Barker talks merger proposal

Santos made an announcement recently on its proposed merger
with Oil Search.
But some senior staff of Oil
Search have resigned, the most recent being the managing director Dr Keiran Wulff.
Oil Search is said to have more than 90 per cent of its assets in PNG – including its 29 per cent ownership of the PNG LNG project.
Oil Search has always been one of the best performing companies in the country’s resource industry.
Economist and executive director
of Institute of National Affairs Paul Barker gives Business Editor SHIRLEY MAULUDU his views on
the status of Oil Search right now as a major petroleum company and the talks of a possible merger.
This is what he said:

The global petroleum sector
It’s been a challenging few years for the oil and gas companies globally.
Firstly, they’re under growing pressure to transform themselves into broader-based energy companies, as the world realises that it must wean itself off hydrocarbons at a markedly faster pace than many companies had assumed.
Since 2014, oil and gas prices have been much lower than hitherto, as increased supply and competition, notably from fracking and other unconventional sources, put a ceiling on prices and undermined returns.
Then, beginning of last year, demand and hence prices have been further hit by the Covid-19 pandemic, with major downsizing of whole industries, including aviation.
The prospects for PNG’s hydrocarbon industry have been somewhat better than for many producing countries.
This is because PNG’s resource largely comprises gas, which is considered a transitional energy source as the world decarbonises and as PNG is in relative close proximity to the world’s largest LNG market, notably in East Asia, a region that’s been heavily dependent upon coal and desperately needing cleaner energy sources.
PNG’s gas prospects have also been given an additional, unfortunate, stimulus from instability and insurrection in some other major current and prospective gas producing regions and countries, including Mozambique.

PNG’s story
The oil and gas industry has been facing challenging prospects and in due course the scenario of becoming a sunset industry, although PNG’s own potential within that industry is perceived as rosier than most for the medium term, if it plays its cards well.
However, the industry within PNG had faced its own additional uncertainties, around disrupted project agreements and changing investment and benefit sharing rules, which caused ongoing uncertainty and substantial delays in major new investments, notably Papua LNG and P’nyang, from proceeding as envisaged from 2019.
With weakened and shifting energy demand last year, the appetite for financing major new resource projects, including for LNG, have also diminished.
However, the investment fog has been clearing and prospects in mid-2021 for further gas developments in PNG are certainly looking more positive and impending.

Oil Search
Oil Search has a long history in PNG, largely as an explorer since 1929, and joint venture partner and subsequent operator of the Kutubu oil fields since 1992.
It’s a relatively modest-sized oil company by global standards.
But with most of its assets and operations in PNG, and as an influential local industry participant and leader, it’s a relatively major player in this country and one of the middle-tier oil companies in this region. While it doesn’t have the capitalisation of the major oil companies, it does have extensive exploration concessions, notably in PNG, and substantial prospective stakes in several major projects that are progressing to production phase.
Like other oil companies, it has seen its share price fall heavily during recent years.
But it has faced other challenges and uncertainties, related to its narrow geographical dependence and its role as an industry driver in PNG, which have added to the pressures facing the company, including the recent share price and perhaps managerial volatility.
Oil Search has always had high aspirations as an industry innovator and driver in PNG.
It is well placed with its resource base, but with an ever diminishing revenue from its shrinking oil operations and its weaker gas returns to date, faces a tighter capital position than envisaged for its planned level of participation in new gas projects.
A merger with Santos would create a stronger medium-sized oil company, with a more diverse investment and revenue base.
It would certainly enhance Santos’ engagement in PNG, where costs are lower and returns potentially greater than LNG operations in Australia, while providing a combined entity with the enhanced capital and lower risk portfolio, better able to invest and further borrow for major participation in the prospective projects in PNG.
It also provides Santos with immense PNG human capital and Oil Search shareholders reduced risk and volatility.
The PNG Government may be concerned that it will result in a company less committed to PNG, but that relationship proved somewhat fraught over recent years.
So a more conventional corporate-government relationship would probably be considered healthier for both parties anyway.
With its strong underlying asset value, but relatively low share price, recent controversies and management disruption, perhaps reflecting corporate uncertainty, Oil Search was certainly exposed to potential acquisition.
A merger with a similar-sized entity, which has enjoyed greater recent stability, would enable a stronger entity, but still with a major focus on PNG.
This would probably work better for Oil Search and for PNG, than an outright buyout by a major global energy company.
So the issue may ultimately come down to the price offered for the Oil Search shares, and hence level of ownership by the two sets of shareholders in the ensuing company.
Clearly, the Oil Search directors consider the current offer inadequately reflects the underlying worth of the company, although they are clearly not opposed to the merger in principle.
Maintaining a presence on the PNG stock market would reflect a level of sustained engagement with Oil Search’s roots.