Sonk explains Kroton Equity

The National Business

The issue of Kroton Equity in the PNG LNG project, and the vendor financing option offered by Kumul Petroleum Holdings Limited to beneficiary groups in the project impact areas, had been widely discussed in recent months as the deadline drew closer. KPHL managing director WAPU SONK explains to The National acting business editor SHIRLEY MAULUDU what the public debate was all about.

MAULUDU: What is the Kroton Equity?
SONK: The Umbrella Benefit Sharing Agreement (UBSA) provides for the beneficiary group to be given a commercial option for 25.75 per cent shareholding in Kroton (Kroton No 2 Limited – now Kumul Petroleum (Kroton) Limited). Kroton holds the States 16.57 per cent in the PNG LNG project. The option, under Clause 6.1(a) (ii) of the UBSA, is for an undivided and fixed 25.75 per cent shareholding in Kroton, as a result of which the beneficiary group will have an indirect interest estimated in the UBSA at 4.27 per cent in the PNG LNG project (now calculated to be 4.27 per cent). There is no grant under the UBSA of a direct interest in the PNG LNG project. There is no provision in the UBSA for the appointment of a third party to manage the benefits from Kroton option entitlement for the beneficiaries. The UBSA expressly directs Kroton to act as a clearing house and to pay the cash distributions or dividend payments directly to beneficiaries. The UBSA directs that the beneficiaries interests in the PNG LNG project with respect to the Kroton equity will be represented by Kroton which is now a subsidiary or Kumul Petroleum Holdings Limited.
MAULUDU: Who are the beneficiary groups?
SONK: The Kroton equity beneficiaries are the PNG LNG project-impacted provincial governments – Hela, Southern Highlands, Central, Gulf and Fly River provincial governments – the PDL 1, 7, 8, 9, 2, 4, 5, 6 area landowners, LNG plant facilities and pipeline segments 1 to 8 as provided for under the Kokopo UBSA.
MAULUDU: What is the vendor financing option that Kumul Petroleum Holdings Limited is offering to the beneficiary groups?
SONK: The State wishes every beneficiary to have the opportunity to decide whether or not to exercise their Kroton option and recognises that in the current economic climate, this may be difficult for some beneficiaries. The National Executive Council approved KPHL to make available a “standby facility” (vendor finance) to assist any beneficiary who wishes to exercise their option but does not have access to sufficient funds to pay the option price. It is not mandatory to use the vendor finance and beneficiaries are able to use other sources of funds if they chose but must tender the option price at the time of exercising their Kroton option prior to 31 December 2016.
MAULUDU: Briefly explain certain important areas of the vendor financing option that KPHL is offering.
SONK: KPHL is basically offering following benefits:

  • Government reduced the option price from US$240 million (for each per cent bought) to now US$150 million, and  extended the option exercise period to December 31, 2016. KPHL has been instrumental in assisting the Government to reach this positive decision;
  • Landowners will not have to pay a single toea to exercise the option upfront. KPHL will self-fund the option price of US$640 million on their behalf by withholding 25.75 per cent of the LNG revenue which would be allocated to the beneficiaries. The Government will be paid by Kumul Petroleum yearly for the next 20 years to pay up the option price. If the oil price improves, the payment period will be shorter;
  • The beneficiaries will get a distribution of US$10 million per year to the beneficiaries as a preferential dividend if the oil price on an annual basis averaged US$45/barrel. The distribution will increase to US$15 million if the price average is US$55/barrel. It further goes up to US$20 million if the oil price goes up to US$65 per barrel. The landowners will benefit as oil price increases and at the same time payment to State would increase, hence shortening the term period.
  • KPHL will work with the beneficiaries to have board positions on the Kroton company so there is visibility of the operations of the company. Beneficiaries can know how the company is performing, how much revenue is coming in and how much of that is going to State and how much is being distributed to the beneficiaries. This provides transparency and also fulfils the intent of the UBSA where Kroton was only supposed to be a pass through vehicle. Kroton will pass through all benefits (LNG revenue) to the Mineral Resources Development Company which is the entity legislated to manage landowner benefits;
  • The exercise of option doesn’t necessarily mean that the beneficiaries are locked into KPHL. They can use their share option and if the oil price is high enough to raise capital, the beneficiaries can seek financing and pay State and opt to have fully paid shares of Kroton;
  • The vendor financing is a fall back option and so far, no beneficiary group has provided any financing. So KPHL has provided a fall back option.

MAULUDU: What is the role of KPHL in dealing with Kroton Equity?
SONK: The UBSA is an agreement between the State and the group beneficiaries. The terms of the UBSA can only be varied by agreement of the State and the beneficiary groups. KPHL currently holds 100 per cent of the shares in Kroton and is required to implement the terms of the UBSA in relation to the Kroton option strictly as provided in the UBSA.  KPHL is not a party to the UBSA. It has no other role other than ensuring that the terms of the UBSA, as they relate to the Kroton option, are complied with and the State’s legal obligation is implemented.
MAULUDU: Explain the difference between the groups not benefiting directly, but indirectly, in the PNG LNG project, when they acquire the Kroton Equity.
SONK: In the UBSA, the shareholding option would give the beneficiaries an indirect interest in the PNG LNG project of about 4.27 per cent. The option price was agreed to be calculated at US$240 million for each ‘indirect percentage interest’ in the project, which, in this regard, translates to US$1.0128 billion. The UBSA beneficiary groups must understand the key principle here that it is an option and that option can be exercised or not. It’s not a must  for any group to exercise that option if the price is not right or if the economic conditions are not right. At the end of the day, it’s not free; hence a commercial decision need to be made.
MAULUDU: How much is the equity that the groups will pay to acquire?
SONK: The UBSA provides for the option price to be determined at US$240 million per percentage point corresponding to the Kroton equity percentage. The State has now offered a discounted price of US$150 million per percentage point corresponding to Kroton equity percentage (current option price). The current option price is payable in full by each beneficiary upon exercise of their respective Kroton option entitlement.
 MAULUDU: Does the completion of the clan vetting exercise play any significant role in having the respective beneficiary groups to benefit from this equity?
SONK: KPHL also wishes to stress that the clan vetting process and the ADR (alternative dispute resolution) process must be allowed to progress very quickly and concluded so that beneficiaries are properly identified and their representatives elected.
MAULUDU: Why is it important for the interested beneficiary groups to sign up now?
SONK: The Kroton option exercise is a commercial exercise with its deadline as agreed or provided under UBSA. The key criteria of the option is it has a price and must be exercised in a fixed time. Both have not been made and there is a real risk of the risk being declared void. This is why KPHL as a joint venture partner in the project has been facilitating exercise of the “last resort” option of vendor financing KPHL has offered. KPHL prepared itself over last two years to provide this option as a back stop option because the Department of Petroleum and Energy and other agencies of Government were delaying the CVP and other programmes to properly identify beneficiaries.