Government to pay $5,391 million Corporation Tax for oil companies\nreporting after tax profits of $16,175 million. \n<\/p>\n\n\n\n
Introduction <\/strong><\/p>\n\n\n\n This second part of a mini-series on the\nthree oil companies which operate the Liza 1 project under the Stabroek Block reviews\nthe 2020 financial statements of the Guyana branch of Hess Guyana Exploration\nLimited (Hess). For the better understanding of the financial statements, the\ncomments last week (Part 88) on the rules governing financial statements by\nCNOOC are applicable to Hess and Esso as well. But first, a few words on Hess. <\/p>\n\n\n\n Hess is a branch of a Cayman Islands\ncompany of the same name. It was registered as an external company under the Guyana\nCompanies Act on 28 October 2014 and holds a 30% interest in the Stabroek Block.\nThe Cayman Islands company is owned by Hess Corporation, a public company in\nthe USA, which claims on its website that its purpose is to be \u201cthe world’s\nmost trusted energy partner\u201d. <\/p>\n\n\n\n The income statement shows an Income Tax\nexpense of $1,725 million, referring the reader to Note 9 which states that\n\u201cthe Branch is subject to\ncorporate income tax at a statutory rate of 25% (2019: 25%)\u201d. Tucked away in a\nnote on the branch\u2019s accounting policies, is the statement that under\nthe Petroleum Agreement, certain taxes are settled<\/em> by the Government on\nbehalf of the Branch. The Agreement does not use the word \u201csettled\u201d: it\nprovides unambiguously that \u201cthe tax assessed will be paid<\/strong> by the Minister\u201d.\n <\/p>\n\n\n\n Financials <\/strong><\/p>\n\n\n\n Income Statement <\/em><\/p>\n\n\n\n According to Note 10 to the financials, the\nBranch in 2020 sold approximately one million barrels of crude oil to a related\nmarketing subsidiary of its parent, receiving net proceeds of approximately G$7.8\nbillion, or US$37 per barrel. This compares with data in the parent company\u2019s\nannual report which gives the price of Guyana crude of US$46.41 inclusive of hedging,\nand US$37.40 excluding hedging. Since the G$7.8 billion accounts for only 13%\nof total sales of $59,240 million, the obvious questions are how many barrels in\ntotal did the Branch sell and the process for selling the remaining 87% by\nvalue. <\/p>\n\n\n\n From the $59,240 million, deductions are made\nfor Cost of Sales $21,295 million (35.6% of sales revenue) and Depreciation,\ndepletion and amortisation (DPA) of $24,893 million (42.0% of sales revenue), leaving\na gross margin of $13,051 million or 22.0%. A separate note shows that cost of\nsales is made up of production expenses of $19,571 million, royalty of $$1,493\nmillion and change of inventory of $230 million. Based on sales, royalty works\nout at 2.52%, which is 0.52% over what the Petroleum Agreement calls for. The\nDPA is made up of $24,811 million in respect of development assets,\nrepresenting approximately 7% of development assets, and $82 million on\nLeasehold costs, representing 7.8% of Leasehold assets. <\/p>\n\n\n\n Deductions are also made for General and\nAdministrative expenses of $4,292 million, inclusive of pre-development and\npre-production costs of future projects, and Exploration expenses of $1,360\nmillion, suggesting multiple cases of the revenue of Liza I bearing non-Liza 1\nexpenses. This is a violation of the principle of ringfencing which our\nregulators appear to miss both conceptually and practically and therefore fail\nto address. An earlier column has suggested that the absence of a specific\nringfencing provision in the Petroleum Agreement is not fatal since the\nMinister can impose conditions in every production licence. <\/p>\n\n\n\n The income statement also shows financing\ncost of $520 million arising from provision for decommissioning, for which new\nand additional provisions and revisions of $3,514 million were made in 2020.\nWhile the $520 million can be traced to the income statement, the category of\nexpense under which the provision for decommissioning is charged is not immediately\napparent. <\/p>\n\n\n\n After all these costs are deducted from\nrevenue, the Branch reports net income before taxation of $6,877 million, which\nbut for the Petroleum Agreement would be subject to Corporation tax (25%) and to\nwithholding tax (20%) on the deemed distribution branch profit tax (BPT). A\ndeemed distribution is the balance of profit after the Corporation tax less any\nre-investment of such profits, subject to the approval of the Commissioner\nGeneral. In 2020, the Branch\u2019s reinvestment was considerably higher than the\nbalance of profit so that while withholding tax most likely would not apply to\nyear 2020, corporation tax does. It gets a bit tricky here. The Agreement\nstates that such tax must be included in the taxable income of the Contractor, meaning\nthat the $6,877 million has to be treated as if it is a post-tax amount, requiring\ngrossing up. <\/p>\n\n\n\n Petroleum Minister (Mr. Vickram Bharrat) must\nfind, within the next few days, $2,292 million to pay to the GRA the tax owed\nby Hess for 2020. Failure to do so would constitute a breach of the Petroleum\nAgreement and would also incur late filing penalty (10%) and interest (18%\np.a.). Similarly, for CNOOC (see column # 88), the Minister is required to pay to\nthe GRA Corporation Tax of $3,099 million on the grossed-up value of post-tax\nprofit of $9,298 million earned by it. The total of Corporation Tax to be paid by\nthe Government for CNOOC and Hess earning a total of $16,175 million in 2020 is\n$5,391 million. Ironically, the tax payable would have been much more but for\nthe liberal accounting applied by the two Branches. <\/p>\n\n\n\n Balance Sheet<\/strong> <\/em><\/p>\n\n\n\n The total value of assets of the Branch at\nyearend was $469,363 million of which Property, plant and equipment accounted\nfor 91%, with the remainder spread fairly evenly over cash, receivables and\ndeferred income tax asset. At December 31, Hess is also shown as having an advance\nto Esso of some $13,167 million while an amount of $14,879 million is shown as\nowing to Esso. <\/p>\n\n\n\n The Branch\u2019s bank balance at year end was $66\nmillion while its commitments for capital expenditure on the Stabroek Block was\napproximately $544.0 billion (United States Dollars: $2.6 billion), \u201cto be\nincurred over the next several years\u201d. <\/em>It is unclear where this money will come\nfrom – at December 31, 2020 the parent company\u2019s cash resources stood at US$1,739\nmillion while its total debt and lease obligations stood at US$8,534 million. <\/p>\n\n\n\n Note: All figures in Guyana Dollars unless\notherwise stated. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":" 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 … <\/p>\n