By Tim Treadgold - Forbes
Political upheaval in Papua New Guinea has raised doubts about the timing of a major expansion of the country's liquefied natural gas (LNG) industry and the future of PNG's national oil and gas leader, Oil Search.
Adding to the problems of the company, which has operated in the island nation for 90-years is the start of a succession process to replace Oil Search's long-term managing director, Peter Botten.
Exactly when Botten will step aside after 25 years in the top job at Oil Search has not been revealed and Botten himself says he expects to be around "in some form or another" while a final investment decision was made on the LNG expansion, and a big oil development in Alaska.
Prime Minister Steps Aside
The future of Peter O'Neill, PNG's Prime Minister until last Sunday is less certain after he stepped aside following criticism of an ill-timed investment by the PNG Government in Oil Search.
The crisis in PNG started in March, 2014, three months before the oil price crashed, when PNG Government borrowed $1.24 billion from UBS, a Swiss bank, to buy a 10% stake in Oil Search.
Three years later the government sold out of Oil Search booking a loss estimated at $420 million, a blow for a poor country.
Loan Deal Investigated
Since then the roles of O'Neill and UBS have been under close scrutiny in PNG where a 332-page report by the country's Ombudsman described the deal as speculative and highly inappropriate. There have also been questions raised in Switzerland over the role of UBS which reportedly earned $120 million in fees.
It's against this background the PNG Government, now led by Sir Julius Chan, is hoping to negotiate the expansion of the PNG LNG project which is led by U.S. oil giant ExxonMobil with a 33.2% stake while Oil Search owns 29% of a project which cost $19 billion to build.
The expansion plan, which would see the French oil company, Total, become part of the overall development could cost up to $14 billion and effectively double LNG output to around 16 million tons a year, confirming PNG as a regional energy powerhouse.
But, that move up the LNG pecking order has been thrown into doubt by the UBS loan investigations, the resignation of O'Neill, and the planned retired of Botten.
Baillieu, an Australian stockbroking firm, told clients last week that it was concerned about the outlook for Oil Search and the LNG expansion.
Country Risk Rising
"Recent political instability could see country risk being brought front of mind again," Baillieu said.
"Succession planning to replace Peter Botten is well advanced, supporting our view that Botten could leave in the next 18 months, which could cause a de-rating event for Oil Search.
"We still consider Oil Search more a takeover target than ever before, and wonder if the only reason to hold Oil Search is hope of a takeover."
Delay, Delay, Delay
Credit Suisse, an investment bank. headlined a report on Oil Search yesterday as: "PNG turmoil portends delay, delay, delay".
On the resignation of O'Neill, Credit Suisse said that at best it saw the event as a distraction for the government amid critical project negotiations.
"Should a material delay materialize due to the politics, the risk to the project timeline could then be further exacerbated," Credit Suisse said.
"ExxonMobil and Total may sanction other LNG projects in the interim which could cause them to further delay a PNG LNG expansion.
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