The suspension, at least for now, of negotiations over the P’nyang LNG project, has raised issues about the investment environment in Papua New Guinea and the issue of risk, according to analysts.

Hides is one of the seven gas fields associated to the PNG LNG project. Credit: Oil Search

Commenting on the breakdown of talks over the P’nyang LNG project, Oil Search said that ‘the project returns under the State’s proposed terms were approximately the same as our cost of capital, on an un-risked basis’.

This inevitably raises questions about the profitability of the proposed project and the cost of doing business in PNG.

David Lennox, Resources Analyst for the Australian investment firm Fat Prophets, tells Business Advantage PNG that the cost of capital would probably have been ‘fairly minimal.’

‘PNG expansion is slipping further and further to the back of the queue.’

‘Think about where interest rates are and how low they are,’ he says. ‘They wouldn’t have to raise equity; they probably could do it by debt, almost.’

Nevertheless, Lennox says the assessment of sovereign risk would probably have been high. Once the project has commenced, he notes, ‘you can’t just pack up shop and march away if the locals don’t like something that has gone wrong in their view. There is a fine balance.’

Brownfield

David Low, Senior Research Analyst for LNG in Oceania at Wood Mackenzie, says the proposed P’nyang project is more akin to a brownfield project (that is, an expansion of an existing facility) rather than a completely new project. He was reluctant to speculate on the reason behind the failure of negotiations.

‘I don’t like comparing countries … The political systems are different, the locals are different, the environment is different.’

‘Without understanding the terms the PNG government were negotiating for, it is hard to say if it is that the project risk weighting was high or that it was the terms that made the project look unattractive,’ he adds.

‘The outgoing three weeks in the office for Managing Director Peter Botten are shaping up as busy ones.’

However, sovereign risk may not have been the only risk consideration. Low tells Business Advantage PNG that last year saw the highest LNG capacity ever sanctioned (approved) worldwide.

‘That carries its own set risks as well. Darren Woods [Chief Executive of ExxonMobil] alluded to the current LNG market dynamics as not a bad reason to pause and take stock.’

Woods reportedly said that because of the waves of new LNG that have been sanctioned over the last 18 months, and with more in the pipeline to reach Final Investment Decision (FID) in 2020. The implication, as Wood Mackenzie research director Angus Rodger suggests, is that ‘PNG expansion is slipping further and further to the back of the queue.’

International comparisons

Kerenga Kua, Minister for Petroleum.

The Minister for Petroleum, Kerenga Kua, has claimed that the government shares of LNG projects in Malaysia and Indonesia are higher. He asked why resources companies are ‘prepared to give a better deal to all other countries in South East Asia, but not extend that to PNG?’

Lennox believes that projects should be assessed in isolation, however.

‘I don’t like comparing countries. You have to say: “This is what this country is all about.” The political systems are different, the locals are different, the environment is different.

‘Building a project in the middle of the Sahara desert is not the same as building in the Antarctic: everything is different. And [the investment context] can all change. You might have one set of circumstances this year and in three or four years you have a completely other set of circumstances.

‘You have to look at projects in the country that it is in, around the parameters you think you might get from that project in the future.’

Playing peacemaker

Oil Search’s Peter Botten

Energy analyst for RBC Capital Markets, Ben Wilson, asked in a note if Oil Search will ‘play peacemaker again as it did in Singapore last year around the Total-PNG Government negotiations’ for the Papua LNG gas agreement?

‘The outgoing three weeks in the office for Managing Director Peter Botten are shaping up as busy ones.’

Wilson said continued delays put at risk a number of contractual arrangements including: the access and infrastructure agreements between the PRL15 (Elk/Antelope) joint venture and the PNG LNG joint venture. He said it may also affect the Front End Engineering Design (FEED) costings for Papua LNG and Oil Search’s gas marketing which it is being pursued on an independent basis.

All of this, he noted, is occurring ‘against the backdrop of a weak LNG market both from an oversupply perspective and a demand outlook [principally short term].’