes it to those yet to come to ensure that there are inter-generational savings from oil. The NRF is too important to become a political instrument and must be protected and defended.

Ram’s Note: A number of editing changes were made to this piece subsequent to its appearance in the Stabroek News.