TRUST BUT VERIFY: MONITORING THE OPERATIONS OF INTERNATIONAL OIL COMPANIES IN GHANA. A PERSPECTIVE AND CALL TO ACTION.

1. TRUST BUT VERIFY: MONITORING THE OPERATIONS OF INTERNATIONAL OIL COMPANIES IN
GHANA. A PERSPECTIVE AND CALL TO ACTION.
A former Chief Executive Officer of the Ghana National Petroleum Company in an almost
apologetic tone recently denied that Ghana was being cheated by foreign oil companies due to
the method used in collecting taxes from them. He further opined that “it is myopic to think the
multinational companies are shortchanging Ghana”. He explained that the multinational
companies have to recoup their investments and that Ghana would begin making more money
from the oil fields after the investments made by the oil companies are paid.
This statement would be befuddling for its naiveté if made by a freshman oil and gas accounting
student; it would also be expected from a lobbyist or spokesperson for an International Oil
Company (‘IOC”); but for it to emanate from the head of a national oil company, mandated to
be the gatekeeper and watchdog of Ghana’s non-renewable oil and gas resources is pretty
startling. With friends like that, who needs enemies, as the adage goes.
After pondering at length as to what might have triggered this unequivocal expression of
confidence and trust in the integrity and credibility of the IOC’s, three explanations came to
mind:
1. Institutional indoctrination and brainwashing coupled with lack of experience and
knowledge of the inner workings of the IOC’s.
2. Classic case of what is referred to as “regulatory capture”, where the regulator forgets
his or her loyalty to the people or nation he represents because he/she interacts and
socializes with colleagues from the IOC’S on a frequent basis.
3. Non -familiarity with the history of accounting and reporting malfeasance committed by
the IOC’s on unsuspecting nations and regulators since the days of Lawrence of Arabia.
None of these explanations however augur well for the country in terms of ensuring that the
country receives an accurate share of its entitlement in the underlying Petroleum Agreements
which govern the relationship with the IOC’s. While not indicting the entire IOC fraternity, it
would behoove any regulator to exercise a certain measure of cynicism and caution in dealing
with the IOC’s due to past evidence and occurrences of deliberate underreporting of the value of
resources and accounting malfeasance committed by several IOC’s.
Over the past 15 years, oil companies in the United States have paid more than $3 billion to
resolve charges that they “regularly cheated the U.S. government and Native American
communities out of royalties and gas leases,” according to a new report based on research by
the Thompson Reuters Foundation.
This inevitably raises concerns that they might use, if they are not already, using similar
techniques to underpay citizens in underdeveloped countries for their resource wealth. It is not a

2. coincidence that many of the companies that have had to pay major penalties, back payments,
and settle lawsuits accusing them of fraudulently underpaying royalties are some of the same
companies are leading the fight against revenue transparency in the United States States and
around the world.​ ​The aforementioned Thompson Reuters Foundation focuses particularly on
Shell and ExxonMobil (which coincidentally is about to commence exploration and development
operations in Ghana), who have settled lawsuits and paid significant sums of penalties and back
payments on multiple occasions based on accusations of knowingly and fraudulently
underestimating the value of oil and gas to lower their royalty payments and submitting false
data to the US government.
In the lawsuits settled with the U.S. government, lawyers and whistleblowers have alleged that
it's relatively easy for energy companies to fudge their numbers using dubious accounting
techniques and outright fraud. Audits and compliance checks by the Office of Natural Resources
Revenue, the U.S. agency charged with managing America’s energy and mineral leases, similarly
have found billions in corporate underpayments on oil and gas leases since 1998. In total, the
Department of Justice and the Office of Natural Resources Revenue (ONRR) have
collected $3.014 billion from settlements, fines and audits, according to the research,
compared with $11 billion in revenues the U.S. government collects on average each year from
oil, gas and mining leases.
Over two-thirds of the money, or $2.221 billion, was from audits conducted by ONRR to check
whether royalties were accurately calculated. In the cases brought by the Department of Justice
under the False Claims Act, six of the world's 10 largest oil companies based on revenues
accounted for 75 percent of the $739.2 million in settlements, including $168 million paid by
Shell and $84 million by Exxon. As a senior policy advisor for a United States policy think tank
campaigning for greater transparency in the oil and gas business has poignantly stated "If this is
happening in the U.S, where we have a strong legal and regulatory system, which should in
theory reduce the incentives for this type of behavior, it’s very likely to be happening around
the world, especially in places with much weaker governance systems".
Other major oil companies have been accused of similar wrongdoing. Chevron agreed to pay
more than $45 million in 2009 to resolve allegations under the False Claims Act that it
“systematically under reported the value of natural gas” produced from Federal and Indian
leases for more than a decade. BP paid more than $20 million in 2011 to resolve similar claims
of knowingly underpaying royalties.
The case of Texas wildcatter, Harold Eugene Wright should provide a cautionary tale for all
regulators regarding their dealings with the major oil companies. Wright battled some of the
country’s biggest oil companies for 14 years before he died in 2008. At a hearing on industry

3. practices before the Senate Finance Committee in Washington, he overheard an ExxonMobil
official saying lease holders were in the dark about how much money they were entitled to, so
it paid them whatever Exxon thought would keep them happy. ExxonMobil had wells on some
of Wright's land and he had enough experience in the oil industry to roughly calculate the
royalties he was owed and informed the company that he believed they were underpaying
him. Exxon sent him $25,000 without any questions. So he wrote another letter stating that the
payment was insufficient and they sent him more money. At that point, Wright knew the oil
company was hiding something. And when he found out the extent of the deceit, he was
outraged – not only had he and other private leaseholders been duped , but so had the U.S.
taxpayer.
Wright sued more than a dozen oil and gas companies in 1996, including Shell and ExxonMobil,
on behalf of the U.S. government claiming contract fraud. The suit revealed the many schemes
that the companies allegedly used to under pay the government – accounting sleights of hand
such as rigging the prices by putting gas in storage when prices were low and then paying
royalties on that amount instead of the market price; and under-measuring the amount of
natural gas and oil that was produced from the leasehold. Wright's experience in the oil
industry allowed him to see that he was being cheated but most people and countries don't
have the expertise to figure out if they are getting their fair share from oil companies. It's very
difficult to determine whether a company is paying the right amount of royalties because they
control the entire operations and so much of the business happens behind closed doors.
Suits continued by the Justice Department after Wright’s death resulted in settlements by Shell
and ExxonMobil companies in the amounts of $110 million in 2001 and $32.2 million in 2010 to
claims that they knowingly underpaid royalties to the federal government.
Other big companies settlements under the False Claims Act include $56 million payment to
the federal government by Shell in 2000 for underpayment of gas royalties in the Gulf of
Mexico, a $66.8 million jury award in 2009 against Shell for fraud and breach of fiduciary duty
over an Oklahoma oil field lease. Shell also is listed by the Office of Natural Resources Revenue
for paying its largest civil penalty, $21.8 million, for knowingly submitting false and misleading
data about oil and gas extracted at its Augur platform in the Gulf of Mexico in the 1990s.
In overseas operations, foreign companies can take advantage of corruption and weak
governments in poor developing countries to earn extra profits at the expense of revenues that
could otherwise be used to help improve the lives of poor people, said Michael Ross, professor
of political science at the University of California, Los Angeles. Evidence of such deliberate
under-reporting and underpayments abound. The Republic of Timor-Leste and Chad have
successfully recovered substantial amounts of penalties and interest payments from
ConocoPhillips and Exxonmobil for late payment of taxes, invalid and dubious deductions, false

4. reporting of production volumes, inflated costs and illegal cost recovery.​ A court in Chad
handed a judgment of $76 billion against Exxon Mobil in the infamous “world’s largest lawsuit”
for unpaid royalties and back taxes. While the judgment was without doubt outrageous, it was
settled out of court for $819 million. A titan like Exxon would not fork over $800 million if they
were playing with clean hands and devoid of culpability.
In Nigeria, a report commissioned by the government identified several oil producing
companies committing offenses in the area of under-assessment/under/payments in the
Petroleum Profit Tax, and royalty validation. Specifically, Total, Shell Nigeria Limited and Mobil
were fingered in under-assessment/underpayments of $294.87 million, $53.9 million and
$49.20 million respectively in Petroleum Profit Tax; while Shell, SNEPCO and Pan-Ocean were
held liable for $73.16 million, $50.946 million and $29.006 million royalty
under-assessments/underpayment in the period under review. There are murmurings about a
small producer in Ghana who has not paid any royalties or taxes to the government despite
years of production, albeit in small volumes.
I have gone to great lengths to provide these anecdotes and actual reported incidents of
accounting malfeasance by international oil companies to illustrate how big oil companies will
play fast and loose with reports and information which forms the basis of how “profit oil” is
shared with the owners of the natural resources. By engaging in these underhanded and
patently fraudulent acts, these multinational oil companies are deliberately undermining the
economic wellbeing of the countries in which they operate by failing to remit necessary
payments as well as fulfil other statutory obligations to the countries.
The structural and operating hierarchy of upstream international oil and gas operations makes
the ability to engage in such abhorrent practices all but inevitable. Except in very few instances,
the IOC is always designated as the Operator due to their superior technical competence and
expertise, as well as their financial capacity. The Operator controls all expenditures related to
the exploration, development and production of the oil and gas. These expenditures, termed
“Cost Oil”, are deducted from any revenue generated from oil and gas sales before profits,
termed “Profit Oil” are disbursed. There is empirical evidence that in several instances, these
expenses are highly inflated and padded by the Operators in addition to engaging in dubious
cost deductions which thus reduces the amount of revenue available for disbursement as
“Profit Oil”. Chances are therefore very high that a country would be shortchanged if the
regulators fall asleep at the wheel.
LEARNING MOMENT FOR GHANA

5. Ghana as most oil producing countries depend on the IOC’s to extract and sell our non-
renewable resources, and to pay us a fair price for the oil, as well as taxes on their profits. But
the oil companies have different loyalties as their managements are beholden to their
shareholders and feel obligated to make the most money possible for their shareholders and
owners. They did not become Fortune 500 companies or become rich by giving money away to
the countries where they operate. This presents an inherent an inevitable conflict of interest
situation. The companies want to maximize profit and minimize taxes, while the country wants
to get the most money possible for its people, and to ensure that the companies are socially
and environmentally responsible.
It is therefore incumbent on Ghana as represented by GNPC to protect and look out for the
country’s interest and not expect the IOC’s to do that for the country. Should they renege on
this obligation or adopt a laissez faire and lackadaisical approach to this important obligation,
the country can become victims of the financial shenanigans of the IOC’s. In this regard, the
petroleum contractual model adopted by the country, be it Production Sharing or the Hybrid
will not guarantee an accurate receipt of the country’s proportional share of oil revenues.
Oil and Gas accounting is however, a highly intricate and complex discipline and monitoring the
operations of these companies to ensure that a country is receiving its fair share of the
extracted resources is a daunting task even in advanced countries with strong regulatory and
legal systems. This is further compounded by the disparity in resources between the IOC’S and
National Oil Companies (“NOC”). A recent article poignantly described the disparity in
resources between a NOC and an IOC operating in a country as follows:
ConocoPhillips and Eni each produced nearly ten times as much oil and gas as in the
country(sic). ConocoPhillips has 450 times as many staff as the NOC, and spent 7,000 times
as much money on operations as the GNP of the country.
While this was in reference to a specific country, it is typical and representative of the disparity
in resources in several developing oil producing countries including Ghana.
To effectively monitor the IOC’s, Ghana would have to significantly improve its human capacity
and receive expert training and guidance on the intricacies of the oil and gas business in general
and oil and gas accounting in particular. It will also have to engage external experts to
complement its local staff in performing oversight functions. While not by any means
denigrating the competence or abilities of the dedicated local staff, the skill set and experience
required to provide effective oversight and monitoring in the oil and gas industry takes years of
hands on experience to master. Ghana has been in the oil producing business for about a
decade and do not have the luxury of waiting to develop these skills as production is ongoing
and new discoveries are coming on-stream which require unabated vigilance and monitoring to
ensure the country is not being shortchanged. The external experts engaged by the country will

6. work in tandem with the local staff while they develop the requisite expertise to ensure that
we do not fall victim to financial malfeasance of the IOC’s.
While most PSC’s provide for an “independent auditor” to review the PSC reports, GNPC should
out of an abundance of caution engage its own external auditors as there have been many
reported instances of independent auditors who have not questioned a single item on the oil
companies’ documents. The independent auditor is truly not independent as they are paid by
these companies and thus emboldens the companies to make more questionable claims. GNPC
should be using its own external auditors in tandem with its internal auditors to conduct its
own audits as well as review the reports of the company paid independent auditors so as to
identify past irregularities and assess the value of such irregularities and thus level the playing
field somewhat.
The external experts in conjunction with GNPC staff should undertake forensic audit and
scrutiny of the books of the Operator, ask questions, verify and authenticate expenditures for
relevance, engage in comparative cost analysis, etc., all in a bid to ensure the country is not
being taken to the cleaners. We should not shirk our oversight responsibilities and naively
believe that the IOC’s would do the right thing by the country. The drilling rigs and platforms
used in extractive operations are located 200 kilometers or so offshore, away from the prying
eyes of the government and non-operators. To totally trust and rely on information provided by
the Operator which would form the basis for calculating our share of “profit oil”, taxes and
royalties would be foolhardy and constitute regulator malpractice.
As President Reagan inarticulately but accurately stated during the rapprochement era with
the Soviet Union, “Trust but Verify”. Aware that big brother is watching or might come
snooping, the IOC’s might be less inclined to indulge in nefarious activities due to the huge
penalties they might be faced with and industry opprobrium of being labeled a cheat if they are
discovered.
RECOMMENDATIONS
1. Close the loopholes
2. Enforce the petroleum laws more effectively and reopen the books.
3. Keep the oil companies honest
4. Enforce stiff penalties on late payment of taxes
5. Ensure capital gains tax from selling interest in a project is accurate and collected.
6. Review tax filings and Operator reports for dubious deductions.

7. 7. Audit the petroleum tax returns and operator cost reports from 2007 to present.
Although the statute of limitations may prevent looking too far back, tax returns may be
examined if fraud is discovered.
8. Increase the number of personnel and further strengthen their expertise to enable them
to monitor exploration and production operations and collect petroleum taxes more
effectively.
9. Hire external auditors to go over the books and collect “audit payments” for any
detected non-payments or malfeasance such as unreported capital gains tax,
inappropriate head office expenses, inflated operating costs, self-dealing, etc.
10. Strengthen the enforcement of the taxation laws governing the oil and gas sector.
11. Create a dedicated oil and gas tax and cost operations audit team.
I am certain that ​a forensic audit and scrutiny of the books of the IOC’s involved in oil
production activities in Ghana since inception, assuming the time frame provided in the
Petroleum Agreements for conducting audits has not elapsed, will result in corrective payments
of substantial amounts of money to the country which could be used for badly needed
infrastructure and other development programs.
E. Kofi Ofori Amoako, JD, LLM, MPA, MA.