Thanks to Julio for the find. There seems to be an off-take deal, or at least one that is in the making (sufficiently progressed for PNG officials to write detailed three page letters with complaints about it), but the PNG government as raised concerns. Concerns that are not easily neutralized, it seems. We’ll discuss, first the article..
A cheap gas deal
By GORETHY KENNETH
THE Government has been advised that Papua New Guinea will lose billions of kina if rumours about an InterOil led Liquid Niugini Gas Limited (LNGL) gas agreement and potential discounted sales to a Chinese buyer are correct.
In terms of the gas agreement, should these concessions be given, it will result in a substantial amount of the value of the natural gas that will be given to LNGL, with little left for provincial government, landowners and the rest of the nation.
Treasurer Patrick Pruaitch has raised concerns about the proposed agreement with Prime Minister Sir Michael Somare, advising him to defer the approval or execution of the agreement until all relevant State agencies had vetted it, in a letter dated March 24, 2009.
“Based on these assumptions, Treasury’s preliminary analysis indicates that the total cost of the State of these concessions could exceed $US20 billion over the life of the PNG LNG project,” Mr Pruaitch said in the letter.
Mr Pruaitch is in his Aitape-Lumi electorate and could not be contacted directly for comment. His office and Treasury Secretary Simon Tosali advised he was the only one authorised to comment on this issue.
But Petroleum Minister William Duma when contacted advised that these issues were still being negotiated on and the Government had not made any decision on what was raised in Mr Pruaitch’s letter.
Mr Pruaitch wrote to Sir Michael, advising him that the Department of Treasury and the State Solicitor’s office were concerned that the agreement was being rushed through without its implications to the State being analysed properly. “TREASURY believes the State should attempt to offer fewer concessions to projects as we move forward,” Mr Pruaitch said.
There is an additional and substantive concern as the project agreement also contains a non-binding discrimination clause. The effect of this clause will be that any fiscal concession or incentives that are made available to the LNGL project, even if it was not the State’s intention, at the time it granted the new concessions.
Mr Pruaitch in his letter raised that there were no proven reserves — only contingent resource estimates and that LNGL was refusing to provide a live project model to the State to evaluate the project (unlike the PNG LNG Project, where all parties, including the State, worked off an agreed project model).
Mr Pruaitch in his letter also pointed out other concessions being sought from the State (which was dangerous) were as follows:
- A 10 year tax holiday, which will cost the State a further $US1.7 billion. This concession was not granted to the PNG LNG project, the cost to the State may exceed this amount,
- STATE equity — the project agreement grants the State the right to acquire up to 12.5 per cent, based on preliminary analysis, the reduced entitlement offered by the LNGL project will cost the State about $US2.4 billion. This contradicts the Oil and Gas Act, which allows the State the right to acquire up to 22.5 per cent equity
- THE proposed project agreement requires the State to enter into a Fiscal stability tax, which is expected to cost the State about $US2.4 billion,
- No additional profits tax
- THE 22.5 per cent in upstream (gas fields) and up to 10 per cent in remainder of project does not equate to 32.5 per cent in total project and that the State’s participation in total projects is likely to be well below 15 per cent,
- ONE Way option — seeking 50 year agreement which does not obligate LNGL to do the project at any time within the 50 years and
- STATE only offered up to 10 per cent of pipeline and plant – in the PNG LNG project the State has 19.4 per cent in the entire project
The letter states that these concessions are already not necessary as the PNG LNG project, led by ExxonMobil has signed a Gas Agreement on substantially more onerous terms. There are also strong rumours that the LNGL are trying to secure sales contracts with the Chinese buyer at a highly discounted gas price that will significantly reduce the amount of revenue that will flow back to PNG. This is potentially a double negative for PNG, less revenue in the first place and then less tax. It is tantamount to giving away the nations’ heritage, according to Mr Pruaitch’s three-page letter.
Acting Prime Minister Dr Puka Temu could not comment on this matter. His office advised yesterday that the matter was before ministerial review committee.
——–[End of Article]———
This is very good and not so good at the same time. Some conclusions:
- The negotiations with the Chinese must be in a rather advanced and serious state. That is very good news
- The terms of the agreement, some of which are laid out above, seem quite generous to Liquid Niugini (LNGL) and not to the PNG government, which has important powers, like withholding agreement
- One sentence we didn’t like: “There are also strong rumours that the LNGL are trying to secure sales contracts with the Chinese buyer at a highly discounted gas price.” This seems to indicate that LNGL and the Chinese might arrive at a mutually very advantageous deal at the expense of the PNG government.
- We’re not privy to the antics of PNG politics so we wouldn’t discard the possibility that the article is written with the aim of creating alarm in certain cycles, overstating certain issues perhaps, mobilizing the troups, gaining political capital, etc. Politics has a habit of doing this, and we don’t think PNG will be an exception
- For shareholders though it should be very good news. No question about that.