Dr. Fabian Pok response to Hon. Philip Undialu's concern on Gas Agreement (PNG LNG project)

Dear Governor and all concerned,

As Minister responsible for Petroleum I am here to clarify any and all of your concerns in relation to this Gas Agreement or any matters concerning my Ministry or Department of Petroleum.

I appreciate your questions and concerns but as you very well know Petroleum is a very complex industry and can be confusing to people whom are not directly involved. At this same time I can assure you my Ministry, Department and Consultants are all extremely experienced and each decision taken has gone through its due process as per the Oil and Gas Act 1998.

The questions asked can be viewed via the following link - 

Hela Governor Philip Hundialu asks serious questions over PNG LNG project and Papua LNG agreements

In reference to your questions I have answered directly below each individual question in [brackets] outlining my answer. I trust they will satisfy your concerns.

Before I begin I would like you to note that Hon Charles Abel our DPM has been appointed to the Extractive Industries Transparency Initiative International Board. This is due to the world’s confidence in the Transparency of the Gas Agreement signing and negotiations we have just concluded. 

The EITI is an international multi-stakeholder body which promotes the open and accountable management of Oil, Gas, and Mineral Resources it currently has 51 implementing Countries. It is there to promote the Transparency and Accountability!


YOUR QUESTIONS AND ANSWERS AS FOLLOWS:

However, I am of the view that argument on 0.4% is a concern not serious issues in contention.

[Governor this is not an argument it is mere facts with proof which people are manipulating to confuse our Members of Parliament with lies for political gain. As clarified earlier 0.4 is owned by Mr Mulusek whom was the Chairman and CEO of Interoil when the interest was allocated. Interoil is a public company any shares or spending of money must be made public and the public company is under heavy scrutiny by the stock exchange regulator with severe Jail Terms for any offenders. 

All share transfer documents of these agreements will be available online and if you need hard copy proof our Department of Petroleum will have copies along with the share registry for you to review.]

1. Why did State ignored recommendations or proposal by State Negotiation Team or SNT backed by Ashurst, KBR, Wood Mackenzie, and signed a completely different agreement? I have confirmed with some SNT members and let's not fool fellow leaders, professionals and our peoole in general.

Ans: [In response to your question, The clear answer is recommendations from SNT and its advisors were not ignored, the SNT was appointed by the Government to work for our people. I understand that will not satisfy you so in order to give you more details I would like to Firstly outline the State Negotiating Team was endorsed by me to the NEC where they were appointed by NEC to perform negotiations since March 2018 to March 2019. 

The team had a clear mandate and was to report to the Ministerial Gas Committee, Ministerial Economic Committee and finally to the NEC. Mid way through the negotiations In order to increase the level of scrutiny and due diligence on the negotiations.

 The Prime Minister, Deputy PM and I further added an oversight committee (A Higher level committee comprising of the SNT Chairman and members with external advisors) so the country gets the best deal possible with as much clarity and scrutiny as possible.

Governor why are you not naming these SNT members??? what you are saying is unbelievable and does not make any sense as none of the SNT members have voiced their concerns to me of their alleged disappointment.

I can confirm your information is incorrect and based on lies by possibly some opposition members trying to instigate things which as untrue. I assure you the SNT for the last 12 months has worked on the MOU (Signed at APEC again no complaints by SNT Members) and the Gas Agreement where they were part of the process from every step of the way. 

I assure you The Prime Minister, Deputy Prime Minister along with SNT went through line by line on the Gas Agreement prior to the final discussions with Total. Had there been any dissent from SNT it would have been raised in APEC or after APEC by SNT members, why wait till today (Again your claim makes no sense)?

 I assure you each and every SNT recommendations that was brought to the Ministerial Gas Committee and National Executive Council was reviewed throughly and members of the SNT were present in the Ministerial Gas Committee meetings and National Executive Council (NEC) Meetings. I can also advise you the MOU and the Final NEC submission on the Gas Agreement was prepared by the SNT for deliberation by NEC.

I would also like you to note unlike in the PNG LNG project, we not only had Ministers but also concerned Governors and Members of Parliament present in the Ministerial Gas Committee meeting to seek their views and comments to have a fair Gas Agreement.

Governor of Gulf and the local Member was also part of the whole process including SNT, Oversight Committee, MGC and all parts of negotiations. You will notice they have not voiced any concerns or as you are raising.

So unless you can name these SNT members you maybe relying on incorrect fabricated information.

2. Why did State signed an agreement when Total failed to submit important requirements of law? I have confirmed that the from Acting Secretary Petroleum to Chief Secretary as Chairman is real, there exist such a signed letter and State brushed that and signed.

Ans: Governor I can confirm to you the law has been complied to in full by the Government, you are part of this Government and you know we uphold the Law at the highest level in all our decisions. In order to clarify your concerns my Department will send you a copy of the Oil and Gas Act highlighted with the sections I refer to below.

If you refer to Section 184 of the Oil and Gas Act it clearly outlines The Minister may, on behalf of the State, execute an agreement. The section outlines no such conditions as a condition precedent prior to signing a Gas Agreement, that you are referring to in your question.

To clarify the letter you refer to is the advice from the Acting Secretary to the Chief Secretary outlining the requirements TOTAL must go through post signing of the Gas Agreement prior to the granting of the Petroleum Development Licence. This is normal process that is followed each and every time. 

The Gas agreement is there to provide the Fiscal and Commercial agreement which only requires the reserves numbers, proposed CAPEX, Opex, project structure (commercial and development concepts) which are all presented in the Open Book Economic Model and hence satisfies Section 184 of OGA. 

No company in the world will perform the requirements set out in the letter by Acting Secretary if it was prior to a Gas agreement being signed. This is because of the cost associated the investor needs to be sure of the Fiscal framework which will ultimately outline if the project in todays market is viable/marketable or not. 

Hence the Gas Agreement signing is a normal procedure prior to granting of a PDL. You are very well aware that until a PDL is given to the Developer they can not produce the gas, so your concerns regarding the letter will be scrutinised by the Department and I assure you a Petroleum Development Licence will not be granted until all the conditions in that letter have been fulfilled.

If in doubt I urge you to look and familiarise yourself at Section 53, Section 54, Section 55 Section 56 Section 57, Section 59, Section 60 and Section 63 of the Oil and Gas Act as these sections outline all the requirements before a Petroleum Development Licence is Granted which will be consistent with the letter of the Acting Secretary.]

3. Why did State ignored StateSol advice on serious implications? His media statement this week Wednesday confirms that Gas Agreement is subject to Total fulfilling necessary requirements. What do you think those necessary requirements are? And are those requirements not necessary to be complied with first? Why did we ignored advise for six months adjournment?

Ans: [Governor your are well aware that without State Solicitor legal clearance the Government can not sign the Gas Agreement, so how can his advice be ignored when he himself has cleared the Gas Agreement. Incase you missed it, the State Solicitor did provide the Legal Clearance and post that the NEC meeting was held to discuss the Gas Agreement. 

Incase you are confused the job of the State Solicitor is to provide advise with a Legal Clearance if everything is ok on the legality of the agreement and he did which is why NEC approved the Gas Agreement and its terms. What State Sol stated in his letter is advising the Government and the Department of Petroleum that all the necessary compliance requirements are outstanding of a PDL which must must be fulfilled prior to granting the PDL. 

So there there is no further confusion on your end I will be sure to highlight the above mentioned sections of he Oil and Gas Act 1998 concerning the Petroleum Development Licence.

4. Why did State ignored 3 consecutive letters from Governor of Central Bank not to sign the Agreement until our Monetary regulatory requirements are complied with? In the letter, he warned that he let go the the first LNG project though fundamentally flawed GA but will not be allowed again.

Ans: The Central Bank have been part of the process and SNT has been incorporating their views. At the last SNT meeting before signing, their view was that they are now happy with the minimum of USD$250million per year conversion to KINA for the life of the project that the Project Partners have agreed to keep in Central bank. They were also happy that 10% of every export will be sent to the Central Bank. However, they expressed concern about two issues:

1. They wanted the Partners to share information, which in PNG LNG Project case, because of a confidentiality clause, they have not been accessing data. In this agreement, they will have full access. Also they will get 10% of every export so they can back calculate what the total export volume and price was so this should be satisfied down to the last Toea.

 2. They expressed that they want to know how access funds from the revenues will be dealt with as they expected funds can be kept offshore but should be only for Loans payments, USD Capex and Opex for operations etc...This is something that BPNG and the developers can deal with on a company by company basis as there is no exemption for this.

5. Why did State give Tax Exemptions having known we lost K6.0 billion from PNGLNG? PNG stand to loose another K6b or more because of the GST and other exemptions.

Ans: Governor I urge you to look at the open book economic model which captures all elements of a project and what is the Minimum Internal Rate of Return (IRR) needed to make it a viable project.

You will notice when you review it that the IRR is in single digits for the Joint Venture partners concerning the Papua LNG project due to the strong negotiations by the SNT and our Government meaning its the lowest possible for a project to be acceptable commercially. 

All investors review this IRR and then decide if they will put the money in the country to invest especially when the investment is of this scale. Just so you are aware our gas fields are very small in comparison to the rest of the world, Papua LNG is a 6.9 TCF field, in comparison Qatar is 1000+TCF, Mozambique is 90TCF, USA has 2459TCF ect. All these countries are asking for investment by these few Oil Majors. 

There are currently 26 projects seeking Final Investment Decision (FID) all requesting investment by these few Oil Majors, six of which are by Total SA as operator. 

You must also know the current consumption by the world is 122TCF by 2040 it only grows to 160TCF as a result of limited import terminals, pipeline infrastructure and greater reliance on Oil & Coal which is far cheaper to extract and burn meaning ultimately many of these projects will not be able to start production anytime soon. We have entered the Papua LNG project at the right time to lock in long term contracts ultimately meaning our gas sales are secure.

Hence in order to arrive at deal which is 50/50 (a win/win) their is a need for some exemptions to be provided to the investors due to the abundance of Natural Gas in the world today and limited future buyers. We have negotiated very hard and made the Papua LNG Project work in the interest of our people. 

You will notice in the agreement where we have exempted we have also clawed back on things such as Gas to be made available locally for industries such as Petrochemicals, Power Projects ect at a very competitive price these are benefits we should not forget. Also Today there is a new Bench Mark made by Total on Papua LNG project and we will try and better this for each and every project our country negotiates in the future.

Our country must be seen to be a fair destination for investment otherwise no one will do the initial exploration in the first place and there will no Oil Gas or Mining projects to negotiate.

6. Corporate Tax used to be 45% since first Oil Project in 1990 but reduced to 30% under PNGLNG. Why did State ignore SNT reccommendation to bring back to 45%? A lost of 15% is a serious question State need to be responsible because we will again loose Billions of Kina every yeat.

Ans: The SNT never recommended this in any of the meetings. It was brought up at the early stages during discussions but was never brought up so it can be negotiated. I will be surprised that SNT even negotiated or mentioned this to Total and the developers. But as I have explained in detail above it all comes down to the IRR and we could not have negotiated a better deal in the current investor climate.

7. If we can reduce Tax exemptions and reduce Corporate Tax, why didnt we ask for exemptions on Sunk Cost as recommended by SNT? As announced by DPM , we will pay our sunk costs after first sale of gas. Remember, any capital cost you want to pay after project construction will apply Premium costs ranging 10-30% on the principle amount.

Ans: [I again urge you to look at the open book economic modelling and factor the sunk cost to be exempted and notice the IRR. Please also note that Sunk cost was never recommended to be exempted...Again, at the early stages this were brought up but towards the end, never brought up, this is because such practice is not normal in the world and if applied would not be viable for the project. We negotiated hard to get deferment of payment to first LNG production, which has never been done before. The interest on the deferred sunk cost is fixed at 7% which only comes in after project goes to FID so I don't know how you have calculated this premium cost range (10-30%) its completely wrong and portraying false information to the public.]

8. On one end, we talking about better deal on DMO but I think developers playex dump fool on us. Why I say this? Because currently for NiuPower and Dirio Power, we are paying gas price at 9% Japanese Crude sales price or US$5/mmbtu. The Papua LNG agreed pay around US$5/mmbtu. That is, 9% of JCS is same as $5. Therefore, i think we have been fooled.
Why did we ignore SNT recommendation for 2% JSC and went for $5/mmbtu or 9% JSC which means the same thing?

Ans: [Firstly in the PNGLNG Project, there was never any DMO, now we have 5% at discounted fixed price with no CPI

Secondly: The DMO price is fixed at $4.5 for the entire life of the Project with no CPI or any other adjustments. This is good as it gives certainty to downstream projects, Power development opportunities ect.

Thirdly: 9% JCC at current Brent oil price is actually $6.50MMbtu so don't know how you can come up with gas price as low as $5/MMbtu.
NIUPOWER and DIRIO are going to be paying $6.50/Mmbtu plus plus on the current model by PNG LNG (Exxon Mobil price).

This 9% + JCC is subject to rise and fluctuate as Brent has gone up to USD$71.36 that’s why we have fixed our DMO at $4.50 assuring all investors on their investment and returns whom will use this Gas for Domestic Benefit.

NOTE: There was never a 2% JCC Proposed by SNT. This is another of those initial wild discussion ideas that may have been circulated. Governor Please note we are not the only country in the world that has Gas we must also be mindful of international standards and international norms.]

9. Why Central Provincial Government, very host of pipeline and LNG facilities NOT invited to be a party to the agreement?

ANS: The Central Provincial Governor was invited by me personally to come and participate in the Gas Committee discussions. The Central Province will be invited and be part of the Development Forum. The Gas Agreement is between State and Developers and does not require the provincial Government of Pipeline or Facility areas to sign.

10. Did we agreed for 2% Gross Wellhead Value payment for Royalty and development Levy? Under the PNGLNG, they are literally deducting 1.6% and paying only 0.4% because of deductions such as Opex, Capex, and Premium on Capital cost. Over the last four years (2014 -2017) we lost K1.2billlion. Did we ever leant from that?

ANS: The Papua LNG Agreement formula is as follows: Gross Revenue - Opex - Depreciation. There is no Capex deduction or uplift of 7% like in the PNG LNG Project etc...so, 2% Development Levy and Royalty will be a lot of revenue for the People of Gulf especially as the population size is much smaller. This is the lessons learnt from PNGLNG Project. Also, the formula is not specifically defined in the oil and Gas Act. Due to the strong negotiations this agreement will set the new benchmark which will have to be bettered by all new projects.

11. The SNT team had a clause called “Lessons Learned from PNGLNG”. One of the lessons learned was the confirmation that PNG lost K48 billion from construction phase to operation phase. What actions have we taken to correct that?

Ans: Again I urge you to refer to the Open Book Economic Model and advise me how a project can be viable with such numbers. The numbers you have mentioned are not possible anywhere in the world where there is 22.5% back in rights and all other benefits to the State.

12. State need to explain to the parties affected by PNGLNG project wether or not there will be any implications as Papua LNG likely to share common facilities.

Ans: The PNGLNG Project Partners have signed the Facility Sharing Agreement with PapuaLNG Project partners the very next day on 10th April 2019 after the Gas Agreement Signing so they are all aligned. There will be no affect to the PNG LNG Project, this is a commercial arrangement between the PNGLNG and Papua LNG project with the overall aim to reduce CAPEX costs to ultimately make the gas as cheap as possible to the world buyers.

13. I heard that the Financial Model doesn't even incorporated financing and refinancing in their Open Book Economic Model. The numbers used in the economic model is only Class IV - ORDER OF MAGNITUDE COST ESTIMATE of +- 50 %. The likely high case cost estimate for the overall project will be plus 50% of the current estimate of US $13 billion.

Ans: The very reason why it is not included is because there is no financing being done yet...After the Gas Agreement the Partners are now doing Marketing and Financing now so this was obviously not need. Assumptions could have been built in but that’s really up to State Team.

14. The Foundation Volume is rumoured to be stated as 10.3 tcf, when their outdated proven reserves is only 6.7 tcf. Where will the extra 3.4 tfc of gas will come from. What's the Basis? For any Petroleum project, the Foundation Volumes determines everything from Field Development Plan to Cost Estimate, Financing. Etc. Also clarify how the treatment of P'nyang and PNG LNG gas will be like if there's shortfall on committed gas supply for Papua LNG.

Ans: The basis is the same as PNGLNG Project. It is 50% onto of the 2P Reserves provided by the Developers. The reason is for them to continue exploration and drilling (Like PNG LNG currently is doing) within the License area so we continue the LNG Project beyond the current economic limits..It's good for PNG as well as the Developers as the facilities will be used for longer periods with no new CAPEX costs . 

And the 2p Reserves are 6.9TCF not 6.7 TCF. Please refer to the 2P volumes which are certified by independent experts so I am not sure why and where the short falls will occur.

Governor Undialu, I trust the above will satisfy your concerns.

Thank you,

Dr. Fabian Pok 

Minister for Petroleum and Energy