PNG warns 22b Santos-Oil Search merger must be in national interest

Papua New Guinea’s Prime Minister has warned Australian energy giants Santos and Oil Search he expects them to maintain a significant local presence of senior management in the country if their $22 billion merger proceeds.

“We do not wish for the largest oil and gas company operating in our country to simply be a branch office of a foreign company,” PNG Prime Minister James Marape said.

Oil Search owns oil and gas interests in Papua New Guinea and AlaskaCredit:

“It is important that the merged entity ensures significant local influence on decisions affecting Papua New Guinea assets, jobs and the broader community.”

Australia-listed Oil Search is an $8 billion oil and gas company whose activities are centred in PNG, comprising a large percentage of the country’s gross domestic product and providing direct and indirect jobs for thousands of PNG residents.

Under a deal announced on Monday, Oil Search and larger ASX-listed rival Santos are set to merge into a $22 billion industry juggernaut, becoming the top oil and gas producer in Australia and one of the 20 biggest globally. The companies are undertaking four weeks of due diligence on each other.

Santos and Oil Search are already joint-venture partners in the ExxonMobil-operated PNG LNG project in Papua New Guinea. If their merger proceeds, Santos and Oil Search’s combined 42.5 per cent stake in the venture would be larger than Exxon’s 33 per cent holding.

“With Oil Search already operating the PNG oil producing assets, this would place [the merged entity] in a position for it to possibly move to operatorship, should ExxonMobil possibly exit in the future,” Royal Bank of Canada analyst Gordon Ramsay said.

Mr Marape said his government’s top priority was ensuring that projects such as Papua LNG and the P’nyang gas projects proceeded as soon as possible to supply the PNG LNG venture, and it “strongly recognised” the proposed merger could deliver higher capacity and value to PNG projects. However, he cautioned he was closely monitoring the merger developments.

“Any proposed merger must satisfy the national interest test,” Mr Marape said.

While not commenting on specific aspects of the merger, a Santos spokesman said the company was committed to Oil Search’s unique social and community programs in PNG, and the ongoing economic and internationally competitive development of PNG’s resources.

Any merger agreement would be subject to conditions including Oil Search shareholder approval and PNG government approval.

Under the terms of Santos’ offer, which Oil Search’s board intends to unanimously recommend for approval, Oil Search investors would receive 0.6275 new Santos shares for each Oil Search share held, implying $4.29 per Oil Search share based on July 19 prices. If the tie-up goes ahead, Oil Search shareholders would own approximately 38.5 per cent of the merged group and Santos shareholders will own 61.5 per cent.

Investors and analysts are predicting a wave of merger-and-acquisition activity to sweep the oil and gas industry in coming years, as elevated concerns about global warming cause lenders to flee the sector and push the cost of capital higher.

A landmark report by the International Energy Agency in May recommended investors must avoid funding any new oil and gas fields for the world to achieve the Paris agreement’s goal of limiting global temperature rises to 1.5 degrees.

“We’ve been expecting to see more consolidation among international exploration and production companies, following the lead of the US independents that have sought strength and resilience in scale,” Wood Mackenzie research director Andrew Harwood said.

“The Santos-Oil Search merger follows the consolidation template, bringing together two firms with overlapping interests, building scale in a strategic resource theme, LNG in this case, and on terms that provide additional value upside potential for both sets of shareholders.”

Oil Search said it had briefed Mr Marape on its management changes and appreciated the continued “constructive engagement” with his government.

“We recognise the importance of Oil Search to the PNG economy and will maintain our ongoing commitment to the country and communities in which we operate,” a company spokesman said.

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Nick Toscano is a business reporter for The Age and Sydney Morning Herald.

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