PNG lays down gas demand to Santos, Oil Search CEOs
Santos and Oil Search have been told of a new demand from the Papua New Guinea government as the two energy giants attempt to strike a $21bn merger deal.
Papua New Guinea’s Prime Minister has told Santos CEO Kevin Gallagher the Pacific nation wants an extra 10 per cent stake in the lucrative PNG LNG project as negotiations heat up ahead of its $21bn merger with Oil Search.
Prime Minister James Marape met with Mr Gallagher and Oil Search chief executive Peter Fredricson at Port Moresby’s five-star Airways Hotel on Wednesday, when he laid down the demand as part of a broader discussion over the merits of the merger deal.
The national government originally held a 19.4 per cent stake in PNG LNG but is in the process of distributing a 7 per cent share to provincial governments and project landowners as part of the original benefit sharing deal struck in 2009. That means the PNG government will be left with a 12.4 per cent share of PNG LNG, which it regards as too small.
The blockbuster merger, recommended by Oil Search, would hand Santos 42.5 per cent of PNG LNG once it adds Oil Search’s stake to its own smaller share. Most investors expect Mr Gallagher to then sell up to 10 per cent to ensure it does not have a higher stake than operator ExxonMobil’s 33.2 per cent holding.
Mr Marape told the Santos and Oil Search chiefs that PNG would be interested in picking up part of or the entire 10 per cent holding.
“All things considered, the state would like to pick up a portion of whatever Santos will make available in their rebalancing,” PNG’s Petroleum Minister Kerenga Kua told The Australian. “If the deal goes through, Santos will end up with 42.5 per cent equity, which is a big proportion of the project and may be onerous too. The Prime Minister is asking that the joint venture project partners should all agree for the state to be given the first right of refusal to acquire some portion of that equity.”
The demand adds a fresh hurdle for Santos as it looks to get investors on board for the merger and also juggle a set of “national interest” expectations laid down by the PNG government for the deal to proceed.
Sources said the PNG government would expect either a low price for the stake from Santos or even potentially a loan, given pressures on the nation’s economy. Given the government owns a 22.5 per cent stake in Papua LNG, it is expected to argue that it should hold a similar interest in PNG LNG to ensure the tariff agreements for accessing the PNG LNG infrastructure for a forthcoming expansion are even.
While Mr Marape may not use the PNG LNG stake talks as leverage for supporting the merger deal, the demand is likely to test the ability of Santos to retain Oil Search’s reputation as a national champion for the country’s oil and gas sector. It may also prove a commercial headache given expectations that Santos would look to sell the 10 per cent stake at market rates to either ExxonMobil or through a swap deal with France’s TotalEnergie, giving it a foothold in the Papua LNG project.
The two companies have signed a merger agreement, with Santos controlling 61.5 per cent of the beefed-up producer to Oil Search’s 38.5 per cent, a sweetener to the previous 63-37 per cent ratio rejected by Oil Search’s board.
But with the deal requiring the approval of at least 75 per cent of shareholders at the November 29 meeting, there is growing talk that several institutional Oil Search shareholders still harbour concerns over the tie-up and whether the company is being handed over too cheaply to a major energy rival.
