According to the Production Sharing Agreement (PSA) with ExxonMobil, the Government of Guyana has the right to audit ExxonMobil’s books. But Petroleum Advisor to the coalition administration, Dr. Matthew Wilks warned that audits alone would not be enough to stop revenue leakages.
During an exclusive interview with the Guyana Standard, the Oil and Gas Expert said that when the financial laws of the country have gaps or loopholes and there is a stability clause that prevents fiscal terms in the petroleum contract from being updated, or affected by new laws, then companies may be able to claim costs that auditors have no legal basis to correct.
For this reason, Dr. Wilks said that laws affecting the treatment of costs must be carefully designed before contracts are signed. He noted that in Guyana’s case, auditors do not have the legal tools to effectively protect government revenues.
The Petroleum Advisor said, “Audit rights can be set out in legislation or project-specific agreements. However, the right to audit costs is necessary, but not sufficient, to control costs. A country can only exercise its audit rights in a contract within the confines of its laws. Therefore, it is crucial that laws affecting the treatment or eligibility of costs are in place before PSAs are signed…”
The Oil and Gas Expert said that the case of Ghana is an excellent reference point in this regard. He said that in Ghana, the law only allowed for Production Sharing Agreements to be ring-fenced. This means that companies with two or more oil agreements could not offset or transfer the costs from Agreement A to Agreement B.
Dr. Wilks noted that Tullow Oil found a loophole in this arrangement. He said that Tullow Oil began transferring costs between oil fields within the same Production Agreement for a period of five years.
The Petroleum Advisor said that when this anomaly was found, Ghana was unable to take any action since its laws were unclear on whether this was allowed. Dr. Wilks said that substantial tax revenue was deferred as a result.
“Ghana lost US$50 M in taxes annually… The Government of Ghana argued for months before the courts that their ring-fencing laws prevented Tullow from transferring costs between fields. But the court ruled that it was, however, the Production Agreements, not the fields, that were ring-fenced…Ghana has since revised the law to ring-fence by field rather than by agreements…”
Dr. Wilks then emphasized that what Ghana had to its advantage is the fact that Tullow’s contract was not bound by a stability clause. He noted that Guyana is not so lucky.