IHS Global Insight Perspective | |
Significance | The collapse of the deal occurred after the Australian Securities Exchange told Oil Search that it would require shareholder approval, the gaining of which could have prevented the company from finalising financing arrangements ahead of the 8 December final investment decision (FID) target date. |
Implications | The termination of the deal reflects the haste at which project partners are moving to reach FID by the year’s end. Oil Search has now opted to raise the A$895 million (US$820 million) necessary to cover IPIC's stake. |
Outlook | Initial signs suggest the market is responding positively to the shares which were materially oversubscribed while eliciting a strong response from the company's existing shareholder base; the offer by the Japan Bank for International Cooperation (JBIC) to fund the government's equity in the project will also help shore up investor certainty in the project. |
IPIC Deal Collapses
Papua New Guinea-focused independent, Oil Search, has announced the shock termination of a deal with Abu-Dhabi-based International Petroleum Investment Co. (IPIC) that would have helped fund development of the multi-billion-dollar PNG LNG project. Oil Search agreed in August 2009 to sell a 3.5% stake in the PNG LNG project to IPIC but announced on 19 October that it had terminated discussions "due to delays in finalising the proposed IPIC transactions". The deal was terminated after the Australian Securities Exchange told the company it would require shareholder approval, which would have prevented Oil Search from finalising financing arrangements ahead of the 8 December FID target date set by project operator ExxonMobil. In a statement, Oil Search (which already has a 34% stake in the project) said that it had now opted to raise the A$895 million necessary to cover IPIC's stake and would sell shares in the project at a fully underwritten price of A$5.90 each. However, IPIC will retain an interest in the PNG LNG project through Oil Search. In March 2009 the Abu Dhabi sovereign wealth fund completed its purchase of five-year exchangeable bonds, which, upon conversion, give IPIC a 17.6% stake in Oil Search (see Papua New Guinea: 17 March 2009: IPIC Completes Purchase of PNG Government Equity in Oil Search).
The termination of the deal reflects the haste at which project partners are moving to reach FID by the year's end. Indeed, the government's attempts to amend the Oil and Gas Act (which the parliamentary opposition claims was being pushed forward without proper respect for legal process) and protests by landowners (who claim land identification studies were pre-empted by the Petroleum Department) are further evidence of the consortium's attempts to implement the project at the greatest speed possible (see Papua New Guinea: 7 April 2009: Deadline Postponed for Landholder Agreement on PNG LNG). The reason for the haste in project implementation could be because project partners want to shore up financing and finalise supply contracts for the project so that PNG LNG can compete alongside other huge liquefaction projects in Australia such as Gorgon, which is due to come online within the next few years. However, four separate LNG offtake agreements still need to be finalised with various customers and although project partners are hoping to sign off all these supply agreements in the final quarter of 2009 price negotiations are still reportedly continuing with China's Sinopec, which seeks 2 million t/y of LNG from the project to supply a re-gasification terminal in eastern Shandong province. ExxonMobil and partners may also be looking to finalise FID quickly to take advantage of the more competitive costs from contractors following the global financial crisis, while the PNG government is keen to push forward the project to receive its share of revenues as soon as possible.
Outlook and Implications
Following the announcement, Oil Search's share prices took the steepest dive in 10 months. The company's ability to meet its capital requirements could be undermined by the rise in costs for PNG LNG, which for the first stage of the project are now put at US$15 billion compared with US$13.5 billion previously, although this is partially due to the increase in the terminal's capacity to 6.6 million t/y. However, the A$5.90-a-share price is a 12.6% discount on its last traded price while initial signs suggest that the market is responding favourably to the A$895 million worth of shares, which were materially oversubscribed, according to Oil Search, while eliciting a strong response from the company's existing shareholder base. Many investors also continue to see the long-term value in the PNG LNG project, particularly as there is a significant upside, with studies now underway for a third production train.
In a further boon to the projects financing, reports suggest that the Japan Bank for International Cooperation (JBIC) has agreed to fund the PNG government's equity in PNG LNG while agreeing to buy half of the LNG gas once the project is completed. Although only a memorandum of understanding (MoU) was signed on 19 October, with further details to be worked out, JBIC's move will help shore up investor certainty in the project, offsetting the negative impact of the collapse of the IPIC deal and potentially giving gas negotiators more leverage in existing price negotiations with Sinopec. For Japanese consumers, LNG from Papua New Guinea also promises an alternate regional supply source to Indonesia where the government is keen to re-orientate production to supply the domestic market.