Tricks oil companies use to rob nations
By Kiana Wilburg
Cost recovery is considered an integral part of production sharing agreements signed between governments and oil companies. The mechanism is one that allows oil operators to recover money spent for exploration, development and production of oil and gas resources.
But the process, if not properly scrutinized by governments, is often used by oil companies to rob nations of billions of dollars by inflating costs. In fact, the Center for Public Integrity (CPI), which has been researching this issue for decades, has documented many of the ways in which oil companies are abusing the cost recovery process.
In some cases, the international watchdog on corruption, said expenses claimed by oil companies were found to be simply ineligible. Examples, drawn from actual cases, include companies seeking to claim expenses incurred before signing the “host government agreement” contract; expenses for the personal benefit of executives, expatriate workers and families; expenses for technical training of expatriates; a duplicate invoice for an already spent product or service; include expenses such as oil and gas marketing fees, or expenses related to mergers, acquisitions, or transfers in participating benefits that are generally considered ineligible by the contract.
In other cases, CPI noted that the price of legitimate goods and services was deliberately inflated. The not-for-profit organization said this practice, known as transfer pricing or mis-invoicing, is of particular concern for transactions between related companies.
In this regard, he cited, for example, one case where offshore drilling was contracted to another subsidiary of the same parent company. He said the eventual invoice submitted for the work was inflated 30% beyond the actual value of the drilling. The 30% in this scenario was recorded as a cost to the project, but is actually a profit for the company. Ultimately, this “profit” is reported in a low-tax jurisdiction – a process known as profit shifting.
Furthermore, CPI said it also found that contracts usually include clauses requiring all transactions between related companies to be based on international market prices. He emphasized, however, that these provisions were “extremely difficult to enforce.”
Turning its attention to another controversial category of costs, CPI said that overseas headquarters costs were legitimate but were often used to inflate project expenses. He said that in most contracts, these costs were supposed to be limited to a small percentage of the overall project costs.
He also said that countries must be wary of the interest on loans taken to finance projects, as these are oftentimes a potential area for abuse. CPI said that many tax regimes put restrictions on the debt-to-equity ratio (to avoid what is known as “thin capitalization”). Finally, the nonprofit said that countries should also be wary of invoices submitted for goods that were not actually procured and for services that were not actually delivered. He has documented hundreds of examples where countries have been fooled in this regard.