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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 89 – June 18, 2021

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.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 87 – June 11, 2021

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.

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APNU’s legal games are not about law, it is about lawlessness

This was Published on July 20,2020

The High Court will today deliver its ruling in APNU’s latest case, this time instituted by its Agent Misenga Jones. Let us face reality: this is part of the plan to delay the declaration of the results of the March 2 elections – now a full 140 days since and an incredible 577 days since the December 21, 2018 no- confidence motion (NCM). Once considered scaremongering, the fear that the APNU would not give up power seems to be validated. It is not a series of unconnected events that there were three court cases on the NCM involving the High Court, the Court of Appeal and the Caribbean Court of Justice. And so far, there have been eight cases, including appeals, arising out of the elections: one before the CCJ, two before the Court of Appeal, one before the Full Court and four before the High Court. If the decision today goes against the APNU, it is almost certain that the Court of Appeal and the CCJ will have further work.

Those legal games are not about law, it is about lawlessness. It is not about the fairness of elections, it is about the rigging of elections. It is not about conceding to who or conceding to what. It is a power grab, an electoral coup, the attempted entrenchment of a dictatorship where one group considers itself superior and another inferior.   

For APNU, it is their assertion of perpetual power, the control of state resources and denial of the vote of one out of every two electors in Guyana. Apparently for them only some votes matter. And yet, Guyanese remain remarkably patient, simply wondering if when and how it will end. Fortunately or unfortunately, the same is not true of the international community. They are neither taken in by the ruses and tactics of the APNU, nor possessed of the unlimited patience of Guyanese.

The US State Department has already announced visa restrictions on those engaged in denying democracy in Guyana with the warning that punitive action will be escalated and targets widened. With signals of similar action by regional, hemispheric and international nations and groups, Guyana will find itself not only more isolated than it has ever been but more isolated than any other country in the world – Iran, Syria, Venezuela and Zimbabwe included. 

Five years ago, Granger was touting his decency, honesty and integrity. He came to power the model of an upright individual, intolerant of improprieties, committed to values. Yet, in five relatively short years the path of his Government is littered with constitutional violations, corruption, cynicism, ethnic preferences, waste and extravagance, arrogance and delusion. Those of us who promoted and supported him find it impossible to recognise the David Granger of five years ago. The veneer of virtues has been shattered. With a determination that borders on the irrational, Granger seems willing to take Guyana into that black hole. And yet, not a single institutional member of the Coalition, not even the JFAP, is decent or brave enough to say, to borrow Andaiye’s famous words, “Not in our name”.

They are all it seems, under the spell of Joe Harmon, the master of bravado, the untouchable and above and beyond the law. A lawyer himself, he seems willing to court international notoriety by mocking the threat of sanctions. He clearly is unmindful and uncaring of the consequences of his further acts of recklessness to the country and its people. Time will tell whether he is indeed as invincible and untouchable as he thinks he is. 

For more reasons than one, I do not celebrate sanctions and do believe that problems concerning Guyana should be solved in Guyana. But I do not accept that the theft of an election is a purely domestic matter since it infects and infests all with whom it comes into contact. It is for that reason and that reason alone that I support sanctions. Bullies, cheats and thieves must realise that evil does not pay.

Yours faithfully,

Christopher Ram  

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GECOM silent on inquiry about election expenses of parties

This was Published on October 26, 2020

The Guyana Elections Commission (GECOM) has not replied to an October 12, 2020 letter from commentator Christopher Ram requesting copies of the declaration of expenses by political parties which contested the March 2nd general elections.

Ram had written GECOM Chair Claudette Singh pointing out that according to Section 108 of the Representation of the People Act, the election agent of each group of candidates has to forward to the Chief Election Officer a return in Form 26 of the Act.

He pointed out that this return was due no later than 35 days following the declaration of the result which would have been September 7th.  Ram also pointed out that in the absence of an authorised excuse the failure to comply “constitutes an illegal practice”.

Ram further noted that Section 109 requires the publication in the Official Gazette of a summary of the returns and a notice of the time and place at which the return and declaration can be inspected or copies of these purchased. Ram said he was desirous of obtaining copies of the returns for analysis and public dissemination.

The letter was sent to Singh and copied to the six commissioners.

In a statement on Saturday, Ram expressed regret that he had not even been given the courtesy of a reply by Singh. He said that the provision is not unrelated to campaign financing, “a matter about which I have advocated for decades, and which is intended to bring accountability (to) the political parties which at the moment is close to zero. This is not good for democracy ..for our country”.

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Ogunseye was wholly wrong about Elvin McDavid providing me with work

This was Published on July 3, 2020

Dear Editor,

The lull in election letters as we move towards the election defeat staring the APNU+AFC+WPA, allows me the opportunity to react to the responses to my letter of June 13, 2020 edition of SN, `A movement once famous for its values and Rodneyite principles is now deeply involved in attempts to rig the 2020 elections’. Readers will probably recall that a response came first from Tacuma Ogunseye, then Desmond Trotman and latterly Eusi Kwayana.  I will ignore the innuendoes and attempted attacks by Ogunseye and Trotman as unworthy of both the WPA we all knew, or a reply and merely seek to correct Kwayana who seemed to mix-up, unwittingly I hope, my reference to our conversation when he was leaving Guyana in the heat of the Buxton troubles with when he returned for the Walter Rodney Commission of Inquiry. I would like to maintain my respect for Kwayana and the privacy of our conversations even as he chooses to highlight a narrative reflective of an obviously evolved view of events and key actors.

I was both surprised and amused at the lengths to which Ogunseye would go to fabricate facts. He accused me of being a major shareholder in a company of which Ram & McRae is the independent auditor a statement which an Editor’s note forced him to retract. That was not his only fabrication. His letter also stated that “What Ram has failed to tell readers is that it was under the PNC/Burnham regime, aided by his buddy, Elvin McDavid, who at the time was a powerful politician in the ruling party and government that “opened” the door for Ram to emerge as a successful businessman and now an economic power in the country. The genesis of his economic empire lies in the support he received from Mc David’s organised “state patronage”.

As the following shows, and he can confirm this with Kwayana, the facts are quite different.

I left Guyana as an employed person in 1978 for Grenada where I worked first with Coopers & Lybrand and then the People’s Revolutionary Government (PRG) led by Maurice Bishop. After the invasion, I returned to Guyana with my young family to set up home. Among those returning were Freddie Kissoon, Ms. Denise Cossou and economists Claremont Kirton and Eddie Dewar. The latter two and I set up the ambitiously named Management and Economic Consultancy Services Limited along partnership lines. After a few months of struggle and no work, they packed up and left. I was determined to stay on and set up an accounting practice which Ogun refers to as an economic power.

Miles Fitzpatrick who had also worked with the PRG rejoined the law firm de Caires and Fitzpatrick and persuaded David de Caires to give me “a brace”. I would visit their office every Friday afternoon to balance the partnership’s books. I supplemented my meagre income by doing some moonlighting accounting work with an old friend from South West London College who had an accounting practice in Central Trinidad. Because I had written in 1980 as Purpose of Visit on my immigration landing card “To attend Walter Rodney’s Funeral”, a complete search of person and luggage on arrival had become obligatory. I soon discovered however that an offer of a copy of Time magazine as good an explanation as any to ease the entry process!

In the meantime, I had reconnected with Paul Chan-a-Sue, my old boss from Bookers Stores Limited Guyana. Paul offered me a small engagement to set up an accounting system at National Printers Ltd. Shortly before the commencement date, Paul informed me that he had been “advised” by Mr. Elvin McDavid, Chief Political Advisor to President Burnham, to withdraw the offer on the instructions of Burnham. (Mr. Chan-a-Sue who is still around has consented to my use of his name in this letter). During that time when the State boasted of controlling the commanding heights of the economy, all State audit and accounting work was reserved entirely for Thomas, Stoll and Dias. Even crumbs were not available to the few private accounting and audit firms around and the period witnessed the exodus of some of our brightest accountants.  

Sometime after McDavid’s removal by Hoyte as Chief Political Adviser to the President following Burnham’s death, Mrs. Doreen de Caires called to tell me that McDavid, whose house in Queenstown had been rented by the Stabroek News, was concerned about his tax affairs and requested her to inquire of me whether I would assist him. I agreed and brought his affairs up to date, all at no cost.

Anyone who knows Elvin would tell you he was not a shy man and even while we were meeting to finalise his work, he requested similar work for Mrs. Viola Burnham on the same terms which he enjoyed! I agreed and I have to say that I have met few women with Mrs. Burnham’s charm, elegance and humility. Elvin and I did become friends in the late eighties, and he as the pioneer of the Burnham Foundation invited me to deliver the feature presentation at one of the early anniversary events for Burnham. But money or work from Burnham, McDavid and Viola? – definitely never.      

I do not need any further apology from Mr. Ogunseye. What is important to me is that the public must not be misled or deceived by those in support of our new riggers.

Yours faithfully,

Christopher Ram