PNG Gas

(a) Seven gas fields supply the project. The main one is the Hides gas field in Hela province in the middle of the highlands of Papua New Guinea. It required the drilling of eight boreholes of 3600meter deep. A Gas Conditioning plant was built in Hides where the gas is separated from oil and water.

(b) The gas then needed to be transported to the coast for shipping. That required a pipeline of 290 km to the mouth of the Omati river..This pipeline was extended under water for 407 km to Caution Bay near Port Moresby where the LNG processing plant is. (c) At Caution Bay gas is chilled to minus -161C to make it liquid enough for transporting. Two such processing plants –called trains- were built. Two huge storage tanks were built auxiliary to this. Thirdly, a loading pier for LNG tankers was constructed. (d) The Hides gasfield produces a mixture of oil and gas (condense). The oil is separated in the highlands and transported in a separate pipeline to the loading facilities of Oilsearch company for the Kutubu oilfield at the Kumul Marine Terminal offshore in Gulf Province.. (e) The construction of these projects was in extremely difficult terrain consisting either of very steep mountain ranges in the highlands or swamps near the coast. The project built at Hides a special long runway that could take Antonovs- the largest cargo planes in the world- to bring in material as road transport could not cope with this.[11][12][13] (f) Oil Search acquired the management contract for the Hides installations. Exxon Mobil manages the installations at Caution Bay.

(a) The construction of PNG/LNG is a major engineering achievement. It was a massive project in extremely difficult terrain. The project was completed ahead of schedule in 2014. That was within four years. There was however an expenditure overshoot of: US$3.3 billion.[14][15] (b) The project required massive training of PNG nationals.: 10.000 nationals during the time of construction. The project employs after construction 2600 PNG nationals and they constitute 82% of the workforce. Twenty two percent are women.[16] (c) The project produces above-planned capacity. It was expected to produce 6.9 million tonnes of LNG per year. The actual average output is however 8 million tonnes a year. In 2017 the production was 8.3 million tonnes. It decreases in 2008 to 7.5 million tonnes due to the shutdowns as a result of an earthquake. The plant was however again in production after 8 weeks. It is estimated on the basis of the highest monthly figures that output may grow to 9.2 million tons. (d) The project is a low-cost producer. The project's break-even price of around $7.40 per million British Thermal Units compares favorably to an average over $10 per million BTU for eight recent gas projects in the region, according to analysis by consultancy Wood Mackenzie and Credit Suisse.[17] (e) The project is bigger than mere focus on the major Hides gasfield suggests. Project gas is sourced from seven fields: the Hides, Angore and Juha gas fields and from associated gas in the Oil Search-operated Kutubu, Agogo, Moran and Gobe Main oil fields, which provides approximately 20% of PNG LNG Project gas. Gas is also purchased on a third party basis from the SE Gobe field.[18] (f) The reserves in the gasfields were evaluated anew in 2016. This resulted in an estimated increase of 50% as compared with the estimates made before construction in 2009.[19] (g) The project supplies about 20% of the domestic energy markets which leads to considerable savings. This is an afterthought. The original degree there did not provide for domestic market obligations or local.[20]

(a) ExxonMobil commissioned study by ACIL-Tasman, Australian consultants to calculate the benefits and costs to PNG. They projected large gains for the PNG economy as a result of the project. However, two Australian economists – Paul Flanagan and Luke Fletcher - compared in 2018 the predictions of this report with actual outcomes. This study was commissioned by Jubilee Australia. They found an actual fall in employment, household incomes, employment, government income, and imports where the ACIL-Tasman study predicted increases. GDP was expected to double as a result of LNG/PNG in the ACIL-Tasman study, but the researchers found a mere 10% growth. These disappointments cannot be explained by lower energy prices than expected.[21][22] The Jubilee study has been criticised because the researchers did not produce a credible counterfactual: What would have happened in the absence of the PNG/LNG project and in how far are the observed effects related to PNG/LNG?[23] Prime minister Peter O’Neill rejected the Jubilee report mentioning low energy prices as the main factor.[24] Exxon Mobil has responded by mentioning social and economic benefits of the project such as stimulating entrepreneurship and supporting local communities.[25]

(b) Second, specific questions were asked already before the start of the project about the depreciation allowed and tax concessions. Sir Mekere Morauta challenged in parliament the exemption of GST and interest withholding tax given to LNGPNG. The exemption of interest withholding tax is particularly important as the project is highly geared and much income is needed to service these loans. Arthur Somare, the relevant minister at the time, stressed that a 30% corporation tax on profit remained despite these concessions.[26] A second concern was raised by Aaron Batten while presenting a seminal report by the Asian Development Bank: Papua New Guinea: Critical Development Constraints. He mentioned specifically the taxation concessions to the LNG project. The Internal Revenue Commission argued that companies need the time to extract, produce, export and sell their products before they can generate a continuous income that is taxable. However, the Internal Revenue gave no definite and precise information of income flows from LNG/PNG. Substantial income was not expected until after 2020 as a result of these concessions.[27] The actual arrangements between government and companies are in a secret Resource Development Agreement.. However, Flanagan and Fletcher suggest : Exxon and Oil Search should be paying half a billion dollars (AUD) to the PNG government every year, since the gas started to flow in 2014. Instead, they are paying a fraction of this amount, partly because of their use of tax havens in the Netherlands and the Bahamas as they do in Australia.[28]

(c)The local beneficiaries of the project have not had their dues in time. The design of the PNG/LNG project is enlightened with respect to distribution among local residential groups. In 2009 before the start of the project there was a large meeting of local stakeholders in Kokopo: representatives of provincial and local government as well as representatives of local communities that made claims to be landowners in the area involved. This resulted in a written agreement on the sharing of benefits.[29] There have been regular announcements that benefits would be distributed, but these do not seem to have been followed up.[30][31][32] Landowners have threatened to shut down the projects. The most serious clash took place in Angore in 2017.It actually led also to the destruction of property.[33][34] Property was destroyed by protesting landowners again in 2018 and they demanded a big payment of US$10million as a fee for maintaining security at the plant. Payments for that purpose were not foreseen in stakeholders agreements.[35] Exxon Mobil as well as Oil Search insist that they have paid the amounts due to landowners. The problem is a question of distribution and not of payment.[36] This was followed a few days later with a message that it was not the intention to blame the government, According to Oil Search this was a misinterpretation of journalists.[37] From reporting it is difficult to find out what the actual situation is. Exxon Mobil says that it has a good working relationship with the Mineral Resources Development Corporation which is in charge of looking after the interests of the landowners,[38] Some money has been released to downstream landowners along the pipeline and in Boera village near the loading bay landowners near the pipeline. Government argues that identification is most difficult in the upstream areas. Most of the royalties seem to be locked in trust accounts. The amounts mentioned are around US$200million.[39] Government argues that identifying the landowners and the actual resident clans is much more difficult than assumed and this causes the delay. Prime Minister O'Neill puts the blame on the previous government who should have sorted out this issue.[40] However, it can be argued that such an identification is almost impossible where oral testimony is the only source available to identify descent and territory. There are calls for revision of the Oil and Gas Act 2018 to sort out the problem as well as calls for revising the whole process in the light of what has been learnt until now.[41][42][43][44]

(d)The income dependent on profit is disappointing.[45] According to Exxon Mobil, they have paid US$1.4 in royalties, development levies, taxes and dividends to the PNG government. They argue that after 2025-2027 these amounts will increase greatly. The project is to the largest extent financed by loans. These will then be paid off and no longer depress profits. Income from corporation tax and income from equity will rise as a result.[46] Nevertheless, there is a strong current of feeling that the PNG government has been outdone in negotiations with the companies. As a result, there is an important debate among politicians about the mining and taxation legislation:[47] Charles Able as a treasure in the government made also the following perceptive statement; “We need to develop a mineral and petroleum regime where we take a smaller equity for free and a higher royalty rate, introduce domestic market obligation and local con- tent. We need to understand why a large current account surplus (from mineral and petroleum exports) still leaves us with a foreign exchange shortage.”[48]

Two relatively small oil and gas companies are major players in the struggle for control of the Elk/Antelope gasfield: Interoil and Oil search. Interoil was a very small player in the gas and oil industry. It acquired in 2005 exploration licenses for oil and gas in PNG. The driving force in Interoil was its charismatic founder: Phil Mulacek. They announced in 2007 the discovery of a very large gasfield on the edge of the Gulf of Papua in the South of the Country: "the InterOil Corporation, made the kind of announcement investors crave: explorations near the refinery had uncorked a vast pool of natural gas potentially larger than the United States' total residential consumption of the fossil fuel in 2005. The size of the discovery was so large, Phil E. Mulacek, InterOil's chairman and chief executive, informed an analyst, that simply controlling its output 'was sort of like trying to stop the Mississippi.'"[53] An agreement was made with the PNG government to proceed towards exploitation, but there was one strong condition: they had to partner with a company that had experience in developing and running a gas field.[54] Shell and ExxonMobil were mentioned as possible partners when Interoil entered negotiations. [55] The investment bank Merrill Lynch was also involved.[56] However, at the end of 2012 they had not managed to find a partner to reach an FID (Final Investment Decisions) and they were in danger of losing the licence.[57] The idea was launched that the PNG government would become a 50% shareholder instead of taking the proposed equity of 22.3%.[58] However, that was a pipedream because government did not have the money and it would not solve the problem of expertise. The French multinational Total is a major player in the world of oil and gas and they filled the void buying a 60% interests in the gasfield.[59] Oil Search Company entered the fray at about the same time. It was already a stakeholder in the LNG/PNG project and it extended its interests by buying into the Elk/Antelope gasfields. They bought the Pac LNG group that had a 22.8% stake in the gasfields.[60] Oil Search paid about US$900 million for this participation. That money was sourced from equity bought by the PNG government, financed from a loan from the Swiss bank UBS.[61] OilSearch ambitions went further and it contested the participation of Total before a London court of arbitration. Oil Search claimed to have priority rights (pre-emptive rights) in buying into Interoil because of its acquisition of Pac LNG.[62] Out of the negotiations came a continued presence of Total in Papua-LNG but at a reduced rate of 40% instead of 60%.[63] Interoil remained however with an interest of about 40% in the Elk/Antelope Gasfield. If it was for sale then these shares would be very expensive: OilSearch had paid a much higher price than Total. Oil Search made nevertheless a bit for Interoil's remaining shares in the gasfield of US$3 billion.[64] The question was where OilSearch would source the capital for this acquisition unless it would be an exchange of shares. The quest for a major and very experienced oil and gas operator remained as well. It was thus not surprising that OilSearch had to give way to ExxonMobil. They offered US$2.2.billion for the remaining shares of Interoil in the gasfield.[65] The resistance of the founder of Interoil was the last hurdle to take. Phil Mulacek had however in 2013 been removed form the position of ceo and replaced by Michael Hession.[66] Nevertheless, Mulacek challenged the deal in courts and in the shareholders meeting, but he was in both instances defeated. It ended a period of volatility surrounding the ownership of the Elk/Antelope field.[67]

This pattern of fierce competition and shifting alliances resulted in the following shareholding and proposed structure for the project: Total is the largest shareholder of the Elk-Antelope fields with a 31.1% interest. Partners are: ExxonMobil (28.3%) and Oil Search (17.7%). The State back-in right of 22.5% and 2.5% of this is for landowners.. The plan assumed that construction is 70% debt financed.[68]

Oil Search will have the management contract for the upstream facilities while Exxon Mobil will manage the gas liquidification plant and loading bay. The latter facilities will be at the same place near Port Moresby as those installations serving LNG/PNG. These will be expanded with a three trains, installation to liquidify and deliver. Fixed costs will therefore be less because of shared facilities.[69]

The agreement contained an obligation to provide gas for domestic use (a reserved 5%) so that PNG is for 70% self sufficient for electricity supply in 2030. The State and landowners are not obliged to pay for their equity (US$900 million) before revenues start coming in. Payment for the Interoil shares by Exon Mobil is partly deferred until the Final Investment Decision and partly deferred until the first shipments are made. Interoil retains residual rights to income from the gasfield if it performs above certain expectations.[70] Pac-Lng has similarly retained residual rights to income if the output is beyond a certain expectation.[71] Total has also deferred cash payments for equity to the date of the Final Investment Decision (US$230 million).[72]

The Memorandum of Understanding between the PNG government and the companies involved in the Elk/Antelope field was announced at the end of the APEC conference in 2018. The intention was to buttress the international status of PNG.[73] This was followed by an agreement in April 2019 to start the Front End Engineering Design process. The Final Investment Decision (FID) that makes construction possible is expected in 2020. Output is expected to flow in 2024.[74]

This is much later than was earlier envisaged. For example: in 2011 the final investment decision was expected in the same year.[75] In 2017 the first LNG exports expected in either late 2020 or early 2021[76] The new dates are also speculative because the financial underpinning of the announced agreement is virtually absent. There is only a commitment of a small proportion of the necessary cash for construction. The cash paid for the gas field is for the shareholders of Interoil and is not working capital for Papua-LNG. Nothing has been built or constructed with that money. It is merely a sum paid in the expectation of income to come. This in contrast to investing in a company that starts from scratch. The most imponderable factor is the possibility to generate credit. The project is expected to be financed from loans for 70% and there is not yet an indication where this loan capital could come from.[77]

The agreement was also politically controversial. Authoritative voices had argued that the mistakes of LNG/PNG should be avoided. Prime minister Peter O’ Neil; agreed with that position albeit that he also said that there should be an ‘environment for our development partners to maximise returns on their investment ‘.[78] He was under pressure of a comment in the March Monetary Policy Statement from the Bank of Papua New Guinea. This urged the government not to be to generous with tax concessions. The current policies with respect of tax and natural resources projects had led to less availability of foreign exchange and had not strengthened tax revenues. PNG had in 2018 a strong positive balance on the current account. This should lead to an increase in foreign exchange and this did not happen.[79] The deputy prime minister Charles Abel had made very critical comments on the benefits of natural resource projects for PNG.[80][81] Charles Abel was together with mines minister Fabian Pok on the government negotiating team for the Papua/LNG project. He was content about the agreement: We made compromises, but he considered it a significant improvement over the PNG/LNG project: “ “this Agreement provides earlier, less risky flows to the State, reduces the States financing burden to buys its shares, and provides some gas for domestic use at a discounted and fixed price. There are strong provisions for third party access to infrastructure and national content.” [82]

However, the agreement was immediately controversial. It is striking that some of the initial criticism came from Hela province. That is the locus of LNG/PNG and benefits should have been coming in.. Philip Undialu, the Governor of Hela Province submitted a long list of critical questions .[83]) The finance minister James Marape, also originating from Hela, resigned.[84] More MPs followed him and resigned from the governing party (PNC). Four out of five resigning MPs originated from resource-rich areas [85]

Ex-Prime minister Mekere Morauta has formulated the most coherent criticism of the agreement and these cover three areas in the agreement.. First, the agreement has been formulated without the necessary and required consultation.. Landowner groups have not been properly identified in the PNG-LNG project after ten years of operation. Government claims that the money is reserved for the time when the process of identification is complete. But it is not clear where the money is. It is thus seen as a cardinal mistake in the PNG-LNG project that this identification was not completed before the start of the project. .Therefore, landowner groups need to be identified before the APDL (Application for a Petroleum Development Licence), is submitted. Charles Abel, the deputy prime minister, defends this as the agreement is simply provisionally.[86] There is not yet an APDL None of the members of the SNT (State Negotiating Team) has publicly broken ranks with government. However, there are strong statements claiming that this team, as well as the Department of Petroleum, have been sidelined, Mekee Morauta distributed a letter from the Department of Energy to Secretary of the Government demanding that a proper APDL is made together with the necessary documentation about the size of the field and its economic viability.[87] Total should have furnished ten documents that are absent or deficient, but they did not follow up requests.. The necessary information for decision making is simply not there and the required procedure is not followed.[88]

Second, the tax arrangements are not very different from the ones in LNG-PNG. There is no indication of lessons learnt from LNG-PNG. The State has agreed with the ongoing operational and depreciation costs. Depreciation was in the LNG-PNG project tied to the repayment of loans. Profitability will therefore be low until the loans are repaid with interest. If the participating partners furnish the loan capital themselves then they have assured themselves of a steady income stream irrespective of profitability. The faster the depreciation the less profit will be made. There will be no withholding tax on interest or dividend. That means the companies can export their income to a destination where little or no tax is paid without any taxation by the PNG government. Two of te participating companies – Total and ExxonMobil- will also have a steady income stream from the management contract. The companies also have an exemption from GST, import duties and taxes on project goods and consumables.. The management of the project is thus virtually tax free and this makes the management contract more profitable. Morauta argues that nothing seems top be learnt from the LNG/PNG project and mentions two specific instances: first, there is no proper taxation for windfall profits and there is no mention of taxing the oil that comes out of the well mixed with gas (condensate). That oil is sold to Oilsearch: this can be seen as a compensation for Oilsearch losing out on the management contract.[89][90]

The third area of criticism concerns the domestic gas obligations of the project. The domestic provision of gas is in the agreement an option to 5% of the output. It is striking that this is an option and it may thus be that no gas will be domestically supplied. The agreement is also contrary to the National Energy Policy which demands 15% of all gas output to be available for domestic use, The agreement mentions only provision of gas for electricity supply and therefore ignores possible wider industrial use. The gas will also be expensive as it will be indexed from a high base to the world market price while it is domestically supplied.[91]

At the time of concluding the agreement great doubts returned with respect to the value of the field.[92] Interoil has always presented the Elk/Antelope gas field as their own original find. That is not true. There is an earlier exploration of the area that found gas, but had great doubts whether this field is exploitable. This was a well known story,[93] but a whistleblower in the Department of energy has brought this in the open again at the time of signing the agreement. According to the report: the field has five major problems: the gas may not be anywhere near as extensive as first thought, nor as easily extractable, there is a high water content, the gas is of low quality, requiring expensive treatment, and the geology of the field is suspect.[94] The nature of the field is such that the initial impression is made of great gas pressure leading to high flames.. however they soon diminish to a relatively low level. There is no definite judgement on the issue yet, but the call is for new research.

Dr. Fabian Fok, the minister of mines wrote a reply to the Governor of Hela province, Philip Undialo,s concern about the Gas agreement. He denied all accusations and considered them lies for political purposes. He stress particularly that none of the members of the State Negotiating Team had publicly spoken negatively about the Gas Agreement. He denied that this team had been sidelined, but “Mid way through the negotiations In order to increase the level of scrutiny and due diligence on the negotiations. The Prime Minister, Deputy PM and I further added an oversight committee (A higher level committee consisting of the SNT Chairman and members with external advisors) so the country gets the best deal possible with as much clarity and scrutiny as possible.[95]

The agreement on the Elk-Antelope gasfield became the core of intense political controversies about PNG’s policies with respect to natural resources.It led to the resignation of Prime Minister Peter O’Neill.[96] His successor, James Marape, announced changes in the management of PNGs natural resources in his maiden speech. Yet at the same time he was keen to reassure investors: “he did not intend to chase industry away, but asserting that reforms were needed to ensure benefits are spread more evenly.” [97] Oil Search's Peter Botten proclaimed immediately after Marape's appointment even confidently that it was likely that nothing would change and that arrangements would even remain as before when the third gasfield Pn'yang would come into production. Botten didn't expect therefore any significant new concessions on the deal.[98] This led to a bristling reply from Marape, yet he remained vague as regards to envisioned changes.[99] The minister for petroleum announced two months after the change of government that a revision of the “regulatory and commercial terms of the so called LNG agreement was ready for political approval”. The companies involved were however not sympathetic to proposed changes. Total declared that no change in the agreement will be entertained. Oil Search warned that revisions may push back the final investment decision to 2021 and projects elsewhere in the world may then take precedence over Papua-LNG [100] There is, however, international trust in the project. In the meantime three government-backed lenders – Japan Bank for International Cooperation (JBIC), the US Overseas Private Investment Corp (OPIC) and Australia's Export Finance and Insurance Corp (EFIC) announced an initial commitment to lend to Papua-LNG [101] The Petroleum Minister Kerenge Kua negotiated with Total in Singapore during August 2019 in order to get better terms. This resulted in a number of nonbinding statements of intent. The Papua-LN project will however in first instance proceed as envisaged. His most important statement was however that in future contracts will be made on the basis of Production Sharing Agreements which will lead to early free cash flows in petroleum and mining contracts.[102]