Kumul Petroleum News

3rd Petroleum and Energy Summit, Port Moresby, 19th March 2019

“These are exciting times in PNG.

There are three Major Projects moving towards FID in Papua New Guinea.

• The Total led Papua LNG moving forward quickly, with the Key Terms agreed and Gas Agreement with State expected to be finalised within a month. And while there remain some differences between the parties, we expect Total to finalise the access agreement with PNG LNG JVP in the near future.
• Meanwhile ExxonMobil is finalising their development plan for the P’nyang gas field, and we expect the Gas Agreement with the State to be finalised sometime in Q2 2019.Given this, both Projects should enter FEED in Q2/Q3 2019, with both aiming to put LNG in the market in the 2024-25 window.
• Finally Twinza are finalising their plans to develop the first offshore field in PNG (PASCA Project), which while it is a much smaller development that the two LNG Projects we’ve talked about, it is a significant project for PNG as it is the first commercialisation of an offshore field. Some key challenges still remain, but we are confident that these too will be resolved shortly.

When it comes to how Kumul Petroleum Holdings will participate in the future, we intend to exercise our maximum entitlement of 22.5% of the equity in all new Petroleum developments, retaining 20.5% of the equity and 2% is passed to the Landowners.

Obviously this involves raising a considerable amount of capital, and early last year we engaged Lazard in Paris as our financial advisors to look into how we can do this. They have completed our Equity Finance Feasibility Study, and subsequently have developed a Strategy and Financing Plan which has been approved.

More recently we’ve engaged White and Case as our Legal Advisors for the financing program. They are now working closely with Lazard to implement the Financing Plan.

Lastly, we are jointly marketing our LNG entitlements from Papua LNG with Total from our shared office here in Singapore. I’m pleased to say that two of the four staff in that office are national secondees from Kumul Petroleum Holdings.

We plan to incorporate the marketing JV after the Gas Agreement has been signed, most probably in Q/2 of this year (2019).

To discuss the role of the NOC in PNG, I want to fist talk about the advantages to a nation when they establish a properly functioning NOC.

The major advantages to a nation when establishing an NOC

An NOC allows for an integrated control over hydrocarbon resource policy: IOCs are often driven by objectives which may differ from the national agenda, such as reserves replacement or revenue drivers. An NOC helps integrate the two agendas.

–Increased technology and skills transfer. Directly participating in the development and production of a Project is very important to promote the transfer of knowledge and technology. Exposure to the benefits from NOC to NOC relationships. NOCs talk to NOCs and promote intercompany cooperation and trade.

-Infrastructure design benefits through integrated planning. Petroleum Projects bring heavy development, quite often in remote areas, bringing with it associated benefit such as roads, power generation and local employment, all of which the NOC will promote

– Diversification of revenue streams towards tax and dividends. The old story: When oil prices are high, so are taxes, when they are low, the largest stream of revenue for the State comes from dividends. Diversification wins.

-Significant build on the country balance sheet.  The NOC often quickly build up capital value. They are owned by the State, and as such, are part of the State’s bottom line.

-Long term investment strategy should outlast domestic resources. A good NOC investment program will return long term revenues and rewards, which should outlast the domestic resources.

Critical success factors for an NOC

Firstly, to quote a report published by FGE on the topic in 2013: “There is no point in establishing an NOC unless it is powerful and creates wealth for the country” This is something we absolutely agree with.

Before Kumul Petroleum Holdings legislation was passed into law, the company sought expert advice built on a global review of NOC and to simplify a pretty long report, they came up with some core success factors, all of which were addressed in the legislation.

To limit direct political interference with company operations: The Act requires independent expert Directors and specifically separates the functions of the company away from Government.

Grant a right to participate in new (and established) Projects. While this was already in place with the Oil & Gas Act, the KPHL legislation enhanced this by detailing the charter of the company.

Regularly pay taxes and dividends to the State. KPHL is a taxable entity and the legislation specifies how and when profits must be returned to the State.

Train nationals to the highest standard (and pay appropriately). While this is not legislated, the company uses external expert advisors to ascertain the correct level of training and compensation for employees.

Unify all the governments Oil and Gas participation into one body. The Act specifically sweeps all the States Oil & Gas assets into Kumul Petroleum Holdings.

Limit the scope of the States obligations on the company. While this obviously cannot be legislated against, it is a fact that the State does not load KPHL with the excessive obligations which have broken other NOC’s.

Subject the Company to the highest level of scrutiny: I think it speaks for itself when I can tell you that we not only have to produce our financial statements according to a strict timetable, we also have two audits run over our operations every year, one by the Auditor General and the second by one of the “Big Four”.

As the NOC, we will act on our core mandate

We will utilise the nation’s oil and gas resources to bring the maximum possible value to the people of Papua New Guinea. This basically means we intend to exploit the provision the KPHL Act which allows KPHL to invest and operate in all direct and indirect areas of the industry

We’ll broadly follow the finding of the 2015 McKinsey study by focusing on the downstream activities which bring the greatest benefits for PNG which is Electricity. The generation of electricity to meet two objectives, power for households and reliable and reasonably priced power for industry

Gas supply (and possible investment in) for the furnaced based industry, such as cement and glass

feedstock for Petrochemicals particularly when used domestically.

Financial drivers to move into the midstream and downstream market

It’s pretty well known that a lot of the NOC’s particularly the small ones without a lot of financial muscle, are all highly exposed to upstream operations, and thus very exposed to oil prices.

When the market crashed in 2014, everyone in the industry took a hit, but an analysis by Accenture published in 2017 showed the NOC suffered the most. In the 2012 – 2016 period NOC’s average profitability fell 30% to around 10% and while the impact was greatest on the smaller NOC’s, it still impacted the very large leading NOCs.

Of course IOC’s were impacted too, but not to the same extent, and their analysis gave some ideas.

It turns out that many IOCs (particularly the Majors) have major diversification in refining and other midstream business which posted healthy profits, mitigating the upstream revenue reduction.

KPHL’s Strategic Direction over the next few years – Upstream

Firstly, KPHL is obviously pleased to be part of the new LNG Projects being developed, and we will proactively assist the Developers where we can.

Having said that, even after these new Projects are brought online, several gas fields in PNG will remain stranded, particularly in the Western Province.  We want these developed and we want exploration in this highly prospective area to restart, and we will promote this.

KPHL will strongly support Third Party Access to pipelines, as well as promote other options to allow easier access, thus encouraging independent development of stranded fields.

We believe that the commercialisation of current stranded assets in the Western Province are key to renewed exploration interest in the Western Provence.

We are encouraged to see the current interest in the offshore basin in the Gulf of Papua, and we strongly support these efforts.

KPHL’s Strategic Direction over the next few years – Mid/Downstream

We have engaged external and renowned expert resources to review how pipeline networks can bring optimal field development for the nation as a whole. These studies target several aspects, such as the routes, capacities, costs and risk mitigation, and we will promote and encourage the best solution for the nation.

We continuously encourage discussion with all parties who promote the development of downstream industry in alignment with the McKinsey Report findings.

Above all, we will invest in, and encourage others to invest in the “Electrification (household) and Electrification (industry) Program”.

In alignment with this, Kumul Petroleum Holdings intends to utilise the Domestic Market Obligation (DMO) for electricity generation, as gas feedstock for industry and to distribute LNG nationally.

KPHL has launched several business initiatives targeting sustainable development in PNG including building a 58MW power station in a 50:50 JV with Oil Search next to the PNG LNG Plant to provide power for Port Moresby and hopefully help PNG Power address the frequent blackouts residents’ experience. This has now been completed, and is today undergoing commissioning. We are also considering expanding the plant to add additional generating capacity should it be needed for the expanding demand in Port Moresby.

Provide funding and project oversite of Hela and SHP Rural Electrification Project, consisting of over 150km of high voltage power lines, aimed at bringing power to the densely populated areas near the source of the gas for PNG LNG. This is due to commence this month.

We’ve also in a very advanced stage of discussions about supplying feedstock gas to Mayer for a cement plant a few kilometres north of Port Moresby. This will effectively replace imports with locally manufactured cement, bringing with it several multipliers in job creation and business development opportunities in the derivative industries.

And lastly we have a JV with Sojitz to look at possible methanol production, with plans for this to be used nationally for further wealth and employment creation.

Domestic LNG Production

Kumul Petroleum Holdings is also keen to promote the domestic distribution of LNG around PNG, principally as an alternative, clean fuel for electricity generation, reducing the current reliance on HSFO and diesel and replace this imported products.

We believe this distribution of LNG will make a significant contribution toward the key goals of increasing household electrification and encourage industrial growth in these remote locations.

To this effect KPHL has completed a concept study with Oil Search focused on the national distribution LNG which found that the foundation distribution to some key bulk storage locations was economically viable with the support of some of the major users in the area, mainly in power generation and mining.

It should be noted that this initiative will take on a small fraction of the LNG produced, making only a small impact on the export of LNG, yet delivers a huge benefit to the nation.

Lastly I want to mentioned ISO containers.

KPHL recognises the importance of how this has quickly grown from being an unusual way to transport LNG into one which is gaining mainstream acceptance.

The number of IS containers is growing exponentially, the unit cost is going down and they are now available through lease with service agreements.

The transportation of LNG by ISO containers is particularly suitable for PNG, allowing relatively small qualities of LNG to destinations close to break-bulk locations.

We believe this could be quickly implemented from Port Moresby either by accessing the current facilities, or providing access with the future constructions, or the independent installation of a small scale LNG plant processing raw gas.

And if the bulk shipping of LNG nationally becomes a reality, ISO container shipment from secondary bulk storage locations could supply LNG to a wider and wider range of destinations.

I want to leave you with some key messages

We will exercise its full equity rights (20.5%) in both the P’nyang and Elk/Antelope LNG projects.

We are marketing our future equity entitlements from Papua LNG jointly with Total

In the upstream Kumul Petroleum Holdings will promote and encourage:

• the developing the stranded gas fields and new associated exploration prospects
• the exploration and development of the areas offshore

In the midstream/downstream Kumul Petroleum Holdings will promote and encourage

• Building the optimum pipeline network to commercialise the stranded fields
• Downstream industry aligned with the 2015 McKinsey report