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The new emerging threat to the Oil Search share price

News that ambitious LNG expansion plans in Papua New Guinea (PNG) have hit a roadblock doesn’t seem to have rattled the Oil Search Limited (ASX: OSH) share price – at least not by much.

While shares in Oil Search followed the energy sector higher on the back of a rise in the overnight crude oil price, it’s gains were more muted.

Oil Search advanced 1.1% to $7.24 on the last day of trade for the week, while the Origin Energy Ltd (ASX: ORG) share price jumped 2.2% to $8.48, the Woodside Petroleum Limited (ASX: WPL) share price added 1.3% to $34.02 and the Santos Ltd (ASX: STO) share price gained 1.4% to $8.

Puff taken out of OSH expansion plan

The OSH share price may be lagging behind after the Australian Financial Review reported that ExxonMobil, the lead partner in the LNG venture that Oil Search is a member of, shut down negotiations with the PNG government.

PNG’s petroleum minister, Kerenga Kua, said in a statement released this morning that he was disappointed that ExxonMobil refused to consider terms put forward by the country relating to the P’nyang gas field.

That’s a blow to Oil Search’s growth plans. The ASX-listed company was hoping to reach an agreement before the end of December so work can proceed on a planned US$14 billion ($20 billion) expansion.

Why the share price is holding ground

This development may not have sent the Oil Search share price tumbling into the red today, but if the impasse cannot be resolved soon, the stock will underperform. As it is, Oil Search is already looking like the ugly duckling of the large cap energy sector.

The stock inched up a miserly 4% since January when Santos registered gains of over 50%, Origin Energy recorded a 34% increase and Woodside showed a 12% improvement.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index rallied nearly 21% over the period.

But the performance gap may be what’s saving the Oil Search share price today. There’s clearly not much good news factored into the stock after the change in the PNG government earlier this year.

Putting PNG first

The new prime minister James Marape is demanding a better deal for his country compared to his predecessor Peter O’Neill. The former PM struck a deal with the joint-venture consortium in relation to the Papua LNG project but expansion plans cannot be financially justified without a similar deal struck for P’nyang.

It doesn’t look like the new PNG government will capitulate either. Mr Kua described the P’nyang field as the last significant LNG opportunity in PNG.

The terms demanded by PNG was not released but Mr Kua said it was based on international best practices.

Oil Search share holders will want to watch this space carefully.

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