P’nyang project cost competitive and still likely to go ahead, say analysts


What is likely to happen with the P’nyang gas project? Resources analysts say that it is cost-competitive in world terms, and examine some of the options that the players have.

Credit: Oil Search

In terms of overall unit costs, the PNG LNG expansion is one of the more competitive projects globally, after factoring in full value chain costs including transport cost, says Saul Kavonic, Head of Equities Research for Oil and Gas at Credit Suisse.

‘At the end of the day, it is a very competitive project on a cost basis,’ he says, adding that it ‘sits around the bottom tercile [third]’ for unit costs in a global comparison,’ he tells Business Advantage PNG.

‘Despite being one of the more profitable global LNG projects, it still has generous fiscal terms under the old fiscal regime compared to global benchmarks, which goes some way to explaining why the PNG government has argued the government should get better terms this time around.’

‘Within that pie, renewables are going to become a bigger part, but natural gas consumption is forecast to rise quite significantly.’

The concern, believes Kavonic, is that the market window for new LNG projects may get pushed out past 2028, in which case ‘the appetite to bring on more supply in 2025 becomes increasingly uncertain.’


Fat Prophets’ David Lennox.

David Lennox, Resources Analyst for the Australian investment firm Fat Prophets, says the project is very likely to go ahead in some form.

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‘Logic would tell me it is going to become an operation in due course. It is really the structure around which it all comes together that may raise a few eyebrows.’

The LNG price has fallen by a quarter this year, and is predicted to fall even further due to new supply coming on and warmer winter temperatures in the Northern hemisphere. Lennox says that he has been surprised by how low the price has gone, but it is not necessarily relevant to investment in projects.

‘You have to look at these things out a lot longer than five, 10 or 15 years. You have a look at the US Energy Information Administration’s forecasts and energy demand is going to boom. Within that pie, renewables are going to become a bigger part, but natural gas consumption is forecast to rise quite significantly.

‘Is there a way to develop without P’nyang? Given the quality of the resources there is always going to be interest and an appetite.’

‘Maybe the price is $1.50 btu (British thermal units) now, but in 40 years time you are likely to get $US50-60 btu. Some of these assets will still be producing then.’

National interest

Credit Suisse’s Saul Kavonic.

Kavonic says the industry will now start to look at a Plan B. Indeed, Oil Search CEO Peter Botten has already flagged that ‘Joint Venture meetings are planned in the short term’.

‘Given the quality of the resources, there is always going to be interest and an appetite,’ he says.

Kavonic adds that the Government may also start looking at alternative options to monetize their asset.

‘You could envisage a situation where the government wants to take back the licences and look to find someone else who is more willing to work with the government on their terms. But that is a long way down the road from where we are today.’

Various local politicians are already pushing for the introduction of a new Oil and Gas Act this year. As outlined by Kumul Petroleum Holdings Ltd’s Managing Director Wapu Sonk, this new legislation would give the state-owned oil company the primary role in the development of PNG’s oil and gas assets.

Lennox warns that the government should not consider nationalising the asset, noting that this has caused ‘utter disasters’ in other developing countries.

‘If they did [that], not only would investment money for this project disappear, investment money for every project under the sun would also disappear,’ Lennox says.

‘They would end up in the hands in the Chinese, who, in 40 years time, are going to need more energy than they have today.’

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