Economic Update

Published 14 May 2016

A new wave of investments in Papua New Guinea’s energy sector could see some $19bn of projects launched in the coming years, boosting the country’s liquefied natural gas (LNG) output and providing employment to thousands.

In mid-April French energy giant Total announced its intent to push ahead with plans to build the country’s second LNG plant for an estimated $10bn. The project – dubbed Papua LNG – would develop gas from the Total-operated Elk-Antelope gas field in the Gulf province, 260 km north-west of Port Moresby.

During an April meeting with PNG’s Prime Minister Peter O’Neill, Patrick Pouyanné, CEO and chairman of Total, said that the company is expecting to soon make a final decision on when to begin developing its project, with an eye on commencing work on extraction and processing facilities in 2017 or shortly thereafter.

One of the incentives to break ground on the project is the prospect of lower construction costs. With few new projects being rolled out due to low gas prices, demand for skilled labour and materials has fallen.

“For Total, the best strategy is to invest when prices are low, because then costs are low,” Pouyanné said at an LNG conference in April. “In the commodity business, you make money if you are able to launch projects in counter-cycle.”

Though the full potential of the deposits is still being determined, developing gas from Total’s Elk-Antelope field will allow for the production of 7m tonnes of LNG per year, according to Papua LNG partner InterOil.

Not only would the project inject much-needed cash flow into the PNG economy, it could also provide employment for up to 10,000 people in the development stage.

ExxonMobil eyes expansion

In addition to Total’s investment in LNG, ExxonMobil is considering expanding output and export capacity at its PNG LNG joint venture, which currently produces about 8m tonnes per year.

In a bid to increase processing capacity, PNG LNG’s partners are considering adding a third train to its plant, located north-west of the capital, though a final decision has yet to be made. Global financial services firm UBS predicts that the expansion project could cost up to $9bn.

Despite the downturn in oil and gas prices, ExxonMobil’s facility is working above its rated capacity. In March output from PNG LNG rose by 3% quarter-on-quarter to 7.72m barrels of oil equivalent, marking the fourth consecutive quarter of production growth, according to PNG LNG partner OilSearch.

Boost for the economy

The commitment to the development of Papua LNG will be welcomed by the government, which is contending with a cooling economy and lower energy revenues.

In its latest economic outlook, the Asian Development Bank predicted PNG’s GDP would expand by 4.3% this year and by 2.4% in 2017. Released in early April, the report said the 2016 projection falls short of the regional growth average of 5.7% in Asia.

If the Papua LNG and PNG LNG projects are realised on budget, investments in the energy sector would reach at least $19bn in the coming years.

The new developments could also benefit key sectors of the economy that have seen growth and earnings ease after the PNG LNG project was completed in 2014.

The new projects are expected to create a steady flow of work in the transport, construction and services sectors, in particular.

The transport and infrastructure sectors have also been impacted by government cuts, with the revised 2015 budget indicating a 22.8% decrease from original allocations, with further scaling back expected in the coming years.

Downstream development

While seeking to expand upstream production, the country is also promoting the potential of downstream development.

In mid-March Ben Micah, petroleum and energy minister, visited Japan, which is PNG’s largest single market for energy exports, to meet with existing clients and operators in gas processing.

The government hopes that, while still in the development stage, the country’s LNG industry can attract additional investments in the downstream segment.

Ahead of his arrival, Micah said that PNG would be both a reliable gas supplier and a potential hub for gas processing.

“There is enough gas in our country for both export and domestic processing, for requirements of power and also other value-added products such as methanol, fertilisers and other by-products that need to be downstream-processed in our country,” he said.

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