Introduction
This second part of a mini-series on the three oil companies which operate the Liza 1 project under the Stabroek Block reviews the 2020 financial statements of the Guyana branch of Hess Guyana Exploration Limited (Hess). For the better understanding of the financial statements, the comments last week (Part 88) on the rules governing financial statements by CNOOC are applicable to Hess and Esso as well. But first, a few words on Hess.
Hess is a branch of a Cayman Islands company of the same name. It was registered as an external company under the Guyana Companies Act on 28 October 2014 and holds a 30% interest in the Stabroek Block. The Cayman Islands company is owned by Hess Corporation, a public company in the USA, which claims on its website that its purpose is to be “the world’s most trusted energy partner”.
The income statement shows an Income Tax expense of $1,725 million, referring the reader to Note 9 which states that “the Branch is subject to corporate income tax at a statutory rate of 25% (2019: 25%)”. Tucked away in a note on the branch’s accounting policies, is the statement that under the Petroleum Agreement, certain taxes are settled by the Government on behalf of the Branch. The Agreement does not use the word “settled”: it provides unambiguously that “the tax assessed will be paid by the Minister”.
Financials Income Statement
According to Note 10 to the financials, the Branch in 2020 sold approximately one million barrels of crude oil to a related marketing subsidiary of its parent, receiving net proceeds of approximately G$7.8 billion, or US$37 per barrel. This compares with data in the parent company’s annual report which gives the price of Guyana crude of US$46.41 inclusive of hedging, and US$37.40 excluding hedging. Since the G$7.8 billion accounts for only 13% of total sales of $59,240 million, the obvious questions are how many barrels in total did the Branch sell and the process for selling the remaining 87% by value.
From the $59,240 million, deductions are made for Cost of Sales $21,295 million (35.6% of sales revenue) and Depreciation, depletion and amortisation (DPA) of $24,893 million (42.0% of sales revenue), leaving a gross margin of $13,051 million or 22.0%. A separate note shows that cost of sales is made up of production expenses of $19,571 million, royalty of $$1,493 million and change of inventory of $230 million. Based on sales, royalty works out at 2.52%, which is 0.52% over what the Petroleum Agreement calls for. The DPA is made up of $24,811 million in respect of development assets, representing approximately 7% of development assets, and $82 million on Leasehold costs, representing 7.8% of Leasehold assets.
Deductions are also made for General and Administrative expenses of $4,292 million, inclusive of pre-development and pre-production costs of future projects, and Exploration expenses of $1,360 million, suggesting multiple cases of the revenue of Liza I bearing non-Liza 1 expenses. This is a violation of the principle of ringfencing which our regulators appear to miss both conceptually and practically and therefore fail to address. An earlier column has suggested that the absence of a specific ringfencing provision in the Petroleum Agreement is not fatal since the Minister can impose conditions in every production licence.
The income statement also shows financing cost of $520 million arising from provision for decommissioning, for which new and additional provisions and revisions of $3,514 million were made in 2020. While the $520 million can be traced to the income statement, the category of expense under which the provision for decommissioning is charged is not immediately apparent.
After all these costs are deducted from revenue, the Branch reports net income before taxation of $6,877 million, which but for the Petroleum Agreement would be subject to Corporation tax (25%) and to withholding tax (20%) on the deemed distribution branch profit tax (BPT). A deemed distribution is the balance of profit after the Corporation tax less any re-investment of such profits, subject to the approval of the Commissioner General. In 2020, the Branch’s reinvestment was considerably higher than the balance of profit so that while withholding tax most likely would not apply to year 2020, corporation tax does. It gets a bit tricky here. The Agreement states that such tax must be included in the taxable income of the Contractor, meaning that the $6,877 million has to be treated as if it is a post-tax amount, requiring grossing up.
Petroleum Minister (Mr. Vickram Bharrat) must find, within the next few days, $2,292 million to pay to the GRA the tax owed by Hess for 2020. Failure to do so would constitute a breach of the Petroleum Agreement and would also incur late filing penalty (10%) and interest (18% p.a.). Similarly, for CNOOC (see column # 88), the Minister is required to pay to the GRA Corporation Tax of $3,099 million on the grossed-up value of post-tax profit of $9,298 million earned by it. The total of Corporation Tax to be paid by the Government for CNOOC and Hess earning a total of $16,175 million in 2020 is $5,391 million. Ironically, the tax payable would have been much more but for the liberal accounting applied by the two Branches.
Balance Sheet
The total value of assets of the Branch at yearend was $469,363 million of which Property, plant and equipment accounted for 91%, with the remainder spread fairly evenly over cash, receivables and deferred income tax asset. At December 31, Hess is also shown as having an advance to Esso of some $13,167 million while an amount of $14,879 million is shown as owing to Esso.
The Branch’s bank balance at year end was $66 million while its commitments for capital expenditure on the Stabroek Block was approximately $544.0 billion (United States Dollars: $2.6 billion), “to be incurred over the next several years”. It is unclear where this money will come from – at December 31, 2020 the parent company’s cash resources stood at US$1,739 million while its total debt and lease obligations stood at US$8,534 million.
Note: All figures in Guyana Dollars unless otherwise stated.
Next week’s column will look at Esso’s financials. Those tell their own shocking story.
