Negotiations between Twinza Oil Ltd and the Papua New Guinea government are likely to proceed, according to an economist, but refusing to change conditions at the last minute sends a disappointing message to international investors.
Marcel Schroder, an economist with the Asian Development Bank's macroeconomic analysis division, was referring to the government's announcement, conveyed to the company on April 16, that a 6% output levy is now needed to sign the agreement for the Pasca A gas project offshore of Gulf.
“This is four per cent higher than the production levy that was agreed as part of the comprehensive terms for Pasca A, negotiated by the State negotiating team and announced by Prime Minister James Marape last Sept 24,” he said.
In general, according to Schroder, an investor will back out if the anticipated advantages of its outside alternatives outweighed the benefits of the project under discussion. “Outside options for the investor could be projects in other countries,” he said. “Outside options for the Government are leaving the resources in the ground. A new investor may come forward if they view it as financially beneficial.”
Future investors will be worried, according to Schroder, that the government may want to renegotiate the deal after development has begun.
“They might also be concerned about this happening in other future agreements,” he said. “Since any investor requires to be compensated for higher incurred risks, this can weaken the government’s bargaining position, and, thus, negatively affect its take in future projects. Economically, it was sensible of the negotiation team to ask for early revenues from the project. These can be used for financing development projects and they will aid macroeconomic stability.”
