Was the P424.74 billion received by the government as royalties from the Malampaya natural gas project since 2002 enough?
The Commission on Audit (COA) said the declared share of the government from Malampaya was “unreliable” after finding that the Department of Energy (DOE) failed to inspect the books of contractor Shell Philippines Exploration B.V. (SPEX) on time.
In its 2017 annual audit report, the COA said the DOE’s Conventional Energy Resources Compliance Division (CERCD) had not audited SPEX’s books and accounts for 2005 to 2015 within one year as provided for by Service Contract No. 38.
Only audit reports for the years 2002 to 2004 were issued on time.
The latest audit report issued by CERCD on Aug. 25, 2017, covered the year 2013. The audit for the year 2014 started only on June 5, 2017.
CERCD cited the “large size” and the “very complex transactions/records” of SPEX and lack of manpower for the audit delay.
Interruptions
The division also cited interruptions caused by DOE officials being summoned to congressional inquiries, transition in its data processing systems and SPEX’s transfer of offices.
The COA did not buy these explanations and stressed that CERCD should have been equipped for the audit by now since the Malampaya project began operations in 1991.
It also noted that CERCD lacked audit guidelines to ensure an efficient process and to meet auditing standards.
The COA said Section 15.2 of Service Contract No. 38 could be deemed “disadvantageous” to the government.
It noted that the contract justified the DOE’s failure to perform the mandatory audit that could lead to the assumption of “correctness and reliability of the books and accounts of the service contractors despite the absence of an actual verification.”
State auditors recommended that the DOE fast-track the audit for the years 2014 to 2017 as the 2016 and 2017 audits have not yet been deemed delayed.
The COA said the DOE management agreed to revisit and amend the “disadvantageous” audit provision.
‘Exceptions’
There was also a lack of clear rules and procedures regarding “exceptions” or expenses that the contractors were allowed to deduct from gross proceeds for the purpose of computing the government’s share.
Since the exceptions “could not be properly evaluated,” the COA said these “may have understated the amount of government share from the production of the Malampaya natural gas project.” (The government’s share is at least 60 percent of net revenues from Malampaya).
The COA said its review of the SPEX audit reports showed that some of the exceptions
deducted from gross proceeds included intercompany charges, unrealized foreign exchange gains and administrative overhead expenses incurred outside the Philippines.
Charges related to the Malampaya Foundation (the contractors’ corporate social responsibility arm) and even personal expenses like membership clubs, recreational activities and pension fund contributions were treated as exceptions too.
Uncollected taxes
Although $254.7 million of the $307.8-million exceptions were removed, resulting in additional government royalties, the COA said that these were settled at the level of the financial services director and the energy secretary was not involved.
Prior to the online publication of the 2017 annual audit report, the COA struck down the government’s appeal to let the Malampaya contractors keep P146.8 billion in underpayments from 2002 to 2016.
The government had not collected the amounts representing the tax liabilities of SPEX, Chevron Malampaya LLC and state-owned Philippine National Oil Co. Exploration Corp.
Instead of making the contractors pay, the DOE allowed the underpayments to be reflected as part of the government’s 60 percent share in Malampaya’s net revenues. This allowed the contractors to keep the full 40 percent portion for themselves.