Energy majors on alert as PNG strikes tough tone ahead of LNG expansion talks

The first shipment of liquefied natural gas from the Papua New Guinea project (PNG LNG). Picture: Supplied

• Perry Williams

  Senior Business Writer

  @perrybwilliams ‏

  
• 6:17PM August 15, 2019
• 3 Comments

Papua New Guinea has reignited tensions with energy producers including Australia’s Oil Search after striking a tough tone ahead of negotiations on the controversial $16 billion Papua LNG expansion deal.

The nation’s petroleum minister, Kerenga Kua, and a state negotiating team travelled to Singapore today to rework the gas deal originally sealed with ousted Prime Minister Peter O’Neill back in April.

Oil Search’s partners in Papua LNG, energy giants Total and ExxonMobil, both told investors last month they expected PNG to respect the previous deal. But Mr Kua released a statement today suggesting talks could turn hostile.

“Considering what’s at stake the peoples’ expectations must be guarded during this period. The negotiations could work out well or even disastrously, but either way, the people must be ready to accept whatever the outcome. As a nation we have reserved all our rights in law as we move down this path.”

Mr Kua had previously suggested a reworked deal could be sealed within weeks, but appeared to back away today from earlier optimism by suggesting it may ultimately fail to sign a new agreement.

“Success in the discussions could lead to an early progress of the project,” the minister said. “By the same token, failure could have very serious ramifications. But failure must not be ruled out and must remain within our contemplation. This is a risk we take as we try to move in the direction of taking PNG back and making it wealthy.”

The negotiating team expect to return to PNG early next week. A briefing will be prepared for Prime Minister James Marape — who used controversy over the Papua dealto topple Mr O’Neill — with the National Executive Council to then make a final decision.

Oil Search (OSH) — whose shares closed 6.7 per cent lower at $6.55 — said it looks forward to “further clarity” on PNG’s position regarding the agreement and “ways forward for the project”.

The hawkish rhetoric which appears to contradict a softer government tone on the issue two weeks ago is concerning, according to Credit Suisse.

“Bulls can read it as posturing pre-negotiations which will likely result in a benign settlement. And bears can read this as a sign that the minister must be asking for material concessions to justify such a tough rhetoric in support of his negotiating stance. We remain worried when the politics is so unclear,” Credit Suisse analyst Saul Kavonic said.

The broker says it can’t rule out a tougher approach presenting risk of material delays to the deal. It would also spark a new hurdle for a second part of a planned PNG LNG expansion where Oil Search and Santos hold stakes. Talks for that agreement won’t start until the Papua deal is renegotiated.

“We can’t rule out the new PNG government holding its nerve over the Papua deal here, which could then throw off the entire PNG LNG expansion schedule, setting it back years and presenting a more immediate negative catalyst for Oil Search. So it’s likely a case of a fast catalyst or slow catalyst for Oil Search to derate in our view.”