PNG Gas

Papua New Guinea Gas (PNG Gas), has been an exporter of liquefied natural gas (LNG) in Papua New Guinea since 2014. The LNG sector is important in the PNG's economy: the value of LNG exports in 2017 was estimated to be at US$3.6 billion while GDP was estimated to be at US$20.5 billion. On a global scale, PNG is a minor producer. In 2017, PNG acquired the 17th rank on the list of exporting countries; its exports covered 1.5% of the world's total exported LNG. There are five LNG projects in PNG; only the Hides Project is fully operational. An agreement was made between the PNG government and a consortium of companies to develop the second project: the "Elk/Antelope" field. These companies cooperate under the Papua-LNG project. The development of the third project, the "Pn’yang Gas Field", is in an advanced planning stage. The fourth LNG project in development is the "Western Gas" field. The fifth Gasca gasfield is offshore. The benefits of LNG development for the country is a controversial issue. Government participation in the projects is controversial and has been a dominant theme in PNG politics in the past decade. It became a major issue in the events leading to the resignation of Peter O'Neill as prime minister.
PNG/LNG.
The Hides gas field is the main field operated by PNG-LNG and was discovered in 1987 by BP, who sold it to Oil Search company. Originally, the idea was to transport the gas through a pipeline to Australia. Chevron was the big fossil fuel company that would carry it forward. It came close to a production phase but the project was dropped in 2007 after Australian customers dropped out of the conditional sales agreements. At present Australia exports a manifold of LNG compared to PNG and the project would not be of interest for that market anymore. In 2008 ExxonMobil assumed leadership to develop a gas project sourcing the Hides gas field to export LNG to the Asian market. The project was completed in 2014 after rapidly completing planning and construction phases:
Project achievements.
The construction of PNG/LNG is a major engineering achievement: it was a massive project in difficult terrain. The project was completed ahead of schedule in 2014, though there was an expenditure overshoot of US$3.3 billion.
The project required PNG citizens to be extensively trained: 10,000 citizens during the time of construction. The project employed 2,600 citizens after construction and they constituted 82 percent of the workforce; 22 percent were women.
The project produced above-planned capacity: it was expected to produce 6.9 million tonnes of LNG per year, but the actual average output was 8 million tonnes a year. In 2017 the production was 8.3 million tonnes. It decreased to 7.5 million tonnes in 2018 due to earthquake shutting down plants. The plant resumed operations after 8 weeks. It is estimated on the basis of the highest monthly figures that output may grow to 9.2 million tons
The project is an inexpensive producer. According to an analysis by consulting firm Wood Mackenzie and Credit Suisse, the project's break-even price of around $7.40 per million British Thermal Units compares favorably to an average over $10 per million BTU for eight recent gas projects in the region.
The project does not only focus on the major Hides gas field. Project gas is sourced from seven fields: the Hides, Angore, and Juha gas fields, and the Oil Search-operated Kutubu, Agogo, Moran, and Gobe Main oil fields, provide approximately 20% of PNG LNG Project gas. Gas is also purchased on a third party basis from the SE Gobe field.
Gas field reserves were re-evaluated in 2016, which resulted in an estimated increase of 50% when compared with the estimates made before construction in 2009.
Negative aspects of the project.
ExxonMobil commissioned a study to Australian consulting firm [ACIL-Tasman] to calculate the benefits and costs to PNG; they projected large gains for the PNG economy as a result of the project. However, in a study commissioned by Jubilee Australia, two Australian economists – Paul Flanagan and Luke Fletcher – compared the predictions of this report in 2018 with actual outcomes. They found an actual fall in employment, household incomes, employment, government income, and imports where the ACIL-Tasman study predicted increases. GDP was expected to double as a result of LNG/PNG in the ACIL-Tasman study, but the researchers found a mere 10% growth. The Jubilee study has been criticised because the researchers did not produce a credible counterargument: What would have happened in the absence of the PNG LNG project and to what extent are the observed effects related to PNG LNG? Prime Minister Peter O'Neill rejected the Jubilee report and claimed low energy prices as the main factor. ExxonMobil responded by mentioning the social and economic benefits of the project such as stimulating entrepreneurship and supporting local communities.
Specific questions about the depreciation allowed and tax concessions were asked before the project began. Mekere Morautachallenged the exemption of General Sales Tax and interest withholding tax given to LNG PNG in parliament. The exemption of interest withholding tax is important as the project is highly geared and much income is needed to service these loans. Arthur Somare, the relevant minister at the time, stressed that a 30 percent corporation tax on profit remained despite these concessions. A second concern was raised by Aaron Batten while presenting a seminal report by the Asian Development Bank: "Papua New Guinea: Critical Development Constraints". He mentioned the taxation concessions to the LNG project. The Internal Revenue Commission argued that companies need the time to extract, produce, export, and sell their products before they can generate a continuous income that is taxable. However, the Internal Revenue gave no definite and precise information of income flows from LNG PNG. As a result of these concessions, substantial income was not expected until after 2020. The actual arrangements between government and companies are in a secret Resource Development Agreement. However, Flanagan and Fletcher suggested that Exxon and Oil Search should be paying AUD$500,000 to the PNG government every year, since the gas started to flow in 2014. Instead, they are paying a fraction of this amount, partly because of their use of tax havens in the Netherlands and the Bahamas as they do in Australia.
The local beneficiaries of the project have not received their dues on time. In 2009 before the start of the project there was a large meeting of local stakeholders in Kokopo District: representatives of provincial and local government as well as representatives of local communities claiming to be landowners in the area involved, which resulted in a written agreement on the sharing of benefits. There have been regular announcements that benefits would be distributed, but these do not seem to have been followed up. Landowners have threatened to shut down the projects. The most serious clash took place in Angore in 2017 and involved destruction of property. In 2018, protesting landowners destroyed property again and demanded a payment of US$10million as a fee for maintaining security at the plant. Payments for that purpose were not foreseen in stakeholders agreements. ExxonMobil as well as Oil Search insist that they have paid the amounts due to landowners; the problem is a question of distribution and not of payment. A few days later, Oil Search claimed that journalists misinterpreted a message where its intent was not to blame the government. ExxonMobil says that it has a good working relationship with the Mineral Resources Development Corporation which is in charge of looking after the interests of the landowners. Some money was released to downstream landowners along the pipeline and in Boera village near the loading bay landowners near the pipeline. The government argued that identification is most difficult in the upstream areas, as most of the royalties appear to be locked in trust accounts. The amounts mentioned are around US$200,000,000. The PNG government argues that the delay comes from landowner identification: identifying actual resident clans are more difficult than expected. O'Neill blamed the previous government as being the ones responsible for this issue's resolution. However, it can be argued that such an identification is almost impossible when oral testimony is the only source available to identify descent and territory. There are calls for revisions to the Oil and Gas Act 2018 to resolve the problem as well as calls for revisions to the entire process.
The income dependent on profit is unsatisfactory. ExxonMobil claims to have paid 5 billion kina (US$1.4 billion) in royalties, development levies, taxes, and dividends to the PNG government. They argue that after 2025-2027 the amounts paid will significantly increase. The project is primarily financed by loans, which would eventually be paid off; Income from corporation tax and income from equity would rise as a result. Nevertheless, there is strong agreement that the PNG government has been outdone in negotiations with the companies, which inspired an important debate among politicians about the mining and taxation legislation. Charles Abel said: "We need to develop a mineral and petroleum regime where we take a smaller equity for free and a higher royalty rate, introduce domestic market obligation and local content. We need to understand why a large current account surplus (from mineral and petroleum exports) still leaves us with a foreign exchange shortage.”
PAPUA LNG: the second LNG company in PNG.
When the proposals for an LNG facility in PNG were raised there were two factions in the cabinet: one headed by Prime Minister Michael Somare who advocated a partnership with InterOil to develop the Elk-Antelope gas field, and the other by his son Arthur Somare, who advocated a partnership with ExxonMobil/Oil Search to develop the Hides gas fields. Somare's son won, but once PNG/LNG became operational, attention went to Interoil's Elk-Antelope Gas Field. The fields are located in a marshy area in the eastern margin of the Papuan Basin to the west of Port Moresby (90 km from the Gulf of Papua coast). The size of the gas field is certified at about 6.5 trillion cubic feet, compared to the estimated 7.1 trillion cubic feet in Hides and associated fields. While planning and implementation of the LNG PNG project did not encounter problems, the Elk-Antelope gas field project was mired in political and technical controversies.
Competition for control over the Elk-Antelope gas fields.
Two relatively small oil and gas companies were major players in the Elk-Antelope gas field: Interoil and Oil Search. Interoil was a minor company in the gas and oil industry that acquired exploration licenses for oil and gas in PNG in 2005. The driving force in Interoil was its founder: Phil E. Mulacek, who announced in 2007 the discovery of a large gas field on the edge of the Gulf of Papua in the south of the country. "The InterOil Corporation, made the kind of announcement investors crave: explorations near the refinery had uncorked a vast pool of natural gas potentially larger than the United States' total residential consumption of the fossil fuel in 2005. The size of the discovery was so large, Phil E. Mulacek, chairman and chief executive, informed an analyst, that simply controlling its output 'was sort of like trying to stop the Mississippi.'" An agreement was made between Interoil and the PNG government to proceed towards exploitation on one condition: Interoil had to partner with a company that had experience the development and management of a gas field. Shell and ExxonMobil were mentioned as possible partners when Interoil entered negotiations. The investment bank Merrill Lynch (now called Merrill (company) was also involved. However, at the end of 2012 Interoil did not manage to find a partner to reach a Final Investment Decision (FID) and were in danger of losing the licence. A proposal suggested that the PNG government would become a 50 percent shareholder instead of taking the proposed equity of 22.3 percent . It was denied because the government did not have the money and it would not solve the problem of expertise. The French multinational Total SE is a major company in the oil and gas industry and they filled the void by buying a 60 percent interest in the gasfield. Oil Search Company entered negotiations around the same time. It was already a stakeholder in the LNG PNG project and it extended its interests by buying into the Elk-Antelope gas fields, and they bought the Pac LNG group that had a 22.8% stake in the gasfields and paid about US$900 million for participation. The money was sourced from equity bought by the PNG government and financed from a loan from the Swiss bank UBS. Oil Search contested Total's participation before a London court of arbitration. Oil Search claimed to have priority rights (pre-emptive rights) in buying into Interoil because of its acquisition of Pac LNG. Total continued to be present in Papua-LNG but at a reduced rate of 40% instead of 60%. Interoil remained with an interest of about 40% in the Elk-Antelope gas field. Oil Search made a bid for Interoil's remaining shares in the gas field for US$3 billion. OilSearch had to concede to ExxonMobil: they offered US$2.2.billion for the remaining shares of Interoil in the gasfield. However, Mulacek had been replaced by Michael Hession as CEO in 2013. Nevertheless, Mulacek challenged the deal in courts and in the shareholders meeting, but was defeated in both instances.
The pattern of fierce competition and shifting alliances resulted in the following shareholding and proposed structure for the project: Total is the largest shareholder of the Elk-Antelope fields with a 31.1% interest. The partners are ExxonMobil (28.3%) and Oil Search (17.7%). The plan assumed that construction is 70% debt financed.
Oil Search had the management contract for the upstream facilities while ExxonMobil managed the gas liquefaction plant and loading bay. The latter facilities would be built at the same place near Port Moresby as installations serving LNG/PNG.
The agreement contained an obligation to provide gas for domestic use (a reserved 5%) so that PNG is for 70 percent self-sufficient for electricity supply in 2030. The State and landowners are not obliged to pay for their equity (US$900 million) before revenues start coming in. Payment for the Interoil shares by ExxonMobil is partly deferred until the FID and first shipments are made. Interoil retains residual rights to income from the gasfield if it performs above certain expectations. Pac-LNG has retained residual rights to income if the output is beyond a certain expectation. Total deferred cash payments for equity to the date of the FID (US$230 million).
Reactions to the Elk-Antelope field agreement.
The Memorandum of Understanding between the PNG government and the companies involved in the Elk-Antelope field was announced at the end of the A Asia-Pacific Economic Cooperation (APEC) conference in 2018. Its intent was to support PNG's international status, and it was followed by an agreement in April 2019 to start the Front End Engineering Design process. The Final Investment Decision (FID) that makes construction possible is expected in 2020. Output is expected to flow in 2024.
In 2011 the FID was expected in the same year. In 2017 the first LNG exports were expected in either late 2020 or early 2021 The new dates are also speculative because the financial underpinning of the announced agreement is virtually absent. There is only a commitment of a small proportion of the necessary cash for construction. The cash paid for the gas field is for the shareholders of Interoil and is not working capital for Papua-LNG. Nothing has been built or constructed with that money: it is merely a sum paid in the expectation of predicted income, which contrasts with investing in a company that started from scratch. The project is expected to be financed from loans for 70%; where the loan capital would come from is undetermined.
The agreement was also politically controversial. Authoritative voices had argued that the mistakes of LNG PNG should have been avoided. O’Neill agreed, though he also said that there should be an "environment for our development partners to maximise returns on their investment". He was under pressure from a comment in the March Monetary Policy Statement from the Bank of Papua New Guinea, which urged the government to be less generous with tax concessions. The policies with respect of tax and natural resource projects had led to less availability of foreign exchange and had not strengthened tax revenues. In 2018, PNG had a strong positive balance on the current account, which should have led to an increase in foreign exchange that never happened. Deputy Prime Minister Charles Abel criticised the benefits of natural resource projects for PNG. Abel collaborated with Minister of Mining Fabian Pok on the government negotiating team for the Papua-LNG project. He was content about the agreement: "We made compromises, but he considered it a significant improvement over the PNG LNG project: this Agreement provides earlier, less risky flows to the State, reduces the States financing burden to buys its shares, and provides some gas for domestic use at a discounted and fixed price. There are strong provisions for third party access to infrastructure and national content.” 
However, the agreement was immediately controversial. Some of the initial criticism came from Hela province, the locus of LNG PNG where benefits should have appeared. Philip Undialu, Governor of Hela Province, submitted a long list of critical questions. Minister of Finance James Marape, who was from Hela, resigned. More MPs followed him and resigned from the governing party (PNC). Four out of five resigning MPs originated from resource-rich areas 
The analysis of Mekere Morauta.
Former Prime Minister Mekere Morauta criticised three areas in the agreement: first, the agreement was created without the necessary and required consultation. Landowner groups have not been properly identified in the PNG LNG project after ten years of operation. The government claimed that the money was reserved for when the process of identification is complete, without clarifying where the money was. It was seen as a cardinal mistake in the PNG LNG project that this identification was not completed before the start of the project.Therefore, landowner groups should have been identified before the APDL (Application for a Petroleum Development Licence) was submitted. Abel defended it as the agreement is provisional; there was no APDL at the time. None of the members of the SNT (State Negotiating Team) publicly broke ranks with government, but there were strong statements claiming that this team, as well as the Department of Petroleum, have been sidelined. Morauta distributed a letter from the Department of Energy to the Secretary of the Government, which demanded that a proper APDL be made with the necessary documentation about the field's size and its economic viability. Total should have provided ten documents that were absent or deficient, but they did not follow up on requests. The necessary information for decision making was not there and the required procedure was not followed.
Second, the tax arrangements are similar to the ones in LNG PNG. The State agreed with the ongoing operational and depreciation costs. Depreciation in the project was tied to the repayment of loans. Profitability was predicted to be low until the loans were repaid with interest. If the participating partners furnished the loan capital themselves they would have assured themselves of a steady income stream irrespective of profitability. The faster the depreciation the less profit would have been made. Tax on interest or dividends would not be withheld, which meant the companies could export their income to a destination where little or no tax was paid without any taxation by the PNG government. Two of the participating companies – Total and ExxonMobil – would also have a steady income stream from the management contract. The companies would also have been exempt from paying GST, import, duties, and taxes on project goods and consumables. The management of the project was virtually tax free which made the management contract more profitable. Morauta argues that nothing was learnt from the LNG PNG project and mentions two specific instances: first, there was no proper taxation for windfall profits and there was no mention of taxing the oil that came out of the well mixed with gas (condensate). The oil was sold to Oilsearch, which could have been seen as compensation for Oilsearch losing out on the management contract.
The third area of criticism concerned the domestic gas obligations of the project. The domestic provision of gas was an option to 5% of the output in the agreement. The agreement was also in contravention to the National Energy Policy which demanded that 15% of all gas output was available for domestic use. The agreement mentions the only provision of gas for electricity supply ignores possible wider industrial use. Gas would also have been expensive as it would be indexed from a high base to the world market price while it is domestically supplied.
Doubts over the field's value.
At the time of the agreement's conclusion, doubts returned in regards to the field's value. Interoil had always presented the Elk-Antelope gas field as their own original find. That is not true; there is an earlier explorative team in the area that found gas, but doubted whether the field was exploitable. A whistleblower in the Department of Energy has brought this in the open again at the time of signing the agreement. According to the report, the field had five major problems: the gas was probably not as extensive as predicted, not easily extractable, high water content, low quality gas, required expensive treatment, and the field's geology is suspect.
Government’s response.
Fok, the Minister of Mining, replied to the Governor of Hela province, Philip Undialo, who had a concern about the gas agreement. He denied all accusations and considered them lies for political purposes. He stressed that none of the members of the State Negotiating Team had publicly spoken negatively about the agreement.
Effects of the change of government.
The agreement on the Elk-Antelope gas field became the core of political controversies about PNG’s policies with respect to natural resources. It led to Peter O'NeillO'Neill's resignation. His successor, James Marape, announced changes in the management of PNG's natural resources in his maiden speech, though at the same time he was keen to reassure investors: “He did not intend to chase industry away, but asserting that reforms were needed to ensure benefits are spread more evenly.” Oil Search's Peter Botten proclaimed immediately after Marape's appointment that it was likely that nothing would change and arrangements would remain the same when the third gas field Pn'yang came into production. Botten did not expect any significant new concessions on the dea. which led to a bristling reply from Marape, yet he remained vague as regards to envisioned changes. Minister for Petroleum and Energy Kerenga Kua announced two months after the change of government that a revision of the “regulatory and commercial terms of the so called LNG agreement was ready for political approval”. The companies involved were unsympathetic to proposed changes. Total declared that no change in the agreement would be entertained. Oil Search warned that revisions may push back the FID to 2021 and projects elsewhere in the world may take precedence over Papua-LNG Three government-backed lenders – Japan Bank for International Cooperation (JBIC), the US Overseas Private Investment Corporationt(OPIC) and Export Australia Finance otherwise named Export Finance and Insurance Corporation (EFIC) – announced an initial commitment to lend to Papua-LNG. Kua negotiated with Total in Singapore in August 2019 to receive better terms, which resulted in a number of non-binding statements of intent. The Papua-LNG project would proceed as planned. His most important statement was that in the future, contracts would be made on the basis of a Production sharing agreement which would lead to early free cash flows in petroleum and mining contracts.
The Pn'yang gas field.
The Pn’yang gas field is the third project for PNG Gas. It is situated in the lowlands to the northwest of the Hides gas field. It was originally thought to be a relatively small gas field, but a certification exercise revised this as composing of 4.37 trillion cubic feet of gas. For comparison, Hides is estimated to be at 7.1 trillion cubic feet and Elk-Antelope at 6.43 trillion cubic feet. The development of this gas field would require relatively fewer expenses: the pipeline from Hides to the coast would only need to be extended inland. At the Caution Bay loading point it would need one extra train to condense the gas for shipping, which would mean building one extra train besides the two extra trains for the Elk-Antelope gas field. Synergies are expected. ExxonMobil has been the main actor in this field but it is not the only participant. ExxonMobil as lead operator owned 49 percent, Oil Search held 38.5 percent, and JX Nippon of Japan held 12.5 percent interest. The Australian company Santos has bought into the project a 14.3 percent stake. Santos' acquisition saw current participant ExxonMobil's stake drop from 48.99 percent to 36.86 percent, Oil Search's from 38.51 percent to 36.86 percent and JX Nippon's from 12.50 percent to 11.96 percent. However, the deal with Santos was contingent on the award of a product development licence and reaching a final investment decision. Before the political changes, Oil Search was optimistic about the development of Pn’yang. They expected an agreement with the PNG government similar to the one with Papua LNG in the second quarter of 2019 and an FID in 2020 in conjunction with the FID for Papua-LNG. It is unlikely that these deadlines will be met because of the political changes.
The Western Gas Project.
The Western Gas Project is the fourth LNG development. Central in this proposal are four drilled gas fields in the Western Highlands. Horizon oil is the major partner in these. Most of these interests have been bought from Repsol, a Spanish company. The Chinese company Balang also bought interests in the fields from Repsol. Repsol maintained interest in the field. after selling off shares. Kumul Petroleum holdings, the PNG state company is another partner. Brent Emmer, the chief Executive Officer of Horizon declared in 2017 that pre-Feed studies (concept engineering and design were ready. It entails the construction of a processing (conditioning) plant at the wellheads to separate the oil (condense) from the gas, a separate pipe line to Daru, and the construction of a liquefaction plant in Daru. ( There has been no significant follow up. It is a mooted point whether it should be a stand alone project or whether it should be integrated in the operations of LNG-PNG and Oil Search in the highlands.The expectation is that the project will generate also much condensate, oil that comes with the gas extraction. The project has been the subject of a conflict with the government because permits were cancelled/ This was solved amidst allegations of corruption. An inquiry concluded that nothing inappropriate had happened and the PNG government did not follow up the accusations.
The Pasca Gas field.
Pasca gas field is an offshore project in the Gulf of Papua New Guinea. It entails a production platform and loading capacities offshore. Twinza oil holds the licence. The field is known since 1988 but the technical capacity to develop the field is according to Twinza recent. The company has been very optimistic about the stage of preparation. However negotiations with the PNG government only started in may 2020. and the FEED phase in the project had not started yet then contrary to earlier expectations.
Equity participation finances.
The projection of equity participation finances in LNG projects is a major issue in the politics surrounding LNG projects. The Mining Act in PNG allowed government participation to be involved to have a share of a maximum of 30 percent in natural resources projects; In the case of PNG LNG this was projected as a 19.4% share. About US$800 million was contributed to the construction of the project and the mining rights. This payment was to be made following the FID. A concurrent phase in the project was the front end engineering Design (FEED) which raised the project's cost, which required the share to be financed by equity. As a result, the PNG government had to find US$1 billion when the FID was made on 12 August 2008. In early March 2009 the PNG government acquired the sum through a loan from IPIC (International Public Investment Corporation; part of Mubadala Investment Company), a sovereign fund from the government of Abu Dhabi. It was not an ordinary loan, but an Exchangeable bonde. IPIC acquired the right to either be repaid in cash or through the security in the loan: PNG's equity in Oil Search Limited. These shares ideally would, at the time of redemption, equal at least the value of the loan which was designated at a share value of A$8.55. If the value of the shares was lower than the loan, the PNG government would have to pay out the missing cash. If the value of the shares was higher than the loan and IPIC wanted to buy the shares, the PNG government was entitled to the extra value in cash. The loan was expected to mature after five years, but IPIC could opt for a shorter period. The interest was 5%. When the loan matured in 2014 the share price was around A$8.55 and IPIC wanted the shares as repayment for the loan. The PNG government sent a delegation to Abu Dhabi in an attempt to dissuade them and accept cash. They refused and the Oil Search shares were transferred from the PNG government to IPIC. The share price also fell back and PNG had to add US$70.8 million. This financial construction was defended by Arthur Somare when the deal was concluded. He argued that the government did not want the loan to add to government indebtedness. It was fundamentally the sale of an asset – the Oil Search shares – in the first place. 2008 was also the year of the worldwide financial crisis which made it difficult to raise money. “The exchangeable bond effectively involved a future swap in shares held in Oil Search for immediate funding for a direct equity stake in the LNG venture.” The latter was expected to be much more profitable: The government also expected to raise more money from the equity participation in LNG-PNG than from Oil Search dividends. It was expected that the revenue stream from the LNG project would redeem the loan. Arthur Somare was the government minister in charge of public companies (IPBC) and the LNG project. Morauta challenged Somare when the IPIC loan concluded; he criticised Arthur Somare's position as minister in charge of IPBC and the use of his position to monopolise negotiations about the loan. From the beginning, he criticised the mortgages of national assets (the government's shares in Oil Search). Morauta became the minister of IPBC in 2011 and reiterated his criticisms: "A loan in which Treasury was not involved; a loan which never had NEC approval; a loan which was never tabled in Parliament. It was negotiated and signed behind closed doors by people with no experience in the complex world of international high finance." He criticised technicalities of the loan: "The loan was drawn half a year before it was needed for financing and this led to a loss of interest. Currency risk was not hedged either. The most fundamental criticism was that A longer running time of the loan could have resulted in financing it from the income stream of PNG/LNG. That was due to early maturing of the loan not realistic."
The government of PNG lost its equity in Oil Search after the IPIC loan was redeemed and had exchanged it for equities in LNG PNG. O’Neill wanted to redress this situation with a new shareholder in Oil Search, who was looking for fresh capital to buy a stake in the next LNG project: the Elk-Antelope gas field. They needed US$900 million to buy the share of Pac LNG group in that field. Oil Search issued new share capital to finance this acquisition. These shares were bought by the government of PNG and financed with a loan from the Australian branch of the UBS bank. This loan was similar to the IPIC loan to finance shares in LNG PNG: the shares that PNG bought in Oil Search were security for the loan; it was a "collared loan", which implied hedging one's bets on the movement of share prices – the high and low were the collar – in order to guarantee a loan purchasing the shares. The risks for the bank were reduced because the loan was to be serviced directly from an Escrow account in Singaporewhere PNG's income from LNG PNG was paid. UBS had a first claim to the money,
The finances were controversial since its inception and were similar to the debate around the IPIC loan. First, the loan concluded by bypassing the legally required channels and the little consultation that took place was careless. For example, the board of the State Petroleum organization was presented with a decision that they were expected to follow and concerns were ignored. PNG's National Executive Council (NEC) was also confronted with a prepared statement. The treasurer, Don Polye, refused to sign and was fired as a result. However, there were more ministers who opposed the decision. The decision has probably passed in some form through the Central Bank and the Ministry of Finance, but prominent PNG economists argued from its inception that “the UBS loan was sought outside of sound fiscal management laws and legal governance”. This was confirmed by an Ombudsman Commission report that recommended a leadership tribunal for Marape and O'Neill. The Commission found fifteen breaches of procedure. The most important breach may be that parliament was not asked to approve the loan as this was constitutionally required.
Much of the loan was shrouded in mystery and there suspicions about parties benefiting themselves. The suspicions were warranted as there was a bridging loan of A$335 million covering the costs of acquiring the shares besides the substantive collared loan of A$904 million to cover the price of the Oil Search shares. The Ombudsman Commission's report found that “it involved different contracts being signed between at least eight different parties including the PNG State, UBS AG, UBS Nominees Pty Ltd, UBS Securities Australia Limited, the National Petroleum Company of PNG (Kroton) Limited and its parent, the Independent Public Business Corporation, the Papua New Guinea Liquefied Natural Gas Global Company LDC and, finally, Oil Search Limited”. The Commission of inquiry into the UBS loan would pay attention to the fees paid to brokers and negotiators.
Third, the loan was supposed to be redeemed for a long time before one could expect revenues from the Elk-Antelope gas field to repay it. It was expected to be serviced from the income from PNG LNG. However, according to the treasury secretary Diari Vele, the PNG government could only expect revenues to flow after 2020 when investment costs were recouped. The investment costs had to be settled out of depreciation charges to pay off the loans to the highly geared project. The loan had to be repaid in 2016 and Morauta wondered how that had to be repaid. Ultimately, the loan was repaid by the transfer of shares to Oil Search. The repayment was made at a loss: the government of PNG had bought these at A$8.20 and the price was A$6,70 at the time of redemption. When the deal concluded the PNG government expected the share price to double which would have resulted in a windfall for the PNG government. Kumul Petroleum Holdings, the state owned company that owned the shares estimated the loss at US$254 million.
The policy debate.
Income from natural resources in PNG projects were far below international standards, according to authoritative institutions (OECD, IMF and IETI Extractive Industries Transparency Initiative). It was thus understandable that renegotiation of the Papua/LNG agreement was a priority for the Marape government after coming to power. Kua reopened negotiations. However, the energy companies were only willing to grant minor concessions. Kua had to accept the terms of the Papua-LNG agreement, but he insisted that the agreement for the P’nyang gas field should offer considerably better terms: "In the P’nyang talks, the government appears to be seeking a better tax take, more local content and jobs opportunities, more project information from the operator, and a firm commitment to development of P’nyang in a defined timeframe.” The energy companies were not willing to take that into consideration and talks broke down between government and the companies on 31 January 2020. Prime Minister Marape sounded confident that progress on the Papua LNG project with lead developer ExxonMobil would continue. Three new trains to convert natural gas into LNG were planned to treat the gas from Papua-LNG as well as from P’nyong. The energy companies wanted to only proceed with preliminary engineering and design for the expansion of its PNG LNG plan with new trains after a Petroleum Development Licence was given for the P’nyang field. The result was a stalemate.
Landowner interests are a further complicating factor. An umbrella organisation of landowners groups covering the area of operation of Papua/LNG went to the courts in order to ask for a temporary injunction against the continuation of developing Papua-LNG. The court allowed the landowners to delay the issue of a Production Development Licence until a new agreement was negotiated and a new Petroleum and Gas Act was in place. Among the landowners' demands were production sharing and at least 50% PNG ownership.
Policies did not reflect much on the attempts to gain equity in the projects. The PNG government has lost its shareholding in Oil Search and exchanged them in practice for a shareholding in LNG PNG. This exchange came at a substantial cost of contracting and servicing a loan and an additional payment. The government of PNG has not acquired a shareholding in Papua-LNG through Oil Search despite the cost of contracting and servicing a loan plus unknown extra payments. The energy companies benefited from a capital injection in PNG LNG through the government's shareholding. Oil Search has benefitted from a capital injection through the botched attempt to gain shares through the UBS loan. The agreement on Papua-LNG expected a shareholding of 22.25 percent in Papua LNG that is expected to be paid from the project's income. Ken Ail Kaepai of PNG University of Technology sketched the dilemma as follows: “Under this arrangement, the dividends will be delayed over more extended periods required for allowing the State to repay the equity capital sourced from external lending institutions or will enable the investor to recoup its equivalent equity capital cost internally using future positive cash flows from the project.” 
Kerenge Kua, the minister of mines gave the most comprehensive statement on mining policies so far to a webinar of the PNG Chamber of Mines. He advocated moving from a concessionary statement to a policy of production sharing. He deplored the borrowing for equity from the past, but did not come out against equity ownership of the government. On the contrary: the statement left the possibility of 100% state ownership open. The Chamber of Mines deplored the proposals. It also queried whether government debt was due to participation in mining.