Making the oil companies pay what they owe

Timor-Leste is the most petroleum-export-dependent country in the world. Oil money pays for about 90% of everything the Government does. But the oil companies cheat – they pay as little as they can get away with. After six years, Timor-Leste is beginning to scrutinize their tax returns, and has discovered what should have been expected – that companies have not paid all that they owe.  We have already collected tens of millions in back taxes and penalties from ConocoPhillips and other companies, and further investigation is likely to reap much more.

La’o Hamutuk has posted an article to our website explaining the tax system and some of the difficulties and irregularities Timor-Leste has encountered, as well as some recent successes. This blog entry is a greatly abridged version of that 4-page article.

When taxes are calculated, the oil companies are entitled to deduct the expenses of operating the project through a process called cost recovery. This means that Timor-Leste effectively reimburses the company for expenses related to the project. There’s a lot of room for cheating. 

In November 2010, after several months of investigation, Timor-Leste sent a $32.4 million bill to ConocoPhillips (USA) and its joint venture (JV) partners Santos (Australia) and Inpex (Japan) for a cost the companies wrongly recovered from the Bayu-Undan project in 2005.

The illegitimate cost was for an exploratory well named Firebird (sometimes called Phoenix, the red circle on the map). In 2003 ConocoPhillips reassessed old data and concluded that there could be a valuable natural gas field west of and under the Bayu-Undan field.

Under their contracts, oil companies are required to give back parts of the contract area that they no longer want to explore, and they were supposed to relinquish the  pink area in 2004. The companies asked the Timor Sea Designated Authority (TSDA) regulator for time to drill one more well at Firebird, which they thought might contain 1.4 tcf of gas, about ¼ as much as Bayu-Undan.

The TSDA granted the extension in February 2004, but told the companies not to charge Firebird costs against Bayu-Undan revenues. They would only be able to recover these exploration costs if Firebird became a commercial project.

The Firebird well drilled at the end of 2005 found only small amounts of gas, and the well was plugged and abandoned. The companies relinquished the area.

Contrary to their agreement with TSDA, the companies charged the $32 million cost of the well against Bayu-Undan revenues, reducing their tax payment by $9.7 million.

Timor-Leste reopened this issue this year. On 24 November 2010, Timor-Leste ordered ConocoPhillips, Inpex and Santos to pay $32.4 million, including $9.7 million in back taxes, as well as a 100% penalty for gross negligence and 1% per month interest and penalties for late payment.

In early December, Inpex paid $7.1 million, Santos paid $5.1 million, and ConocoPhillips has agreed to pay $19.5 million (although the companies could still appeal within the Ministry of Finance).

Oil companies often buy and sell their ownership in different projects. If they get more for selling their shares than they spent on developing them, they have to pay capital gains tax, which is 30% in Timor-Leste. Although several such sales have occurred in the JPDA, the companies have not paid this tax. Current investigations are likely to produce payments for overdue taxes from Woodside, Santos and other companies, which is discussed in more detail on our website.

In December 2010, Timor-Leste’s National Directorate of Petroleum Revenues will begin to audit Bayu-Undan tax returns since 2005, the first time Timor-Leste has audited petroleum tax returns. External audits have turned up nothing, which is not surprising since the auditor has been paid by the companies. Timor-Leste has recently obliged the companies to keep copies of records in Timor-Leste, which will make audits possible.

Timor-Leste is the owner of the oil and gas in the ground, and it writes the contracts and the laws. For our people’s sake, we are glad that they are finally being enforced more effectively.