BECAUSE of the on-going public debate regarding the various benefits and revenue derived from the PNG LNG project, The National asked the managing director of the Kumul Petroleum Holdings Limited Wapu Sonk, to explain what the benefits are, who are the beneficiaries and how the benefits are distributed. Below is what he told Acting Business Editor SHIRLEY MAULUDU.
THERE has been a lot of questions on this and it is important that we understand the different benefits that are derived from such a project like the PNG LNG project.
The revenue streams and benefits are prescribed in law already and developers follow that. The proceeds from the LNG project comes in the form of royalty, development levies, project equity and tax.
The other forms of benefits to provincial governments and landowners are the memorandum of agreement, ministerial commitments, business development grants, high impact projects, infrastructure development grants etc.
These are Government commitments and not prescribe by law, hence these benefits vary from project to project as this is a negotiated outcome through the project development forums.
If we look at the royalty, development levies, tax and project equity, here is how things work.
The royalty and development levies are calculated on wellhead value of the gas and 2 per cent is currently what the Oil and Gas Act said would be applicable for all petroleum projects.
The beneficiaries for the royalty are the landowners and the beneficiaries for development levies are the provincial governments of the project affected areas.
There is a legally prescribed formula to calculate the amount and payment is supposed to be paid by the developer to the Government through the Department of Petroleum and Energy.
In the case of the PNG LNG project, the beneficiary clans were not identified. So the Government had asked ExxonMobil to create a Trust Account in the Bank of Papua New Guinea which ExxonMobil as the operator of the project deposits the money. So far, that has been the case and the money is in BPNG.
This money cannot be released or used for other purposes other than its intended purposes. Otherwise, the project developers and most importantly the financiers of PNG LNG project would be very concerned given that it becomes a significant project risk.
The other benefit and the main one is tax.
In the PNG LNG project, a 30 per cent tax has been agreed to in the Gas Agreement. The tax revenue is supposed to be paid to the Internal Revenue Commission. And again, that is as per the Tax Act.
The joint venture partners in the project do their own tax assessment because the PNG LNG project is an unincorporated entity and pay tax to the IRC.
So far, all joint venture partners have paid. But because of the low oil price last year and this year, the tax revenue to the State from the project had been very minimal to none. This would improve as the price recovers.
The other factor is that the project was funded on a 70 per cent project finance debt and 30 per cent equity from partners. Hence the project financiers take priority in the revenue distribution before others.
Apart from the price and the debt repayment affecting the tax revenue to state, the other reason is that in the Gas Agreement negotiations, the State allowed for “accelerated depreciation”. It means that when the joint venture partners assess their tax positions, they also depreciate the project assets at a higher rate than normal, hence less tax to the Government.
These three issues are the key reasons why the Government has not realised the full value of the PNG LNG project to date. But with the oil and LNG price recovering, debt repayment going on and asset being depreciated over time, PNG will realise the value in the next few years.
The other revenue stream for PNG is the 16.6 per cent equity in the project, which KPHL manages for the State and people of PNG.
KPHL is a joint venture partner in the project and our revenue from the project is distributed to us after deductions for royalty, development levy, project debt repayments, project capital expenditure and operational expenditure deductions and tax to the Government.
This is the same for all the project partners. Each joint venture partner has their nominated account where the distributions are paid to.
But for KPHL, our nominated account is in Singapore. The reason is that KPHL is an oil and gas company that transacts in US dollar which has cash calls in USD. And to pay for our commitments not only in PNG LNG project but other assets operated by Oil Search and others, we need to have a USD account and ability to pay in the currency of trade in the business we are in at the moment.
The PNG-based operations are funded in Kina and also dividend payments to the State. Hence we would bring in USD into the country. And we have done this since 2014. The question of how much revenue we earn per shipment is not an easy question to answer because every shipment is different and there are various variables mainly because the LNG sales contracts are different types with different buyers.
Some are delivery ex-ship (DES), some are freight on board (FOB) and they fetch different prices. The volumes we sell on the spot market also fetches different prices depending on what the world price market is on the day of the trade.
What has been fixed for PNG LNG project is the price formula which is used to calculate the LNG price with our long term buyers.
Each long-term buyer also fixed the volume they want to receive as DES and FOB. The variable in the formula is oil price so at the end of the day, the biggest impact on revenue we generate is determined by movement of oil price as our long-term LNG sales contracts have been fixed to a formula that is linked to oil price which is usually known as the “JCC Linked LNG Price”. JCC is the Japanese customs-cleared crude, a commonly used index for long term LNG contracts.