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A report by Report By CIP – Center for Public Integrity says “Inflated Exploration Costs Undermining Future Government Revenue”. Extractive sector companies regularly avoid taxes by exaggerating expenses. Through 2012, Anadarko claimed exploration costs in Mozambique of $700 million. One year later they claimed exploration costs of $3 billion. The Government should immediately audit exploration expenses for Anadarko and ENI. The contracts allow for an initial audit of the last three years, with provision to go further back if there has been “manifest disregard of applicable procedure, fraud or willful misconduct.”
Even under the most optimistic scenario, the first government revenues from LNG exports from the Rovuma Basin are at least five years away. But that government revenue is already at risk due to inflated exploration expenses that are not being properly monitored or audited by the Government. This is because in the production-sharing system that governs the Rovuma Basin concessions, the split of “profit” gas between the government and the company comes only after the company has recovered its costs (“cost recovery”). The greater the expenses, the longer the government waits for its share of profit gas to grow. The experiences of other resource rich developing countries suggest that international oil companies routinely claim ineligible or inflated expenses thereby reducing the government’s share of the profits (see case studies on Timor-Leste, Indonesia, India and Alaska below).
Mozambique’s EPC contracts make clear pro vision for government oversight of exploration expenses Companies must submit an Exploration (with estimated costs) for approval at the beginning of the year, and a “cost recovery statement,” listing claimed expenses, at the end of each year. However, CIP inquiries suggest that these processes are not being rigorously followed and that inflated expense claims are being accepted without careful analysis.
The risks to government revenue from inflated exploration expenses are significant. But they pale in comparison to the risks of inflated expenses during the development phase likely to begin in 2015 and involving tens of billions of dollars. As cost overruns on natural gas projects are the norm rather than the exception (often by 45% or more), the opportunities for inflating costs are exceptionally high. It is imperative that Mozambique implement stringent oversight before the development phase begins.
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