News Americas, NEW YORK, NY, Mon. Nov. 21, 2021: The government is promising to audit the US$9.5 billion in capital costs outside the audit window that is now closed. It hasn’t explained how it will enforce any discrepancies found given timeframe to audit Liza 1 and Liza 2, the first 2 projects in the Stabroek block, have expired.
But let’s not jump ahead, even the first steps of how it will proceed with the audit is unclear, there is no mention of a timeline on when the audit is slated to start and when it will be completed. As shown in the analysis below, the Stabroek Block costs appear to be padded by at least 25%.
If we consider the history of the US$460 million pre-contract costs audit, then the outlook for the audit of the US$9.5 billion in capital costs appears bleak. Chris Ram in May 2018 raised serious concerns about the pre-contract costs for the Stabroek Block.
He used the oil companies own financial statements to show the pre-contract costs were overstated by at least 25% or US$92 million. It then took about 19 months for the government to hire a UK firm, IHS Markit, in December 2019 to start the audit. It is now November 2021, and the results of the pre-contract costs audit have still not been released. It has been 3.5 years from when legitimate concerns were raised about pre-contracts cost and we still don’t have any answers.
The capital cost of Liza 1 is US$3.5 billion, and Liza 2 is US$6 billion for a total of US$9.5 billion. The Liza 1 capital cost was originally stated at US$4.4 billion and after concerns were raised in the media by Dr Jan Mangal and others it dropped to US$3.7 billion before settling at US$3.5 billion. That is an initial overstatement of about 26%.
The breakeven cost for Liza 2 is US$25/barrel but Liza 1 breakeven cost is US$35/barrel. However, on a per barrel basis Liza 2 capital cost is US$10/barrel and Liza 1 per barrel capital cost is US$7.78. The details can be found here.
Given these different breakeven costs, one would have expected Liza 2 capital cost per barrel to be lower than Liza 1. Not to mention that on the second project, Liza 2, one would expect the oil companies to be more efficient given the lessons they would have learnt from the first project. If we apply the per barrel capital cost of Liza 1 to Liza 2, we see Liza 2 is about 29% more expensive. This is a red flag that should have triggered an urgent response to initiate an audit.
From the scenarios above, it appears the oil companies may be padding their costs by at least 25%. If we apply a 25% padding to the US$6 billion capital cost of Liza 2, then was it padded by US$1.2 billion? If we also apply the 25% to US$9 billion capital cost for Payara, was it padded it by US$1.8 billion? That would be total padding of US$3 billion which is about 2 times the cost of Guyana’s annual budget.
We call on the government to release the audit of the US$460 million pre-contract costs immediately. Additionally, it should state when it plans to begin the audit of the US$9.5 billion in capital costs of Liza 1 & Liza 2 and when it expects it to be concluded and state who will conduct the audit.
Before the government approves anymore projects such as Yellowtail, the fourth project, it should ensure the auditing and verification of the first 3 oil projects in the Stabroek Block are completed.
EDITOR’S NOTE: EDITOR’S NOTE: Darshanand Khusial is part of the non-profit Oil and Governance Network and a financial researcher with qualifications in management accounting and securities. He is also an IT expert who once served as the lead designer on the engine behind some of the largest retail sites in the world. He holds a Masters and Bachelors in Computer Engineering from University of Toronto. He has 15 patents granted in eCommerce software, augmented reality, retail, and dental fields.