Ipic cash saves Pacific gas project

The International Petroleum Investment Company rescues a natural gas project in Papua New Guinea with a Dh4bn investment.

An Abu Dhabi investment company has agreed to invest Dh4 billion (US$1.08bn) in a natural gas project in Papua New Guinea, coming to the rescue of a small energy company which had struggled to raise capital because of the credit crunch. The investment by the International Petroleum Investment Company (Ipic) marks the government-owned fund's first foray into the region and its first involvement in the fast-growing liquefied natural gas (LNG) industry. In a statement, Oil Search, the Papua New Guinea firm, said the injection of funds into the project was needed at a time of "unprecedented uncertainty in the financial markets".

"Raising these funds removes uncertainty as the project financing team commences discussions with export credit agencies and banks," said the company's managing director Peter Botten. The deal has, however, been the object of some criticism by the opposition party in Papua New Guinea. Ipic said it would buy convertible bonds amounting to a 17.6 per cent stake in Oil Search and is involved in a consortium of six companies - including ExxonMobil and Nippon Oil - that is building Papua New Guinea's first gas liquefaction facility.

The stake acquired by Ipic in Oil Search is currently owned by Papua New Guinea's government, which relies on its partners to make all the up-front investments. LNG is converted to liquid form for transport on tankers by cooling it to minus 161° Celsius, but the costs of liquefaction facilities are prohibitive for all but the biggest multinational firms and state-backed companies. "The deal has secured the funds required by the government to finance its full equity component of the LNG project development cost, estimated to be around $1bn," Mr Botten said.

The project is at the front-end engineering and design stage, with a final investment decision expected next year. It is the first LNG deal to test the financial markets since the beginning of the global credit crunch in September, and Ipic's announcement should bolster bankers' confidence, said Nikos Tsafos, an analyst in the upstream oil and gas sector group at PFC Energy, a Washington-based consultancy. "Ultimately you do rest on the balance sheet of the owner and, with the exception of ExxonMobil, you didn't really have a reassurance about the balance sheet of the owners in this project," Mr Tsafos said. "Because it's also the first LNG project since the crisis, it's not the time the banks will be taking any risks."

Mr Tsafos said the Papua New Guinea project was the most likely of four projects to move forward in the country, which lies to the north of Australia. Ipic, a rapidly growing Dh51bn fund, holds oil and gas assets in Europe, Kazakhstan, Pakistan, North Africa and the Gulf, in addition to energy assets in the UAE. Recent investments have included a controlling stake in Aabar Investments, an Emirates energy company and a $1bn fund in partnership with the government of Kazakhstan. Until yesterday, however, Ipic had not invested in the LNG industry.

"Ipic recognises the increasing strategic importance of LNG in the evolving energy landscape," Khadem al Qubaisi, the company's managing director, said in a statement. Many analysts believe strong growth in the demand for LNG will resume after the economic crisis subsides, as the world's appetite for cleaner burning natural gas increases. Mr Tsafos said Papua New Guinea was in a position to capitalise on growth in demand for gas in Asia. He said the PNG government had been particularly friendly to foreign firms. Yesterday's deal has been rumoured for weeks.

Earlier this month, Sir Mekere Morauta, the opposition leader, said the state enterprises minister, Arthur Somare, was committing to a "risky" deal by "mortgaging" the government's stake in Oil Search. [e-mail]