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Papua N. Guinea looks to Asia market. PDF Print E-mail
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Monday, 20 December 2010 03:16

A massive LNG investment programme is poised to transform Papua New Guinea’s economy, and it is to the Gulf that the country is looking to help inject funding into key areas according to Karl Yalo, who advises the PNG government on LNG development matters

PAPUA NEW GUINEA (PNG) is in the midst of a massive LNG development programme which by 2014 could transform its economy, with three separate LNG projects are currently at different stages of development in the country, located at Asia’s eastern extremity and widely considered one of the world’s most significant remaining untapped gas provinces.

But in a region where LNG industries are already well established in Malaysia and Indonesia and where Australia is embarking on a the $40 billion Gorgon development in Western Australia and the $100 billion coal seam gas projects in Queensland, are PNG’s ambitions to be the new major strategic LNG supplier to gas-hungry north Asia justified?

Its relative lack of infrastructure such as roads, as well as mountainous terrain and remote field locations, presents technical challenges which must be overcome if PNG is to deliver on long-term gas supply agreements already secured - years before the first LNG becomes available in 2014 – with customers in China, Japan and Taiwan.

And it is to foreign investors that the PNG government is looking to help develop its LNG sector, expected to spearhead the creation of a national industrial base and generate wealth for the country of six million.

Karl Yalo, who advises the PNG government on LNG development matters and is also managing director of PNGEPCM Ltd, a local engineering procurement and construction (EPC) contractor which recently entered a joint venture agreement with Korea’s Daehan Oil Pipeline Corporation (Dopco) to develop pipelines, storage tanks and loading terminals in PNG, said the country’s high hopes for LNG are justified.

“PNG is the fastest-growing emerging LNG industry in Asia Pacific and Australasia, located in the heart of the world’s largest LNG market,” Yalo said during a recent visit to the Gulf to raise awareness among potential investors of PNG’s opportunities.

Rather than fear regional LNG over-capacity, Yalo said medium- and long-term LNG demand projections – particularly in the key markets of China, Japan and Taiwan -  will be comfortably sufficient to absorb new LNG capacity from 2014 onwards. Furthermore, global LNG demand is expected to grow at more than 10 per cent annually to 2015, compared with 2 per cent annual growth for oil and gas.

PNG also enjoys strategic advantages over its larger neighbour to the south, said Yalo.

“PNG is fast-tracking its LNG projects, which will come onstream before those in Australia. We are geographically closer to key Asian markets than Australia, we have a more attractive fiscal regime, lower-cost labour, and our LNG sites are not vulnerable to natural disasters such as cyclones. Our gas also has fewer impurities than Australian gas, meaning less processing and lower production costs,” he explained.

Already, the entire output of the largest, ExxonMobil-led project due onstream in 2014, has been secured under 20-year offtake agreements with China’s Sinopec, Tokyo Electric Power Company (Tepco) and Osaka Gas from Japan, and Taiwan’s CPC Corporation, and Yalo, who is also chairman of Niugini LNG Carriers Ltd, said that, to meet these delivery obligations PNG is negotiating with major tanker companies such as Mitsui OSK Lines to ensure availability of sufficient vessel capacity.

PNG’s LNG projects are expected to deliver a massive economic windfall, boosting  government revenues, providing royalty payments to landowners and creating jobs. Reports suggest that revenues from the ExxonMobil-led project could double GDP and amount to more than $30 billion in direct cash flows in 30 years. An independent report on the potential economic contribution of the second project, meanwhile, indicates it could contribute up to 20 per cent of PNG’s GDP by 2020.

The huge cash influx generated by these projects in a short period from 2014 brings the risk of increased inflation, and so the PNG government is setting up an offshore sovereign wealth fund – with Australian government assistance – for this eventuality.

The Kopi LNG project, under construction, is being led by ExxonMobil, with the PNG government an equity partner.

The $18 billion project – the largest private sector investment ever undertaken in PNG - is interesting in many ways, not least the way it was funded in entirety at the height of the global financial crisis.

“The $18 billion was raised in less than six months, a phenomenal achievement. The US Export-Import (Exim) Bank committed $3 billion, the largest commitment in the bank’s history, demonstrating the robust nature of the project,” said Yalo.

In addition, while traditionally PNG has sought investment for major infrastructure projects from Australia, New Zealand, Japan, China, Korea, Singapore and Malaysia, in 2009 the PNG government secured a $2 billion arrangement with Abu Dhabi’s state-owned International Petroleum Investment Company (IPIC), the first ever commercial arrangement between PNG and the Arab world.

“We expect it (the IPIC deal) to be a catalyst for closer engagement between PNG and the Arab world and is something we intend to build on as Gulf States seek to diversify their investments in resource-rich emerging markets,” said Yalo.

Having a top IOC in ExxonMobil as a shareholder (with 41.5 per cent) helped attract investors, who include PNG’s Oil Search (34 per cent), Santos (17.7 per cent), AGL (3.6 per cent), Japan’s Nippon Oil (1.8 per cent), Mineral Resources Development Company (1.2 per cent) and Eda Oil (0.2 per cent), to the project, while ExxonMobil subsidiary Esso Highlands Limited is operator and sole marketing representative for the joint venture.

Construction on the two-train LNG project, which will have a total production capacity of 6.9 million tpy, started earlier this year, and first LNG shipments are expected in 2014. A third train could come onstream in late 2014 or early 2015.

Associated gas for the project will be sourced from the existing Hides-Kutubu field, located in the remote highlands of PNG. The field has been producing crude oil consistently since 1992 yet its mountainous location poses operational challenges and will be linked to an LNG terminal on the coast near national capital Port Moresby via a 900km-long pipeline.

The project includes a 960 million cubic feet per day gas conditioning plant.

PNG’s second major project, which will include condensate strip plant and onshore LNG processing facilities, will be built and operated by Liquid Niugini Gas Limited, and InterOil, a $3 billion capital company listed on the Toronto and New York Stock Exchanges and with petroleum licenses covering about 3.9 million acres, an oil refinery, and retail and commercial distribution facilities in PNG. Pursuant to the PNG Oil and Gas Act, the Government will take 22.5 per cent equity when the project goes into commercial production.

A agreement for the construction of the LNG plant was signed between the PNG Government and Liquid Niugini Gas in December 2009 under which fiscal terms were secured for a 20-year period, including a 30 per cent corporate tax rate and certain other exemptions applicable to large-scale projects, giving the project added stability.

Gas for the LNG plant will be sourced from the Elk/Antelope field, which boasts proven gas reserves of 9 trillion cubic feet (tcf) (against 8 tcf at Hides-Kutubu) and gas condensate resources of 8.2 tcf, making it one of the region’s largest fields. Gas will be transported to a liquids conditioning plant at the well head in the Gulf Province where it will undergo treatment, following which it will be transported to the proposed LNG plant site linked by a 70 km pipeline.

The project is currently at the Front End Engineering and Design (Feed) stage, with construction due to start in 2011. First shipments are due in 2014/2015.

The project has two main elements. The first is the accelerated development of condensate stripping facilities, in which Japan’s Mitsui and Co is investing $500 million as a joint venture partner. The gas will then be reinjected through the reservoir. The second element is the construction of a $7 billion, two-train LNG plant with a total production capacity of eight million tpy. InterOil is currently negotiating offtake agreements with potential clients, which it hopes to secure by mid-2011.

Total capital expenditure on the project is expected to be lower than the ExxonMobil development, partly because of the short distance (70 km) between the gas field and proposed LNG plant site. The project promoters say it has several other advantages: early liquids production will generate useful early cash flow and increase financing options; gas costs are marginal from the high productivity wells and is high in BTU.

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Last Updated on Monday, 20 December 2010 03:36
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