P’nyang joint venture partner Oil Search says it is disappointed with the Papua New Guinea government’s decision to put negotiations related to the gas project on hold.

PNG Prime Minister James Marape late last week the government had called an end to negotiations with the ExxonMobil-led joint venture and would instead focus on projects "already in the pipeline" after it was unable to reach an agreement over fiscal terms.

In a statement on Monday, Oil Search managing director Peter Botten said the company was “disappointed” with the Prime Minister’s decision.

He added that while it respected the government’s right to set fiscal terms for developments in the country, Oil Search is committed to getting the correct balance to ensure appropriate benefits are distributed to the right stakeholders.

“It is unfortunate that, at this time, the stakeholders in P’nyang cannot agree on the appropriate balance of value and benefits for a Gas Agreement to be concluded,” Botten said in Monday’s statement.

“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. 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.”

In his statement on Friday, Marape claimed ExxonMobil had been unwilling to make any “significant” fiscal concessions beyond the terms proposed during negotiations in November.

Marape also claimed those terms were “well below international standards for these developments”, noting the “State take” proposed was "significantly less” than those seen in other Asia Pacific countries such as Malaysia, Indonesia and Brunei.

“It is at the lower end of the estimated State take for nations around the world published by several authorities on the matter, such as Wood Mackenzie, Daniel Johnson & Co and the Boston Consulting Group,” Marape said in Friday’s statement.

“It is simply not reasonable for PNG to accept this. PNG is a developing nation where less than one in five people have access to electricity. We need funds and resources to address this and other fundamental development issues.

“The terms we proposed to ExxonMobil were fair, ensuring PNG benefits from the project while the international oil companies made decent returns. Our proposals were rejected as these companies tried to extract even more profit for themselves.”

In response to the claim PNG was receiving poorer terms compared to neighbouring countries, Botten said: “The challenges of operating in Papua New Guinea are very different to other countries, making broad comparisons with State take under other fiscal regimes in our region misleading.”

The end to talks over the P’nyang Gas Agreement came after Papua New Guinea’s State Negotiating Team had claimed earlier this month it was getting close to an agreement with ExxonMobil and its partners.

However, Marape said Friday the only real progress that had been made in the last three months was on fundamental issues, such as agreeing to put milestones in place to ensure P’nyang is developed as soon as possible and not “warehoused”

They had also agreed that any Gas Agreement would use PNG’s template agreement as a basis for negotiation for development of the country’s own gas and not one imposed by ExxonMobil.

Oil Search will continue to seek dialogue with the government over the P’nyang agreement, but Botten added the company would now also focus on the development of the Papua liquefied natural gas project, where a Gas Agreement was struck last year and endorsed by the Marape government in September.

“We will seek to advance the Papua LNG project in a timely way, recognising that several engineering and commercial modifications will need to be made now that the P’nyang development is delayed,” Botten said.

“Joint venture meetings are planned in the short term to discuss the forward programme and we will update the market following these discussions.”

ExxonMobil chief executive Darren Woods said last week that, while the company was disappointed to not be able to reach a deal with the government, he was hopeful the discussions would move forward and continue.

"We've got our big portfolio of opportunities as I've been referring to here this morning and anything that we decide to FID and move forward has to compete within that portfolio," he said during a conference call following the release of ExxonMobil's fourth quarter results.

"So, that's the basis on which we are looking at this negotiation and working with the government. Need to be a win-win. I think we'll continue to try to establish that with the government.

"But I also think we've got some time given all the other opportunities in front of us. And frankly, given where we are at today in the supply demand balance of LNG, I think ... we've got time to work it with the government and I am hopeful and I am fairly confident that at some point we'll find a way forward with them."

Both P’nyang and the Total-led Paupa LNG project form part of a proposed three-train expansion plan at ExxonMobil’s PNG LNG development.

The expansion would see three 2.7 million tonne per annum trains built, with one train to receive P’nyang gas and the other two to be supplied by Papua LNG.

Failure to reach a deal over a P'nyang gas agreement could have a knock on effect to the timing of a final investment decision over the PNG LNG expansion, something Wood Mackenzie research director Angus Rodger said was concerning.

"Given the waves of new LNG that have been sanctioned over the last 18 months, and with more in the pipeline to reach FID in 2020, PNG expansion is slipping further and further to the back of the queue," he said.

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

While Rodger said the abandoning of P'nyang negotiations meant the PNG LNG expansion would certainly be delayed, he added it did not mean the overall development had been derailed.

"P’nyang is the most remote and difficult field to develop associated with the expansion project, and as such the latest setback will likely lead to a re-shuffling of priorities and development timetables," he said.

"However, going back to the drawing board in terms of how expansion might look – two trains versus three for example – and what fields will feed them will inevitably require lots more time.

"The government has signalled it is willing to play hardball to secure a better fiscal take than it achieved with its first LNG project. The ball is now back in the operators' court as to how they will respond."

The joint venture owners of the P’nyang project are ExxonMobil on 36.86%, Oil Search with 36.86%, Santos on 14.32% and JX Nippon with 11.96%. These same companies own the existing PNG LNG facility.

The co-owners of Papua LNG are operator Total on 40.1%, ExxonMobil on 36.5%, Oil Search on 22.8% and minority parties on 0.6%.

Field Development

Oil Search voices 'disappointment' as Papua New Guinea development talks placed on hold