PNG stops P’nyang gas agreement negotiations with ExxonMobil

The Government of Papua New Guinea has halted negotiations with ExxonMobil over a gas agreement for the proposed P’nyang gas field development in the country’s Western Highlands.

The government says that ExxonMobil, operator of the P’nyang field, has refused to alter its position on financial terms for developing the project and has failed to tender an offer that the government can accept.

Prime Minister James Marape issued a statement late on Jan. 31 saying that the state negotiating team had indicated a willingness to make ‘significant concessions’ if ExxonMobil was prepared to do the same. However ExxonMobil’s final offer was delivered one day before the final deadline (Jan. 31) and contained no such concessions.

“After several months of dedication and good faith engagement by the state negotiating team. ExxonMobil’s offer had barely changed from its opening offer presented last November and is not substantially different from the Papua LNG (Elk/Antelope) Gas Agreement. That is unacceptable,” Marape said.

The P’nyang gas field development proposal involves construction of a third LNG train at the PNG LNG project plant at Caution Bay near Port Moresby, however it is being treated as an integrated stand-alone gas project under the terms of any gas agreement. In the government’s view the new gas agreement for P’nyang will be separate from the terms of the agreements governing the initial PNG LNG project and the new Papua LNG project.

The government said from the outset of negotiations last year that concessions made for PNG LNG and Papua LNG projects will not be readily available for the P’nyang project.

Petroleum Minister Kerenga Kua pointed out at the time that the fiscal terms for Papua LNG were only a slight improvement on the original PNG LNG project. He added, however that the Papua New Guinea government expected the P’nyang project agreement to go further and deliver much better fiscal and economic benefits for the country.

It is understood that the government was seeking terms for P’nyang that would provide the State with considerably more than the 45-50% take established for Papua LNG, something more akin to the 80% take that neighboring countries like Malaysia and Indonesia have on some gas projects.

Kua said the government did have the option of deferring the P’nyang project until the proposed new oil and gas legislation and revised fiscal regime were introduced this year. Nevertheless, he said it was more beneficial to have the P’nyang gas agreement negotiated and signed under the existing Oil and Gas Act 1998.

These benefits included that construction and development work for P’nyang could follow directly on the heels of work on Papua LNG project (operated by Total) which involves two extra LNG trains at Caution Bay, thus extending the economic boom from 4 years for a single project to 8 years for the two projects.

However, with the P’nyang talks now called off, there is confusion about the status of both Papua LNG and the P’nyang extension to PNG LNG.

The government is hoping that Total will still proceed with Papua LNG.

Speaking at a business meeting in Port Moresby Jan. 30 before negotiations were called off, Prime Minister Marape said: “Total, at the highest level, has given the indication that in the worst-case scenario that the third train (P’ynang) discussion fails, then the two trains that they need (for Papua LNG) will go ahead. This is an element of security,” he added.

Marape said Jan. 31 that “PNG continues to welcome international investment and is keen to work with global partners as we develop our nation and seek economic growth that will fairly share the rewards from exporting our resources to allow us to improve our people’s quality of life. We don’t believe the last offer made by ExxonMobil would have done that, so we have stopped negotiations at this stage to allow us to concentrate on developments already in the pipeline.”

In response, Peter Botten, in his last month as managing director of Oil Search Ltd.—one of the JV partners in the P’nyang project as well as Papua LNG, noted Prime Minister Marape’s media release with disappointment.

Botten said that Oil Search respects the PNG Government’s right to set fiscal terms for resources developments in PNG to ensure the State, resource owners, and the people of PNG receive an appropriate share of value. He said Oil Search is committed to getting the correct balance, ensuring that appropriate benefits are distributed to the right stakeholders.

Botten pointed out, however, that the resource size, cost of development, and the challenges of operating in Papua New Guinea are different from other countries, making broad comparisons with State take under other fiscal regimes in the region misleading.

“Under the terms proposed by the State, the (ExxonMobil-led) joint venture partners were unable to obtain a return on their investment that made the (P’nyang) project investable and bankable. For Oil Search, the project returns under the State’s proposed terms were approximately the same as our cost of capital, in an unrisked basis,” he said.

“While Oil Search will continue a dialogue with the State on the P’nyang field and will seek to achieve the appropriate balance of risk and reward for all stakeholders in any future development, it is our intention to now focus on development of the Papua LNG Project (Elk/Antelope) under the terms agreed in April 2019 and endorsed by the present Government in September 2019, as well as on the exploration and development of our Alaskan (North Slope) assets,” Botten said.

Botten concluded by saying: “We will seek to advance the Papua LNG Project in a timely way, recognizing that several engineering and commercial modifications will need to be made now that the P’nyang development is delayed.”

The P’nyang field JV in retention lease PRL 3 is operated by ExxonMobil with 36.86%. Oil Search Ltd. also has 36.86% while Santos Ltd. has 14.32% and JX Nippon has 11.96%. The percentages will reduce proportionately when PNG Government entities back in for 22.5% interest.

The Papua LNG (Elk/Antelope field) JV in retention lease PRL 15 is operated by Total with 31.1%. ExxonMobil has 28.3%, Oil Search 17.7% and PNG Government entities have backed in for 22.5%.