22 January 2009

Offshore royalty audits “Behind, big time”: Dunderdale

In July 2006 when Danny Williams accused ExxonMobil of denying the provincial government access to the books for the Hibernia project there was a lot more to the story either than what he said or than just his fit of pique at the failure of talks to develop Hebron.

Williams put it in another context altogether at the time, claiming the company had reneged on a commitment to “audit process to validate statements by the company that the Hibernia project was not meeting the owners’ expectations.”

As it turns out, the reality – revealed almost three years later by the province’s auditor general in his annual report for 2007 (year ending 31 March 2008) -  is that the provincial government was and is behind in its own audits of offshore oils project reports:

… At October 2008 [sic], there were 87 annual royalty and eligible project cost submissions made by project
owners for which the Department has not started any audit work. No royalty or eligible project cost audits have been conducted on the Terra Nova or White Rose projects since production started in 2002 and 2005 respectively.

On top of that the department’s audit manual was approved in 2000 but hasn’t been updated in the intervening seven years.

reportchartAGThe auditor general also revealed that the department had quietly dropped its 2006 demand for access to the Hibernia books claiming they could adequately assess the issues without the company’s documents.

Each of the 15 companies operating offshore are required to file monthly and yearly operating reports with the provincial government.  They must also file an audited financial report annually on project costs.  All these are used to calculate royalties paid to the provincial government’s royalties and benefits division of the natural resources department.

The majority of the outstanding audits, shown in the chart at left taken from the auditor general’s report,  are for the period after 2003.

In early 2006  - the year Williams made his accusations against ExxonMobil and the year before the one audited by Noseworthy – then natural resources minister Ed Byrne told a House of Assembly committee that his department was experiencing staff problems in the division of his department responsible for the royalty and cost audits. 

MR. E. BYRNE: Difficult not only to attract, difficult to maintain. A lot of this, too, is part and parcel of the energy policy review that is ongoing and the dedicated resources we put to that. Within the Department of Natural Resources, the energy division is most challenged, more than any other division within the department, on not only recruiting but maintaining.

We had senior petroleum auditors who left for double the salary. We recently had an ADM who took a job in Calgary. I do not know what his salary was or what he was offered. He was making a competitive salary here, but it was a significant offer. Those are issues that the deputy and government struggle with everyday. Anyway, that is part and parcel of the change in direction there.

Within the local oil patch the migration of senior, experienced public servants to the private sector caused a great deal of chatter.

The problem hasn’t gone away.  Last May, natural resources minister Kathy Dunderdale told the House of Assembly’s Resources Committee that there had been a number of vacancies in the audit division and that the department was hiring outside contractors to take up the slack. She said the audits were “Behind, big time.”

The department’s deputy minister  - Chris Kieley - told the committee:

For those three projects [Hibernia, Terra Nova and White Rose], and with the increased activity, every year we are doing audits but, because of the turnover in staff, because of the resources that were assigned to that particular piece in previous years, the audits were behind; so, this past year and the year before we have made a particular effort to get those audits up to date and we have used outside assistance through auditing firms to help us do some of those audits. So, we have a combination now of outside accounting firms helping us get the audits up to date and we have our own staff working on the audits as well. We are working on a number of different audits now with all our projects at this point.

Kieley also insisted in May that

“[w]e are within the timelines prescribed by legislation (inaudible) the Hibernia royalty contract, but we are behind and we are putting extra effort into this whole piece to get caught up. When I say behind, we have not lost any ability to audit these. What we are saying is that we would like to get them up to a closer time frame.”

Auditor General John Noseworthy noted in his report that the Hibernia audits completed had revealed $8.66 million owed to the provincial government.  In her testimony to the resource committee, natural resources minister Kathy Dunderdale insisted, however,  that “there has been nothing earth-shattering that we have come across to this point.”  The completed audits done in May 2008 are almost identical to the ones listed as finished by the auditor general in his report.

Noseworthy also noted that the department had committed to completing all outstanding audits by 2010. At the same time, though noted that even the 2008 schedule was off, largely due to staffing problems within the natural resources department.

In 2008, the work plan was amended to move 2400 hours of work scheduled for White Rose to 2009 as a result of audit work done for Hebron.  As of October 2008 – half way through the fiscal year - an external contract for an auditor had not be let for 2008.

The 2008 audit plan was based on 1400 hours for four staff positions supposed to be filled by the start of the fiscal year.  By October 2008, one position was still vacant.  Another was filled in July and only two of the original four planned were in place in April 2008. Associate deputy minister Pierre Tobin gave the resource committee a different version at the committee hearings in May.  Rather than disclose that two audit positions were vacant, he left the committee with the impression the division was “almost fully staffed”:

That would be, in the past year, a number of auditors, but those positions have since been filled for the most part. There would also have been a couple of development officers and a couple of economists. We are almost fully staffed, particularly in the royalty audit section. We are down one person out of upwards to a dozen, I guess; we are doing really well there. [Emphasis added]