PNG Gov't to Use Oil Search Transaction Funds for LNG Project

The PNG Government and International Petroleum Investment Company (IPIC), an investment company wholly owned by the Abu Dhabi Government, have entered into an agreement whereby IPIC will acquire exchangeable bonds over the PNG Government's 17.6% shareholding in Oil Search. The principal amount of the bonds is A$1.68 billion. This money will be used to fund the PNG Government's equity share of capital costs for the PNG LNG Project.

Commenting on the transaction, Oil Search's Managing Director, Peter Botten said, "This is a very important transaction for both the PNG Government and the PNG LNG Project. The deal has secured the funds required by the PNG Government to finance its full equity component of the PNG LNG Project development cost, estimated to be around US$1 billion. Having the Government equity funding in place is an essential part of the total financing package for the Project. Raising these funds removes uncertainty, as the Project financing team commences discussions with export credit agencies and banks regarding the provision of a competitive financing package and as gas marketing negotiations reach an important stage. It also positions the Project to achieve timely financing milestones in 2009.

"The State will retain its full direct equity entitlement in the PNG LNG Project, estimated to be about 19.4%. Keeping its full interest will maximize the potential value for the State and the people of PNG of this long term legacy project and will provide the State with flexibility in accommodating legitimate equity ownership claims by other PNG stakeholders.

"Even though this transaction was concluded during a time of unprecedented uncertainty in the financing markets, it demonstrates a value for Oil Search shares well above the recent trading price. Based on the agreed terms, should IPIC exchange the bonds for shares, the PNG Government will have realised an effective sale price of A$8.55 per share, substantially above the current share price and towards the see-through value of assets indicated by the recent AGL PNG asset sale.

"The Company expects that its very close relationship with the PNG Government will continue, as the parties develop together a strategy for further gas commercialization in PNG. At the same time, this transaction introduces a strong potential shareholder who is supportive of the Company's growth aspirations.

"IPIC is an investment company wholly owned by the Abu Dhabi Government. Its mandate is to invest in the hydrocarbons and related sectors outside Abu Dhabi. It has a range of minority shareholdings in both unlisted and listed energy entities, including 9.5% in Compania Espanola De Petroleos, S.A. (CEPSA), which it has held since 1988, and 19.2% in OMV Aktiengesellschaft (OMV), held since 1994.

"While highly commercial in its activities, IPIC’s stated objective is to maximize the long term shareholder value of each company in which it invests. IPIC has indicated that it is very supportive of Oil Search's goal to be a leader in the development of PNG's oil and gas sector, particularly the PNG LNG Project and commercialisation of second phase gas. Having IPIC as a stable, financially capable and strategic shareholder would enable Oil Search to continue to implement its strategy of creating long term value growth for all shareholders.

"While IPIC does not seek to become involved in day to day management or operating activities, we believe that Oil Search may be able to leverage IPIC's extensive experience in the oil and gas industry. This may include
providing access to international growth opportunities and potential future participation/partnership in upstream opportunities both in PNG and internationally, as well as facilitation of financing."

H.E. Khadem Al Qubaisi, IPIC's Managing Director, said, "IPIC's growth strategy involves investment in companies that have a record of superior growth, have quality assets and strong management. Oil Search fits these criteria very well with outstanding further potential, complementing our other investments in the energy sector. We look forward to developing a strong relationship with both the Oil Search management team and the PNG Government and hope that this initial investment will lead to other opportunities to work together in PNG and in other parts of the world."