Why the Oil Search share price is slipping lower today

Like most energy shares, the Oil Search share price has suffered from falling energy prices. Now it's facing a new hurdle in its PNG fields.

Bernd Struben

Author bio Bernd Struben earned his BA in economics from the University of Michigan in 1991, with post-graduate studies in environmental economics at the University of Connecticut. Over the years he’s written about and analysed the tourism industry in the Caribbean; Europe’s commercial real estate markets; and, since moving to Australia in 2010, global and Aussie share markets. Bernd studies geopolitical and macroeconomic trends, alongside sector and company specific data, to gauge what he believes could be tomorrow's best investments. In his free time, you might find Bernd at the beach with his family or working on his next science fiction novel. Areas of expertise Australian and global share markets Macroeconomic and geopolitical trends Real estate Education Economics, University of Michigan Favorite investment quote "The four most dangerous words in investing are: 'This time it's different." — Sir John Templeton

Published September 3, 2020 1:30 pm AEST

Oil Search Limited (ASX: OSH) shareholders haven't had the best of years. The Oil Search share price has been pummelled by falling energy prices as COVID-19 ushered in a big drop in demand for oil and gas.

From its 2020 high on 15 January until the low on 23 March, the Oil Search share price crashed 76%. Although it's come roaring back from that low, up 75%, the share price is still down 58% from its 2020 peak.

At time of writing, the share price is down 0.8% in intraday trading. A fairly muted reaction in light of the latest sabre rattling from Papua New Guinea's prime minister.

barrel of oil in a shopping trolley sliding down red arrow representing OPEC+ split ASX energy stocks — Image source: Getty Images

What does Oil Search do?

Oil Search was established in Papua New Guinea in 1929 and began trading on the ASX in 1999. The company operates all of PNG's oil fields. It owns 29% of the ExxonMobil-operated PNG LNG Project, a major exporter to Asian markets. The company also holds interests in the Elk-Antelope and P'nyang gas fields.

The company is part of the S&P/ASX 200 Index (ASX: XJO).

How is PNG's prime minister impacting the Oil Search share price?

As a company that holds all of its oil and gas fields in PNG, Oil Search's share price depends on a good relationship with the local government just as much as it depends on a profitable price for oil and LNG.

And in a statement to parliament yesterday, Prime Minister James Marape threw down the gauntlet to international energy and mining companies, demanding a larger share of the resources they extract from PNG.

According to Bloomberg,

Marape said that the state must take a 60% to 65% share of revenue from future projects, up from just 40% on recent petroleum ventures. His government also wants to see the financial benefits flow through to the state coffers quicker, and for developers to commit to using local labor, goods and services in their operations wherever possible…

PNG "has been unfairly held to ransom" by Exxon and its partner Oil Search Ltd., Marape said.

Exxon stated that negotiations were ongoing and it was hopeful for a positive outcome, while Oil Search has not yet commented on the latest developments.

Although I believe the Oil Search share price represents good long-term value at its current price of $3.22 per share, the situation in PNG is a good reminder for investors to take sovereign risk into account when investing in shares operating internationally.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.