Every man, woman and child in Guyana must become obsessed with oil
This column, published for the last time on April 17, 2020, returns for a short series. He will present the 2020 financial performance of the three companies that have signed an oil agreement with the government of Guyana for the Stabroek block. The three companies are Esso, Hess and CNOOC which respectively own 45%, 30% and 25% of the Bloc which has so far had huge success 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 recap of all three.
The Petroleum Accord is largely silent on accounting rules, except for documentation to be submitted to the government in relation to petroleum operations. Extending slightly, the agreement requires companies to keep accounts, operating records, reports and records relating to operations in accordance with the agreement and the accounting procedure set out in Annex C of the agreement. . The substantive part of the schedule deals with the various categories of costs and whether certain specified costs are recoverable without any approval from the Minister, recoverable with the consent of the Minister, not recoverable, and finally, costs not otherwise specified. These would require ministerial approval.
In the absence of prescribed rules, it is up to the Institute of Chartered Accountants of Guyana to set the accounting rules for oil operations. This is what the Institute did by adopting the International Financial Reporting Standards, generally referred to by the abbreviation IFRS. Given the nature of the transactions involved, the rules are extremely complex and their application is subject to interpretation. This is just another area where the country is suffering from the government’s failure to set up an petroleum commission, whatever the name, to regulate the sector. This column will address some of these questions after reviewing each company’s financial statements.
This company changed its name to CNOOC / Nexen which was originally a company jointly owned by Canada and China, but Canadians are no longer involved. Note 2 to the financial statements specifies that some of the management’s activities are carried out under joint agreements, which raises the question of whether it has other activities that it carries out independently.
The Company appears to be a shell within a shell. CNOOC operates as an offshore company in Barbados which so far has provided a safe haven from taxes. So instead of the board of directors 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 contains a long presentation on regulatory changes in Barbados but nothing on the petroleum regulatory 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 reported profit of $ 9,298 million on revenue of $ 41,419 million, a net margin of 22.4%. The financial statements also do not indicate how they account for the pre-contractual costs recovered in the current year and what remains to be recovered.
Of the $ 32,121 million expense, depreciation, depletion, and amortization is $ 14,782 million and refers the reader to note 3, but this number is not evident in the note. The operating costs are $ 16,875 million, but that figure doesn’t even include a footnote or other information to back it up.
The most interesting point about the income statement is the element of taxation. Nowhere in the financial statements or in the copious and copious notes is there any indication that the branch does not pay taxes in Guyana. Indeed, it is surely guilty of a half-truth when it states in Note 8 that the branch is subject to the Guyana Income Tax Act and the terms of the 2016 Petroleum Agreement. At first glance, this seems to suggest a cumulative impact while the reality is the opposite.
The financial statements make good use of what is called deferred tax and therefore the financial statements have a charge of $ 2,324 million for deferred tax, which is not paid to anyone but rather to recover losses allegedly suffered in the past years.
The Company sells all of its share of oil production to an affiliate in Singapore which sells on a cargo-by-cargo basis. Despite this arrangement, the Company owes its related parties more than $ 400,000 million, the terms of which, including interest, are not specified.
Note 5 indicates that the company has a $ 2.5 billion credit facility provided by CNOOC International Limited and it is questionable whether this is a USD facility or, unlikely, ‘a facility in billion dollars. The memo also states that the Company has received a letter of support from BVI (sic) to keep the business at its current level of activity. The financial statements show that the company has already committed for the Liza Phase 2 and Payara projects to the tune of $ 297,000 million.
A final point to note is the decommissioning and remediation provisions at $ 39,365 million as a fund to recuperate and abandon wells and facilities.
Next week’s column will feature Hess’s financials.