Oil Search U-turn on PNG expansion plan
Oil Search’s profit falls 8pc on lower prices, as it backtracks on a plan to slim down its LNG expansion in Papua New Guinea.
Oil Search’s new boss, Keiran Wulff, has backtracked on a plan B crafted by his predecessor Peter Botten to pursue a slimmed down LNG expansion in Papua New Guinea amid fresh hope the original $20bn plan can still be rekindled.
The PNG government abandoned negotiations over P’nyang in late January after complaining a deal on the table would leave it “out of the money”.
That prompted Mr Botten, Oil Search’s outgoing chief executive, to hatch a plan for a smaller two-train Papua LNG project rather than the original three-train concept that requires P’nyang to be approved.
However, Oil Search said on Tuesday it was now focused on the bigger expansion plan, noting both of its larger joint venture partners Total and ExxonMobil had indicated their support to reboot talks with the government.
“It was disappointing we weren’t able to reach agreement by January 31 and in some ways it wasn’t totally unexpected,” Mr Wulff told The Australian. “But it now allows for a more measured listening process to occur that allows us to find a space for the parties to engage.”
Oil Search reported annual net profit after tax fell 8 per cent to $US312m ($472m) in 2019, from $US341.2m a year prior, missing consensus of $US340m, as average LNG prices slipped by 5 per cent over the year and oil prices declined by 11 per cent.
Total, which leads the Papua component, said earlier in February it was prepared to wait for up to a year to seal a compromise and was focused on prioritising value over volume.
Oil Search said a deal needed to work for all sides.
“It really is in everyone’s interests for an integrated three-train project to go ahead especially in a challenging global economic environment where you really do need to drive the most cost effective developments going forward,” Mr Wulff said. “It’s about value not volume in the current economic climate.”
Weak global LNG markets, with spot prices falling near historic lows and faltering demand from Asian buyers due to the coronavirus, had worked in Oil Search’s favour by slightly easing market concerns over hitting deadlines, RBC said.
While delays are frustrating, the “extent of the damage is limited by the macro backdrop for LNG,” RBC analyst Ben Wilson said.
“A combination of oversupply, very weak spot pricing, falling contract pricing and coronavirus-related travel and access restrictions means there is little progress on any LNG projects currently,” he added. “The damage caused by the P’nyang impasse could have been considerably worse had the market been in a more balanced position.”
The PNG government’s tough economic fortunes may also play a part in reaching a compromise, according to the broker.
“The PNG government is facing a $US1bn budget shortfall, hence we think it may have to concede some ground on its position regarding P’nyang in order to facilitate forward investment in the country,” Mr Wilson added.
Oil Search’s annual revenue rose 3 per cent to $US1.58bn. Meanwhile its dividend fell by 10 per cent to US9.5c, from 10.5c back in 2018.
Oil Search operates all of PNG’s producing oilfields, though these are dwarfed by output from Exxon Mobil’s $US19bn PNG LNG operation, in which Oil Search has a 29 per cent interest.
The expansion concept sees three new equal-sized LNG trains being built at the PNG LNG plant, to produce an extra 8m tonnes of LNG a year.
Oil Search shares fell 2.3 per cent on Tuesday to $6.01.