Tag Archives: Papua New Guinea

PNG PM Marape urges investors in Mining and Petroleum to consider Resource owners Interests

Papua New Guinea Today | June 13, 2019 

Papua New Guinea Prime Minister  James Marape  has urged investors in the mining and petroleum sectors to consider the interest and benefit of the resource owners and the country.‍

Prime Minister Marape said this when responding to the Managing Director of Oil Search Peter Botten, who said the new Government led by Prime Minister Marape should be investor friendly.

“I know Oil Search Managing Director, Peter Botten came out a while ago in the media asking me to be investor friendly.‍

“Peter Botten knows that I am investor friendly. But I am more concerned for the interests and benefits and speaking for the 8 million shareholders of this country.

“That is what this generation of leaders wants in our country. That is the catch cry of these leaders and our country and what our people want,” said Prime Minister Marape.‍

He said that his Government welcomes new investors and encourages those already in the country to continue investing in the economy.‍

“I am not in the business of harming our investors in the country. Other investors in the country and our partner investors, ExxonMobil, Oil Search, Total, Santos, Nippon Oil, they have been with us for a long time.‍

“We are in the business of now consolidating on these investments here, as well as attracting new investors into the country.‍

“But, as I speak I want to first pick the lowest hanging fruits to improve our economy, improve on areas of domestic market obligations, areas of local content, and in improvements in greater equity participation in the resource sector by our landowners.‍

“We are tired of being rent collectors. Sometimes down the line, whether that is in 2022 or 2025 with the best advice from the Petroleum Department and with the new Ministers we will be making regime shift and change in the resource laws and most importantly it will be friendly to the investors.

“But more so importantly friendlier to the interests of the 8 million people of our country and the benefits they truly deserve.‍

“And that is by making sure that our economy gets the residual benefit from those resources.

“And I make no apologies to anyone. I make no apologies. If you don’t like the way I am speaking, pack up and leave.

“I am more about adding value to the economy and for my people to benefit,” said Prime Minister Marape.

Prime Minister Marape on May 30th during his maiden speech after his election as the 8th Prime Minister of PNG told Parliament he does not want any international conglomerates in the resource sector to dictate to his Government what to do and or change the laws to suit their interests.‍

He said he would tweak and turn the resource laws for the benefit of the resource owners and the country. Prime Minister Marape said his intention is not to chase away investors, but wants maximum benefit and meaningfully participation by landowners and the Government in the resource development.

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PNG’S RESOURCE CURSE: DOUBLE OR NOTHING REVISITED

Paul Flanagan | PNG Economics | 12 June 2019

Executive Summary

Do the controversial conclusions of the “Double or Nothing: The Broken Economic Promises of the PNG LNG project” report still hold? The broad answer is “Yes” – indeed the conclusions are re-enforced by recent economic data. Fortunately, PNG’s new Marape/Steven government is seeking better terms for future projects. It is too early to tell if it will make even more important but politically difficult policy changes to reverse the “resource curse” approaches of the O’Neill government.

  • Recent PNG National Statistics Office figures have confirmed that PNG Treasury was over-estimating the health of the PNG economy in 2016. The new figures increase the gap between PNG LNG promises and actual outcomes relative to “business as usual” prior to the PNG LNG project (see “statistical details” section below for detail).
  • At a more detailed sectoral level, there is a mixed story with sectors such as health not doing as badly as thought (now ‘only’ minus 27%) but manufacturing doing worse (now minus 32%). The average outcome remains that PNG’s industries were just over one-fifth worse off in 2016 than if they had simply continued the “business as usual” growth prior to the PNG LNG project.
  • Overall, the PNG LNG project massively over-promised and then failed to deliver. This is not because of the fall in oil prices – indeed LNG export returns are higher than predicted.
  • Resource projects on good terms should be good for development – but this requires good policies. The PNG LNG project induced poor policies under the O’Neill government. These poor policies have overwhelmed the potential PNG LNG benefits.
  • The O’Neill government made little progress on the four recommendations from the report designed to address the broken promises of the PNG LNG project (see below). This probably contributed to its fall.
  • There are encouraging signs that the new Marape/Steven government is seeking better returns from its resources. Hopefully, it will also pursue better policies in other policy areas such as competition policy and devaluing the exchange rate to deal with the resource curse. But these will be politically difficult.

Details

The release of national accounts information by the NSO in April shows lower GDP and non-resource GDP (a proxy for household incomes) in 2016 relative to the PNG Treasury forecasts used in the earlier analysis. This has the effect of increasing the gaps between the PNG LNG modelling predictions, and actual outcomes. Specifically, the PNG LNG modelling had projected an increase in GDP of 97% two years after production had commenced. The actual outcome relative to the pre-PNG LNG “business as usual” case was a 6% increase – down from 10% in the initial report. For household disposable income, the prediction was an 84% improvement. The outcome is a decline of 9%, larger than the decline of 6% estimated in the earlier report. Using updated Bank of PNG figures on employment, the prediction was an increase of 42%. The outcome is now estimated as a fall of 26%, slightly smaller than the 27% decline in the earlier report. There is no new data on exports, imports and government expenditure.

The following graph updates that on page 6 of the Executive Summary of the initial “Double or Nothing” report. It contrasts PNG LNG predictions with actuals all relative to the pre-PNG LNG undergrowing growth path (or ‘business as usual’ growth case which was running at 5% growth per annum).

Of course, many people have benefited from the PNG LNG project such as local transport, catering and security firms, the support for local health and education facilities, the work of project partners in responding to the 2015 drought and 2018 earthquake, some tax and dividend revenues, and some landowner benefit payments (although see a related Jubilee Australia report “On Shaky Ground” (see here) which discusses some adverse local impacts and broken promises at the local level). However, taking a helicopter view of the entire economy, household incomes, government expenditures, employment and import levels were worse by 2016 than if the pre-PNG LNG underlying ‘business as usual’ growth trends had continued.

The reasons for failing to deliver had nothing to do with the fall in oil prices in late 2014 – see here (although a continuation of historically high oil prices would have helped). Indeed, as shown by the first columns in the above graph, the PNG LNG project is actually earning more in export incomes than initially projected. The reasons for failure are linked to the O’Neill government’s policy shortcomings in not addressing the well-known “resource curse” risks of a major resource project:

  • a 50% build-up in spending before revenues flowed that has led to the largest on-going budget deficits in PNG’s history;
  • crippling foreign exchange shortages due to poor exchange rate policies;
  • a failure to put enough policy effort into other critical sectors of the economy;
  • unwise state investments such as the Oil Search purchase funded by the UBS loan; and
  • growing corruption.

As documented in Chapter 5 of the earlier report, the O’Neill government continued to ignore local and international warnings that PNG LNG required appropriate policies to manage the possible adverse impacts on other parts of the economy once the construction phase was completed. PNG slid into classic resource curse policies. Indeed, those making such warnings were often attacked – a classic case being when Isaac Lupari accused me of being unprofessional and working for former Treasurer Don Polye when all I did was to correctly claim that the fall in oil prices in late 2014 would affect 2015 budget revenues. His claims that PNG would largely be sheltered from such falls was false as was his claim that I was still working for Don Polye (although I admired Don Polye including for his stand on the UBS loan and I did work for Polye as a public servant when he was Treasurer). If such warnings had been listened to, the O’Neill government could have made a more rapid fiscal response which would have lessened PNG’s current debt burden.

The “Double or Nothing” report was condemned as “utter nonsense” by former Prime Minister O’Neill (even though he subsequently admitted to the press that he hadn’t read it). Oil Search CEO Peter Botten promised to subject the report to “rigorous analysis” by an independent accounting firm to “demonstrate that there are some serious flaws in the Jubilee report”. This was not done, or at least the findings have not been released over the last year. Fortunately, former Treasurer Charles Abel did acknowledge that project returns were indeed below par. More recently, the Papua LNG project partners have been more cautious in selling the latest project and we do not have the black magic PNG-GEM model making more overly-optimistic promises. However, the PNG public still does not have access to the economic modelling behind such key claims that the Papua LNG fiscal agreement “divides the net free cash flow 50/50 between PNG and Total led developers”. More transparency is required.

It is encouraging that the new government appears to be taking a more balanced approach towards the resource sector and its potential contribution for inclusive development. Prime Minister Marape’s discusses PNG’s resources as going beyond minerals and gas to agriculture, forestry, fisheries and human resources. Given his strong legal background, including as a former Attorney General, appointing Kerenga Kua as the new Petroleum Minister should help address local concerns about current and prospective LNG agreements.

There is also positive language on gauging views on what needs to be done to create a healthy economy even if it means he doesn’t make many friends (see here). The strong stance on corruption is welcome. However, some policy corrections to move away from the resource curse will be extremely challenging politically. For example, PNG has an over-valued exchange rate which acts as a subsidy on all imports and a tax on all exports. It reduces incomes for rural households yet lowers the cost of living especially in urban areas (the latter because more consumption is imported). However, urban elites appear to have a stronger voice in PNG than the much more numerous rural poor. PNG has also moved away from competition and trade policies that would balance the resource sector and allow PNG to benefit from its strategic location in the Indo-Pacific region. Policies such as high tariffs to protect local manufacturing are understandable but economic history shows the costs for the many outweigh the benefits for the few. These are two examples of the vexed political economy challenges facing the new government. Addressing such policies are critical to addressing PNG’s resource curse. They are at least of equal importance as getting a better direct benefit return from resource projects. Time will tell if the new government will tackle such difficult political economy challenges, challenges that must be addressed to make PNG a much richer black Christian nation.

My next article will explore the different economic impacts of the construction phase and the production phase of large resource projects. The dramatically different economic impacts across these two phases could help explain why former Prime Minister O’Neill wanted to push through the Papua LNG project against the advice of his local team.

Recommendations Re-visited

The “Double or Nothing” report included four recommendations for the PNG government.  One year on, how have they gone? Following are the four recommendations, with some comments on progress shown in italics.

1. PNG should return to more inclusive development policies while better managing the resource curse. There is a need to address the overvalued exchange rate, ensure the new medium-term fiscal plans are implemented in a  transparent fashion, and re-design the SWF to ensure all resource revenues flow to the budget.

As noted above, there are some positive messages that the new government may consider action in such policy areas. Over the previous year, there had been no improvement in managing the exchange rate (the sovereign bond did not address the underlying issues), the medium-term fiscal plans faced major inconsistencies between the 2019 Budget Strategy and the actual 2019 Budget, and there was little progress on the SWF (which needs to be redesigned anyway).

2. PNG should establish a clear policy framework for all future resource projects (and extensions) that ensures PNG gets a better and earlier share of the resource pie than current agreements. No new resource projects should be approved until this framework is completed and publicly released.

This was not adequately done prior to the Papua LNG agreement. While the new deal has improved some elements of the PNG LNG deal, there clearly was a lack of internal agreement as to whether enough extra had been gained.

3. Projects should not be approved without the production and release of transparent, verifiable, contestable and independent economic modelling by the government; this modelling should include a completely new independent model that includes net costs to the budget.

Fortunately, there was little PNG-GEM spruiking of the new Papua LNG project. However, it did appear to be making claims of future revenues as well as benefit sharing that were not verified by transparent figures or modelling.

4. PNG should urgently clarify some of the confusing figures in the most recent EITI reports that royalties and development levies paid by ExxonMobil are not being received, and explanations provided as to why the level of what should be identical payments are so different.

EITI continues to do a good job in PNG given data limits. However, key information such as the Kumul Petroleum Holdings annual accounts have not been released. Recent data indicates that PNG Treasury had been claiming as “dividend revenues” funds that were actually just “advances” financed by loans from BSP.

Overall, progress against the four recommendations had been poor. That said, it is quite possible that the original report helped confirm and strengthen views in PNG that future projects needed considerably better deals. As stated a year ago “As the government considers this report, there are potential benefits for PNG in terms of encouraging public discussion about PNG’s future options and even supporting PNG’s negotiating hand with the LNG companies. Hopefully, with the benefit of hindsight, “fake news” comments will fade and true benefits will be understood.” Given developments over the last month, possibly the O’Neill government didn’t deal adequately with the broken promises of the PNG LNG. The new government appears committed to not repeating that mistake in terms of benefit sharing. Time will tell if it will also address the crucial underlying “resource curse” policy issues.

Statistical background

The PNG National Statistics Office released updated national account figures for the PNG economy on April 10 2019. This release included detailed figures for 2015 and 2016. The new numbers would be more robust that the earlier PNG Treasury estimates, although they are likely to still be too high. The release also provided consistent figures for 2006, but these did not include new growth rate figures for 2006. If it had, this would have allowed a re-estimation of underlying growth rates which had been based on the three years growth rates for 2007 to 2009. Given that 2008 was actually a year of recession according to the NSO (with growth falling by 0.3%) the inclusion of 2006 information is likely to have lifted the estimate of “business as usual” real GDP growth to slightly above 1.7% per annum in per capita terms, or 4.8% without taking population factors into account. More detailed justification around the “business as usual” growth rates are provided here. The next article will also provide some sensitivity analysis around “business as usual” growth rates.

Using the same methodology as outlined in appendix 2 of the earlier report, three actual 2016 values are updated (shown in green in the following table). These lead to three updated figures for the difference between what the 2016 value would have expected to be if “business as usual” pre-PNG LNG situation continued and the actual 2016 value.

The updated story at the sectoral level also produces slightly worse outcomes. The following table sets out the expected sectoral impacts from the PNG LNG modelling in the second column. The third column covers the gap between the underlying sectoral ‘business as usual’ growth path and the available PNG Treasury figures for 2016. The fourth column uses the recently released 2016 NSO data (except for agriculture exports which continues to use BPNG data). Some sectors have not done as badly as set out in the initial report. For example, the health sector has “only” declined by 27% when the original estimate was a decline of 33%. Other sectors have done worse. For example, the manufacturing sector has declined by 32% rather than the initial estimate of a decline of 23%. The overwhelming story remains – all sectors in the PNG economy outside of the petroleum and LNG sector have gone backwards relative to their underlying ‘business as usual’ growth performance prior to the PNG LNG project. The average decline is now 23%. This is an extraordinary missed opportunity with poor policies pushing PNG away from the “business as usual” pre-PNG LNG case. It is also a remarkable contrast to the foreshadowed gains averaging 36% from PNG LNG partners.

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Caballus Deal Is ‘Smoke And Mirrors’

Jeff McGlinn of Caballus Mining giving a presentation in Bougainville

Post Courier | June 11, 2019

The McGlinn Caballus presentation to the Autonomous Bougainville Government totally contradicts the Bougainville Mining Minister’s recent statement that appeared in the Post-Courier (May 7, 2019) that Bougainville Advance Mining Limited, is not McGlinn’s Caballus.

The original draft bills introduced to the House of Representatives and sponsored by the Bougainville Mining Minister Raymond Masono, specifically referred to Bougainville Advance Mining Limited.

Searches of the Registry of Corporate Affairs in the British Virgin Islands confirms that the Bougainville Advance Mining Limited was approved for incorporation on August 8, 2018, and the Certificate of Incorporation was issued and dated August 9, 2018.

The incorporation certificate confirms the BVI Company Number for Bougainville Advance Mining is 1988673.  The directors and shareholders were not disclosed.

The off shore company is incorporated by Intershore Consult (BVI) Ltd.

Their web site interestingly states that Intershore is a wealth management firm specialising in tax planning, virtual offices and nominee services, among other things.

Philip Miriori, the chairman of the Panguna Landowners Association – the Special Mining Lease Osikaiyang Landowners Association (SMLOLA) asked the question, as to why is the Mining Minister Masono now trying to hide the fact that Caballus is behind Bougainville Advance Mining Limited?

“Everyone knows this is a McGlinn incorporated shelf company and the Autonomous Bougainville Government (ABG) has undertaken to give McGlinn 40 per cent in this entity and Panguna for free.

“The ABG has told everyone including our ABG MPs for months this.

“While the BEC – Special Meeting No.2 of 2019, Decision No.3 of 2019, dated January 28, 2019, confirms the BEC formally endorsed the assent of the bills and the issuance of a Special Bougainville Mining License to Bougainville Advance Mining Limited in respect of the whole of Bougainville.

“Similarly, the Bougainville Executive Council special meeting No. 1 of 2019 dated January 24, 2019, recorded the formal approval of Bougainville Advance Mining Ltd (BAM) for the purpose of carrying out all mining activities in Bougainville, approved the establishment of BAM.”

SMLOLA advisor Lawrence Daveona also chimed in to say that it is totally unacceptable to be trying to steal Panguna from the customary owners.

And further transfer Panguna to this highly secretive off shore BVI entity. “This Caballus deal is smoke and mirrors.” he added

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Photo confirms AFP officers visit to the Panguna mine

Australian Federal Police take photos at the site of the abandoned Panguna mine.

AFP PRESENCE AT BOUGAINVILLE MINE RAISES SUSPICIONS

The Chairman of Bougainville Hardliners Group and former combatant turned businessman, James Onartoo has called on the Autonomous Bougainville Government (ABG) Police Minister to explain what the Australian Federal Police (AFP) were doing at the site of the controversial Panguna mine on Wednesday, June 5.

According to Mr. Onartoo, members of the communities around the mine site became suspicious when they saw the Australian police taking GPS readings at various points around the mine. This points included the one where the mining company BCL considered building an airstrip in the early part of the Bougainville crisis, to bring in aircraft supposedly to evacuate expatriate mine workers and their families out of Panguna.

“I think the public is owed an explanation as to what is happening. To the best of my knowledge the AFP were ousted in 2007 on suspicions of spying on the ABG and the people of Bougainville by the former President, late Joseph Kabui.

“Their presence at Panguna, which is the site of so much controversy and disagreements plus issues of sensitive nature stemming from proposed reopening by ABG, raises serious questions considering the fact that in the past Australia always supported military intervention by Papua New Guinea Defense Force to regain control of the mine.

“If AFP can raid ABC office in Australia itself then they are capable of anything including maybe gathering intelligence on ground for the purpose of regaining control of Panguna and restarting the mine with use of force,” Mr. Onartoo said. 

Mr Onartoo said that it is a well known fact that Australia’s interest in the mineral deposits at Panguna never declined and Australian advisors to ABG have denounced agriculture, tourism, fisheries and other sustainable industries saying that only mining is able to finance Bougainville’s independence. Several companies which are vying to reopen the Panguna mine, which was shutdown by landowners in 1990, are also of Australian origin. 

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AFP PRESENCE AT BOUGAINVILLE MINE RAISES SUSPICIONS

Presence of the Australian Federal Police at Panguna is being questioned

Chris Baria | June 8 2019

The Chairman of Bougainville Hardliners Group and former combatant turned businessman, James Onartoo has called on the Autonomous Bougainville Government (ABG) Police Minister to explain what the Australian Federal Police (AFP) were doing at the site of the controversial Panguna mine on Wednesday, June 5.

According to Mr. Onartoo, members of the communities around the mine site became suspicious when they saw the Australian police taking GPS readings at various points around the mine. This points included the one where the mining company BCL considered building an airstrip in the early part of the Bougainville crisis, to bring in aircraft supposedly to evacuate expatriate mine workers and their families out of Panguna.

“I think the public is owed an explanation as to what is happening. To the best of my knowledge the AFP were ousted in 2007 on suspicions of spying on the ABG and the people of Bougainville by the former President, late Joseph Kabui.

“Their presence at Panguna, which is the site of so much controversy and disagreements plus issues of sensitive nature stemming from proposed reopening by ABG, raises serious questions considering the fact that in the past Australia always supported military intervention by Papua New Guinea Defense Force to regain control of the mine.

“If AFP can raid ABC office in Australia itself then they are capable of anything including maybe gathering intelligence on ground for the purpose of regaining control of Panguna and restarting the mine with use of force,” Mr. Onartoo said. 

Mr Onartoo said that it is a well known fact that Australia’s interest in the mineral deposits at Panguna never declined and Australian advisors to ABG have denounced agriculture, tourism, fisheries and other sustainable industries saying that only mining is able to finance Bougainville’s independence. Several companies which are vying to reopen the Panguna mine, which was shutdown by landowners in 1990, are also of Australian origin. 

The AFP party, which comprised of three policemen and two civilians including a doctor were escorted on their visit to the autonomous region by the Bougainville Service Commander, Francis Tokura and police personnel. They are also said to have visited the proposed border posts sites at Koromira and Kangu Beach.

Mr Onartoo said he had nothing to say about AFP visiting other parts of the Autonomous Region.

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Papua New Guinea appoints reformer to crucial petroleum portfolio

Kerenga Kua is a former attorney general turned prominent opponent of Marape’s predecessor, Peter O’Neill.

Tom Westbrook | Reuters | June 7, 2019

Commodity and energy companies with projects in the resource-rich archipelago have been awaiting the makeup of Marape’s cabinet as a sign of his plans, after parliament voted him in last week on a platform of economic change.Papua New Guinea Prime Minister James Marape installed a reformer as petroleum minister on Friday, handing him a mandate to overhaul the sector and warning investors to “pack up and leave” if they did not like it.

Announcing his ministries in the capital of Port Moresby, Marape said Petroleum Minister Kerenga Kua – brought in from the opposition – shared his vision for raising more revenue from the resources sector.

“We are tired of being rent collectors,” Marape told reporters at Government House where the cabinet was sworn.

He promised changes “friendly to the investor but also friendlier to our country”.

Marape had sparked months of political chaos when he quit as finance minister over the government’s handling of a big gas agreement struck in April with French oil major Total SA.

He then rode a wave of discontent over that deal, and an earlier one with ExxonMobil Corp, into the top office, triggering a new round of scrambling – this time from commodity firms clamoring to meet and lobby him.

Kua is a former attorney general turned prominent opponent of Marape’s predecessor, Peter O’Neill.

He has been quoted in the media as saying resource laws should be changed to give the state a bigger stake in extractive projects.

“(He is) widely respected and a noted critic of dodgy deals,” said Jonathan Pryke, director of the Pacific Islands program at Sydney think-tank the Lowy Institute.

Nevertheless, Marape has insisted reforms would be slow, unlikely to take effect until well beyond elections due in 2022, and not designed to harm investment.

Peter Botten, the head of PNG-focused energy firm Oil Search Ltd said in Sydney on Thursday he did not expect to make any significant new concessions on a gas deal it and ExxonMobil Corp hope to strike with the government.

Marape, referring to concern among foreign investors, offered both reassurance and a warning.

“I make no apologies to anyone,” Marape said. “You don’t like the way I’m speaking? Pack up and leave.”

“Peter Botten knows me. I am investor friendly. But I have also to win for eight million shareholders of this country and that’s what this generation of leadership is all about.”

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Oil Search CEO says new PNG leader unlikely to demand big concessions on gas deals

Oil Search CEO Peter Botton

* Oil Search CEO confident on Papua LNG, P’nyang deals

* Comments follow PNG PM vowing to raise revenue from resources

Jonathan Barrett | Reuters | 6 June 2019

The head of Papua New Guinea-focused energy firm Oil Search Ltd said he did not expect to make any significant new concessions on a gas deal it and ExxonMobil Corp hope to strike with the South Pacific nation’s new leader.

Commodity and energy firms with projects in the resource-rich archipelago like Oil Search have been closely watching the agenda of Prime Minister James Marape since his election by parliament last week on a platform of economic reform.

A policy speech Marape made on Wednesday offered investors some relief as he said changes would be slow.

Oil Search managing director Peter Botten told the Sydney Mining Club at a lunchtime address that the P’nyang gas agreement, which has yet to be finalised, would resemble a deal already brokered on the Papua LNG project led by Total .

“I don’t envisage there will be any changes to the Papua LNG gas agreement,” Botten said, meaning the P’nyang agreement would be unlikely to see major change either.

“I am confident about that (but) I’m not 100-percent confident because I need to sit down with the government, as does Total as operator.”

Oil Search has previously said it hopes to agree terms for P’nyang this month.

Marape, a former finance minister, has promised he would be “taking back” the economy and revising resource-sector laws after the resignation of his predecessor, Peter O’Neill.

Marape said on Wednesday that he wanted to increase the amount of revenue flowing from resource projects, after years of underwhelming returns most notably from the gargantuan PNG LNG project, run by Exxon in partnership with Oil Search and others.

But changes would be gradual, Marape said, and unlikely to take effect before 2025.

Papua LNG, operated by Total, plans to develop the Elk and Antelope gas fields to feed two new liquefied natural gas processing units, called trains, at the PNG LNG plant.

Oil Search and Exxon also plan to add a third new train at the plant, partly fed by gas from the P’nyang field.

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