Slugcatcher and problem with PNG's success fee proposal

PERHAPS the latest twist in attempts to expand the liquefied natural gas industry of Papua New Guinea is a case of lost-in-translation but as far as Slugcatcher knows governments do not get paid “success fees” for drafting a project development agreement.
Slugcatcher and problem with PNG's success fee proposal Slugcatcher and problem with PNG's success fee proposal Slugcatcher and problem with PNG's success fee proposal Slugcatcher and problem with PNG's success fee proposal Slugcatcher and problem with PNG's success fee proposal

IS a success fee a surefire way to see PNG's LNG industry fail?

Slugcatcher

 
Investment bankers and stockbrokers get success fees, because that's how they make a living. Governments get their money from taxes and royalties and their employees are paid salaries and wages for doing their jobs.
 
The "success fee" issue which has surfaced in PNG appears to be the cause of a reported breakdown in talks between the government and the US oil giant, ExxonMobil.
 
First hint of the proposal to develop the P'nyang gasfield hitting a speed bump came last Wednesday in a report carried in this publication which noted a story in PNG's Post Courier newspaper which said the State Negotiating Team (SNT) for the US$11 billion project was demanding a US$100 million success fee.
 
The curious logic behind the fee was that it should be paid before the government granted a project development licence.
 
Put another way the SNT, which is simply an arm of government, demanded a special fee for doing nothing more than the job for which it was created in order to encourage investment in the economy of PNG and a long-term flow of royalties and other taxes.
 
Not surprisingly ExxonMobil and its partners in P'nyang walked out of the process leaving the SNT to wonder whether it had overstepped the line between what it is a commercially acceptable negotiating position and an attempt to extract an unreasonable payment for which no service has been provided.
 
There is a connection in PNG behaving in the way it just has with the success fee demand with an earlier attempt to strong-arm companies behind the country's LNG industry.
 
Back in mid-August it was a case of PNG's Energy Minister, Kerenga Kua threatening to "rip up" the gas agreement for Papua LNG, unless operator Total and its partners Oil Search and ExxonMobil agreed to a deal which significantly boosted the returns to the government.
 
At the time Kua saw LNG expansion as a way for "taking PNG back and making it wealthy", causing The Slug to suggest that Kua was playing a game of bluff. 
 
The problem back then is the same problem as today with the success fee nonsense, and that is a serious misunderstanding at the highest level of the PNG government about how business works, starting with the need for the owner of capital to get a fair return on that capital - and if that's not possible the owner will take the capital elsewhere.
 
With a global glut of LNG dampening the price of the fuel, and a line of new projects jockeying for a share of the capital needed to fund a development, PNG is not in a strong position to make the unreasonable demands it has now, twice.
 
The August "take back PNG" proposal was political theatre, quickly shuffled off stage. The success fee proposition appears, at first glance, to be something darker because it gets down to the nitty-gritty of handing over money for no obvious service - and there are some very unpleasant ways of describing that sort of activity.
 
In the days after Energy News reported the success fee proposal by the State Negotiating Team relations with ExxonMobil and other oil companies took a dive which appears to have culminated in a walk-out.
 
According to a weekend report in The Australian newspaper ExxonMobil has refused to consider the terms of the deal offered by PNG through its negotiating team with Kua urging a re-start of the talks, though that seems unlikely to happen quickly.
 
Kua's position seems to be based on a belief that the oil companies are ripping off PNG rather than being suppliers of the capital and technical expertise that PNG lacks.
 
"The State Negotiating Team is committed to working with international oil companies to develop our natural resources as quickly as possible to support the development of PNG, but our resources cannot become money-making machines for oil companies at the expense of the nation," Kua said. "We must get a fair deal."
 
ExxonMobil, so far, has been cautious in its response to the success fee reports, with a spokesman saying that discussions were continuing, but added that an agreement was needed before front-end engineering and design to the three-train development could proceed.
 
Oil Search, another partner in the PNG LNG industry, has declined to comment.
What happens next could be quite interesting because the whole success fee issue has a disturbing feeling to it and the last thing PNG needs, if it is to achieve the wealth-creating resources sector it wants, is to frighten off providers of capital and technical skills by making unreasonable demands.