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Papua New Guinea fails to step on the gas

Despite promising resources, disputes over payment terms are stalling progress

ExxonMobil's latest discovery in hydrocarbon-rich Papua New Guinea hangs under a cloud of continuing unrest among landholders that threatens the country's gas-exporting ambitions.

In mid-January, the company reported finding gas in the onshore P'nyang field, adding to what Liam Mallon, president of ExxonMobil Development, describes as a "rapidly growing inventory of low cost-of-supply natural gas in PNG". The supermajor has a 49% interest in the block, with drilling operator Oil Search having 38.5% and JX Nippon holding the remaining 12.5%.

However, the PNG government—which is sitting on some of the cheapest gas in the region—has been embroiled in a simmering years-long dispute over its failure to pay a promised 2% royalty to landowners that was due from 2014 when the country first began exporting gas.

Although the government belatedly began payments in late 2017, the tension continues because it has dragged its feet in the fundamental process of deciding who's entitled to the royalties and who isn't. As one source said, the "landholders have been extremely patient".

All in all, about $12.5m is involved in various forms of royalties and grants.

The tension boiled over most recently in November, forcing Exxon to abandon all but essential operations in the Highlands. Much of the unrest is occurring in areas where, principally, Exxon and Total are operating. According to local media, activity in the Highland region of Angore was shut down "for an indefinite period" because of local frustrations over the release of the royalties.

This is more than two months after the government had supposedly started paying out the royalties under a promised 100-day timetable following earlier unrest, much to the oil and gas industry's relief. The royalties have been held in trust by the government pending the vetting process.

The current delays are par for the course in PNG. Successive governments have been trying to catch up with the country's undoubted oil and gas potential, particularly the latter, since commercial production began in 1992 following many years of mainly fruitless wild-catting. Development of its five main oilfields has been slow and production "in steady decline since the mid-1990s", as the global Extractive Industries Transparency Initiative reported in December.

The expected returns from the government's flagship $19bn PNG Liquefied Natural Gas project were also hit by falling global LNG prices with, notes the report, "potential ramifications for the government's financial position". In 2015, oil and gas payments contributed as much as 10.2% to PNG's GDP.

But even when prices were robust, the government failed to exploit its opportunities. For instance, the Department of Petroleum and Energy is so chronically under-resourced that it doesn't have current data on the oil and gas industry and is only now starting to catch up.

Under Prime Minister Peter O'Neill, the government also bungled an early attempt to take an equity stake in its oil and gas industry. Under pressure from critics, the government was forced to admit late last year that it lost hundreds of millions of dollars on the much-disputed purchase in 2014 of a debt-funded stake in Oil Search, an Australia-listed group that is a joint venture partner in the PNG LNG project.

Without seeking parliamentary approval, the O'Neill government had taken out a $1.2bn loan to purchase the stake, mortgaging future revenues from the project to pay for it. In the wake of the transaction, a leadership tribunal was proposed to demand an explanation from the prime minister, but he fought it through the courts and the tribunal was never convened.

For good measure, the prime minister also sacked the government's treasurer for alleging the loan was illegal.

The stake in Oil Search, which was held by government-owned Kumul Petroleum, was sold late last year after what were certainly heavy losses. Although they have never been revealed and Prime Minister O'Neill insisted that the investment earned the government a $39m profit, third-party estimates put the losses much higher than the $254m that it cost Kumul Petroleum for the interest and payment of a bridging loan at the start of the deal.

However, with good government, PNG's prospects remain promising as an LNG exporter. PNG is now selling about 8m tonnes of LNG a year to customers in China, Japan and Taiwan. That's well above the nameplate capacity of its LNG plant in the country.

And both Exxon and Total are ready to invest billions of dollars more there, but only when the time is right.

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