"We declare our first goal to be for every person to be dynamically involved in the process of freeing himself or herself from every form of domination or oppression so that each man or woman will have the opportunity to develop as a whole person in relationship with others".
- Papua New Guinea National Goals and Directive Principles
Tuesday, 13 November 2012
US$150 Million Bill for PNG Government
The huge US$3.3 billion blowout in costs associated with Exxon's PNG LNG project, has come as a shock to shareholders (see below Oil Search Project Update).
It appears shareholders will be expected to put their hands into their pockets and pay for 30% of the difference.
This means that the PNG Government will be liable for about US$150 million (approx K$300 million). Where will this come from? This is a huge blow to the O'Neill government as it attempts to role out plans for improved access to education and health.
It is also a huge blow to investor confidence in Esso Highlands management. After all, we are talking about a 20% increase in costs.
They point to unexpected foreign exchange impact. Ah 101 management you put in place measures to insure against that. They argue, we didn't expect so many land access issues and work stoppages? Well perhaps had you paid national workers and landowners more, they would not have been so combative.
A bad day for Exxon, an even worse day for the people of PNG, who bet on them.
PNG LNG PROJECT UPDATE
12 November 2012
Esso Highlands Limited, a subsidiary of Exxon Mobil Corporation and operator of the PNG LNG Project, completed and provided to co-venturers last Friday a revised cost and schedule estimate for the Project. (See Operator’s press release attached).
The Operator confirmed that the Project remains on track to achieve first LNG sales in 2014 and is now approximately 70% complete. The Operator also provided a revised capital cost estimate for the Project which indicated that it has increased from US$15.7 billion to US$19.0 billion. Foreign exchange is the largest single contributor to the increase, at US$1.4 billion. This brings the total realised and estimated foreign exchange impact (though to first LNG deliveries) to US$2.1 billion since Project sanction. Delays from work stoppages and land access issues, which have led to increased construction and drilling costs, have added US$1.2 billion to the cost estimate. In addition, adverse logistics and weather conditions, including rainfall exceeding historic norms for most of the last two years, are estimated to have added US$0.7 billion.
It is anticipated that the capital cost increase will be funded in line with the Project’s existing financing terms, namely 70% by debt and 30% by equity contributions from the Project co-venturers.
Based on the estimated capital cost forecast, Oil Search would be required to contribute additional equity of approximately US$300 million. Including this increase, Oil Search’s remaining equity share of costs through to the end of 2014 is approximately US$0.74 billion. The Company has ample liquidity to fund this increased equity contribution, given its existing cash balance, strong operating cash flows and the recently established US$500 million corporate revolving credit facility, which is presently undrawn.
The Operator has confirmed an increase in the LNG plant capacity, from 6.6 mmtpa to 6.9 mmtpa, which is now available to be sold into the market.
Peter Botten, Oil Search’s Managing Director said:
"The increase in the estimated final costs of the Project is disappointing. The extent of the change is considerably beyond the upper end of what might have been expected from cash drawdowns and Project progress to date. In addition, the estimated foreign exchange impacts and the amount allowed for additional contingency is higher than we would have anticipated. Oil Search intends to fully review the revised estimates and is committed to working with the Operator to seek to mitigate these estimated cost increases. Nonetheless, even including the higher costs, PNG LNG remains a highly robust economic project.
The Operator has assured the co-venturers that the PNG LNG Project remains on schedule, with first deliveries expected to commence in 2014. Confirmation of an increase in plant capacity is pleasing, with the additional 0.3 mmtpa likely to be sold either under contract or on the spot market.
Oil Search’s balance sheet and funding capabilities are strong and the Company is fully committed to advancing its suite of potential growth opportunities, which include the expansion of the PNG LNG Project, high potential exploration opportunities in the Gulf of Papua and the appraisal and possible development of the recent Taza oil discovery in Kurdistan."
PETER BOTTEN, CBE