A lot of complications arise when a government changes. Particularly if the new government comes in on a mandate to reverse alleged deficiencies and corruption of previous governments. This is amplified when significant natural resources are involved. It has happened in the past – when Iran nationalised its oil industry by kicking out BP – and it could happen again in the future – in Guyana where the promise of oil riches in the hands of foreign firms has already caused grumbles. And it is also happening right now in Papua New Guinea, as the new government led by Prime Minister James Marape took aim at the Papua LNG deal.
Negotiated by the previous government of Peter O’Neill, the state’s new position that is the current gas deal is ‘disadvantageous’ to country. A complex set of manoeuvres – accusing O’Neill of multiple levels of corruption – led to a proposed vote of no confidence and an eventual resignation. With the departure of O’Neill, public opinion on the Papua LNG project (as well as the PNG LNG project) switched from being viewed as a boon to the economy to one of unequal terms that would not compensate the nation fairly for its resources.
So, despite a previous assurance in early August that the new government of Papua New Guinea would stand by the previous gas deal agreed with the Papua LNG stakeholders in April, Marape sent a team led by the Minister of Petroleum Kerenga Kua to Singapore to renegotiate with the project’s lead operator Total.
As the meeting was announced, suggestions pointed to a hardline position by Papua New Guinea… that they could ‘walk away from a new deal’ if the new terms were not acceptable. In a statement, Kua stated that the negotiations could ‘work out well or even disastrously’. From Total’s part, CEO Patrick Pouyanne said in July that he expected the government to respect the gas deal while Oil Search stated that it was seeking ‘further clarity on the state’s position’. The gas deal covers framework of the Papua LNG project, which was scheduled to enter FEED phase this year with FID expected in 2020, drawing gas from the giant onshore Elk-Antelope fields ahead of planned first LNG by 2024. So, the stakes are high.
With both sides locked into their positions, reports from Singapore suggested that the negotiations broke down into a ‘Mexican standoff’. No grand new deal was announced, and it can therefore be inferred that no progress was made. There is a possibility that PNG could abandon the deal altogether and seek new partners under more favourable terms, but to do so would be a colossal waste of time, given that Papua LNG is nearing a decade in development. Total and ExxonMobil have already raised the possibility of legal moves if the deal is aborted, with compensation running into billions – billions that the PNG government will not have unless the Papua LNG project goes ahead.
But the implications of the deal or no-deal are even wider. The PNG state has already stated that it will look at the planned expansion of the PNG LNG project (led by ExxonMobil and Santos) next, which draws from the P’nyang field. Renegotiation of the current gas deals in PNG may have populist appeal but have serious implications – alienating two of the largest oil and gas supermajors and two of PNG’s largest foreign investors could lead to a monetary gap and a mood of distrust that PNG may be unable to ever fill. Hardline positions are a good starting position, but eventual moderation is required to ever strike a deal.
Papua LNG Factsheet:
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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