Plans to double Papua New Guinea’s gas production could be revived, according to the outgoing head of resources company Oil Search, who expects a deal between oil majors and the nation.
Peter Botten, who will stand down as managing director of the Australian-listed business on Tuesday, said he was optimistic that talks between Exxon, Total, Oil Search and PNG authorities could still result in the $13bn expansion of PNG LNG going ahead.
But he warned there was a risk that the deadlock in the negotiations could cause the companies to turn their attention to competing projects.
“We started off two years ago being towards the front end of the [development] queue. Now we’re towards the back end of the queue and pricing, and the market is changing,” said Mr Botten, who has led Oil Search for a quarter of a century. In that time the company has grown from a A$250m ($167m) minnow into a A$10bn company.
Prices for liquefied natural gas traded in Asia fell bellow $3 per mmbtu for the first time ever this month as the coronavirus outbreak in China hit demand.
“The irony is many of the LNG projects in the market, from the US to Asia and elsewhere, are probably losing money right now. It is not a sustainable long-term position to have LNG pricing in this range without some serious pain in the industry,” Mr Botten said.
Oil Search owns 29 per cent of PNG LNG, an Exxon-operated plant that is part of negotiations to double the country’s gas exports to 16m tonnes per year by 2024 by tapping new fields.
Talks between Exxon and the government stalled last month over financial terms to develop the P’nyang gasfield — a critical part of the project. PNG halted talks at the end of January, saying Exxon was unwilling “to agree reasonable terms”.
Shares in Oil Search plunged on that news, as the project is the company’s biggest prospect.
Mr Botten suggested the companies had room to improve their terms, compared to those agreed for the existing PNG LNG plant. The project’s proposed expansion is seen as less risky than the initial development, as it is mostly brownfield.
PNG LNG has drawn scrutiny in the past, as returns for the community did not live up to expectations. The IMF concluded in 2016 the tax arrangements for mining and LNG sectors in PNG “are very generous compared to other resource-rich countries”.
Mr Botten, who described Oil Search’s role as a “marriage guidance counsellor” between the oil majors and the government, said PNG LNG had benefited the country’s economy but he conceded there were legitimate questions about the distribution of wealth.
“I think there are a number of people in the country that have become quite rich on the back of PNG LNG. I’m sceptical that the benefits have properly been distributed,” he said.
Analysts are cautious about the possibility of a deal.
Saul Kavonic, an analyst at Credit Suisse, said a deal on the P’nyang field might still be achieved but there was large uncertainty due to PNG’s unclear political situation.
“One of the issues for Oil Search is that the expansion of PNG LNG is far more material for them than for either Total or Exxon. But they remain a passenger in the ongoing negotiations with the PNG government on fiscal terms, which are being led by Exxon. Exxon and Total determine much of Oil Search’s fate.”
Exxon said in a statement it was disappointed it has been unable to reach an agreement with the PNG government, adding it is hopeful it can work towards an outcome that benefits all stakeholders.
Despite LNG prices hitting record lows, Shell, the world’s biggest LNG company, is still forecasting that demand will eventually outstrip supply.
Additional reporting by David Sheppard in London