Oil Search
Recommendation
Building a large scale, 6.6m tonne per annum LNG plant in the wildest parts of the Papua New Guinea (PNG) highlands was always going to be hard. The PNG government has made matters no easier. After spending months with two feuding Prime Ministers and its very own constitutional crisis, PNG suffered an attempted coup last week as a rogue military commander stormed parliamentary offices in an attempt to reinstate Grand Chief Sir Michael Somare back into power.
The coup, supported by just a handful of soldiers, ultimately failed. But concerns have again been raised about the safety of the giant Papua New Guinea LNG project (PNG LNG), to which Oil Search has hitched its future.
PNG LNG is a deeply political project. Once at full capacity in 2014, it will double the size of the PNG economy and provide decades of stable revenue for an impoverished country. Landowners, governments and local ‘big men’ have reached agreement to allow sound progress to date but the political instability is a reminder that, in PNG, agreements can be fleeting and risks are high. Oil Search and project operator ExxonMobil have reassured investors that their plans remains unaffected. That may be true today but this remains a high risk venture that will always be threatened by local upheaval. Yet no other LNG project in the region is its financial equal which is why, despite shares in Oil Search rising slightly since 14 Dec 11 (Hold - $6.37), we’re sticking with HOLD.