Angela Macdonald-Smith | Australian Financial Review | November 22, 2019
Oil Search’s year-end target for reaching a deal with the Papua New Guinea government – so that work can proceed on a planned $US14 billion ($20 billion) expansion of liquefied natural gas – is uncertain after the parties failed to agree on terms or even the state of the negotiations.
PNG petroleum minister Kerenga Kua released a statement on Friday expressing “disappointment” with the progress of talks after ExxonMobil, the lead partner in the LNG venture, “refused to consider the state’s proposed terms”.
Mr Kua said the proposed terms, which were not disclosed, are “based on international best practice”. They are understood to involve a higher tax rate and a more onerous domestic gas requirement than under a similar earlier deal for the separate but related Papua LNG project.
But ExxonMobil said the discussions with the PNG government to complete were continuing. “An agreement is needed before decisions can be made regarding front-end engineering and design for the three-train development at the PNG LNG plant site,” an ExxonMobil spokesperson said.
Exxon, French major Total and Oil Search need to reach an agreement on the fiscal and other terms related to the development of the P’nyang gas field to proceed with the LNG expansion. The earlier deal for Papua LNG was struck under the former government of Peter O’Neill, while the new government, led by James Marape, has taken a much tougher line on resource development, demanding that more benefits flow to the PNG economy and local communities.
The partners need the second deal to be tied up before they can proceed with engineering work on the three-train expansion, which involves both Papua LNG and the expansion of the existing PNG LNG project, fed by the P’nyang field.
Credit Suisse analyst Saul Kavonic told clients the statement supported his view that the PNG government was seeking “much tougher” terms on P’nyang than for Papua LNG.
That risks prolonging negotiations, delaying engineering work and potentially putting the final investment decision at risk for the whole project, which he calculates is worth $2.40 a share for Oil Search.
Shares in Oil Search dipped when the statement was released, but still closed up 1.1 per cent at $7.24 on Friday. Neither Exxon nor Oil Search would immediately comment.
Mr Kua described the P’nyang field as the last significant LNG opportunity in PNG, and said the revenues from development were, hence, critical for the nation.
He said the team negotiating the deal on behalf of PNG had carried out “extensive” preparatory work to draft terms in line with international standards to ensure a good deal for the PNG people. The revenues would be used for infrastructure, health and education.
“It is disappointing Exxon has refused to even consider these terms and we urge them to reconsider their position,” Mr Kua said.
According to a source familiar with the situation on the PNG side, Exxon has sought to table its own proposed agreement as the starting point for discussions.
Mr Kua said that while the negotiating team was committed to working with international oil companies to develop PNG’s natural resources as quickly as possible to support the development of PNG, “our resources cannot become money‐making machines for oil companies at the expense of the nation”.
Oil Search’s outgoing managing director Peter Botten has previously underscored the importance of a timely agreement on the gas development so that the LNG expansion doesn’t miss a market “window” for new demand expected to emerge mid next decade.
The timing of the expansion has already been delayed by many months owing to the difficulty of the negotiations, particularly after the change of government.
Mr Kua said the terms PNG proposed were comparative to those for oil and gas projects in Indonesia and Malaysia.
“We have asked Exxon to be transparent about their costs and intentions with P’nyang, so we can move forward with negotiations and secure a deal that is beneficial for PNG and project partners,” the minister said.