The signing of a fiscal stability agreement between Papua New Guinea and French oil major Total looks set to finally trigger the FEED phase of the multi-billion dollar Papua LNG project. In this exclusive interview, Wapu Sonk, Managing Director of national oil company Kumul Petroleum, tells Business Advantage PNG the signing is expected within the next two weeks.

Kumul Petroleum’s Wapu Sonk. Credit: WBG

Kumul Petroleum’s Wapu Sonk tells Business Advantage PNG that the signing of the fiscal stability agreement is a formality before the commencement of the Front End Engineering and Design (FEED) stage of the project. He says executives from Total are expected in PNG shortly to sign the agreement.

‘It is the final piece of documentation that needs to be signed so that the fiscal terms that were agreed to in the gas agreement in April of 2019 are locked into position: any subsequent changes to the Oil and Gas Act or the Tax Act or anything that happens after the signing of the gas agreement do not affect the terms that were agreed to at that point.’

‘There have been some consequential amendments to different pieces of legislation, through budget processes, and this clears up any confusion. It is just formalities, basically. It is setting it up for the announcement of FEED.’

‘They are going to have to rejig the engineering and decide the facility, the tie-in points – everything to suit two trains from Papua LNG coming in and operating together with the existing two trains.’

Kumul Petroleum Holding Ltd (KPHL) is the State’s nominee for the Papua LNG project, which is based on the Elk-Antelope gas fields in PNG’s Gulf Province. KPHL will take a 22.5 per cent stake in the project.

Two trains

Location of the two Papua LNG sites. Credit: Oil Search

While entering the FEED stage is not a guarantee any project will go ahead, it would nevertheless be a major milestone for a project that was delayed following the new Marape government’s decision to review its gas agreement when it came to office in May 2019.

Research by ANZ bank conducted in 2019 suggests over 90 per cent of gas projects that enter FEED go on to achieve a positive final investment decision.

Sonk believes the engineering will be straightforward because most of the work has already been done.

However, he says, the pre-FEED work for Papua LNG was initially undertaken on the assumption that three new LNG trains would be constructed at ExxonMobil’s LNG plant at Caution Bay outside Port Moresby: two for Papua LNG and one for the ExxonMobil-led P’nyang project, which the project partners had hoped could be developed concurrently with Papua LNG.

PNG’s government has insisted that the two projects be treated separately, however, and that argument appears to have been won. The Papua LNG project will now be based on building two new trains, says Sonk.

With only two trains now in prospect, a redesign is required as part of the FEED process.

‘You can’t market LNG on Zoom. Financing is the same. You need to talk face-to-face.’

‘They are going to have to rejig the engineering and decide the facility, the tie-in points – everything to suit two trains from Papua LNG coming in and operating together with the existing two trains.

‘Also, they might have to make provision for a third train down the line. It might take the whole of this year to re-engineer all that out.’

Marketing and finance

The Elk-Antelope gas field, the site of the Papua LNG project.

‘Entry of the FEED phase also means we will start doing marketing and financing rounds before FID [Final Investment Decision],’ Sonk tells Business Advantage PNG.

Kumul Petroleum will work with Total on the marketing as a way to develop more in-house expertise.

‘We have signed an agreement with Total to jointly market our share of the LNG. They can market their own share. If we had the technical and commercial set-up and experience as an LNG marketer, we could have done it ourselves. But we are taking advantage of their experience and knowledge.’

Marketing the gas and financing the project will be more of a challenge because of COVID-19 restrictions and the global economic downturn.

‘You can’t market LNG on Zoom,’ observes Sonk in good humour. ‘Financing is the same. You need to talk face-to-face.

‘Papua LNG might be ready for FID in the third or fourth quarter of 2022; it really depends on the travel restrictions.’

Optimism

While marketing and finance will be a challenge, Sonk is optimistic about the outcome.

‘I think the market has recovered. LNG prices have gone to unprecedented levels on the spot market and the fundamentals are still there, for a sustained demand.

‘Let’s allow Total to announce FEED and let that project take off and then we will bring P’nyang back to the table a few months later.’

‘The demand gap opens up in 2027–2029. We were trying to target the 2025–2026 window, but it has now been extended another two years. There is still room for this project and it creates an opportunity for PNG.’

What about P’nyang?

Meanwhile, Sonk says negotiations over the P’nyang gas field development proposal are likely to be delayed by six months.

‘What the government is trying to do is say: “Let’s allow Total to announce FEED and let that project take off and then we will bring P’nyang back to the table a few months later.”

‘It could come right back. It really depends on Exxon and Oil Search and whether capital will be invested in it, about the same time as Papua LNG.’