Papua New Guinea (PNG) is one of the bright spots on the horizon for the oilfield services industry; but a recent change in the law has reversed long-standing principles of ownership rights to leased oilfield equipment and puts owners and lenders at risk.
When a small oil discovery in PNG in the early 1990s didn’t lead to major oil finds, Chevron, who had developed the discovery, left the country. The decision was made, in part, because it seemed that everywhere holes went down there was gas, not oil, and no-one wanted gas at that time.
Drilling was expensive because of the remoteness and topography with complicated and then poorly understood geology. A significant gas field held by Exxon didn’t have enough oil to warrant development and the major had to establish a small gas to electricity plant for a large nearby mine to ensure that the field was in production and could be retained. Drilling in the PNG highlands was (and is) an expensive exercise where skilled specialists in multiple fields are absolutely vital and large quantities of plant and equipment find their way into the country for use and then depart again.
However, all that unexploited gas in a location close to Asian markets is now driving rapid development. A 2-train, roughly 7MTA LNG plant built and operated by ExxonMobil and in production now for two years, is producing in excess of nameplate capacity. This has de-risked the country somewhat for both the capital and gas markets; so the race is now on to further monetize the country’s gas.
Two significant projects are competing to be the next cab off the rank, a brownfields expansion of Exxon’s current plant, and a Total-lead consortium looking to establish a second separate plant of similar size. Additionally, there are a number of smaller fields operated by less well-known names looking to bring their gas to market in different ways.
Unlike the situation in Australia, the cost of construction has not blown out; it is close to markets and priced attractively.
This makes PNG an enticing place for field services firms to send rigs and equipment both now and when one or both of the two new large projects and some of the smaller projects get through the process and FID.
However, a recent and significant change to the law has opened up the potential for the unwitting loss of title to rigs and other equipment in PNG which is owned offshore but used locally.
Personal Property Security Act
PNG has just adopted a new Personal Property Security Act (PPSA), flipping the principles of ownership of "personal" property, including the heavy, non-fixed equipment needed for the upstream industry.
Traditionally, PNG had a rule (of such antiquity that it had its own Latin maxim) that "you cannot pass better title than you yourself have." Because merely passing possession to someone on loan or hire did not transfer ownership in most circumstances, if the party physically holding the equipment tried to sell it to a third-party buyer or lender, the true owner could simply prove their better title and have it returned. The true owner won and the innocent third party lost, having discovered too late that they had transacted with someone who had no legal rights to deal with the property.
Legal and financial systems around the world have grappled with how best to balance these competing interests and PNG is no exception. In PNG there has been a system of registration of various interests and claims to personal property under the Instruments Act and a process for registering security interests granted by companies against their own property, but there was no register for ownership of personal property that was out on hire.
Consequently, where heavy machinery in PNG was in the possession of a charterer or hirer, determining the true owner using only those registers was impossible. Typically, the charter or leasing document between the owner and the operator identifies the true owner of the equipment and, where there is no competing claimant, all is well.
Unfortunately, in PNG, there have been cases of charterers or hirers selling property that doesn’t belong to them or using the property to secure loans. These are not isolated incidents; in just the last 12 months my firm alone has had to take three such cases through the courts.
Previously, the "loan or hire does not pass ownership" rule protected the true owner, but that is no longer the case. Under the PPSA the presumption of ownership has been reversed and now the innocent third party who transacted with the person in possession of the property will win against the true owner unless the true owner has his ownership (or lending) interest recorded in the newly launched PPSA register before the third party registers theirs.
To complicate matters, owners and lenders who have already registered their interests under the Instruments Act or had them secured by a company charge under the Companies Act are not protected as there is no automatic transfer of existing registered instruments.
This now makes it critical that anyone in the industry who has (or intends to) put equipment into PNG on charter or hire and who is not going to be in possession of that property, attends to registration of their ownership under the PPSA.
Unfortunately, the problem is not just a domestic PNG issue. Offshore global financiers lending outside of PNG are also at risk if they lend to the head office of a borrower, using the security of the borrower’s property worldwide, and the borrower then sends that secured property (still 100% in their borrower’s possession) to PNG. The lender’s contractual (or even ownership) rights will be at risk of losing to local claims for liens disposals or securities given by their borrower in country unless the offshore lender has registered the equipment in the PNG PPSA Register.
As ever with all things legal the answer is diligence. You must know what you have, where it is, and what you need to do to protect it. Registration under the PPSA will protect the true owner, but only if they know about it and take the right action.
About the author
Erik Andersen is a senior partner in the Port Moresby office of Gadens Lawyers. He has been advising and acting on the PNG oil and gas industry since 1990 for supermajors, wildcat explorers, service companies, financiers and regulatory bodies. His work has included both transactional and contentious matters.