Oil Search under
pp. 16-56 · Read in the full issue
lire for Hides sale
By Sam Vulum
DESPITE the ongoing political
instability, the stagnating econ omy, and the chronic crime problem, Papua New Guinea was able to maintain its investor confidence at a credi ble level. The confidence level slumped to a worrying degree in 1998, mainly evident in April during Oil Search’s purchase of HP’s upstream oil and gas assets for US$400 million (K900 million).
Although BP and the PNG gov- Wp|K emment argued that it was a com mercial decision, many critics ' have seen it as loss of confi (|||4# dence in the country’s invest- SgjBpi|k ment climate. However, recent developments indicate an IjpPF encouraging improvement.
In a report released WWk January 25 by two inter national highly respect
a ''d independent rating
f ilfagencies, PNG has & \m[ r . "■ been assigned a long term foreign curren cy rating of B-plus a long'terrn local currency mJm. rating of BB Jgj: )e B).
T h e ■MByp ratings, by
Moody’s,
based New York, r;/,) rar and London ▼based w Standard and Poor’s, puts PNG on the world map for international investors and will increase capital.
The PNG government engaged the agencies to pre- IPi ' pare the report to allow for eign capital markets, partic ularly the US and Euro
bond markets, to have greater understand ing of the government policies and the PNG economy.
This improvement is further evident in the recent plans by Oil Search to sell a 25 per cent stake in the lucrative Hides gas field in the Southern highlands province to Santos Limited of Australia.
It was a deal described by prime minis ter Bill Skate as a “smart business move” by Oil Search and a vote of confidence by Santos in the PNG economy.
Petroleum and energy minister Sir Rabbie Namaliu also backed the deal, and said he appreciated the reasons for the sale.
Oil Search announced on February 1 that it would sell a 25 per cent stake in Hides to Santos for up to Asl42 million (K 192 million).
The move opens the door for Santos into the multi-billion dollar PNG to Queensland gas project.
Santos will pay Oil Search US$55 mil lion cash, plus a contingent payment of between US$25-35 million, subject to the pipeline project proceeding and drawing on the Hides reserves, and the initial pro ject value at commitment. ■ “The PNG to Queensland gas project, if it proceeds, will help achieve the objective of obtaining a return on this major invest ment,” Santos said.
Oil Search managing director Peter Botten said the deal with Santos’ PNG sub sidiaries would reduce Oil Search’s stake in Hides to 27.5 per cent from 52.5 per cent, with US energy giant Exxon holding the remaining 47.5 per cent.
“Santos have clearly made a major strategic acquisition in the Hides field, which represents a significant investment for them and strong endorsement that the PNG to Queensland project has a good chance of reaching commercial reality,” he said in a statement.
Oil Search will use the sale proceeds to pay down its debt. The company complet ed re-financing of a U 55292.5 million bridging facility with a group of six banks on February 31.
Botten said Oil Search would remain the largest interest holder in the pipeline project despite the Hides sale, which had been signalled last year following the acquisition of licences from BP.
“The company remains totally commit ted to developing Hides gas for the PNG to Queensland gas pipeline project, and, in the longer term, LNG development,”
PNG PM Bill Skate called tip sale "a smart business move”
Botten said. Negotiations are underway to incorporate Hides’ proven and probable reserves of more than five trillion cubic
feet into the pipeline project’s existing
reserves of roughly half that size, centred on the Kutubu and Gobe fields in PNG’s
southern highlands.
Major potential customers such as Comalco Ltd, which has flagged the possi bility of building a gas-fired alumina refin ery in Gladstone, will not finalise sales agreements until long-term supply can be guaranteed.
PNG gas project public affairs manager Cliff Leggoe said Santos’ involvement in Hides was unlikely to delay reserve inte
gration negotiations.
“We do not see this as having any neg ative impact on negotiations or the pro ject,” he said.
Leggoe said Santos could add positive dimensions with its vast experience in gas marketing in Queensland and long-term potential supply access to other PNG gas fields.
Santos group companies had made pre vious discoveries in PNG, such as the Elevala gas field, and acquired the PNG petroleum operations of MIM Holdings Ltd, including the SE Gobe oil field.
However, the planned sale has been the centre of a political storm, erupting just a day after it was announced.
While the government fully welcomed and endorsed the sale, a strong political lobby group said it was not in the national interest and should not be entertained.
The governor of southern highlands province Anderson, who appeared to be in the forefront of the anti-sale campaign, called on Skate to stop it.
Agiru said he was “disgusted and angry” over the issue because the proposed sale contravened provisions of the new Oil and Gas Act.
He said the new legislation required the National Gas Corporation (NGC) be given the first right of refusal on any sale of petroleum and gas assets.
The NGC has yet to be established.
“I am angry because we are not playing by the rules. We have to be consulted and views from various parties including the landowners, must be sought before making such decisions on a major resource project in the province and the country,” he said.
Agiru has directed a special working group to meet with Oil Search and Santos.
The comments are also being endorsed by
Oil and Gas Task Force chair Alfred Kaiabe.
Kaiabe has failed to get parliament’s blessing of a new independent gas act in 1998. Parliament instead approved amend ments to the Oil and Gas Act, sponsored by petroleum and energy minister Sir Rabbie.
Among other things, the amendments allow for the establishment of a National Gas Corporation to take charge of local equities in gas projects.
Kaiabe said the deal had been struck because the task force and provincial gov ernors had been too slow in setting up the new NGC.
Kaiabe and Agiru are being supported by 19 other MPs, who are governors of the country’s 20 provinces.
Kaiabe accused the industry and ele ments in the government bureaucracy of “collaboration” to take advantage of the deal.
According to Sir Rabbie,
principals of Oil Search
had briefed him on the
decision to sell the Hides
equity to Santos
“Fortunately or unfortunately, it has taken three months for the Office of Legislative Council to process this one small piece of document,” Kaiabe said.
“In the process, everybody has wasted so much time in trying to get the corpora tion established. Because of the delay we are missing cut on this deal between Oil Search and Santos.”
The Hides umbrella landowner compa ny has also weighed into the argument, backing governor Agiru in saying that the NGC should have been given the first right of the refusal in the sale.
Gigira Development Corporation chief executive Larry Andagali told the Post- Courier that landowners knew nothing of the deal until it was reported in the media.
Saying he was speaking on behalf of a number of gas project leaders, Andagali said he understood Oil Search’s reasons for selling, but said the company had a respon sibility to offer part of the interest to NGC, which represented all landowner interests in gas and petroleum projects.
“We support Santos coming into the picture, but as landowners, we should have been given the option whether we would be allowed to take part in the purchase of
shares,” he said. Andagali said he support ed the call by Agiru for prime minister Skate and petroleum and energy minister Sir Rabbie to intervene and stop the sale until the landowners, the provincial gov ernments and other interest groups had been provided with an opportunity to dis cuss the deal.
“We (landowners) cannot become mere recipients of royalties from our resources.
We want to participate in the actual devel opment of our resources and in future sales. Where a partner wants to offload its shares, they must let us know first whether we have any money to acquire those shares,” he said.
The chair further expressed concern that Hides had been “kicked around like a football” with former operator BP selling out to Oil Search last year, followed by the
mid-February announcement.
Andagali said local groups had been prepared to work with the Hides partners since its inception, and there had been a good relationship with Oil Search manag ing director Botten.
“We have done nothing wrong to the company and we are happy with the way the companies are treating us,” he said.
Opposition leader Bernard Narokobi said Oil search has “shirked its corporate obligation to Papua New Guinea.”
He said it appeared no lessons had been learned from experiences at Wau/Bulolo, Bougainville, Ok Tedi and Misima.
Skate said while he was aware of criti cism by governor Agiru and Kaiabe, he believed the move by Oil Search would minimise its exposure and reduce the need for overseas borrowings to fund future gas developments. This would have a positive impact on the economy, he said.
“Oil search is still firmly in control of its investment in this nation and this move could be reasonably expected following the substantial cost of Oil search’s acquisi tion o British Petroleum’s interest in the gas field last year,” Skate said.
According to Sir Rabbie, principals of Oil Search had briefed him on the decision to sell the Hides equity to Santos.
“Oil Search will be retaining a 27 per cent stake in hides, and will maintain its 100 per cent ownership of the Hides gas to
electricity project,” he said.
Sir Rabbie said Oil Search would con tinue to be the largest stake holder in the
Continued on page 56
PNG to Queensland pipeline project, and Santos’ acquisition had given the gas pipeline project the strongest possible endorsement.
Santos is already a major operator in the oil and gas industry in Australia and its involvement in the pipeline project through its equi ty in hides Gas certainly confirms that another leading Australian resource company has confidence in the pipeline project and the oil gas industries in Papua New Guinea,” Sir Rabbie said.
I remain totally confident that the pipeline project - the largest and most significant infrastructure project in our history - will pro ceed and these developments only strengthen my confidence.”
Oil Search is also very positive about the sale. The company’s managing director Botten said he was confident the sale to Santos Ltd would proceed, despite any political opposition.
“We are very confident (it will go through),” Botten told AAP.
“We have the full support from the prime minister and the minis ter for petroleum and energy. They have both said publicly that they are in favour of the transaction.”
In a separate statement, Oil search said it was “disturbed and dis appointed by the press reports about political reactions to the deal - a transaction which is unequivocally in the best interest of Papua New Guinea and Oil Search shareholders.”
The statement, jointly attributed to chair Trevor Kennedy and Botten, highlighted the company’s record in PNG since 1929. It described last April’s purchase of BP’s upstream oil and gas assets for US$4OO million (K9OO million) as “the boldest and riskiest move of its corporate life.”
"This was done to facilitate the development of the PNG to Queensland gas project and the Moran oil project, which were both in danger of stalling due to lack of commitment by various parties,” the Oil search executives said.
“Oil search convinced a number of banks and its shareholders to invest this money, the largest single investment ever made by a Papua New guinea company in the country. This shows our commitment to PNG, hardly an act of disloyalty or betrayal to the country, as quoted recently in the press.”
Chief among the claims of those opposed to the deal was that it had been made against provisions of PNG’s new Oil and Gas act.
They claimed the Act, which was passed late last year, provided for
the newly created National Gas corporation to be given the first option on any sale. But Botten said there were no grounds for the politicians’ claims as the National Gas Corporation did not have first right of refusal and the transaction was done to the letter and spirit of the law. “It’s not unusual that various voices in the political arena may not be supportive - that’s always the case in various parts of the world, including Australia,” he said.
In the statement, Oil search said as a relatively small company it would have been unable to fund its obligations to the pipeline project - between US$2.5 billion to US$3 billion (K 5.5-6.5 billion) without selling part of Hides.
“This was communicated in both discussion and in writing to the minister for petroleum and energy and the southern highlands provin cial government oil and gas taskforce, of which Kaiabe, governor Agiru and Larry Andagali are members,” Oil Search said. The com pany also distributed a copy of a letter, dated September 3, 1998, describing its intentions.
“In this letter, we told the committee that we may sell (an) interest in Hides on commercial terms and that we would be happy to discuss any offer they might make.
It is unfortunate that inaccurate and unwarranted assertions, polit ically motivated, have clouded the facts in recent times. Having received no reply from the Committee, we proceeded with our sale process and closed our deal, some five months after our letter to the committee.”
The Hides gas field’s estimated five trillion cubic feet of gas reserves are considered crucial for the pipeline project. Negotiations to incorporate the reserves into the pipeline project are underway.
Botten said Oil Search’s purchase of PNG licences from BP last year took three months to complete. “We hope this can be achieved in a shorter time than that.”
Oil Search said that NGC had the right to acquire, by agreement on commercial terms, an interest in Hides.
“This is the same right as any other company or organisation.
Whether or not NGC is formed and who runs or controls it, it is not our business. We have been open with our sale process and did what was reasonable to involve landowner and political representatives.
This can hardly be described as a slap in the face to landowners.
On the contrary we did what we could to involve them,” Oil search said.