By Ross Verne
“BORING is an under-appreciated asset,” Deloitte’s Chris Richardson said in his presentation on the global economy on the first morning of the 13th PNG Mining and Petroleum Investment Conference on 1 December.
By the end of the day everyone knew what he meant.
Mr Richardson’s sentiments on the value of a stable, predictable, boring business environment were echoed by other speakers, including ExxonMobil head in PNG Peter Graham.
A few hours later the market closed and crude oil prices had crashed to a six-year low, 6.4 per cent was wiped off Australia’s energy sector, and PNG’s oil and gas players were reconsidering investment decisions throughout the country.
It should be noted that Mr Richardson followed his speech on the value of “boring” with a warning that “the next decade will not be one as well suited to many in this room as the past decade was”.
Speaking to PNG Resources on 2 December, the day after the plunge, Oil Search managing director Peter Botten said the whole industry was surprised at the “rapidity and size” of the downturn in oil prices in recent months.
“It does take cream off the top – there’s no doubt about it,” Mr Botten said of the impact of crude oil prices falling to $US68.34 on 1 December.
“It just means we will re-prioritise and look at our priorities for spending and investment.”
The Wall Street Journal reported that day that Oil Search had pulled out of a deal with Talisman Energy to acquire $300 million of the company’s PNG assets.
Mr Botten declined to comment on the report.
PNG Chamber of Mines and Petroleum president Greg Anderson said despite some recovery in the days following the plunge, the price was “tanking”.
“In recent months as we all know we’ve had the oil price shock – we don’t know for how long that will be sustained,” he said.
“It really hasn’t flown through yet but it is obviously going to have impacts down the track.”
Santos head in PNG John Chambers acknowledged the price plunge had hit the company hard.
“We’re probably no longer a top 25 company as of yesterday’s share market movement and our market cap is probably significantly less than that,” Mr Chambers said on 2 December.
Due to its low-margin projects, Santos is among the companies in the Asia-Pacific most vulnerable to the price dip.
Mr Botten said most players had expected prices to drop off $100 sometime in 2015-16, but the dramatic plunge had not been foreseen.
He said OPEC’s decision to maintain production would take some time to have the desired effect as low-margin producers were impacted.
“Obviously it relates to primarily the Saudis’ position in re-establishing a mechanism as a primary supply source for oil and having influence on its pricing,” he said.
“If they’re serious about supply destruction and taking barrels out of the system that’s going to take a couple of years and it’s not a six-month exercise.
“It takes a while therefore to have drilling progressively curtailed… and remove barrels from the supply scenario.”
He said the high margins of Oil Search’s PNG oil and gas businesses left them in a better position than many in Asia-Pacific.
“There are a number of projects around Australia that I think at these sorts of prices are certainly somewhat problematic but I think our business, both our oil and our LNG are both high margins.”
“Competition will diminish at the overall space but at the end of the day we’ve got to manage our business very tightly, be very focused about what we spend.”
PNG treasurer Patrick Pruaitch acknowledged in his 2015 Budget outlook speech that declining oil prices had to be taken into consideration in forecasting.
“The government is aware crude oil prices are under significant downward pressure which could affect demand and pricing for LNG,” he said.
“However, we are convinced demand for cleaner fuels in Asia will lead to strongly growing demand for LNG.”
Horizon Oil chief representative in PNG Kelvin Bramley said the company’s production was “well hedged”, making it less vulnerable to the plunge.
“We are reasonably well insulated from the current low oil prices,” Mr Bramley said.
Mr Botten said he was similarly confident that the company was set up to weather a Saudi-US price war.
“It is disappointing to see some of that cream come off the top but at the end of the day we are running a very robust business,” he said.
“Progressively the number of projects moving forward are going to be whittled down to a relatively [small amount] of high margin pieces of business.
“If you’ve been in the business for a few years you have seen a few of these things before.”
When asked whether the price plunge had caused the company to re-think the outcomes of its strategic review, which proposes the addition of at least two new LNG trains, Mr Botten said the plan remained on track.
“We know an expansion of PNG LNG is obviously a very good piece of business and a high margin business and I think the resource base at Elk-Antelope will prove up to be a base for another high margin LNG project.”
While the OPEC decision was designed mainly to cripple low-margin US producers, Mr Botten was quick to point out PNG’s advantage over the big new LNG plays in Mozambique.
“Some of those green fields projects in developing countries, in deep water, have a range of challenges,” he said.
“PNG is very close to Asia, the fundamental fiscal stability of the financing process, the banks, customers, suppliers all know PNG pretty well now and it gives us an inherent advantage over something brand new.”