THE total assets for the oil companies grew from $1.2 trillion in Financial Year (FY) 2019 to $1.9 trillion in FY 2020, representing an increase of $641.5 billion or 55 per cent.
Total liabilities grew from a position of $651.4 billion in FY 2019 to $763 billion in FY 2020 representing an increase of $111.7 billion or 17 per cent and 54 per cent of total assets.
Total equity increased from $546.7 billion in FY 2020 to $1.129 trillion in FY 2021 representing an increase of $581.7 billion or 106.4 per cent and 46 per cent of total assets
*In the absence of the Consolidated Balance for EEPGL and its partners, EEPGL growth rate of 33 per cent for FY 2021 over FY 2020 was used to estimate FY 2021 Consolidated Balance Sheet Position
*The decommissioning liability represents three per cent of PPE and this was used to estimate the depreciation expenses attributed to the decommissioning provision that was added to the fixed asset amount in the balance sheet
*Decommissioning depreciation expense represents 0.43 per cent of revenue which was used to estimate the finance cost attributed to the decommissioning discount factor in the profit and loss account
EXPLANATION OF DECOMMISSIONING PROVISIONS / ACCOUNTING TREATMENT
The decommissioning provision is recognised as an estimate of costs of dismantling and removing fixed assets and restoration of the site/environment on which they are located.
This is an essential aspect of the business model for oil and gas companies. The amount recognised for decommissioning costs is the present value of the expected future decommissioning costs which is calculated as future cost x discount factor.
The unwinding of the discount of the dismantlement provision is included as a finance cost in the profit and loss account.
Importantly to note is that the accounting treatment of the decommissioning provision affects the balance sheet where the fixed asset value is increased by the amount provided and the corresponding entry is on the liability side of the balance sheet.
Additionally, given that the fixed asset value on the balance sheet is depreciated over time and the depreciation amount is an expense item on the profit and loss account – it therefore means that the amount by which the fixed asset value is increased on the balance sheet is subject to depreciation deductions on the profit and loss account.
Against this background, the decommissioning provisions as illustrated in table (c-i and c-ii) above, the estimated depreciation and finance expense for the decommissioning liability, represents 0.47 per cent of gross revenue for FY 2021.
This means that the decommissioning expense has less than one percent impact on profit oil, while the total provision for FY 2021 represents 14 per cent of revenue and 3 per cent of total non-current assets.
The financial ratios above indicate that ExxonMobil and its consortium partners, Hess and CNOOC (Guyana operations) outperformed the global industry averages, where the performance indicators for profitability and asset management or efficiency ratios were all in the negative for FY 2020 and 2021
Most importantly, oil companies typically employ a low level of debt in their capital structure. This is largely because of the complex nature and high-risk factor of the industry where the life cycle between exploration stage, development and production stages can be as long as 10 – 20 years.
In the case of Guyana, for example, exploration commenced shortly after the 1999 agreement was signed with ExxonMobil, oil was discovered in commercial quantities in 2015, approximately 16 years later, and production commenced another 5 years later following the development stage.
Altogether, the exploration to production lifecycle in Guyana spanned almost two decades. Then, another two years later, into production, the oil companies made a profit. That said, the long term-debt-to-equity ratio for the oil companies operating in Guyana is 0.2 or 20 per cent.
This means 80 per cent of the companies’ capital structure comprise of equity (typically, this ratio for other industries is as high as 50 per cent – 70 per cent). More so, owing to this low level of long-term debt, the financing cost as shown in the statement of comprehensive income represents less than one percent of revenue. Thus, the companies’ financing expense has almost zero impact on profit oil for Guyana and the oil companies share of profit.
The analysis contained herein revealed that, under the current fiscal regime within the framework of the PSA, Guyana’s total share of profit oil and royalty for FY 2020 amounted to $25.5 billion which increased to $79 billion in FY 2021 – while the oil companies net take in profit oil for FY 2020 amounted to $22 billion which increased to $68.1 billion FY 2021.
It is worthwhile to note that Guyana’s share in profit and royalty is greater than the net profit of the oil companies. To this end, the oil companies share of profit oil for FY 2021 amounted to $68 billion or US$325 million while Guyana’s total [actual] share in royalty and profit oil stood at $85.3 billion/US$408 million, representing $17 billion/US$81 million or 25 per cent more than the oil companies.
The depreciation and financing expenses attributed to the decommissioning (provision) liability represents less than one percent of gross revenue – thus having almost zero impact on profit oil. Similarly, financing cost represents less than one per cent of gross revenue due to the low level of debt employed in the financing structure of the oil companies.
Overall, the analysis disproves the following contrary views of other analysts and political commentators where:
iv) ExxonMobil or the oil companies walk away with more profit oil than Guyana is far from the truth. Guyana’s net take in royalty and profit oil is actually greater than the oil companies’ share of profit oil;
v) The decommissioning provision is a balance sheet item which affects both the fixed asset and liability side, and has a minimal to virtually zero impact on the profit oil. In other words, the full sum of decommissioning provision which is approximately US$357 million up to FY 2021 is not a deductible from profit oil as has been incorrectly reported and misconstrued by a certain section of the media and other analysts;
vi) Finally, the oil companies employed a low level of debt in their financing structure thus reducing the financing cost for total debt which in turn has minimal to virtually zero impact on profit oil.