A transformational impact: the Papua LNG Project Gas Agreement

The next phase of Papua New Guinea’s development is well and truly upon us. Reaching a significant milestone for the country, a Gas Agreement was signed on 9 April 2019 for the USD$13 billion Total S.A. operated Papua LNG Project.

Coupled with the proposed contemporaneous expansion of the USD$19 billion PNG LNG Project that commenced production in 2014 and had its own significant impact, the Papua LNG Project will have a further transformational impact on the Papua New Guinea economy, bolstering the emerging middle class and propelling the country’s development.

The Gas Agreement, made between the Government of Papua New Guinea and the Project‘s sponsors Total, Oil Search and ExxonMobil, defines the scope of the Papua LNG Project, outlines fiscal terms and benefits sharing arrangements and paves the way for the commencement of front-end engineering and design later this year. A final investment decision for the Project is scheduled for Q4 2020 ahead of the commencement of production in 2024.

The last Gas Agreement to be signed was in May 2008 for the PNG LNG Project, operated by ExxonMobil. That project went on to achieve FID in December 2009 and to transform the Papua New Guinea economy – precipitating the emergence of a Papua New Guinea middle class and a corresponding growth and maturation of domestic businesses and institutions.

The period from FID through to the early stages of production of the PNG LNG Project coincided with a period of strong global oil prices and expansionary Government budgets that were expected to be underwritten by tax revenue from the Project. However, the Government was not well prepared for the curtailment of revenue as global oil prices declined, putting significant pressure on the country’s fiscal position. Foreign exchange liquidity in particular became a significant challenge for business in Papua New Guinea throughout this period, although it is now improving as tighter foreign exchange control policies take hold and the Government successfully raises foreign currency debt.

The Government has clearly learned from these experiences to be more cautious, reflected in its budgetary and policy responses and the fiscal terms agreed in the Papua LNG Project Gas Agreement. The further transformational economic impact of the Papua LNG Project and PNG LNG Project expansion can therefore be expected to be more sustained and less volatile, setting a strong platform for further maturation and development of domestic businesses and institutions.

For example, we are likely to see reform and modernisation of financial services regulation as the domestic economy grows and users of financial services become more sophisticated and demanding. Economies of scale, generally, are likely to emerge, enhancing conditions for corporate mergers and acquisitions. Investors, and superannuation funds in particular, as their funds under management swell, will seek cross-border investment opportunities for diversification.

The signing of the Papua LNG Project Gas Agreement is a further demonstration that large scale projects can be developed in Papua New Guinea, and will encourage other project proponents such as Newcrest Mining and Harmony Gold in the development of the world class Wafi-Golpu underground copper/gold project. It also comes less than six months after the governments of Australia, Japan, New Zealand and the United States announced that they will jointly invest in a massive expansion of Papua New Guinea’s electricity system with the aim of reaching 70% of the population by 2030, up from 13% currently. This too should further pump-prime the expansion and diversification of the Papua New Guinea economy.

There is a bright future ahead for Papua New Guinea and great opportunity. Papua New Guinea truly is a developing country and the next phase of that development is well and truly upon us.