Interview: Peter Botten
How will global liquefied natural gas (LNG) trends affect the industry in Papua New Guinea?
PETER BOTTEN: The LNG market is undergoing a revolution: moving away from traditional long-term contracts into much higher volumes that are traded on the spot, or in other short-term markets. The world is becoming much more connected in terms of LNG sales, meaning that energy demand in Europe impacts prices in the Middle East and the Far East. In this way, the LNG market is linked more so than ever in terms of volume, offtake and price, which is different to five years ago when Europe and Asia sat on their own, with not much LNG coming out of the US.
I see the market continuing to be dominated by oversupply over the next couple of years, as we see many LNG projects around the world coming on-line. Spot prices for LNG have the potential to fall to $4-5 per million British thermal units (Btu). It will be a tough process in the short term. Obviously, many of the contracts are linked to the price of oil, and I don’t see the price of oil rising much any time soon. Estimates put long-term prices at around $50-55 per barrel, but this depends mostly on how higher prices impact shale investment in the US.
With lower LNG prices we will see outstanding demand for the commodity. LNG, being a transition fuel between coal and renewables, fits very nicely into a mix of competitively priced fuel for the future, and has a much better environmental outcome. This presents a real opportunity for anyone who has a competitively priced development to become well situated in the market by 2021-22, when demand will likely outstrip supply. You have to remember that you can’t just “turn on” LNG; there is a need for substantial investment and infrastructure, which takes time to realise. If you are not careful, you can overshoot on the downside, which could lead to much higher prices in the middle of the next decade. I believe the PNG LNG expansion and the Papua LNG project are two of the most cost-effective new developments in the region, and probably in the world, which puts PNG in a prime position to compete extremely well with other projects on cost and deliverability.
What factors are crucial to best realising the economic benefits of the proposed LNG expansion?
BOTTEN: A number of recent examples on the west and east coasts of Australia, where a lack of cooperation has led to substantial overcapitalisation, has resulted in very uncompetitive projects and substantial losses of revenue to the state in the form of tax revenues. We cannot afford to see that happen in PNG, because we have to be most efficient in order to compete. The value to the state and landowners is heavily affected by the ability to optimise the development through cooperation.
Optimising future developments relies on finding ways to carry out commercial opportunities with minimised capital costs, as well as utilising facilities and equipment already in the country. If we are also able to share the reserves and optimise the development of trains, on the back of bringing reserves together to underwrite each train, then we can accelerate projects and optimise the value of the gas going in.
For the PNG LNG project, we brought seven different fields together under one umbrella in order to share reserves. For Papua LNG and the expansion of PNG LNG, we believe that the P’nyang and Elk-Antelope gas fields represent resources that can be brought together to underwrite at least two trains. Additional reserves found from exploration could possibly support a three-train development. So, within the next 18 months it is critical to have parties, stakeholders and the state cooperate with the common goal of developing the fields in the most efficient way. Parties that put up challenging commercial barriers will only delay the development, which could see the whole of PNG miss the window of opportunity in the market.
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