Commentary on Income statement <\/strong><\/p>\n\n\n\nEsso holds a 45% interest in the Stabroek\nBlock while Hess has 30% and CNOOC holds the remaining 25%. The reported\nrevenue approximates to those interests with Esso\u2019s share of revenue (rounded\nup) accounting for 43%, Hess 34% and CNOOC 24%. The disparity in sales to the\ncompanies\u2019 interest in the operations can partly be accounted for by the unsold\ncrude oil at December 31: Esso had some $1.731 billion dollars\u2019 worth of unsold\ncrude while Hess had approximately $334 million. CNOOC had none. <\/p>\n\n\n\n
Given that the relationship among the\nthree is essentially one of a joint venture, not only is income expected to\nreflect the respective interest but so too is expenditure. On a total level,\nreported expenditure by CNOOC was 19% of the total expenditure, Hess 31%, and\nEsso, 49%. It is either that CNOOC, the most profitable of the three companies,\nis underspending or Esso is overspending. But that too is not consistent \u2013 as\nthe share of their revenue used in production cost shows. In the case of CNOOC\nit was 42%, Hess 33% and Esso a mere 12%, which is hardly plausible. This\nlopsidedness extends into the total expenditure as well: of the combined\nproduction expenses of the three entities, CNOOC accounts for 37%, Hess 43% and\nEsso 20%. <\/p>\n\n\n\n
The reverse is true for Depreciation,\nDepletion and Amortisation (DDA) for which CNOOC incurs 36% of its revenue, but\nrepresenting 23% of the total on this class of non-cash expenditure incurred by\nthe three companies. For Hess it is 42% and 39% respectively while for Esso it\nis 31% and 37% respectively. It needs some explaining that Hess would incur a\nhigher cost or charge on DDA than Esso, the much larger partner. <\/p>\n\n\n\n
The next two classes of expenditure take\nsome believing. CNOOC incurs just 1% of its revenue and 2% of the total\nincurred by the three companies on General and administrative expenses. For\nHess it is 7% and 17% respectively while for Esso it is 28% and 81%\nrespectively. Esso has two functions under the Petroleum Agreement \u2013 as a joint\nventurer, and as Operator, but it appears that these functions are not only conflated\nbut are confused. It is noted that general and administrative expenses of Esso have\nmoved from $6.982 billion in 2019 to $20.829 billion in 2020, almost treble.\nThe question arises whether this entire sum is incurred in its role as the JV\noperator, as a separate entity, or as is more likely, both. <\/p>\n\n\n\n
CNOOC did not incur any Exploration\nexpenses in 2020 and its financials actually show a credit of $524 million. It\nis possible that this represents cost recovery but that is pure speculation. On\nthe other hand, exploration expenditure by Hess of $1.361 billion represents 2.3%\nof its income and 6.7% of the total Exploration expenses incurred by it and\nEsso in 2020. For Esso, the corresponding percentages are 24% and 93%\nrespectively. <\/p>\n\n\n\n
Interest and finance costs incurred by\nCNOOC were negligible, again with a small credit, while the $520 million\nincurred by Hess represents 1% of its revenue and 6% of the total finance costs\nincurred by it and Esso in 2020. And for Esso, it is 10% and 94% respectively.\nIt does need an explanation that interest cost derived from leases would arise\nout of capital leases which require the lessee taking the asset and the\nobligations under the lease on its balance sheet. It is this liability which\ngives rise to interest charge. Typically, as the lease obligations are reduced\nby payment, such interest costs also reduce but in the context of a giant\nlicensed area and a gold mine of discoveries, this is unlikely to happen for at\nleast another decade as expensive assets are leased under new production\nlicences. These costs would not arise if applicants for production licences did\nin fact possess the financial resources which the law requires them to have, or\nif Guyana insisted on thin capitalisation restriction. <\/p>\n\n\n\n
Royalty and revenue <\/strong><\/p>\n\n\n\nThe two American Joint Venturers disclose\nthe amount of royalty paid to the Government of Guyana for petroleum produced\nand sold \u2013 CNOOC does not. Royalty paid by Hess was $1.493 billion and by Esso\n$2.049 billion, a total of $3.542 billion (roughly US$16.9 million), representing\nrespectively 2.52% and 2.72% of sales revenue of the two companies. In early\n2021, the Government of Guyana announced that its revenue from royalty in for\n2020 was US$21.2 million (G$4.410 billion). By deduction, this means that CNOOC\npaid roughly US$4.3 million (G$903 million), equivalent to 2.2% of its revenue,\nmaking the overall average royalty paid by the three companies as 2.5% of\nsales. The Petroleum Agreement stipulates a royalty rate of 2% which suggests\nthat all the companies are voluntarily paying more royalty than they are\ncontractually required to pay. This raises the question whether the revenue\nfigure of all three entities is in fact understated. <\/p>\n\n\n\n
Similar uncertainty arises in relation to\nthe oil companies\u2019 revenue declaration and the Government\u2019s share of profit\noil. The Government has announced that the revenue earned in 2020 from its\nshare of profit oil was US$184.9 million. At a rate of US$1 to G$210, this amounts\nto approximately G$38.9 billion which means that as a share of gross oil\nrevenues Guyana received 18.1% which added to the royalty of 2.5% gives a total\nreturn of 20.6%, compared with the 14.25% which everyone, including senior\nExxon officials, expected would prevail beyond 2025. <\/p>\n\n\n\n
Efforts to obtain clarification of these anomalies\nhave proved futile, again inviting speculation for which there are a number of\npossibilities. The first is that the companies\u2019 revenue figures do not\nrepresent the true value of sales, and that there is undisclosed income.\nAnother is that Guyana may have received what in the industry is referred to as\nan overlift, meaning that there is an imbalance in its favour in the\napportionment of production during 2020, to be evened out in subsequent\nperiods. A single shipment one way or the other can make a huge difference and\nit is probably safe to say that any overlift would be in Guyana\u2019s favour. While\nGuyana has disclosed its oil lifts and the revenues per shipment, none of the\noil companies presented any such information. \n<\/p>\n\n\n\n
Another possibility is that the oil\ncompanies might have deferred some of the precontract recoveries to which they\nwere entitled. This has been a controversial issue since the 2016 Agreement was\nfirst made public, and has caused the companies\u2019 numbers being challenged on a\nnumber of occasions. A further explanation is that Guyana\u2019s revenue is at full\nmarket value while the revenue earned by the oil companies is depressed by inter-company\nsales. <\/p>\n\n\n\n
Taxation<\/strong> <\/p>\n\n\n\nCNOOC and Hess include a taxation charge\nin their financial statements when in substance, they and Esso are not liable\nto pay no taxes in Guyana. Their taxes are paid for them by the Government of\nGuyana but the Guyana Revenue Authority issues them with a Certificate of Taxes\npaid to enable them to receive a credit in their respective home countries.\nThat appears to be a fraud disguised as a feature of some old-fashioned\nproduction sharing agreement. Esso has chosen not to reflect a credit for what\nis referred to as deferred tax and one has to wait to see how it will treat\ntaxation when it finally declares a profit in Guyana. Meanwhile, it and its JV\npartners studiously avoid any clear reference to their tax position under the\n2016 Agreement. <\/p>\n\n\n\n
Conclusion\u00a0 \u00a0\u00a0<\/strong><\/p>\n\n\n\nNot all the questions raised by the\ninadequate information presented by the oil companies in their 2020 financial\nstatements are negative to Guyana\u2019s interest. But they are all significant. And\nthey demand proper answers. <\/p>\n","protected":false},"excerpt":{"rendered":"
Every man, woman and child must become oil minded Introduction Each of the past three columns (#\u2019s 88 \u2013 90) reviewed the financial statements of one of the three oil companies which signed the 2016 Petroleum Agreement with the Coalition Government of President Granger. Today\u2019s column compiles the income statements from the separate financial statements, … <\/p>\n
Continue reading “Oil and Gas Column # 91 \u2013 June 25, 2021”<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[288],"tags":[],"class_list":["post-2287","post","type-post","status-publish","format-standard","hentry","category-the-road-to-first-oil"],"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","wps_subtitle":"","jetpack_shortlink":"https:\/\/wp.me\/p3L0nt-AT","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/posts\/2287","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2287"}],"version-history":[{"count":2,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/posts\/2287\/revisions"}],"predecessor-version":[{"id":2290,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=\/wp\/v2\/posts\/2287\/revisions\/2290"}],"wp:attachment":[{"href":"https:\/\/www.chrisram.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2287"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2287"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.chrisram.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2287"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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