O’Neill’s rushed Papua LNG deal could cost taxpayers $45 billion

Mekere Morauta

“Analysis of the gas agreement seen by the Financial Review claims that this missed condensate income, along with a fleet of exemptions from goods and services taxes, could cost the PNG exchequer $US20 billion-$US30 billion over the life of the project. The same analysis values exemptions from dividend and interest withholding tax at upwards of $US15 billion“.

Oil Search gas play a target in latest PNG power play

Matthew Stevens | Australian Financial Review | May 7, 2019

A former prime minister of Papua New Guinea has claimed that a technical study prepared for the government has raised doubt over the quality of a Papuan Basin gas and liquids discovery that has so far lured $4.5 billion of acquisition investment by Total, Oil Search and Exxon.

Sir Mekere Mourata said on Friday that a study “available” within the PNG Department of Petroleum says the Elk-Antelope gas and condensate discovery that has lured investment by two super majors and the Australian-listed Oil Search could prove a marginal and excessively risky investment for the state.

The study that has fired up Sir Mekere was written by a consultancy called Sarkal Energy and it was delivered on December 31. According to the widely respected former PM, the review reveals “five major problems” at Elk-Antelope. The most profound of them is the claim that there is less recoverable gas than had been stated in past communications with the government and that the gas is of poorer quality than assumed.

“The report suggests that progress on the project should cease until a detailed independent assessment of the Elk-Antelope field is carried out,” Sir Mekere said in the latest of a recent flood of his bellicose “public statements”.

“It says the financial risk to Papua New Guinea is too high not to conduct such an inquiry. If the project fails, according to the report, the cost to PNG could be up to K20 billion ($8.5 billion),” Sir Mekere advised.

Given the wild political times being lived in PNG and Sir Mekere’s standing as an MP opposed to the present leadership, these are claims that need testing. So, naturally, we asked Oil Search people to respond. They did not.

Not every expert’s view

Certainly though, it needs to be noted that this gloomy view of Elk-Antelope’s prospectivity stands in violent contrast to those of two rather better-known independent experts and of the usually equally informed internal technicians at Oil Search.

And the idea that gas majors both super and regional that are steering a $16 billion growth story might have so thoroughly and consistently overlooked the potential that recoveries at Elk-Antelope will be sub-standard is, frankly, a little hard to accept.

Separate assessments of Elk-Antelope in 2016 by sector-leading independent experts Netherland Sewell & Associates and Gaffney, Cline & Associates certified the fields’ contingent resources at 6.1 trillion cubic feet (tcf) and 6.9 tcf respectively. And Oil Search’s internal reserve modelling puts the gross resource near 6.45 tcf.

While that is not quite the potential that was marketed by the discoverer of the novel Elk-Antelope play, a Singapore listing called InterOil, it is certainly enough to justify its acquisition by Exxon for $US2.5 billion in 2017.

To secure that deal Exxon had to fight off Oil Search, which bid for InterOil after earlier acquiring a 22.84 per cent slice of the Elk-Antelope concessions. That 2014 deal cost $900 million. And it was funded from the proceeds of the $1.24 billion that was raised in delivering a 10 per cent stake in Oil Search to the PNG government.

PNG funded its recovery of a 10 per cent stake in Oil Search through a debt raising led by UBS that has been the subject of domestic and regional controversy pretty much ever since.

As The Australian Financial Review reported back in 2014, the then treasurer, Don Polye, lost his job after objecting to the debt raising on the grounds that it was unconstitutional and a breach of budget debt law.

In March the Financial Review reported that Swiss authorities were investigating the circumstances of the UBS loan to assess whether it breached local regulations.

Gas heats O’Neill dissent

PNG’s Prime Minister back in 2014 was Peter O’Neill. And, for the moment at least, the hardest man of PNG politics still has that job. O’Neill has successfully stared down frequent challenges over recent years, but this week his grip on power seems as vulnerable as at any point since his rise to the top in 2011.

One of the trigger points for a threatened no-confidence motion against O’Neill is the April 5 agreement the government signed with the proponents of $16 billion worth of expansions to PNG’s most successful resources developments, the PNG LNG project.

This is an expansion of two parts that involves adding three new liquid natural gas trains to the two that began their campaign back in 2014. One of those new trains will be fed by gas provided by the current joint venturers. The other two are supposed to be filled by gas from the Total-led Papua New Guinea joint venture, which will draw its gas from Elk-Antelope.

High among the issues of contest triggered by the April agreement is that it appears to preclude the usual free-carry arrangements that are offered to host governments of small nations that own equity in capital-heavy resources projects.

It seems, instead, that the agreement assumes that the state will borrow from the other joint venturers whatever funds are necessary to cover its 22.5 per cent equity participation in the expansion.

This prospect has created anxiety in some corners of government not least because there is no indication as to the potential interest rate on the lending nor, indeed, what appetite there may be among the partners to offer funding.

There is concern, too, that marketing rights for the entirety of PNG equity share of the expansion gas has been passed to Total, which is the major owner and operator of the Elk-Antelope play.

Through successive public statements of complaint about the content and processes of the April agreement, Sir Mekere has made particular complaint about the way the expansion gas project is to be taxed.

The expansion trains have been deemed a gas project. They attract a 30 per cent tax take in PNG. But the project will produce maybe 92 million barrels of condensate. It is light oil. Sir Mekere reckons this is extracted through a separate process and it should be taxed at the same 45-50 per cent rates that were demanded of the Kutubu oil development.

Analysis of the gas agreement seen by the Financial Review claims that this missed condensate income, along with a fleet of exemptions from goods and services taxes, could cost the PNG exchequer $US20 billion-$US30 billion over the life of the project. The same analysis values exemptions from dividend and interest withholding tax at upwards of $US15 billion.

“On most of the country’s standard fiscal terms we have exempted the developers of the two important projects, the PNG LNG and Papua LNG,” the analysis complains.

“The critical issue is will a project of such magnitude and size ever be developed in the country again where PNG will have chance to negotiate better deals for the country?

“The gas resources we have discovered left for future development account for smaller volumes if each discovery is to be developed along like the case of Papua LNG.”

Total go slow?

Now, separate to that, we understand there is growing frustration at the lack of urgency of Total’s efforts to procure development approval for Elk-Antelope.

An internal petroleum ministry briefing note written as recently as March 27 complains that the documentation so far presented by Total lacks the “technical detail that the department requires in order to make a decision” on the application for a development licence.

The note, which was written by the acting secretary of the department, Lohial Nuau, made its way into the public arena via Facebook.

“Based on the fact that none of the required documents have been submitted and the Department of Petroleum has no ability to verify any of the important economic parameters provided by Total in the economic analysis,” Nuau wrote.

The point about the complaint is that the department was being asked to make assessment of the terms of the landmark PNG LNG-Papua LNG gas agreement.

The acting secretary noted that the want of Total’s development application and its supporting technical data made it difficult for the department to make informed input to the landmark gas agreement. The agreement was signed just nine days after Nuau’s briefing note was written.

Would it be too cynical to imagine that, with the PNG LNG-Papua LNG agreement now a done deal, Total’s deeply informed application will now land with a thump with the acting secretary?

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Filed under Financial returns, Papua New Guinea

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