Cash Strapped

The head of Papua New Guinea's national petroleum company has publicly called on oil giants ExxonMobil and Total to carry the government through its $US1.4 billion ($1.9 billion) share of the budget for the upcoming LNG expansion just as the venture partners nut out final fiscal terms for the lucrative project and try to avoid further delays.

Wapu Sonk, chief executive of Kumul Petroleum Holdings, said there was no doubt that Kumul would take up its right to the full 20.5 per cent of the LNG expansion project it is entitled to in order to maximise the benefit of the investment to PNG.

But he urged the two oil multinationals leading the expansion to offer a deal that would eliminate the up-front cost for the government from the expensive capital spending phase of the $US12 billion project, which involves Australian-listed Oil Search and Santos.The Elk-Antelope gas field will provide gas for the next phase of LNG expansion in Papua New Guinea.

That would avoid the government having to use expensive commercial funding to cover its share of the costs, with the project partners recouping the amount later, once production begins."The government is offering very good terms to the developers: these terms are way, way better than any other terms in other projects around the world," Mr Sonk said from Port Moresby.

"So it's very attractive for them and the least that they can do is carry the burden that the state has in financing their share in those two big projects. I think they have the capacity to do it."Key uncertaintyThe funding for the cash-strapped PNG government's share of the $US12 billion ($16.6 billion) project to expand LNG capacity has emerged as a key uncertainty for what is a hugely important growth opportunity for Oil Search and Santos.

Mr Sonk's comments come as negotiations between the oil companies and the PNG government on fiscal and other terms for the expansion are at a critical stage, with the "gas agreement" that will set out the conditions due to be signed by March 31.

The clinching of that agreement has already slipped by several months, with Oil Search managing director Peter Botten last year signalling it could be announced during the APEC summit in Port Moresby in November, allowing a go-ahead on the project in 2019 and start-up in 2023.The delay in the deal has pushed back the date for a final investment decision to 2020, and for start-up to 2024. 

Mr Botten and Exxon's head in PNG, Andrew Barry, have both emphasised the importance of avoiding any further delays so the project doesn't miss the next "market window" emerging for new LNG demand in 2023-24 and avoid cost escalation from increasing demand for contractors.

The project will roughly double PNG's LNG capacity by adding three production trains, one to expand the existing Exxon-led PNG LNG venture and the other two to process gas from Total-led Papua LNG, which will tap the Elk and Antelope fields.Potential lendersA chunk of the capital cost is expected to be covered by project debt, and potential lenders are also watching closely for progress on government funding, as well as on fiscal terms, domestic gas supply obligations, and environmental and social issues.

Investors have also pointed out the uncertainty around Kumul's ability to cover its share.A study by Lazard carried out for Kumul on funding options identified several alternatives, including multilateral agencies, bilateral funding, commercial banks and bond markets, Mr Sonk said. He said that the former two options are preferred as they offered lower cost finance than the banks, but that Kumul would switch "very quickly" to a commercial carry by the LNG development partners if it is offered.Discussions with Exxon and Total on the issue have shown the French company more receptive to a carry arrangement, although Exxon hasn't ruled it out, he noted.

The venture partners have already agreed to carry Kumul for investments already made in the expansion, saving it an estimated $US500 million-$US600 million."If the equity can be commercially carried by our development partners that would do a lot for the country," he added.Neither Exxon nor Oil Search would comment.

Kumul will in total hold 22.5 per cent of the expansion, including 2 per cent reserved for landowners. 

Prime Minister Peter O'Neill has underlined his commitment to ensure more benefits flow to PNG from the next LNG development phase, compared to the first, even when oil prices are low.

AFR