This is the second and final part of the interview between The National’s Business Editor SHIRLEY MAULUDU and ExxonMobil PNG Ltd managing director ANDREW BARRY regarding the company’s operations in the country,
including the major PNG LNG project.
MAULUDU: We understand that recently, Oil Search and ExxonMobil entered into an arrangement with ExxonMobil for the acquisition of five licences around Gulf of Papua. What’s the story on that?
BARRY: We are excited about bringing Oil Search on board.
There are five licence areas that we acquired with the acquisition of InterOil. We have done an arrangement with Oil Search. It’s also important to note that Oil Search has been a very important and long-term partner of ours. We have a great relationship. We know each other really well. We know what their strengths are and they know what our strengths are and it’s a real partnership. When we acquired these licence areas, we worked together with Oil Search to say we’d like for you to come onboard to be a partner in these license areas.
One of the things they do really well is seismic activities so they will be performing seismic activities in these licence blocks.
MAULUDU: It was recently stated that there is an oversupply of LNG in the global market forcing prices to drop. As a global operator in the industry, what is Exxon’s comments on that with regards to the PNG LNG project?
BARRY: It’s important to note that if we today have to do a financial decision on a project and we’ve got four or five years before the first LNG cargo gets released or before it gets sold because you get to build all the equipment. That’s why when you think of all the market in the world, you’ve got times when you’ve got the projects that are coming on.
You have got lots of projects that are coming on. Then you’ve got what some refer to as oversupply in the global market and then sometimes there is undersupply. It is really the supply/demand fundamental of an economy. And obviously, the supply and demand affects price. So when you look out for the next few years, there is a lot of finishing construction. There is a lot in Australia and there is actually a lot in the United States. And you can see when those projects are going to finish because they have started half-way through and you can be confident that over this period of years that project is going to come online.
You can understand what the demand situation is globally for LNG. So certainly we are going to say that in the next several years, there is a number of projects coming online which will create a bit of a challenge market position or a softness in the market. But importantly, when you think about the investments, that need to be made today, they are going to come online in the year 2020 or so. And if you are making investment decision, it’s not what is happening today. It’s important what you think is going to happen in the five-plus years’ time. We think that firstly, the demand for LNG around the world is going to continue to be strong.
We see that as populations grow and energy demands grow and the standard of living improves, energy demand increases. And as those factors are increasing energy demand and we see gas being one of the fastest growing energy supply in the market and so we see strong demand for LNG in the future. So we are very positive about the future of LNG market. We are not looking at what’s happening out the window right now. We are looking at what’s going to happen in five-plus years.
MAULUDU: Please explain what a spot market is? What happens at the spot market when LNG is brought there?
BARRY: The LNG business is a little different to oil business, the oil trading business. If you think of oil, individual sort of takers of oil are sold individually and not on significantly long-term contracts.
For LNG, when you are investing into a significant investment like the PNG LNG project, typically, you have long-term contracts which you sign up for 15, 20, 25 years to be able to really underpin the development. So if you think of PNG LNG, we have 6.6 million tonnes per annum of long-term contracts to China, Taiwan and Japan.
So they are locked in for 15 to 20 years and they are part of the long-term deal that we have. When we produce more than that 6.6 million tonnes, we have additional cargoes that we put them out on what we call a spot market. It is where countries and companies buy cargoes just on one-off basis. And they buy what is called stripper cargoes, maybe two, three, four, five cargoes but it’s not a 200-year agreement. If you think of the location of where PNG sits, the spot cargoes still typically go to the Asia-Pacific area. For instance if you think of Japan, Japan does no buy all of its gas on long-term contracts, they buy some of them on the spot market and some from contracts. That’s how those cargoes are marketed as such.
MAULUDU: Are there other countries, apart from those in the Asian countries, maybe Australia for example that import LNG from the project?
BARRY: When you look at different countries, you’ll characterise them as the exporter of gas or importer. So if you look at Australia, it’s a net exporter of LNG. It actually sells out LNG. And so it doesn’t buy LNG. When you look around the different countries in Asia-Pacific, most of the countries are importers of LNG. We’ve sold cargoes into Korea, and there was one cargo that actually went into India last year. So the spot cargoes can go into different locations.
MAULUDU: It’s been said that the PNG LNG project was given tax exemption(s) for a number of years. As such the Government is not getting expected tax revenue from the project until years later. Is ExxonMobil be in a position to make some comments on this?
BARRY: When you talk about the fiscal terms rather, which is not just tax, it’s around all of the different aspects of how the country benefits from projects like ours. So the country benefits through the mechanisms of tax. I talked about the royalties and how the royalties go to the landowners and provincial governments through the development levies. And then there is the equity. So the government invests and is a partner in the project through Kumul Petroleum.
They get benefits through that and payments through Kumul Petroleum. So tax is not the only way that Government benefits from the project as such. This is similar to many countries around the world where you have the way that the tax is calculated, when companies invest, they have depreciation schedules, for those investments as such.
And so as part of the fiscal agreements that we have with the Government, there are different depreciation schedules used. So I wouldn’t call them as tax breaks as there are tax rules that we abide by that are used for the project economics as such. What that means is that it very much depended on the price.
We’ve invested US$19billion (K60 billion) and so there is a depreciation associated with that. And as the price goes up, the tax payments go up with that.
The challenge that we have from our own returns on the project and the country has from its returns on the project, is that the current prices are lower than we expected and so the country isn’t getting quite as much tax because a lot of things associated with the project that is international pricing of the commodity as such. That is what the country is feeling. Many countries around the world are feeling similar type of reductions in revenue if you are a resource-focused country.
I’d say the PNG Government has handled the reduction in the price of commodity prices as good as another other country.