PNG green lights Papua LNG, introduces new fiscal regime

SEPTEMBER, 2019

What happened?
The Papua New Guinea (PNG) Government has completed its review of the April 2019 Papua LNG gas
agreement and validated its terms, but negotiated additional non-binding agreements with the operator, Total. These included
progressing a national content plan, third-party pipeline access, future NOC asset ownership, and a commercial JV for
marketing LNG.
It also announced that all new future petroleum developments will fall under a production sharing arrangement (PSA). Existing
and approved developments, including Papua LNG, will remain under the existing concession system.
What does a PSA mean for the state and IOCs?
Assuming the PSA is constructed on a 'standard' model, we see five main implications. The government/NOC:
1. Would retain ownership of resources
2. Would not partake in costs, removing the need for financing, and the companies will recover all costs from a share of
production
3. Would receive a share of production remaining after cost recovery. Assuming cost recovery is limited to a percentage of
production each year, this will ensure the government receives a share of production every year
4. Typically would have greater approval over budgets. This can lead to disputes and project delays, which has occurred in
other jurisdictions using PSA systems
5. Some, or all, of the fiscal terms in the existing agreements – royalty, development levy, APT and CIT – could be included in a
PSA. Alternatively, these could be assumed to be met by the government/NOC’s profit share
Moving forward, we assume the state NOC, Kumul Petroleum, will no longer need to farm into future developments. Instead,
Kumul (or another government entity) would represent the government in the PSA and receive the government’s profit share,
with no cost obligations.
From an international oil company’s (IOC) perspective, economically there may be no, or little, difference in outcome between a
concession and PSA fiscal regime. However, the IOC will only be able to book entitlement reserves.

Commercial structure of the PNG Expansion project

 

What are the next steps and implications on future developments?
The government greenlight is welcome news for the Papua LNG JV. They can now proceed with confidence into Front End
Engineering Design (FEED) activities.
However, we understand that the PNG Expansion FEED scope will also include PNG LNG Train 3. A signed P’nyang gas
agreement is required for the PNG LNG JV to proceed with FEED works on its third train. The newly proposed PSA regime
increases the uncertainty around the completion of this agreement.
Agreeing a PSA, and the enabling legislation, will take time. However, there are many well established precedents to draw on
for a model PSA. If all parties are committed to a speedy resolution, this should be achievable.

David Low, Senior Research Analyst- Australasia Upstream, Wood Mackenzie

 

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