State of PNG Economy

I have noticed a lack of adequate information in the public domain through appropriate mediums for better appreciation of certain financial aspects of the PNG LNG. I am providing a small commentary for purposes of clarity among my FB friends.

The initial PNG LNG project cost estimation in 2008/2009 was US $15 billion. A year later there was some cost escalation resulting in readjustments hence the anticipated cost at the US $15.7 billion.

In about 2012, a further cost escalation occurred thereby placing the anticipated project cost of the PNG LNG at completion to be the US $19 billion constituting a cost blow out of 30 % from initial anticipated project cost.

Negative Foreign Exchange fluctuations were said to constitute 50 % of this cost escalation and other reasons being the cost of delays due to work stoppages & land access issues adding a further cost escalation of US $ 1.2 billion.

The final PNG LNG project cost at completion and commissioning is said to be US $19 billion.
Not many of my FB friends who may be interested and other commentators fully understand the subsequent capital structure and financing of the total established PNG LNG project cost of US $19 billion.

It is said that 80 % of the total project cost was financed through syndicate finance provided by various international banks including Commonwealth Bank of Australia. On the basis of the project cost being US $19 billion, this 80 % syndicate finance would equate to US $15.2 billion.

If 80 % (US $15.2 billion ) of the total project cost was syndicate financed by a syndicate of international banks, a remainder of 20 % being the only US $ 3.8 billion is the equity portion shared by the equity partners.

Who are the equity partners, you might ask? Let me now provide a summary of the equity partners as I understand (there may be some slight variations ):

ExxonMobil 33.2 %
Oil Search 29 %
PNG Government 16.6 %
Santos 13.5 %
Nippon Oil 4.7 %
MRDC 2.8 %
Petromin 0.2 %
Total 100 %

From the above, one can deduce that the risk capital invested by the equity partners is only US $ 3.8 billion as the balance of the US $15.3 billion was funded through syndicate finance.

Papua New Guinean must understand that given the financial structure of the PNG LNG project as demonstrated above, the project clearly has a debt structure of US $15.3 billion at completion and commissioning of the PNG LNG project funded through syndicate finance by various international banks including Commonwealth Bank of Australia. This US $15.3 billion must be repaid through project revenue and it will take a good number of years including the interest regime negotiated at the total repayable would be US $15.3 billion plus interest.

Note that the Kina has depreciated against the US $ since 2009 so there is an escalation of the kina cost of repayment to meet the same US $ principal sum plus interest cost. Simply speaking, more kina is required now to repay than anticipated back in 2009. Unless of course some arrangements were secured at the granting of the syndicate finance to mitigate this huge potential exchange rate risk exposure.

Friends, not only that but listen to my next clarification; PNG government and MRDC funded their equity through separate loans which are obviously subjects of other ongoing controversies. ..

For clarity, two loan component's payable with respect to the PNG LNG project, 1 being the project cost finance and 2. Equity finance by individual equity partners like PNG Government and MRDC which are separate from operations of the PNG LNG project although it is to do with their equity portion in the PNG LNG project.

One might then ask the obvious question,; what about the LNG product shipments to international export markets since 2014. It is said to be some 250 shipments exported at US $50 million per shipment to date since 2014.

Well, Papua New Guineans need to understand the equity structure and note that not all shipment revenue belongs to one equity holder, say PNG government. Apportion PNG Government's portion out of each shipment and only then one will appreciate in perspective.

Finally, there is some confusion about the size of the PNG LNG project. Let me clarify, it is said to be the biggest single project in PNG simply because its establishment cost is US $19 billion whilst the National annual Budget is an average of $ 4 billion.

Furthermore, by world standards, it's a small stone throw in the ocean, cause nearer to PNG, Gorgon Energy LNG project in Perth Western Australia is US $120 billion-plus project cost..they're doing another one up in Gladstone Queensland at similar project cost.

No comments

Please free to leave comments.