Papua New Guinea makes progress in renewables but hydrocarbons projects remain the focus

Although Papua New Guinea relies mostly on fuel oil and diesel to generate electricity, it holds an abundance of gas, geothermal, hydro and solar energy potential. If exploited sustainably, PNG could not only meet its domestic energy requirements, but also supply reliable, cost-competitive power to its neighbours. The extractives industry is the highest consumer of energy, at 45% of the total, followed by transport (40%), and agriculture, residential and commercial activities (15%).

Structure & Oversight 

The Department of Petroleum and Energy (DPE) is the main authority that governs national energy policy. It sets the rules and guidelines under which the industry operates, and has the authority to issue all exploration, extraction and production licences. The DPE is split into the division of petroleum and the division of energy. The former oversees the exploitation of oil and gas resources, while the latter is responsible for all other energy matters, including renewable energy and electricity.

The National Energy Policy (NEP) guides the country’s long-term energy objectives. The most recent iteration, which covers the years 2018-28, has put the focus on expanding access to electricity, improving reliability, investing in clean energy and making power more affordable to residents. It also aims to bring all energy policies and regulatory bodies under a single entity, the National Energy Authority (NEA), which will oversee the development of fossil fuels and renewable energy resources. The NEP calls for the establishment of the Energy Regulatory Commission, which will act as an independent industry watchdog. As of mid-August 2019, however, these two regulatory institutions had yet to be created. Once the NEA is established, the DPE is expected to undergo a restructuring, with industry stakeholders predicting that the two divisions will be folded under the NEA, which would be headed by a managing director moving forwards.

The government retains the right to acquire up to 22.5% in any upstream energy project. This includes 2% equity for customary landowners, whose rights are managed by the state-owned Mineral Resources Development Company (MRDC). The MRDC distributes 40% of its revenue to beneficiaries, 30% is invested in a diversified portfolio, and the remaining 30% is allocated to community infrastructure projects such as schools and health facilities. The state exercises its remaining 20.5% ownership through Kumul Petroleum Holdings, the national oil and gas company, which holds equity stakes in all major oil and gas projects in PNG.

The Internal Revenue Commission is tasked with the administration and collection of taxes, including corporate tax, goods and services tax (GST), and taxes on labourers’ salaries and wages. It is also authorised to counter tax avoidance and tax evasion. All domestic sales are subject to GST, except for the domestic supply of crude oil that is sourced from an oilfield in PNG. A domestic market obligation clause makes it mandatory for oil and gas producers to set aside at least 5% of their production output for local use.

Regulation

The Oil and Gas Act 1998 is the key piece of legislation that governs the extraction of fossil fuels in PNG. Under the act, the state holds the sovereign right to grant licences to firms that seek to prospect for oil and gas. It also spells out regulatory requirements of the allocation of benefits to the state and community through instruments such as tax, royalties, equity and other channels. Complementing this is the Oil and Gas Regulation 2002, which lays out health, safety and environmental guidelines. The Unconventional Hydrocarbons Act 2015 governs the exploration and production of unconventional hydrocarbons such as shale.

The oil and gas licensing model in PNG is royalty based, meaning that a licensee is entitled to all the output extracted from the concession area for a designated period of time. Taxes in PNG are considered low when compared to international standards; the government’s recent reforms, therefore, have been directed at reforming the fiscal and tax regime, with the aim of securing more revenue for the state. Royalty rates are set at 2% of the wellhead value. In 2018 the government allowed royalties to be treated as deductions from taxable income rather than offsets against tax owed. The corporate tax rate has been set at 30%, while a royalty and development levy has been fixed at 4% of total revenue. Furthermore, an additional profits tax of 30% is triggered once returns exceed a 15% threshold. Meanwhile, a training levy of 2% applicable to employers with an annual payroll of PGK200,000 ($60,700) or more was abolished in January 2018.

A greenfield oil and gas project in the country typically starts with a six-year petroleum prospecting licence (PPL), which allows for exploration, followed by a 25-year petroleum development licence (PDL) following a successful discovery. If an upstream oil and gas company is required to find additional resources for its commercial discovery, it will need to apply for a petroleum retention licence (PRL), which is limited to a five-year period. As of 2017 there were 66 approved PPLs and 28 applications still pending with the DPE.

Hydrocarbons

There are five major sedimentary basins in PNG, but only one has seen significant development: the Papuan Basin. Fitch Solutions, the business intelligence arm of the international ratings agency, estimates PNG’s proven oil reserves will fall from 153.4m barrels in 2018 to 147.9m barrels in 2019, while natural gas reserves will increase from 130.7bn cu metres to 152.5bn cu metres over the same period. Oil output has been in decline since 1999, but the production of natural gas has risen since 2014, when the nation’s flagship project and only producer of liquefied natural gas (LNG), PNG LNG, began commercial operations.

PNG LNG has the capacity to produce more than 8m tonnes of LNG per annum. In 2018 PNG produced 19.1m barrels of oil equivalent (boe), or 7.4 tonnes of LNG, representing a decline of 8.3% from 2017. The marked slowdown in production was primarily due to a temporary 2018 shutdown of the Hides oil and gas facilities following a 7.5-magnitude earthquake in February of that year. The country also produced 3m boe of oil condensate and naphtha in 2018.

With a planned expansion of the PNG LNG project and the $13bn Papua LNG project in the pipeline, LNG capacity is expected to double to 16m tonnes per year by 2024. The implementation of the Papua LNG project was stalled by Prime Minister James Marape, who wanted to review the country’s projects to ensure that they generate maximum benefits for the country and local communities (see analysis). However, by September 2019 the government had announced the project was cleared for implementation, though Total had yet to comment. The anticipated increase in LNG production is expected to boost the contribution of oil and gas to GDP, which currently stands at approximately 16%.

Exports

According to the World Bank, LNG accounted for 40% of the country’s exports and made up 16% of GDP in 2018. Some 6.9 tonnes of LNG were exported that year, accounting for 2.2% of the total international gas export market. PNG’s largest source markets were Japan and China, which accounted for 46.4% and 33.7%, respectively, of total LNG exports. A facility shutdown following the earthquake in February 2018 led to a 1.3m-tonne decrease in LNG production and a 16% drop in exports compared to the previous year. Despite this, revenue rose in 2018, thanks to higher annual average prices of oil and gas. According to US-based energy giant ExxonMobil, PNG LNG’s largest stakeholder, the project generated approximately PGK5bn ($1.5bn) in revenue for the government and landowners through taxes, royalties and benefit payments as of January 2019. According to Fitch Solutions, annual oil exports are likely to remain stable at 21,000-22,000 barrels per day up to 2029, as natural decline at mature fields will be offset by new condensate output from the P’nyang, Elk-Antelope and Stanley fields.

Renewable Energy 

While efforts are under way to expand hydrocarbons output, the country is also looking to boost the share of renewables to the energy mix. Hydropower currently accounts for 30% of the country’s production capacity but constitutes less than 2% of its latent potential. Given the scale and size of the mainland’s river network, it is estimated that PNG has more than 15,000 MW of hydroelectricity, compared to the current installed generation capacity of 230 MW. As part of its commitment to tackling climate change, the government has set a target of meeting all electricity needs through renewable resources by 2050. Of the approximately 580 MW of power capacity currently installed in PNG, geothermal contributes less than 10% and solar’s contribution is negligible. To help meet the government’s target of 2000 MW of installed power capacity by 2030, PNG’s government plans to build or upgrade 800 MW of hydropower and 500 MW of geothermal generating capacity.

PNG has received financial and technical support from multilateral partners to help reduce its reliance on fossil fuels. Most notable is the support from the Asian Development Bank (ADB), which is funding the rehabilitation of the 18-MW Yonki Toe Dam; the 10-MW Warangoi plant; the 3-MW Ramazon facility; and the 2.5-MW Rouna 1 and 1.6-MW Sirinumu plants, both part of the Port Moresby Power Grid Development Project. In the interim, however, gas should emerge as a bridging resource to help PNG make the transition from fuel oil to carbon-free power.

Biomass 

Initiatives in biomass have gained significant traction, with Oil Search’s PNG Biomass project expected to enhance PNG’s investment profile. After extensive planning and engagement with landowners, the project in Morobe Province’s Markham Valley completed its front-end engineering and design (FEED) phase in late 2017. Under a 25-year power purchase agreement signed with PNG Power in 2015, a 30-MW biomass-fired power plant adjacent to an 11-MW solar photovoltaic farm is scheduled for commissioning in late 2022 or early 2023, subject to investment approval. PNG Biomass project director Michael Henson told local media that by adding this solar farm we are creating the Ganef Renewable Energy Park of 41-MW installed capacity which will hopefully become a catalyst for the country’s transition to renewable energy by 2050.

Together, the biomass power plant and solar farm will provide up to 40 MW of affordable and low-risk energy to the Ramu grid, serving the Morobe and Highlands Provinces. As an integrated renewable energy project it will have a secure fuel supply from 16,000 ha of sustainable, certified and dedicated eucalyptus tree plantations, with more than 22m trees, Jessie Mitir, stakeholder engagement manager at PNG Biomass, told OBG. Wood chips harvested from the trees will provide fuel for the power plant. By 2019 the project had raised PGK100m ($30.3m) in investment, already creating 300 out of an estimated 500 local jobs over the 25-year project life, while aiming to reduce carbon emissions by 4m tonnes per year.

Power 

Of total installed power capacity in PNG, about 217 MW comes from diesel and fuel oil. PNG has three large, but mutually disconnected power grids: Port Moresby (116 MW), Ramu (87 MW) and Gazelle Peninsula (19 MW). The Port Moresby system serves the National Capital District and surrounding areas. It is backed by a group of four hydropower stations located on the Laloki River, a 30-MW thermal power station at Moitaka and a privately owned, 24-MW diesel power station at Kanudi. Capacity is expected to increase by 40% before the end of 2019 once a 58-MW gasfired power plant comes on-line. The Ramu system serves Lae, Madang and the Western Highlands. Its main source of generation is the Ramu Hydropower Station, which has an installed capacity of 75 MW, and the 12-MW Pauanda hydropower station. The Ramu grid is also being supported by the privately owned Baiune Hydropower Station at Bulolo, while the diesel plants at Madang, Lae, Mendi and Wabag all remain on a standby status. The Gazelle Peninsula system serves East New Britain Province and is powered by the 10-MW Warangoi hydro-plant, the 8.4-MW Ulagunan diesel plant and the 0.5-MW Kerevat diesel plant.

In addition to these three grids there are some privately run, heavy fuel oil-based power stations serving isolated communities across PNG. According to International Finance Corporation (IFC), the private sector arm of the World Bank, 21% of the population had access to electricity as of May 2019, and about 13% of the population were connected to the grid. To help plug this gap the government allocated PGK30m ($9.1m) to rural electrification projects in the 2019 budget. Steering this mission is the Energy Management Committee, which is led by the secretary of the DPE.

PNG Power is the national utility firm responsible for the generation, transmission, distribution and retailing of electricity throughout the country. The state-owned company also enjoys an exclusive right to provide up to 10 MW of electricity capacity within the 10-km radius of its distribution network. The Independent Consumer and Competition Commission (ICCC) is the consumer watchdog that sets power tariffs and issues licences for the country’s power projects. An electricity regulatory contract signed between PNG Power and the ICCC determines the electricity tariff levied by PNG Power on its customers but allows for quarterly adjustments. The average price of electricity in PNG is $0.30 per KWh – almost twice the world average. Although independent in theory, the regulatory authority of the ICCC is currently being exercised by PNG Power, raising questions about conflicts of interest. However, this issue is expected to be addressed in the near future. “Once the NEA is established, PNG Power will no longer carry out the role of an economic regulator,” Alan Lari, acting director of rural electrification projects at the DPE, told OBG.

The ICCC provides third-party access to PNG Power’s distribution lines. It has laid out codes that define the rights and obligations for licensed independent power producers to sell energy to PNG Power via power purchase agreements. PNG Power supplies electricity to 116,000 customers and has a total installed capacity of 390 MW. The Port Moresby, Ramu and Gazelle Peninsula systems are all run by PNG Power, which also operates 17 mini-grids in remote locations.

Despite the various energy systems throughout the country, power supply remains unreliable and blackouts are often common, leading major oil, gas and mining firms to set up their own power stations to meet their needs. For example, the state-owned mining firm Ok Tedi has a licence to operate a hybrid hydro and diesel facility in the Western Province, while Australian mining firm Newcrest runs a thermal power plant in Lihir. Large palm oil and sugar producers are also licensed to produce power to meet their needs.

Upstream 

ExxonMobil, Oil Search and France’s Total are the three most significant upstream private sector operators, and, in various equity configurations, hold most of the exploration and development licences within the country. The first two are the top equity partners in the $19bn PNG LNG project, while Total is the main equity partner in the Papua LNG project, which plans to develop the Elk-Antelope gas fields in the Gulf Province. ExxonMobil, which holds the largest share in the PNG LNG project, at 33.2%, is in the process of making the final investment decision (FID) to expand the project with the development of the P’nyang gas fields, and drill additional development wells at the existing Hides, Angore and Juha gas fields. The plan for the future is to ship this gas to the PNG LNG plant through an additional train or a liquefaction facility that compresses natural gas into LNG.

PNG-based Oil Search, which is listed on the Australian Securities Exchange, has a major presence in the upstream segment. The company has a 17.7% stake in the Papua LNG project as well as a 29% stake in the PNG LNG project. As of February 2019 Oil Search had 15 PDLs, 12 PPLs, eight pipeline licences and six PRLs.

After several missed deadlines, a gas agreement was signed in April 2019 that seemingly cleared the deck for Total, the largest shareholder (31.1%) in Papua LNG, to begin work on the FEED stage of the project ahead of a FID in 2020. As of early September 2019 the government had made an official announcement that the project had been cleared for implementation; however, Total had yet to publicly comment.

Midstream 

Infrastructure for the midstream segment comprises a 250-km oil pipeline connecting the Kutubu oilfield to the Kumul Marine Terminal; a 104-km, 8-inch-diameter condensate pipeline connecting the Hides gas conditioning plant to the Kutubu central processing facility; and a 700-km gas pipeline that connects the Hides gas field to the PNG LNG plant on the coast of Port Moresby. With two proposed pipelines set to unlock the gas fields of P’nyang and Elk-Antelope, midstream activity is expected to accelerate in 2020-22. An expansion of the pipeline network to commercialise unconnected gas fields is also anticipated, as PNG moves to utilise more gas for electricity.

The IFC is promoting the use of intermodal containers to supply LNG to mini-power grids run by PNG Power. The plan involves moving intermodal containers filled with LNG on ships to supply small power stations near ports, such as those at Lae, Madang and Wewak, in a loop. The IFC believes that, at full deployment, the system could save as much as $40m per annum. The potential development of LNG distribution via intermodal containers or small-scale bulk LNG delivery could provide broader reach and the development of gas-fired generation to coastal towns and mining facilities, utilising PNG’s own LNG resources. Before these benefits can be reaped, however, there are some challenges to overcome. “The first is the willingness of mining firms to switch to LNG,” Mark Wilson, general manager of small-scale LNG projects and project manager of domestic LNG at Oil Search, told OBG. “Only when they stop using heavy sulphur fuel will the use of LNG for power become cost effective.”

Downstream 

More than 50% of domestic crude oil is processed at the Napa Napa refinery run by Puma Energy, a global energy company, which manufactures petrol, diesel and jet fuel. The refinery’s production capacity is more than sufficient to meet domestic demand: Napa Napa can refine up to 32,500 barrels per day, and there are plans to expand operations and increase output by up to 30%. In March 2019 Jim Collings, the country general manager for PNG at Puma Energy, said at the fourth PNG Petroleum & Energy Summit that the firm had invested $100m in upgrades since acquiring the refinery in 2014.

PNG has a three-tier system of price controls based on maximum wholesale margins applicable to distributors, combined with maximum retail margins for retailers capped by pump prices. The local retail price is adjusted at the rate of international price movements on a monthly basis. This system has operated reasonably effectively since the refinery’s introduction to PNG in 2004. According to the ICCC, retail petrol prices in Port Moresby rose from PGK3.17 ($0.96) per litre in January 2019 to PGK3.58 ($1.09) in June 2019. Puma Energy, Islands Petroleum, Mobil and Niugini Oil Company are the four main fuel distributors in PNG. Domestic fuel consumption is expected to increase at a modest rate of 3% over the next 10 years. Demand is anticipated to be driven by improvements to the national road network and the rising level of car ownership.

Outlook 

Although crude oil production is set to decline, LNG output is expected to double to 16m tonnes by 2024, provided the planned expansion and development projects go ahead. The temporary disruption in oil and gas production as a result of the devastating earthquake that struck in February 2018 was offset by a rise in international oil prices over the year. The government expects oil prices to average $ 57-66 per barrel between 2019 and 2022, while LNG prices are to remain steady at $9 per 1000 cu feet. PNG’s proven oil and gas reserve base is not as large as other major producing nations, such as Qatar and Malaysia, PNG remains an attractive upstream investment destination. The country boasts fewer regulatory barriers, lower costs of extraction and less onerous domestic market obligations. While the government introduced an additional tax on profits in the 2018 budget, it amended the Income Tax Act to restore dividend rebates and ensure profits are not double taxed.

With the PNG LNG project starting to pay taxes and dividends, revenue for the government is anticipated to peak after 2021, when capital investment depreciation and tax credits wind down. While the Department of Treasury (DoT) does not report income received from specific projects, it expects a return of $11bn over the life of the PNG LNG project. In 2018 the government received PGK423m ($128.3m) in taxes from mining and petroleum, compared to PGK113.6m ($34.5m) in 2017. Stamp duty collections and royalty and management fees were also above budget expectations. expects that the two flagship gas projects – PNG LNG and Papua LNG – will provide an additional PGK5.1bn ($1.5bn) in revenue by 2030. Gas accounts for approximately 25% of worldwide energy demand. In 2018 some 316.5m tonnes of LNG were traded in the international market, and demand increased by 6% to reach 320m tonnes. With this demand expected to rise to 450m tonnes by 2030, PNG will remain an important supplier of LNG in the Asia-Pacific region. The availability of abundant gas reserves, a liberal tax regime and geographic proximity to major buyers makes PNG a competitive energy producer. For long-term investors such advantages have outweighed the risks of political instability and contentious landownership issues. However, further investment will, to a large extent, depend on the implementation and success of Total’s Papua LNG, with the $13bn project widely viewed among industry players as an indicator for future activity in the energy sector.