State-owned Kumul Petroleum has made an offer to purchase a further five per cent of the PNG LNG project from Santos. The US$1.4 billion move looks set to position it to play a greater role in the future of Papua New Guinea’s oil and gas sector with global demand for LNG increasing.

An LNG tanker loading PNG LNG cargo at Caution Bay near Port Moresby. Credit: ExxonMobil PNG.

In a move initially flagged when Santos took on Oil Search’s stake in the PNG LNG project last year, state-owned Kumul Petroleum Holdings Limited (KPHL) has made a binding offer to acquire a further five per cent of the project from Santos.

The move, which is subject to regulatory approval and financing, would increase the PNG’s stake in its only operational gas project to 21.8 per cent, and reduce Santos’ share to 37 per cent.

Santos has advised its shareholders and investors that it has received a ‘binding conditional offer’ from KPHL worth US$1.4 billion (K4.93 billion) for the increased stake, which includes a proportionate share of project finance debt of around US$300 million (K1.06 billion).

KPHL has paid a deposit of US$55 million (K194 million) to Santos in advance of the deal going ahead, which is expected by the end of the year. In return, Santos has agreed to deal with KPHL exclusively over the sale.

‘KPHL’s move, if successful, brings the PNG State’s stake in the PNG LNG project closer to the 22.5 per cent share it is expected to take up in Papua LNG.’

While Santos has described the offer as ‘irrevocable, except in limited circumstances’, there are still a few steps before the sale can be finalised.

According to Santos, the offer is ‘conditional on Kumul obtaining the waivers of certain pre-emptive rights by each other PNG LNG project participant under the project operating agreement to allow the transaction to proceed’.

The deal must also receive regulatory approvals, while KPHL must secure finance for its purchase.

Stronger role

Santos’ Kevin Gallagher

KPHL’s move, if successful, brings the PNG State’s stake in the PNG LNG project closer to the 22.5 per cent share it is expected to take up in Papua LNG, PNG’s forthcoming second LNG project, which went into its front end engineering and design stage in July.

The Marape government’s long-term vision is for KPHL to play a more central role in the development of PNG’s hydrocarbon assets. A major revision of the country’s regulatory environment for oil and gas has been flagged in the lead-up to 2025.

In a statement, Santos’ Managing Director and Chief Executive Officer Kevin Gallagher also said the potential sale represents ‘an opportunity to build strategic alignment for the future development of PNG’s natural gas resources, including via PNG LNG infrastructure’.

Future gas projects such as Papua LNG and P’nyang are expected to make use of this infrastructure, helping to keep project costs down.

‘PNG LNG is a low-cost and low emissions intensity asset that contributes strong cash flows to the project participants and economic and social benefits to the nation,’ said Gallagher.

ExxonMobil PNG, which holds a 33.2 per cent stake in PNG LNG, will continue to be project operator.

According to industry analyst Wood Mackenzie, global demand for LNG – considered a lower emission replacement for coal – is expect to double by 2040. Recent projections from ExxonMobil suggest PNG will supply around two per cent of the world’s total LNG requirements between now and the end of the decade.

KPHL’s original 16.8 per cent stake in PNG LNG has so far earned it revenues of K7. 1 billion (US$2 billion) since PNG LNG exports commenced in 2014, according to figures released by ExxonMobil in May this year.