Natural gas in Papua New Guinea

• The construction of PNG/LNG is a major engineering achievement: it was a massive project in difficult terrain. The project was completed ahead of schedule in 2014, though there was an expenditure overshoot of US$3.3 billion.[15][17]
• The project required PNG citizens to be extensively trained: 10,000 citizens during the time of construction. The project employed 2,600 citizens after construction and they constituted 82 percent of the workforce; 22 percent were women.[18]
• The project produced above-planned capacity: The original design of PNG/LNG aimed at a capacity of producing 6.9 million tons energy (MTE) per annum, but the actual output has after the first year of production consistently been above that. In 2017 production was 8.3 MTE. It dropped to 7.4 MTE in 2018 because damage due to an earthquake . This was followed by another record year in 2019 producing 8.5 MTE.[19][18] Production in 2021 was 7.7 MTE[20]

• The project is an inexpensive producer. According to an analysis by consulting firm Wood Mackenzie and Credit Suisse, 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.[21]
• The project does focus on more than the major Hides gas field. Project gas is sourced from seven fields: The Hides, Angore, and Juha gas fields belong to the LNG/PNG concession. Only Hides is fully operational (2022).[22] Angore is in development.[23] Development on Juha has still to be started and the Oil Search-operated Kutubu, Agogo, Moran, and Gobe Main oil fields, provide approximately 20% of PNG LNG Project gas. Gas is also purchased on a third party basis from the SE Gobe field.march [24][25]
• Gas field reserves were re-evaluated in 2016, which resulted in an estimated increase of 50% when compared with the estimates made before construction in 2009.[26] The size of the Hides field is now estimated between 9 and 11 trillion cubic feet. The life expectancy of the field is estimated to be thirty years from 2014.[27][18][28]

• Disappointing economic effectsExxonMobil commissioned a study to Australian consulting firm [ACIL-Tasman] to calculate the benefits and costs to PNG; they projected large gains for the PNG economy as a result of the project. However, in a study commissioned by Jubilee Australia, two Australian economists – Paul Flanagan and Luke Fletcher – compared the predictions of this report in 2018 with actual outcomes. 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. The Jubilee study has been criticised because the researchers did not produce a credible counterargument: What would have happened in the absence of the PNG LNG project and to what extent are the observed effects related to PNG LNG?[29] Prime Minister Peter O'Neill rejected the Jubilee report and claimed low energy prices as the main factor.[30] ExxonMobil responded by mentioning the social and economic benefits of the project such as stimulating entrepreneurship and supporting local communities.[31]

• Tax concessions are too generous.Specific questions about the depreciation allowed and tax concessions were asked before the project began. Mekere Morauta challenged the exemption of General Sales Tax and interest withholding tax given to LNG PNG in parliament. The exemption of interest withholding tax is 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 percent corporation tax on profit remained despite these concessions.[32] 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 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. As a result of these concessions, substantial income was not expected until after 2020.[33][34][35] The actual arrangements between government and companies are in a secret Resource Development Agreement. However, Flanagan and Fletcher suggested that Exxon and Oil Search should be paying AUD$500,000 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.[36]
• Conflicts with local communities The project has been plagued by conflicts with landowners -local beneficiaries. Disbursing benefits from the project to local communities was designed in the project during a meeting in Kokomo in 2009. The agreement was signed between the government and representatives of local and provincial government as well as with representatives of landowners. The dispute was thus with the government and not the companies.[37] Loi Bakanı the Governor of the Central Bank declared in 2015 that the funds due to landowners were held in a trust account when these were not paid once the project started in 2014. They were thus held in reserve,[38])This did not assuage protests in 2016, 2017 and 2018.[39][40][41] The management of Oil Search declared at a shareholders meeting that the partners in LNG-PNG paid their dues to the government but that the problem was in the distribution of the money.[42] A few days later, Oil Search claimed that journalists misinterpreted a message where its intent was not to blame the government.[43] The problem was in so called “clan vetting. Incorporated landowner groups had to be formed through this process but it appeared difficult to identify ownership when oral testimony is the only source available to identify descent and territory.[44][45] It is not surprising that money was first released by 2018 to downstream landowners. This concerned visual assists along the pipeline and in Boera village near the loading bay.[46] The most severe conflicts were in the upstream areas when resources underground and thus not easily identifiable had to be compensated. Threats by landowners threatened to shut down the project never materialised but there was serious vandalism in Angore, Hela province. The most serious clash took place in Angore in 2017 and involved destruction of property.[39] In 2018, protesting landowners destroyed property again and demanded a payment of US$10million as a fee for maintaining security at the plant. This introduced a new element, Payments for that purpose were not foreseen in stakeholders agreements.[47][48] The company had to suspend construction there. Peace was concluded however in August 2019 and in 2020 payments flowed.[49] Delayed construction was restarted.[50] The conclusion of these conflicts gives some insight in the mechanisms of landowner compensation: the formation of landowning companies was completed, despite these problems. A director had been appointed to each company and a bank account was opened in his name under tutelage of the Mineral Resources Development Company (MRDC). Total payout to local beneficiaries was Kina 3.76 million for the period 2014-2018, This is to be distributed as follows: 40% to landowner groups, 30% to a Community Infrastructure Trust Fund (CITF) and 30% to a Future Trust. The landowner group is paid out of the allocated funds for equity. This shareholding gives dividends. Besides that , royalties are paid as compensation for exhausting the resource[51] There is a dearth of information on the extent to which this process of clan vetting has been completed. The issues surrounding payments to landowners remains a policy problem. Peter O’Neill blamed the governments preceding his Cabinet for the problems.[52] There are calls for revisions to the Oil and Gas Act 2018 to resolve the problem as well as calls for revisions to the entire process of compensation to local communities.[53][54] A new type of conflict emerged between pipeline and plant site landowners and those of upstream landowners. The latter objected to royalties being paid to the former as royalties are meant to compensate for the loss of resources and not merely the use of land.[55]

• Government income from the project is unsatisfactory.[21] There is in this question, however, not a straightforward set of figures indicating categories and periods on the contribution of the PNG/LNG project to government finance. For example, government mentions a category income from dividend and a category of income from return on capital, One could consider this as one post. Similarly there is a post debt servicing and Oil Search collar related costs. Unless it is clear which debt is serviced and how this relates for example to the Oil Search collar, the meaning of this information is not clear.[56] ExxonMobil presents unambiguous figures. They claim to have paid 5 billion kina (US$1.4 billion) in royalties, development levies, taxes, and dividends to the PNG government over the period 2014-2018. This had grown to PGK 14 billion(about US$4 billion)in the period 2014-second quarter 2022.[57] Exxon Mobil predicts that after 2025-2027 the amounts paid will significantly increase. The project is primarily financed by loans, which would eventually be paid off; Income from corporation tax and income from equity would rise as a result.[58] Charles Abel in his capacity of Treasurer said in 2021 that he expected the loans to be repaid in 2024 and this would lead to doubling of government income. He deplored however that payments would flow through state corporations, notably Kumul Petroleum Holdings(KPH). In such corporations the income is filtered by the management before it is passed on to government.[59] The Chairman of KPH mentioned in defence that KPH passed 78% of its income on to government. He mentioned as well that Kumul Petroleum's remittances represented over three times the total tax paid by PNG LNG Project to Internal Revenue Commission over the same period (2014 – 2018).This vindicated in his view the value of government equity in such projects.However LNG PNG was lightly taxed and that needs also to be taken into consideration.[60] Nevertheless, there is strong agreement that the PNG government has been outdone in negotiations with the companies, which inspired an important debate among politicians about the mining and taxation legislation.[54] Charles Abel recommended on the basis of past experience: "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 content. We need to understand why a large current account surplus (from mineral and petroleum exports) still leaves us with a foreign exchange shortage."[36]

Two relatively small oil and gas companies were major players in the Elk-Antelope gas field: Interoil and Oil Search. Interoil was a minor company in the gas and oil industry that acquired exploration licenses for oil and gas in PNG in 2005. The driving force in Interoil was its founder: Phil E. Mulacek, who announced in 2007 the discovery of a large gas field 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, chairman and chief executive, informed an analyst, that simply controlling its output 'was sort of like trying to stop the Mississippi.'"[65] An agreement was made between Interoil and the PNG government to proceed towards exploitation on one condition: Interoil had to partner with a company that had experience the development and management of a gas field.[66] Shell and ExxonMobil were mentioned as possible partners when Interoil entered negotiations.[67] The investment bank Merrill Lynch (now called Merrill (company) was also involved.[68] However, at the end of 2012 Interoil did not manage to find a partner to reach a Final Investment Decision (FID) and were in danger of losing the licence.[69] A proposal suggested that the PNG government would become a 50 percent shareholder instead of taking the proposed equity of 22.3 percent.[70] It was denied because the government did not have the money and it would not solve the problem of expertise. The French multinational Total SE is a major company in the oil and gas industry and they filled the void by buying a 60 percent interest in the gasfield.[71] Oil Search Company entered negotiations around the same time. It was already a stakeholder in the LNG PNG project and it extended its interests by buying into the Elk-Antelope gas fields, and they bought the Pac LNG group that had a 22.8% stake in the gasfields[72] and paid about US$900 million for participation. The money was sourced from equity bought by the PNG government and financed from a loan from the Swiss bank UBS.[73] Oil Search contested Total's participation 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.[74] Total continued to be present in Papua-LNG but at a reduced rate of 40% instead of 60%.[75] Interoil remained with an interest of about 40% in the Elk-Antelope gas field. Oil Search made a bid for Interoil's remaining shares in the gas field for US$3 billion.[76] OilSearch had to concede to ExxonMobil: they offered US$2.2.billion for the remaining shares of Interoil in the gasfield.[77] However, Mulacek had been replaced by Michael Hession as CEO in 2013.[78] Nevertheless, Mulacek challenged the deal in courts and in the shareholders meeting, but was defeated in both instances.[79]

The 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. The partners are ExxonMobil (28.3%) and Oil Search (17.7%). The plan assumed that construction is 70% debt financed.[80]

Oil Search had the management contract for the upstream facilities while ExxonMobil managed the gas liquefaction plant and loading bay. The latter facilities would be built at the same place near Port Moresby as installations serving LNG/PNG.[81]

The agreement contained an obligation to provide gas for domestic use (a reserved 5%) so that PNG is for 70 percent 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 ExxonMobil is partly deferred until the FID and first shipments are made. Interoil retains residual rights to income from the gasfield if it performs above certain expectations.[82] Pac-LNG has retained residual rights to income if the output is beyond a certain expectation.[83] Total deferred cash payments for equity to the date of the FID (US$230 million).[84]

The Memorandum of Understanding between the PNG government and the companies involved in the Elk-Antelope field was announced at the end of the A Asia-Pacific Economic Cooperation (APEC) conference in 2018. Its intent was to support PNG's international status,[85] and it 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.[86]

In 2011 the FID was expected in the same year.[87] In 2017 the first LNG exports were expected in either late 2020 or early 2021[88] 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 predicted income, which contrasts with investing in a company that started from scratch. The project is expected to be financed from loans for 70%; where the loan capital would come from is undetermined.[80]

The agreement was also politically controversial. Authoritative voices had argued that the mistakes of LNG PNG should have been avoided. O’Neill agreed, though he also said that there should be an "environment for our development partners to maximise returns on their investment".[89] He was under pressure from a comment in the March Monetary Policy Statement from the Bank of Papua New Guinea, which urged the government to be less generous with tax concessions. The policies with respect of tax and natural resource projects had led to less availability of foreign exchange and had not strengthened tax revenues. In 2018, PNG had a strong positive balance on the current account, which should have led to an increase in foreign exchange that never happened.[90] Deputy Prime Minister Charles Abel criticised the benefits of natural resource projects for PNG.[91][92] Abel collaborated with Minister of Mining 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."[93]

However, the agreement was immediately controversial. Some of the initial criticism came from Hela province, the locus of LNG PNG where benefits should have appeared. Philip Undialu, Governor of Hela Province, submitted a long list of critical questions.[94] Minister of Finance James Marape, who was from Hela, resigned.[95] More MPs followed him and resigned from the governing party (PNC). Four out of five resigning MPs originated from resource-rich areas[96]

Former Prime Minister Late Sir Mekere Morauta criticised three areas in the agreement: first, the agreement was created without the necessary and required consultation. Landowner groups have not been properly identified in the PNG LNG project after ten years of operation. The government claimed that the money was reserved for when the process of identification is complete, without clarifying where the money was. It was 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 should have been identified before the APDL (Application for a Petroleum Development Licence) was submitted. Abel defended it as the agreement is provisional;[97] there was no APDL at the time. None of the members of the SNT (State Negotiating Team) publicly broke ranks with government, but there were strong statements claiming that this team, as well as the Department of Petroleum, have been sidelined. Morauta distributed a letter from the Department of Energy to the Secretary of the Government, which demanded that a proper APDL be made with the necessary documentation about the field's size and its economic viability.[98] Total should have provided ten documents that were absent or deficient, but they did not follow up on requests. The necessary information for decision making was not there and the required procedure was not followed.[99]

Second, the tax arrangements are similar to the ones in LNG PNG. The State agreed with the ongoing operational and depreciation costs. Depreciation in the project was tied to the repayment of loans. Profitability was predicted to be low until the loans were repaid with interest. If the participating partners furnished the loan capital themselves they would have assured themselves of a steady income stream irrespective of profitability. The faster the depreciation the less profit would have been made. Tax on interest or dividends would not be withheld, which meant the companies could export their income to a destination where little or no tax was paid without any taxation by the PNG government. Two of the participating companies – Total and ExxonMobil – would also have a steady income stream from the management contract. The companies would also have been exempt from paying GST, import, duties, and taxes on project goods and consumables. The management of the project was virtually tax free which made the management contract more profitable. Morauta argues that nothing was learnt from the LNG PNG project and mentions two specific instances: first, there was no proper taxation for windfall profits and there was no mention of taxing the oil that came out of the well mixed with gas (condensate). The oil was sold to Oilsearch, which could have been seen as compensation for Oilsearch losing out on the management contract.[99][100]

The third area of criticism concerned the domestic gas obligations of the project. The domestic provision of gas was an option to 5% of the output in the agreement. The agreement was also in contravention to the National Energy Policy which demanded that 15% of all gas output was available for domestic use. The agreement mentions the only provision of gas for electricity supply ignores possible wider industrial use. Gas would also have been expensive as it would be indexed from a high base to the world market price while it is domestically supplied.[101]

At the time of the agreement's conclusion, doubts returned in regards to the field's value.[102] Interoil had always presented the Elk-Antelope gas field as their own original find. That is not true; there is an earlier explorative team in the area that found gas, but doubted whether the field was exploitable. A whistleblower in the Department of Energy has brought this in the open again at the time of signing the agreement.[103] According to the report, the field had five major problems: the gas was probably not as extensive as predicted, not easily extractable, high water content, low quality gas, required expensive treatment, and the field's geology is suspect.[104]

Fok, the Minister of Mining, replied to the Governor of Hela province, Philip Undialo, who had a concern about the gas agreement. He denied all accusations and considered them lies for political purposes. He stressed that none of the members of the State Negotiating Team had publicly spoken negatively about the agreement.[105]

The agreement on the Elk-Antelope gas field became the core of political controversies about PNG's policies with respect to natural resources. It led to Peter O'NeillO'Neill's resignation.[106] His successor, James Marape, announced changes in the management of PNG's natural resources in his maiden speech, though 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."[107] Oil Search's Peter Botten proclaimed immediately after Marape's appointment that it was likely that nothing would change and arrangements would remain the same when the third gas field Pn'yang came into production. Botten did not expect any significant new concessions on the dea,.[108] which led to a bristling reply from Marape, yet he remained vague as regards to envisioned changes.[109] Minister for Petroleum and Energy Kerenga Kua 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 unsympathetic to proposed changes. Total declared that no change in the agreement would be entertained. Oil Search warned that revisions may push back the FID to 2021 and projects elsewhere in the world may take precedence over Papua-LNG[110] Three government-backed lenders – Japan Bank for International Cooperation (JBIC), the US Overseas Private Investment Corporationt(OPIC) and Export Australia Finance otherwise named Export Finance and Insurance Corporation (EFIC) – announced an initial commitment to lend to Papua-LNG.[110] Kua negotiated with Total in Singapore in August 2019 to receive better terms, which resulted in a number of non-binding statements of intent. His most important statement was that in the future, contracts would be made on the basis of a Production sharing agreement which would lead to early free cash flows in petroleum and mining contracts.[111] Kua stated on return from Singapore that The Papua-LNG project would proceed as planned.In fact notiations were Broken off and preparation for the project was suspended.

The suspension lasted til May 2021. Collaboration was resumed after a delay of three years as the result of a meeting in Paris between the CEO of Total and Sam Basil, as deputy prime minister of PNG. They announced the remobilisation of the project teams and other required resources, At the meeting there was a reconfirmation of the Papua LNG Gas Agreement in 2019 which had been the contentious issue in the fall of the O’Neill/Abel government.[112] The signing of a Fiscal Stability Agreement in February may in this respect be more important as this concerns the most crucial issue: government income from the project. Government has given in more through withdrawing the amendments 2020 to the Mining Act. These amendments gave among others greater powers to the minister in determining a PDL (Petroleum Development License) and abolished the option of arbitration in case of a conflict.[113] The minister stressed in parliament that these withdrawals were only applicable to Papua/LNG.[114] A Petroleum Retention License extension was also awarded in February 2021. Such a license allows for project financing activities and also strategic market studies, which will be done separately by the participating companies or with other participants. The work programme for the Extension includes technical activities in preparation for the front-end engineering and design work.[115] A pre-Front End Engineering Design (FEED) program does not guarantee a permission for a FEED. The aim remains to announce a FEED in 2022 and a Final Investment Decision (FID) in 2023. Production is expected in 2017.[116] The agreements reached have a peculiar mixture of being definite and being provisional. This was made evident by Petroleum Minister Kerenge Kua when he stressed that the issues involved remained political at a meeting with a senior visitor from Total in France.[117]