PNG aims to retain more natural gas to meet domestic energy needs

Although Papua New Guinea has risen to become a significant regional exporter of liquefied natural gas (LNG) since the launch of commercial operations at the PNG LNG project in 2014, the country continues to deal with domestic energy challenges.

The country’s electrification rate is the lowest among APEC members. Industrial expansion and value-added manufacturing, which will play an important role in diversified long-term development, have also been hampered by lack of affordable, reliable electricity supply. Having proven itself capable of becoming a major energy exporter, the country is now moving to retain more of its own petroleum resources for use domestically. The government has increasingly sought to incorporate domestic consumption regulations in its oil and gas negotiations, and the country’s long-awaited Energy Master Plan is widely expected to contain regulations which will keep more gas within the country’s borders for use in electricity generation and, eventually, petrochemicals production. Although this puts government stakeholders at risk of negatively impacting investor sentiment during a time of persistently low global oil prices, new domestic consumption regulations will be a critical support mechanism for long-term industrialisation targets.

Rising Demand 

With PNG’s electrification rate standing at just 13% as of March 2017, and its population growth forecast to soar by 64.3% between 2013 and 2040, energy demand and consumption will rise significantly in the coming decades. According to a 2014 Asian Development Bank energy sector assessment, the average daily peak demand for electricity in PNG, excluding the mining sector, is estimated to be 290 MW, with demand in Port Moresby rising rapidly, and forecast to impose a much greater load on the system in the coming years, in addition to an inadequate reserve capacity unable to meet demand.

Strategic Planning 

The country’s Development Strategic Plan 2010-30 forecast daily peak demand for electricity will rise to 700 MW by 2021 and over 1400 MW by 2030. This will necessitate substantial new hydropower, gas-based, renewable energy and coal power generation to reduce the system’s current reliance on diesel-based, back-up power generation. APEC, meanwhile, forecasts PNG’s energy consumption will increase more than four-fold between 2013 and 2040, projecting total final energy demand will rise from 11.4m barrels of oil equivalent (boe) in 2013 to hit 40.7m boe in 2040, driven mainly by expansion of the mining and petroleum sectors. Industry will see its share of total energy consumption rise from 51% in 2013 to 64% by 2040, under current APEC projections. The energy mix is also expected to evolve. Oil’s share of the total energy supply will fall from nearly 78% in 2013 to 47% by 2040, while gas will see its share of supply rise from 5% in 2013 to 37% by 2040.

Import Dependence 

Although completion of the ExxonMobil PNG LNG project has seen LNG exports soar since 2014 (see overview), the country imports significant quantities of oil and gas to meet domestic demand. PNG could partially meet its domestic energy needs using LNG or renewable resources, although attaining energy self-sufficiency has proven problematic. According to the APEC’s 2016 “Energy Demand and Supply Outlook”, PNG’s total primary energy supply rose from just 6.4m boe in 1990 to 18.6 boe in 2013. However, while PNG was 100% self-sufficient in terms of primary energy supply in 2000, rapid economic growth since has seen its energy self-sufficiency fall to 70% in 2010, and just 52% in 2013. Although this percentage is forecast to improve to 58% in 2020, APEC projections estimate PNG’s primary energy self-sufficiency falling to 47% in 2030, and 53% in 2040.

LNG Retention 

In March 2017 Nixon Duban, minister for petroleum and energy, told Bloomberg that the government plans to negotiate with international oil and gas companies to allow the country to retain more of its LNG for domestic consumption. Under the terms of the deal signed with ExxonMobil for the PNG LNG project, the oil giant is permitted to export all gas extracted, with LNG exports currently powering grids in Tokyo, Beijing and Taipei.

However, political leaders, including Prime Minister Peter O’Neill, have increasingly sought to use some of PNG’s supply to meet rising domestic energy demands to support long-term industrial growth, manufacturing and, eventually, a robust petrochemicals industry. “Getting gas cheaply for petrochemicals development is a priority for supporting industry in the country, but the petrochemicals sector needs investment. There are a large range of areas with a lot of potential. We can log trees, make glue and begin furniture manufacturing for export. Paint and cement manufacturing both have potential, and we can do more in steel fabrication as well,” Michael McWalter, a PNG-based petroleum expert, told OBG.

LNG Power 

Retaining gas for domestic power generation offers significant near-term benefits, as highlighted by recent developments in Port Moresby. In 2015 the government signed an agreement to buy diesel from the PNG LNG project at half the market price. PNG-sourced gas now produces up to 25 MW of electricity for the capital, roughly a fifth of its requirements. In December 2016 ExxonMobil announced that it planned to begin construction of a new 50-MW power plant outside Port Moresby, with construction starting in early 2017. The project will provide fuel for the company’s third planned LNG train, and is expected to add enough power generation capacity to meet 40% of Port Moresby’s peak demand. It will also offer a cost-effective solution to generation challenges for PNG Power, with ExxonMobil noting that the new plant could help bring down electricity tariffs and generate new revenue to be invested in other areas of electricity, including transmission and customer connection.

Petrochemical Potential 

Bloomberg reported that the government of PNG is in talks with trading firms, including Japan-based Itochu and Sojitz corporations, to build petrochemical facilities near Port Moresby to convert gas into methanol. The government is aiming to keep 15% of the gas extracted for the domestic market – a policy which could be extended nationwide in the future. The new requirements could pose a challenge for the country at a time when the appetite for new investment in oil and gas projects has waned significantly.

Land acquisition challenges could also hamper petrochemicals development. In February 2017 the Department of Lands and Physical Planning declared that a significant portion of land had been allocated to the proposed Konebada Petroleum Park, which has been under development since 2008. Under current plans, the 23,325-ha site will extend across lands owned by PNG Ports, the Napa Napa refinery and PNG LNG project-owned lands. The law firm Dentons reported in April 2017 that the declaration could face a near-term court challenge (see Real Estate chapter).

Energy Master Plan 

As ExxonMobil moves closer to installation of a third train at PNG LNG, government stakeholders are likely to push for new domestic consumption regulations, which have been part of energy policy discussions, though not officially codified.

Officials, stakeholders and local media have reported that retaining a target of 15% of gas production for domestic supply is likely in future energy policies. The most important of these will be the country’s long-awaited Energy Master Plan, which is expected to provide a more detailed framework about long-term energy development, including domestic power consumption and the expansion of manufacturing and heavy industries.

The topic was an area of focus at PNG’s March 2017 Petroleum and Energy Summit, hosted in Port Moresby. When speaking at the conference, Augustine Mano, managing director at Mineral Resource Development Company, told attendees that the sector needs a master plan to facilitate future long-term development, noting that 1trn cu feet of natural gas would be sufficient to meet the country’s energy needs for the next 20 years, and represents just 10% of the PNG LNG project volume. Like McWalter, Mano argued that an additional challenge would be finding new investors for new petrochemicals projects. “Bringing electricity to the entire country would entail allocating just 1.5% of the current known gas resources for domestic consumption. There are maybe 8m people in PNG, so the country doesn’t need more than 600 MW at present,” McWalter told OBG.