"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, 4 November 2014
By Christine Forster | November 4, 2014 12:01 AM It seems there might still be some twists and turns in the long saga of InterOil’s Papua New Guinea LNG project, with analysts speculating that arbitration proceedings launched by Oil Search are ultimately aimed at replacing joint venture partner Total with ExxonMobil. Oil Search clearly sees itself as the key player in the Pacific nation’s emerging gas sector, by virtue of its 29% stake in the new ExxonMobil-led PNG LNG facility near Port Moresby and its significant equity position in the InterOil project. Oil Search, with its strong operating history at PNG oil and gas fields, also enjoys a good relationship with the PNG government, one of its major shareholders. ExxonMobil’s $19 billion PNG LNG project started ahead of schedule in April. The foundation development comprises two LNG production trains with total capacity of 6.9 million mt/year, fed by a gas pipeline from the Hides and other fields in PNG’s Highlands. Separately, InterOil’s LNG project is based on gas discovered in the Elk-Antelope fields, covered by the PRL 15 permit in PNG’s Gulf province. The project has gone through several iterations over the past six years as InterOil, under previous management, sought to bed down a development plan that would meet criteria set out by the PNG government. A key requirement was that there be a proven LNG producer on board. As part of that process, InterOil in 2013 held several months of exclusive but ultimately unsuccessful negotiations with ExxonMobil over the use of Elk-Antelope gas to underpin an expansion train at the operating PNG LNG project. Shell was also involved in the talks. But Total eventually emerged with the prize, unveiling a deal in December 2013 to acquire a 61.3% stake in PRL 15, subject to several conditions including the acquisition of the minority interests in the permit. That agreement, however, was superseded in February this year when PNG-based Oil Search swooped in on a 22.8% stake in the permit by buying out Pacific LNG Group for $900 million plus contingency payments. In late March, InterOil announced a revised deal under which Total purchased a 40.1% stake in PRL 15 for $401 million down, plus $73 million when a final investment decision is taken on the Elk-Antelope LNG project, and $65 million when the first LNG cargo is shipped. Under the terms of the transaction, Total will make additional payments depending on the eventual size of the certified gas resource, scaling from $1.6 billion at 7.2 Tcf up to $3.5 billion if it’s as big as 11.8 Tcf. Oil Search has challenged the Total buy-in, claiming that its own purchase of Pacific LNG Group’s interest vested it with pre-emptive rights in the joint venture. Both InterOil and Oil Search are claiming confidence that they will prevail in the dispute, set to go to the London Court of International Arbitration for a ruling in late November. A decision is expected during the first quarter of 2015. Hong Kong-based analysts with Bernstein Research, which previously dubbed Oil Search’s purchase of the stake in Elk-Antelope an “inspired move,” are now suggesting the arbitration is designed at opening the door for ExxonMobil. “In our view the arbitration is aimed at replacing Total with ExxonMobil to achieve a more timely and efficient development of Elk-Antelope,” they said in a recent note. Whatever the outcome, cooperation with ExxonMobil is clearly on Oil Search’s agenda as it strives for final investment decisions on expansion at PNG LNG and the development of Elk-Antelope by the end of 2016. While InterOil is planning appraisal drilling at Elk-Antelope, the PNG LNG partners are working to firm up the P’nyang and Hides Deep gas resources as potential supplies for an expansion train at their project. According to Oil Search, around $3 billion of potential capital cost savings and about two years production acceleration could be achieved through coordinated development of PNG’s undeveloped resources. Oil Search Managing Director Peter Botten said it was “more challenging” to achieve an FID on a stand-alone Elk-Antelope project in the projected 2016 time frame. “That’s one of the reasons why we are encouraging cooperation between the joint ventures,” he told journalists last month. According to Botten, cooperation could range anywhere between the development of a second entirely stand-alone project at Elk-Antelope, to a completely integrated development with PNG LNG. Either way, he has forecast that Oil Search is likely to be participating in a total of five LNG trains in PNG by the early 2020s. For its part, however, InterOil appears to be firmly focused on a stand-alone development at Elk-Antelope. In its latest briefing for analysts it reiterated it was planning to develop its Elk-Antelope gas as PNG’s second major LNG project. InterOil cited analyst estimates putting the potential cost of an Elk-Antelope development at $2,051/mt of LNG capacity, compared with the $2,324/mt cost of the PNG LNG project. Bernstein agreed that Elk-Antelope was expected to be significantly lower in cost than PNG LNG on the basis that it would not require an airport in PNG’s Highlands or inter-field infrastructure. In addition, the pipeline would be 50% shorter and over a considerably easier route, and the project could take advantage of synergies from being built on a brownfield LNG site. But the Bernstein analysts added: “Given the likelihood of a two-train development at Elk-Antelope and the capacity of PNG LNG to accommodate only three trains, the synergies with Elk-Antelope on cost and schedule could be overstated.”
Monday, 3 November 2014
Originally aired on Dateline Pacific, Tuesday 28 October 2014 An Australian academic says Papua New Guinea's latest monetary policy statement contains some worrying signs that the country could be heading down a slippery slope. TRANSCRIPT An Australian academic says Papua New Guinea's latest monetary policy statement contains some worrying signs the country could be heading down a slippery slope. Paul Flanagan, a visiting fellow at the Australian National University, says a bond agreement to fund a large government deficit effectively amounts to printing money which could lead to hyperinflation. He also says the government is pegging its fortunes too much on the LNG gas project. Mr Flanagan told Jamie Tahana next month's budget will be critical. PAUL FLANAGAN: The devil really seems to be in the detail and even in some things that seem to be a good news story are actually starting down potentially a very slippery slope that may damage PNG's long-term development. JAMIE TAHANA: What kind of things in particular? PF: The announcement was that the Treasury, the PNG Treasury, and the Bank of Papua New Guinea would cooperate in a way that sounded very positive. And this was that if the PNG Treasury was having difficulty in raising the finance from the private sector to fund the very significant budget deficit in PNG at the moment, then the Bank of PNG would buy up those Treasury bonds and would then sell them on to the PNG public. And while this sounds like a good idea for cooperation in reality it is essentially printing money and this is because it seems as if the Bank of PNG is having to purchase, then it is hard to get detailed information, but it could be up to on occasions in some weeks 100 million kina, these bonds. But they're only able to sell 1 million kina of these bonds to the PNG public and that means the other 99 million kina has to be printed. JT: So nobody is buying them, basically? PF: That's right. Rather than dealing and trying to reduce the deficit, or going and looking for raising those funds in international markets, the step seems to have been going down this very worrying path of printing money. It's a worrying path because printing money leads to inflation and if it continues there is a risk of hyperinflation. And hyperinflation can be devastating for development and the economy and especially damaging for the poor. JT: How at risk is PNG of hyperinflation? PF: These are just very, very early days. And it's only a couple of recent developments that have started raising some very early warning bells. So one of those is indications that essentially money will start being printed to fund the deficit, the second one was an intervention in the exchange rate where it looks as if the kina has moved away from a market-related exchange rate system and certainly local businesses are talking about growing amounts of exchange rate rationing so local businesses can't get the funds to be able to pay for the imports they need for their businesses. But it's only a few months on - a critical thing is the budget that will be handed down in November and if that keeps to the medium-term fiscal strategy of reducing the budget deficit from around 7 percent back down to 2.5 percent then hopefully the private markets will be able to fund that and this current risk that I am talking about will hopefully be a very very short-lived experiment. JT: The LNG project that has been touted many times as a great hope - as a way to address the deficit - to increase spending on things like healthcare, education and staff. But we have seen recently it has been very slow to get off the ground. Do you think hopes are being pegged too much on the LNG project being the great bringer of success for PNG? PF: This is something that confuses me in part because the PNG treasury has over the last two years been producing graphs that indicate that PNG LNG revenue is vital but it is vital because it distinctly replaces declining revenues from the OK Tedi mine and the Kutubu oilfield. So PNG needs this money but it is only in line with the revenues and the share of the GDP that they have been getting previously. So this is important money but it is not a huge goldmine that allows the government to do everything that it would like to do. There will still be some tough choices in this budget and there's a tough road of development for a long time still.