Oil Search blasts PNG for foiling LNG expansion plan

Oil Search has hit back at Papua New Guinea after its government foiled a planned $20bn LNG expansion plan.

Oil Search managing director Peter Botten Picture: Adam Yip

Oil Search has hit back at Papua New Guinea after its government foiled a planned $20bn LNG expansion plan, criticising the poor financial terms offered by the nation after months of negotiations.

Talks were abruptly abandoned between the sides on Friday night after PNG said a proposed deal brokered by Exxon, Oil Search’s lead partner in the venture, would leave it “out of the money” and with a lack of benefits.

Oil Search said demands for the P’nyang contract laid down by the government would not have given it an adequate return on investment.

“Under the terms proposed by the state, the joint venture partners were unable to obtain a return on their investment that made the project investable and bankable,” Oil Search managing director Peter Botten said on Monday. “For Oil Search, the project returns under the state’s proposed terms were approximately the same as our cost of capital on an unrisked basis.”

Oil Search shares fell as much as 11 per cent to a six-month low and closed down 7.2 per cent at $6.72.

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The P’nyang gas project was to have formed the second plank of a bid by Oil Search and Exxon to double LNG exports from the ­Pacific nation by 2024, after the companies and operator Total agreed the first part of the enlarged facility through the Papua LNG contract in September. Reflecting the breakdown of negotiations, Oil Search said it would now focus on pursuing a two-train Papua LNG component rather than a grander three-train project.

Still, it conceded several commercial and engineering hurdles still needed to be cleared, with talks to be held with Exxon and Total over the next few weeks.

The companies had originally targeted volumes from the bigger LNG expansion to start flowing by late 2024. However, the impasse could trigger a delay out until 2026, potentially risking the gas producers’ push to seal contracts with buyers at an expected time of increased demand.

“Given 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 in 2020, PNG expansion is slipping further and further to the back of the queue,” Wood Mackenzie research director Angus Rodger said.

“From both a macro pricing and a contractor quality and pricing perspective, trailing in the wake of the biggest wave of new LNG supply the industry has ever seen is not ideal.”

The smaller 5.5 million-tonne-a-year Papua LNG project can still move forward but will experience delays, according to Bernstein. Still, that might be the more feasible path ahead with Exxon unlikely to significantly shift its negotiating position.

“While the tougher stance from PNG could bring Exxon and partners back to the negotiating table, this seems unlikely in the current environment,” Bernstein analyst Neil Beveridge said. “Exxon is unlikely to show much flexibility in meeting the needs of the PNG government.”

PNG has been under pressure to strike a more lucrative agreement for the state over concern it failed to seal a competitive contract for the original PNG LNG plant, which started operating in 2014 and is jointly owned by Oil Search, Exxon and Santos.