How Exxon’s Big Gas Plan Stirred Up Papua New Guinea

‘An International Monetary Fund analysis found Papua New Guinea received “quite limited benefits” because it granted Exxon generous rights to recover costs before paying taxes or fees’

Dan Murtaugh | Bloomberg | August 2, 2019

Papua New Guinea, the impoverished Pacific nation of 8 million people, is in a bind over a $13 billion project to double natural gas exports. Political opposition to the deal has already helped take down a prime minister, and some of the world’s biggest energy companies are anxiously waiting to see what the new government is going to do with it. The drama is playing out as a flood of capacity is about to hit the global market, meaning time for the investment may be running out.

1. What’s the project?

It’s actually two cooperating projects involving a bunch of companies. Together, they will deliver capacity to export 8 million tons a year of liquefied natural gas, roughly 3% of global capacity. That doesn’t sound like much, but it’s a huge deal for a country with per capita income under $3,000 a year.

2. Who’s involved?

Exxon Mobil Corp. and Oil Search Ltd. are leading a group that plans to expand the existing PNG LNG plant with a third LNG production unit, which will be fed primarily by the P’nyang gas field in the country’s highlands. Meanwhile, Total SA is heading another venture, called Papua LNG, which also has Exxon and Oil Search as partners and a plan for two LNG production units fed by the Elk-Antelope gas fields. The projects will save money by sharing some facilities.

3. What’s the hold-up?

Both projects need agreements with the government, which include details that determine how the country will benefit. Total secured such a deal in April with then-Prime Minister Peter O’Neill, but opposition party members complained it wasn’t good enough. Finance Minister James Marape quit and left O’Neill’s coalition in protest. In May, O’Neill resigned under pressure from legislators and Marape was chosen to replace him. Marape’s government is now reviewing the Total agreement and considering changes. Exxon’s deal is on hold until that process is complete.

4. Why so sensitive?

When Exxon first opened PNG LNG in 2014, it did so with the promise of transforming Papua New Guinea’s economy. (Total gross domestic product is about a 10th of Exxon’s annual revenue.) The government estimated it would bring it about 2 billion kina ($613 million) in extra revenue annually through 2021. Instead, the project’s partners paid less than a quarter of that (about 495 million kina) in taxes, royalties, dividends and other payments in 2016. Meanwhile difficulty in identifying landowners in the highlands has delayed payments promised to those affected by drilling and pipeline construction.

5. Why such small benefits?

An International Monetary Fund analysis found the country received “quite limited benefits” because it granted Exxon generous rights to recover costs before paying taxes or fees. For example, Exxon is able to subtract its operating costs, debt amortization and capital costs from its gas revenue before taxes and royalties are calculated.

6. What’s the backdrop?

Extractive industries are key to Papua New Guinea’s economy, comprising nearly 30% of the country’s gross domestic product and 85% of its exports. Disputes over how to split the revenue have long been a source of social unrest. In the 1980s, a civil war erupted in the island of Bougainville over what was then one of the world’s largest copper mines. As many as 20,000 people died in the fighting and the mine has been shut since 1989. The island’s residents are scheduled to vote in a referendum in October that could lead to independence.

7. What’s at stake?

For the energy giants, the impasse couldn’t come at a worse time. Assuming deals are struck, they’ll still need a year for preliminary engineering work before being ready to sign off on the $13 billion building cost. Meanwhile, they have more than $300 billion worth of LNG projects from Russia to the U.S. to Mozambique that will be vying for a limited number of potential customers. A lengthy delay could put the PNG expansion at the back of the line. While Marape says he doesn’t want his country to miss out on the investment and jobs (at one stage expected to be more than 20,000), he’s also committed to securing a larger return for his country from its natural resources.

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Filed under Financial returns, Papua New Guinea

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