Category: The Road to First Oil

Government to pay $5,391 million Corporation Tax for oil companies reporting after tax profits of $16,175 million. 

Introduction

This second part of a mini-series on the three oil companies which operate the Liza 1 project under the Stabroek Block reviews the 2020 financial statements of the Guyana branch of Hess Guyana Exploration Limited (Hess). For the better understanding of the financial statements, the comments last week (Part 88) on the rules governing financial statements by CNOOC are applicable to Hess and Esso as well. But first, a few words on Hess.  

Hess is a branch of a Cayman Islands company of the same name. It was registered as an external company under the Guyana Companies Act on 28 October 2014 and holds a 30% interest in the Stabroek Block. The Cayman Islands company is owned by Hess Corporation, a public company in the USA, which claims on its website that its purpose is to be “the world’s most trusted energy partner”.

The income statement shows an Income Tax expense of $1,725 million, referring the reader to Note 9 which states that “the Branch is subject to corporate income tax at a statutory rate of 25% (2019: 25%)”. Tucked away in a note on the branch’s accounting policies, is the statement that under the Petroleum Agreement, certain taxes are settled by the Government on behalf of the Branch. The Agreement does not use the word “settled”: it provides unambiguously that “the tax assessed will be paid by the Minister”.  

Financials

Income Statement

According to Note 10 to the financials, the Branch in 2020 sold approximately one million barrels of crude oil to a related marketing subsidiary of its parent, receiving net proceeds of approximately G$7.8 billion, or US$37 per barrel. This compares with data in the parent company’s annual report which gives the price of Guyana crude of US$46.41 inclusive of hedging, and US$37.40 excluding hedging. Since the G$7.8 billion accounts for only 13% of total sales of $59,240 million, the obvious questions are how many barrels in total did the Branch sell and the process for selling the remaining 87% by value.  

From the $59,240 million, deductions are made for Cost of Sales $21,295 million (35.6% of sales revenue) and Depreciation, depletion and amortisation (DPA) of $24,893 million (42.0% of sales revenue), leaving a gross margin of $13,051 million or 22.0%. A separate note shows that cost of sales is made up of production expenses of $19,571 million, royalty of $$1,493 million and change of inventory of $230 million. Based on sales, royalty works out at 2.52%, which is 0.52% over what the Petroleum Agreement calls for. The DPA is made up of $24,811 million in respect of development assets, representing approximately 7% of development assets, and $82 million on Leasehold costs, representing 7.8% of Leasehold assets.

Deductions are also made for General and Administrative expenses of $4,292 million, inclusive of pre-development and pre-production costs of future projects, and Exploration expenses of $1,360 million, suggesting multiple cases of the revenue of Liza I bearing non-Liza 1 expenses. This is a violation of the principle of ringfencing which our regulators appear to miss both conceptually and practically and therefore fail to address. An earlier column has suggested that the absence of a specific ringfencing provision in the Petroleum Agreement is not fatal since the Minister can impose conditions in every production licence.  

The income statement also shows financing cost of $520 million arising from provision for decommissioning, for which new and additional provisions and revisions of $3,514 million were made in 2020. While the $520 million can be traced to the income statement, the category of expense under which the provision for decommissioning is charged is not immediately apparent. 

After all these costs are deducted from revenue, the Branch reports net income before taxation of $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. In 2020, the Branch’s reinvestment was considerably higher than the balance of profit so that while withholding tax most likely would not apply to year 2020, corporation tax does. It gets a bit tricky here. The Agreement states that such tax must be included in the taxable income of the Contractor, meaning that the $6,877 million has to be treated as if it is a post-tax amount, requiring grossing up.

Petroleum Minister (Mr. Vickram Bharrat) must find, within the next few days, $2,292 million to pay to the GRA the tax owed by Hess for 2020. Failure to do so would constitute a breach of the Petroleum Agreement and would also incur late filing penalty (10%) and interest (18% p.a.). Similarly, for CNOOC (see column # 88), the Minister is required to pay to the GRA Corporation Tax of $3,099 million on the grossed-up value of post-tax profit of $9,298 million earned by it. The total of Corporation Tax to be paid by the Government for CNOOC and Hess earning a total of $16,175 million in 2020 is $5,391 million. Ironically, the tax payable would have been much more but for the liberal accounting applied by the two Branches.  

Balance Sheet

The total value of assets of the Branch at yearend was $469,363 million of which Property, plant and equipment accounted for 91%, with the remainder spread fairly evenly over cash, receivables and deferred income tax asset. At December 31, Hess is also shown as having an advance to Esso of some $13,167 million while an amount of $14,879 million is shown as owing to Esso.   

The Branch’s bank balance at year end was $66 million while its commitments for capital expenditure on the Stabroek Block was approximately $544.0 billion (United States Dollars: $2.6 billion), “to be incurred over the next several years”.  It is unclear where this money will come from – at December 31, 2020 the parent company’s cash resources stood at US$1,739 million while its total debt and lease obligations stood at US$8,534 million.

Note: All figures in Guyana Dollars unless otherwise stated.

Introduction

With appreciation to the editor-in-chief of Stabroek News, this column which last appeared on April 17, 2020, is returning for a short series. It will feature the 2020 financial performance of the three companies which signed a petroleum agreement with the Government of Guyana for the Stabroek Block. The three companies are Esso, Hess and CNOOC which hold 45%, 30% and 25% respectively of the Block which has so far been hugely successful with a twentieth discovery – Longtail 3 – announced earlier this week. Each of the columns over the next three weeks will feature one of the companies, followed by a wrap-up synthesis of the three.

The Petroleum Agreement is largely silent on accounting rules except in relation to the documentation to be submitted to the Government in relation to the petroleum operations. Expanding only slightly, the Agreement requires the companies to keep accounts, operating records, reports and statements relating to the operations in accordance with the Agreement and the Accounting Procedure set out in Annex C to the Agreement. The substantial part of the Annex deals with the various categories of costs and whether certain specified costs are recoverable without any approval by the Minister, recoverable with the consent of the Minister, not recoverable, and finally, costs not otherwise specified. These would require the approval of the Minister.

In the absence of and prescribed rules, it is left to the Institute of Chartered Accountants of Guyana to set the accounting rules for petroleum operations. This the Institute has done by way of the adoption of International Financial Reporting Standards, generally referred to by the abbreviation IFRS. Given the nature of the operations involved, the rules are extremely complex and their application open to interpretation. This is just another area in which the country suffers as a result of the failure by the Government to have a Petroleum Commission by whatever name to regulate the sector. This Column will address some of these issues after a review of the financial statements of the individual companies. 

CNOOC

This company has changed its name from CNOOC/Nexen which was originally a Canadian/Chinese jointly held company but the Canadians are no longer involved. Note 2 to the financial statements states that certain of the Branch’s activities are conducted through joint arrangements, raising the question whether it has other activities which is carries on independently.

The Company appears to be a shell within a shell. CNOOC operates as an offshore company in Barbados which up to now has provided a haven for sheltering taxes. So instead of the Board having directors from the parent company, three of the four directors of the company are Bajans! It is therefore not ironic that the note to the financial statements carry a long statement on the regulatory changes in Barbados but nothing about the regulatory petroleum environment in Guyana which is the only country in which CNOOC Petroleum Guyana carries out its only operation. 

In its first full year of production, the Company has reported a profit of $9,298 million on income of $41,419 million, a net margin of 22.4%. The financial statements also fail to disclose how it accounts for pre-contract costs recovered in the current year and what is left to be recovered.

Of the expenditure of $32,121 million, Depreciation, depletion and amortization accounts for $14,782 million and refers the reader to Note 3 but that number is not evident in the Note. Operating costs amount to $16,875 million, but that number does not even carry a note or any other information to support the figure.  

Taxation

The most interesting bit on the income statement is the element of taxation. Nowhere in the financial statements or in the extensive, copious notes is there any indication that the branch pays no taxes in Guyana. Indeed, it is surely guilty of a half truth when in Note 8 it states that the Branch is subject to the Guyana Income Tax Act and the terms and conditions of the 2016 Petroleum Agreement. At first glance, this appears to suggest a cumulative impact when the reality is the direct opposite.

The fmancial statements make good use of what is called deferred tax and so the financial statements have a charge of $2,324 million for deferred tax, one that is paid to no one but rather to recover losses claimed to have been made in past years. 

The Company sells all its share of oil production to an affiliate in Singapore which on sells 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.   

Note 5 states that the company has a $2.5 billion credit facility provided by CNOOC International Limited and one wonders whether this is a USD facility, or unlikely, a G$ facility. The note also states that the Company has received a letter of support from BVI (sic) to sustain the business at its current level of activity. The financial statements show that the company is already making commitment for Liza Phase 2 and the Payara Projects to the tune of $297,000 million.  A final matter of note is the Decommissioning and restoration provisions at $39,365 million as funds to reclaim and abandon wells and facilities.

This was Publish on June 21, 2021

Introduction

This column which last appeared on April 17, 2020, is returning for a short series. It will feature the 2020 financial performance of the three companies which signed a petroleum agreement with the Government of Guyana for the Stabroek Block. The three companies are Esso, Hess and CNOOC which hold 45%, 30% and 25% respectively of the Block which has so far been hugely successful with a twentieth discovery – Longtail-3 – announced earlier this week. Each of the columns over the next three weeks will feature one of the companies, followed by a wrap-up synthesis of the three.

The Petroleum Agreement is largely silent on accounting rules except in relation to the documentation to be submitted to the Government in relation to the petroleum operations. Expanding only slightly, the Agreement requires the companies to keep accounts, operating records, reports and statements relating to the operations in accordance with the Agreement and the Accounting Procedure set out in Annex C to the Agreement. The substantial part of the Annex deals with the various categories of costs and whether certain specified costs are recoverable without any approval by the Minister, recoverable with the consent of the Minister, not recoverable, and finally, costs not otherwise specified. These would require the approval of the Minister.

In the absence of and prescribed rules, it is left to the Institute of Chartered Accountants of Guyana to set the accounting rules for petroleum operations. This the Institute has done by way of the adoption of Inter-national Financial Reporting Standards, generally referred to by the abbreviation IFRS. Given the nature of the operations involved, the rules are extremely complex and their application open to interpretation. This is just another area in which the country suffers as a result of the failure by the Government to have a Petroleum Commission by whatever name to regulate the sector. This Column will address some of these issues after a review of the financial statements of the individual companies. 

CNOOC

This company has changed its name from CNOOC/ Nexen which was originally a Canadian/Chinese jointly held company but the Canadians are no longer involved. Note 2 to the financial statements states that certain of the Branch’s activities are conducted through joint arrangements, raising the question whether it has other activities which it carries on independently.

The Company appears to be a shell within a shell. CNOOC operates as an offshore company in Barbados which up to now has provided a haven for sheltering taxes. So instead of the Board having directors from the parent company, three of the four directors of the company are Bajans! It is therefore not ironic that the note to the financial statements carry a long statement on the regulatory changes in Barbados but nothing about the regulatory petroleum environment in Guyana which is the only country in which CNOOC Petroleum Guyana carries out its only operation. 

In its first full year of production, the Company has reported a profit of $9,298 million on income of $41,419 million, a net margin of 22.4%. The financial statements also fail to disclose how it accounts for pre-contract costs recovered in the current year and what is left to be recovered.

Of the expenditure of $32,121 million, Depreciation, depletion and amortization accounts for $14,782 million and refers the reader to Note 3 but that number is not evident in the Note. Operating costs amount to $16,875 million, but that number does not even carry a note or any other information to support the figure. 

Taxation

The most interesting bit on the income statement is the element of taxation. Nowhere in the financial statements or in the extensive, copious notes is there any indication that the branch pays no taxes in Guyana. Indeed, it is surely guilty of a half truth when in Note 8 it states that the Branch is subject to the Guyana Income Tax Act and the terms and conditions of the 2016 Petroleum Agreement. At first glance, this appears to suggest a cumulative impact when the reality is the direct opposite.

The financial statements make good use of what is called deferred tax and so the financial statements have a charge of $2,324 million for deferred tax, one that is paid to no one but rather to recover losses claimed to have been made in past years. 

The Company sells all its share of oil production to an affiliate in Singapore which on sells 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.   

Note 5 states that the company has a $2.5 billion credit facility provided by CNOOC International Limited and one wonders whether this is a USD facility, or unlikely, a G$ facility. The note also states that the Company has received a letter of support from BVI (sic) to sustain the business at its current level of activity. The financial statements show that the company is already making commitments for the Liza Phase 2 and the Payara Projects to the tune of $297,000 million. 

A final matter of note is the Decommissioning and restoration provisions at $39,365 million as funds to reclaim and abandon wells and facilities.

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

Introduction

It has been a week of fast-moving events. This past Monday (February 3), the London-based NGO Global Witness released a report Signed Away in which it made the claim that had Guyana properly negotiated the 2016 Petroleum Agreement with Esso/Hess/CNOOC Nexen, it would have received some US$55 billion more than what it would receive under the contract it now has. By a strange coincidence, a Government sponsored report by Clyde & Co, a law firm out of the UK, appeared in the electronic media despite having as its first words Strictly Private and Confidential.

The Government of Guyana went into overdrive, describing the Global Witness Report as “baseless”, “sensationalist, agenda-driven and extra-ordinarily speculative.” Criticisms came not only from the Government but from Forbes Magazine of the USA and Rystad Energy a research company from abroad and high profile local individuals such as Ms. Melinda Janki and Mr. Wesley Kirton. The comments from Forbes were logically understandable as it saw the report as an attack piece aimed at some of the biggest players in the oil and gas sector. Forbes saw it necessary to defend its friends in that sector.

Understanding numbers and projections

Rystad argued that its 2% royalty and 50% share of profit will give the Government 60% of the profit from Esso’s various projects. For her part, Melinda Janki in a letter in the Stabroek News accused Global Witness of putting out “Lala-land estimates”. I doubt that Ms. Janki was aware that accompanying Global Witness report was the extensive worksheets and report by Open Oil setting out the assumptions used in the projections – including from Rystad and the United States Government. While Rystad did not mention Global Witness in the press release it issued, it sought to counter pose Global Witness’ recommended 69% with its own strange math of 60%. If Rystad wants to be taken seriously and not another majority-of-65-is-35 type, it should make its methodology and assumptions public.  

For his part, Kirton seemed to see the expressed concerns of GW as analogous to a marriage, and of course as arrogance and disrespect for us Guyanese. I wonder what he thinks of an ExxonMobil man Mr. Brook Harris writing the draft Cabinet paper justifying the give-away of the century to a foreign oil company on the 50^th. Anniversary of Guyana’s Independence Day!

The Government had the upper hand: Exxon had the Government 

I have read the Global Witness Report and the projections and long-term estimates by Open Oil. If I have any concern, it is that the estimate of US$55 billion is conservative and understated. It did not take any account of the abundance of gas and it used a median range of oil contracts for oil production which were negotiated before oil was found. Also omitted is that the Government has to pay the oil companies taxes for at least the next forty years from its share of oil profits. And significantly, by the time the 2016 Agreement was signed, there were two major world class finds and Exxon by its own admission was operating under an expired contract. The Government clearly had the upper hand. But Exxon had the Government. That was all that mattered.  

Who paid Clyde?

Now for the Clyde & Company report paid for by taxpayers. Like the Escrow Letter under the Bridging Deed, there are a multitude of annexes which are missing, including the Engagement Letter setting out the terms of reference and fees payable to the legal firm. But the Clyde and Co report seems to have had as a principal objective clearing the name of Trotman who stands accused of the most costly act of incompetence ever perpetrated on the people of this country. Let us recall that by the time this report was commissioned in late 2019, oil and gas had been removed from Trotman’s portfolio. How he came to drive this Clyde process is quite a mystery.  

Yet, Trotman was allowed to select the law firm and to decide who they could meet: only two ministers – himself and Greenidge. He also decided which documents he would share with the law firm. As the Report states at paragraph 1.6.2 the Report was prepared on the basis of information provided by Trotman’s Ministry and the GGMC over which he has portfolio responsibility. One of Greenidge’s signal contribution was to give to the oil companies the assurance that US$15 million of the Signature Bonus would only be used to fund the proceedings with Venezuela in the International Court of Justice. In other words, at a minimum, to protect Exxon’s assets. 

While Trotman’s list of interviewees did not include the oil companies, their presence pervades the report. We learnt that they “appeared” to put a lot of pressure on the Government to secure the 2016 Agreement in a short time scale, with different reasons being offered by the oil companies. None of the reasons seemed to have convinced Clyde. It thought the real reason was because Exxon’s subsidiary was driving to have a new agreement before the Liza-2 well results became fully known.

“Arrogance and disrespect for us Guyanese”

The most important bit of information in the Report was the revelation that on the 25^th. May 2016, exactly fifty years to the day since Independence, while we were celebrating 50, Brooke Harris of ExxonMobil “provided by email a first draft of the Cabinet Memorandum to Mrs. Homer (Mr. Trotman’s Legal Adviser)”. It did not stop there: Clyde states in its report that the Cabinet Memorandum was prepared along the lines of the Independence Day email and that draft versions were exchanged between Mrs. Homer and Mr. Harris right up to the 31^st. May. It was submitted to Cabinet on June 3, the very next business day.    

If ever Guyanese should be offended at – to borrow Wesley Kirton’s words – the arrogance and disrespect for us Guyanese, it is being told this by Clyde. Clyde also tells us that Trotman and Homer told their team that visited Guyana, that they received daily phone calls from the Contractor’s Consortium. And in the same Independence email, Harris told Mrs. Homer that Esso had strong operational need to have the section 51 Order (tax variation) confirmed.   

Conclusion

This is the first time in two years in which more than one Column is published. It took a lot of effort to do three columns and I hope that Guyanese have a better understanding of the path down which the APNU+AFC has taken Guyana. One has to wonder why the Government did and continues to do so many things in secret. We must remember that these things were not expected to come to light – the signing bonus, the Agreement, the Bridging Deed, the Escrow Letter and now the Clyde Report. It is the height or depth of stupidity for the Government to have considered the Clyde Report as exculpatory. For the excerpts cited above, it is damning. Laziness, absence of patriotism and a frightening complex for foreigners, prevented the Government – including Granger – from doing basic reading.

The Government’s response to the Global Witness Report, its pattern of deceit and dissembling of facts, its obsequiousness to Esso in particular suggest that if by whatever means it remains in power, there is no hope of Guyana recovering from the infamous Contract, the product of a Cabinet Memorandum written by ExxonMobil. My hope is that the anger which the Bridging Deed revelation has aroused will be constructively managed and that Exxon will have been sufficiently exposed and embarrassed that it would voluntarily return to the bargaining table. I hope that I am not hoping in vain.

Two days ago, Column 84 set out the main provisions of the 2016 Bridging Deed. That Deed purported to keep alive the 1999 Petroleum Agreement signed by then President Janet Jagan. Effectively, it not only allows the three oil companies all the benefits under the 1999 Agreement, including pre-contract costs, and for the Government to pay their taxes in Guyana, but for those and enhanced benefits to run unchanged to 2056.

No Parliament until then will have the power to make any law adverse to the interest of the oil companies, without compensating them. Nor can the Government stop paying their taxes to the GRA for them. It probably bears reminding that all three companies are incorporated in offshore tax havens and are merely registered in Guyana.

As noted in Column 84, the Bridging Deed describes the Contract area for the 2016 Agreement as the Stabroek Block, “being the area covered by the 1999 Agreement”. Someone forgot to draw to Trotman’s attention that a new licence is expressly prohibited under section 22 (2) of the Act which states in mandatory language that “A petroleum prospecting licence shall not be granted to an applicant in respect of a block which is, at the time the application for the grant of the licence is made, comprised in a licence already granted.” It is clear then that no amount of legal gymnastics could circumvent this express provision prohibiting a second bite of the cherry.

The Government is in a catch 22 dilemma: if it argues, as it does in some places, that the 1999 Prospecting Licence had not expired at the time of the Application for the 2016 Licence, then section 22 (2) applies and there could be no second prospecting licence. And if it claims that the 1999 Stabroek Licence was expired, as Attachment “A” to the Bridging Deed indicates, it has two formidable hurdles. The first is that its purported Relinquishment is meaningless since under section 28 of the Act, relinquishment is only permissible “at any time when the licence is in force”. The second is that Attachment “A” to the Bridging Deed refers to the “expired Stabroek Licence Area”. That in my view makes the Deed ineffective since the 2016 Agreement could not be linked to a dead anything.  

In his lame defence, Trotman embarrassingly argued that the Bridging Deed is like a savings clause, that it is quite normal. What Trotman does not seem to realise is that a savings provision has to be expressly permitted in legislation, or in some higher document, not in any agreement or instrument of lesser status.        

Odd things happen

Here is another oddity: the Deed provided for the signing of the New Petroleum Agreement. The only trouble is that on the date of the Bridging Deed, the New Petroleum Agreement had already been signed and executed. Someone interfered with and initialled the date on the Deed but actually made it worse, and worse still, the change was not initialled by all the signatories to the Deed as is required.

A requirement set out in the Bridging Deed that the National Assembly approve an Order under s51 (1) of the Petroleum Exploration and Production Act, modifying certain specified tax laws to the Oil Companies, and the gazetting of the Order may not be so unusual, except that our sovereign body was expected to do so in within a time demanded by the oil companies. More importantly however, the Deed required the Minister of Finance to table a copy of the New Petroleum Agreement in the National Assembly when he brought the “tax modification” Order there. The Minister failed to comply. The inescapable inference is that he wanted to, and managed to hide the Agreement from the National Assembly and Guyanese until the Government was embarrassed into publishing it following the revelation of the Signing Bonus. Because the omission to table the Agreement did not prejudice the interest of oil companies, they too could not care less. 

Looking after our interest

But the question must also be asked of the Escrow Agent Sir Shridath, a long-term consultant to the Government of Guyana: why did he not carry out his obligation to ensure that the conditions of the Bridging Deed were met by both sides? As a beneficiary of the public purse, did he not consider himself as having any obligation, fiduciary or otherwise, to the people of this country to see that undertakings made in their interest are honoured?

As a public official, the Minister is required to exercise discretion in making decisions. The Bridging Deed however took away much of his discretion under the law by setting out in advance what he would accept as Notices, and the text and extent of the Application for a Licence, including for the granting of a licence in respect of more than sixty blocks. By specific law, this has to be justified by special circumstances. Those who make Venezuela the bogeyman ignore the fact that many of the blocks awarded under the 1999 and 2016 Agreement are in undisputed waters and a significant number are much closer to Suriname than to Venezuela, and therefore raise no threat. And while the law allows the Minister a discretion in a section 51 tax exemption, the Bridging Deed made it into a condition.

Nothing however shows Exxon’s bad faith is its announcement of a major find, one day after the Granger Government awarded them a tainted Petroleum Agreement made possible by the infamous Bridging Deed. It is either trickery or conspiracy. We Guyanese need to take our pick.

In concluding on the Deed tomorrow, the column will touch on some current developments.