Game changer: A new LNG project is expected to have a huge impact on the economy

Perhaps no other project has had greater expectations riding on it than the Papua New Guinea liquefied natural gas (PNG LNG) venture, the largest single investment in the country’s history. It is hoped that the $15.7bn investment will enrich not only the coffers of the participating firms and the government, but also aid the wider economy. The project has the potential to bring in $150bn by 2044, according to investment reports from the Commonwealth Business Council, while the 2012 government budget projects it will bring in $715m over the first three to five years of production, and $1.9bn annually thereafter. The development encompasses all aspects of production, from exploration, extraction and processing from gas fields to pipeline transportation, liquefaction and storage facilities, and shipping the LNG. When deliveries begin in 2014, PNG LNG will have the capability to move 6.6m tonnes of LNG per year and is expected to produce more than 9trn cu feet of natural gas over its 30-year lifespan. Led by Esso Highlands, a subsidiary of oil and gas giant ExxonMobil, which has a 33.2% stake, the venture also includes Oil Search, a veteran Papua New Guinean oil and gas outfit, with a 29% interest. Other project partners include Australiabased gas producer Santos, with a 13.5% stake; Japan’s JX Nippon Oil and Gas Exploration, a unit of JX Holdings, with 4.7%; and PNG landowner group Mineral Resources Development Company, with 2.8%. The government’s participation consists of a 16.6% share, comprising the National Petroleum Company PNG and Petromin PNG Holdings. The Independent Public Business Corporation also holds a share in the project through its residual 14.84% stake in Oil Search.

AT THE SOURCE: Natural gas for the project will be sourced from Hides, Angore and Juha gas-condensate fields in the Southern Highlands and Western provinces, north-west of Port Moresby. The existing Kutubu, Moran and Gobe Main oilfields will also contribute. Gas from the Juha field will be processed at an on-site production facility, capable of producing 250m cu feet per day (cfd) before being piped to the Hides gas conditioning plant. The Hides and Angore wells will be linked directly to Hides gas conditioning plant, which will collect and separate gas and associated liquids. Liquid petroleum and gas condensates will be transported by a separate pipeline to the Moran, Kutubu and Gobe facilities before being piped to the Kutubu Central Processing Facility, from where it will be sent for export through the existing oil pipeline. Natural gas recovered from these fields will also be fed into the main gas transportation pipeline south of the Hides Gas Conditioning Plant.

Once processed, the gas will travel through a 700-km pipeline (292 km onshore, 407 km undersea). The onshore portion starts at an elevation of almost 1700 metres, from where it drops to sea level. The gas will then travel undersea to the plant near Port Moresby. The two-train LNG plant will include two 160,000-cumetre storage tanks and support facilities. From here the gas will move through a pipeline to the berth, where LNG tankers, ranging in capacity from 125,000 to 220,000 cu metres, and product tankers, with capacity of 30,000-50,000 deadweight tonnage, will be loaded. Esso Highlands will lease four tankers to transport the majority of the LNG to its customers while the naphtha will be sold on a spot basis. The project is expected to employ up to 16,000 workers in the construction phase, half of them PNG nationals. “Though the LNG focus is fairly new to PNG, the training facilities must be enforced now that it is becoming such a strong generator of growth,” Julian Councel, the country manager of hydrocarbons recruitment firm Air Energi, told OBG.

ASIA: While demand for energy has slackened in Western economies over the past few years as the European debt crisis and lagging US economy continue to dampen consumption, there has been no such slowdown on the other side of the Pacific. Asia’s appetite for resources is evident from the customers that have already signed long-term contracts for the gas, including: the Chinese Petroleum Corporation, Taiwan, with an order of 1.2m tonnes per year; the Osaka Gas Company, with 1.5m tonnes per year; the Tokyo Electric Power Company, with 1.8m tonnes per year; and China Petroleum and Chemical Corporation (Sinopec), with 2m tonnes per year.

Although initial plans for PNG LNG were predicated around natural gas reserves producing upwards of 9trn cu feet, project partner Oil Search stated in February 2012 that further exploratory activity could reveal greater supplies than earlier estimated. Exploration drilling was being carried out by the company in mid-2012 to determine if adding a third train to the plant would be viable. At least two more prospects, P’nyang and Trapia, the latter adjacent to Angore, are also slated for exploration activity. Peter Botten, the CEO of Oil Search, said that preliminary results on whether enough gas was discovered at the new sites to justify expansion would be available by late 2012 or early 2013.

There is still much to be done for the PNG LNG project to meet its 2014 deadline. The logistical challenges of moving manpower and equipment up to the highland production base are particularly difficult, given the inconsistent state of the Highlands Highway – the only road link between the port at Kopi and the project’s various sites. Much of the equipment and supplies necessary for the construction of the project’s facilities must be flown in using military-grade cargo planes.

COSTS: Although the project has largely kept to its tight schedule – no small undertaking given the logistical difficulties associated with working in the more remote areas – the budget increased marginally from earlier estimates. As late as 2009 total investment costs were estimated at $15bn, but several factors, including the strengthening Australian dollar, have pushed these costs upwards to $15.7bn as of November 2011.

Concern over the environmental impact of the project has also posed challenges, particularly by landowners in the villages located near the onshore pipeline. In February 2012 a landslide at a Southern Highlands quarry, which is used to supply construction material for the project, collapsed, killing at least 25 people. The cause remains unclear, with PNG LNG officials claiming it was a natural event unassociated with construction and local residents blaming the project. However, the incident, along with other social and environmental problems, has resulted in demands for compensation. Other work stoppages have occurred as a result of landowners demanding additional compensation.

KNOCK-ON EFFECTS: The project has the potential to bring in upwards of $150bn by 2044, according to investment reports from the Commonwealth Business Council, though others find this estimate to be rather high. The 2012 government budget projects the LNG project will bring in PGK1.5bn ($714m) over the first three to five years of production, and $1.9bn annually thereafter, and there is optimism that the investment will spur development far beyond the oil and gas sector. Sources at the Asian Development Bank estimate that the windfall could initially boost the government’s revenue by PGK1bn ($476m) annually, growing to as much as PGK6bn ($2.9bn) by 2026. One of the primary uses of these funds has been the creation of a new sovereign wealth fund, meant to safeguard the revenue and put it towards development.

The more immediate impacts of the project are already becoming clear, one of which is the expansion of fibreoptic communications lines, which stretch along the length of the new gas pipeline and will connect the country’s planned national broadband network, improving communications for many isolated areas. These areas will also benefit from increased access to the outside world through the expansion of roads and road transportation, which has previously been somewhat patchy.