THE Guyana Revenue Authority (GRA) has commenced an audit of the costs Exxon has claimed under the cost-recovery provisions of the Production Sharing Agreement (PSA) between the government and the company.

The audit has raised some questions, with many wondering what the findings might mean for Guyana. There is also some confusion on what prompted the audit and what the significance of that might be in the context of the international oil and gas sector.

Thankfully, a review of production-sharing agreements and audits in other oil-producing countries reveals that audits of this type are standard and routine.

The concept of an audit has a negative connotation in Guyana, long associated with investigations of corrupt government deals and shady business practices. But in the world of the international energy sector, audits such as this are quite routine. They are not initiated due to any suspicion of wrongdoing, instead, they serve a simpler purpose of increasing transparency by regularly examining claimed costs to ensure that discrepancies between government and corporate numbers can be found and resolved through negotiation.

Audits thus form a standard part of any cooperation between governments and international energy producers. The sums of money involved in oil production are very high, which makes it important to perform the necessary due diligence. Most times, audits are helpful in identifying any accounting errors of this type. Furthermore, they serve a trust-building role by ensuring that all parties have had their costs and expenses double-checked.

In fact, most oil-producing countries with PSAs conduct audits as a routine and even contractually obligated part of oil development.

Guyana’s own PSA with Exxon subsidiary Esso Exploration and Production Guyana and its partners includes several provisions under Article 23 and Annex ‘C’ and Sections 1.5 and 3.1(k) of the PSA that address routine audits.

Recoverable cost audits are a fact of life for oil companies producing around the world. Uganda, for instance, has conducted 11 audits of companies’ recoverable costs since its first discoveries of commercial quantities of oil and gas in 2006.

Countries such as Norway generally rely on specific government bodies to conduct them. In Norway’s case, that’s the Office of the Auditor General, an independent body tasked with conducting routine audits and reporting the findings to Parliament.

In Guyana, the GRA has asked that Exxon give “specific breakdowns” of some cost-recovery numbers dating to before the Liza discovery. Exxon’s “pre-contract” costs are reported to be around $460 million US—that includes the expense of extensive seismic and geologic surveys and early- stage exploration beginning in the 1990s.

Estimated costs for developing Liza Phase 1 will run into the region of $4.4 billion US, which includes the cost of drilling wells, building floating production storage and offloading vessels, crewing ships and setting up onshore facilities and everything else that goes into developing a massive new oil prospect.

Despite some speculation to the contrary, it’s important to note that Guyana will not be “paying” Exxon or its consortium partners anything. The recoverable costs in question are expenses that Exxon has borne and is allowed to recoup from the oil it produces, before splitting the profit-oil with the government. This is akin to how a restaurant must deduct the costs of buying ingredients and setting up shop from its revenue, before it can claim the remainder as “profit.”

Exxon is also not allowed to recover all its costs at one time. The company and its partners can only recoup 75 percent of their costs in a given year, meaning that the company will likely not recoup its initial investment for several years after Liza Phase 1 starts producing. This provision ensures that even at first-oil in 2020, Guyana will be reaping pure profit which will be divided evenly between the government and the producers. The government will receive additional revenue from the two per cent royalty.

Exxon has said it will submit the documents in question to the GRA and has pledged to cooperate fully with any audits conducted, as per the contract. They have also said that they welcome audits as a normal part of the energy business. As the energy industry expands in Guyana, we can expect audits to continue on a regular basis.