Govt must clarify equity offered in LNG project

IT has been reported that the PNG LNG Project landowners and provincial governments had accepted the vendor financing proposal put forward by Kumul Petroleum Holdings Ltd to take up 25.75 per cent equity in Kumul Petroleum (Kroton No.2) Holdings Ltd, which holds the State’s diluted 16.57 per cent interest in the PNG LNG Project.
The decisions come on the back of workshops and a period of consultations so I am sure all facets of the equity and financing arrangements have been discussed.
Be that as it may, I consider it important to ensure that the contracting parties, especially the landowners, are aware of the implications of the Kroton equity offer.
In this respect, it would be necessary for Kumul Petroleum to provide clarification on some points.
The 25.75 per cent equity that is being made available is that of Kumul Petroleum (Kroton No. 2) Holdings Ltd and is not a direct interest in the PNG LNG Project as such. It is to be noted therefore that benefits would be from the bottom line (profits) and not the cash flow.
What is the actual cost of the shares and what are the terms of the loan being provided?
The Prime Minister has reduced the cost of the shares from US$240m (K780.5m) to US$150m (K487.8m) per one percentage point.
What would the amount to be paid by the landowners be based on — the 25.75 per cent equity in Kroton No.2 Ltd or the 4.27 per cent inferred direct interest in the LNG project?
The firm is not on the IPA website and therefore detailed information on the firm’s capital structure — the authorised and issued capital, is inaccessible
On what did the parties who articulated the UBSA in Kokopo base the value calculations on?
The Oil Search Ltd 2014 annual report states that the total cost of the PNG LNG Project was US$19bn (K61.8bn) .
This would translate to US$4.28bn for the State’s 22.5% which is US$190.2bn (K62.4bn) per one percentage point. The US$240m per percentage point places the implied total cost of the LNG Project at US$24bn (K78.1bn).
What does the US$240m per one percentage point represent?
Good on you Prime Minister for lowering the price to US$150m per one per cent but it is still too high and the landowners may never see any return on their investment.
This is because the payback period for the loan is very high since the investors have to wait for dividends to be declared by Kroton No.2 Ltd which might never materialise or may come in dribs and drabs.
Remember, it is a State entity after all!
Prudent investment parameters would place a payback period of between three to seven years.
Taking a payback period of seven years, the level of dividend receipts will have to be around K305m per annum which implies a total dividend level of K1.18bn for the next seven years.
The necessary question to ask is: “Is this level of dividend possible and sustainable?
Any payback period outside of prudent investment parameters would not be recommended.
In summary, all pertinent information must be made available to assist the parties, especially the landowners, to make informed decisions to ensure the landowners are not trapped in debt on this venture.

Yet to be convinced
Port Moresby