Developments in PNG's energy sector to boost economy

 

Papua New Guinea’s energy sector has undergone a dramatic transformation over the previous decades, with liquefied natural gas (LNG) becoming the sector’s biggest growth driver. The multi-billion-dollar PNG LNG project is now operating well above nameplate capacity, and LNG export revenues are expected to remain a major pillar of the economy in the coming decades. Ongoing exploration activities will offer a clearer understanding of the country’s hydrocarbons reserves and further support plans to expand LNG production. Major international oil companies ExxonMobil and Total are looking to additional gas fields for new supply.

The future of the Papua LNG project, a Total-led greenfield natural gas project, is yet to be decided following the sale of a significant stake in the Elk-Antelope fields. However, the country is almost certain to welcome new LNG trains in the coming years, supporting long-term LNG export growth, and offering knock-on benefits to the national economy during its construction period. More equitable distribution of LNG benefits has become a priority for the government, and with the PNG LNG project now successfully delivered and fully operational, PNG’s leadership is looking to the sector as the country moves to meet rising domestic energy demand. While renewable energy development is already set to significantly increase with the construction of new hydropower facilities in the country’s mountainous interior, the long-anticipated PNG Energy Master Plan is also expected to contain new domestic consumption regulations. This could see the country retain some of its gas production for domestic use, potentially paving the way for long-term industrial, manufacturing and petrochemicals development, while helping boost electricity generation capacity.

At A Glance

In the sixth edition of its “Energy Demand and Supply Outlook”, published in May 2016, the APEC forum reported that PNG has relatively small reserves of oil and gas, as well as an unknown amount of coal reserves. The country has only produced around 400m barrels of light crude oil since production began in 1992, leaving its crude oil reserves significantly diminished and expected to be depleted in the 2020s. Existing oil reserves have been in decline since production peaked in 1993, with oil extraction activities expected to cease by 2026, according to APEC.

However, extensive gas reserves are expected to keep the sector growing for at least the next three decades. APEC reported that PNG’s proven hydrocarbons reserves include 440bn cu metres of natural gas, 660m barrels of oil and 262m barrels of gas condensate. Inclusion of inferred, mean-risk reserves could increase the country’s total supply to 1.7bn barrels of oil and 723bn cu metres of natural gas.

Petroleum development in PNG was limited until 1986, when significant oil reserves were discovered in the Kutubu complex of oil fields in the Southern Highlands Province, sparking a wave of exploration in the late 1980s and early 1990s. “PNG has substantial petroleum endowment, to the point where it seeps out of the ground, from Oiapu in the Gulf Province to Nipa in the Southern Highlands. Tectonically, the country is also highly mobile because it is on the margin of the Pacific and Australian crustal plates,” Michael McWalter, a PNG-based petroleum expert, told OBG.

Sector Oversight 

PNG’s energy sector is overseen by a host of government agencies, led by the Department of Petroleum and Energy (DPE), which is responsible for the overarching energy sector policy and planning. The DPE also heads the Electricity Management Committee, which is expected to assume responsibility for technical regulation in the electricity sector, a role currently filled by PNG’s vertically integrated power company, PNG Power. PNG Power operates as a fully integrated power authority responsible for generation, transmission, distribution and retail electricity sales across the country, in addition to serving individual electricity consumers. The company also holds the regulatory role of approving licences to electrical contractors, as well as providing electrical equipment certification, safety advisory services and major installation inspections.

PNG Power is regulated under the maximum average price control mechanism, under which tariffs across every line of business – industrial general supply, domestic customers and public lighting – are capped at levels determined by the government. The Independent Consumer and Competition Commission (ICCC) is authorised to set electricity tariffs, although the central government holds final authority over any decision made. The ICCC also issues licences for independent power projects and mining companies that own generation and distribution facilities.

Kumul Petroleum (KPH) is the state-owned oil and gas company. It was originally known as the National Petroleum Company PNG until 2015, and is responsible for managing the government’s participation in the PNG LNG project, standing as its third-largest shareholder. It also maintains a right to acquire a 20.5% stake in any new oil and gas project in the country.

Oil Production 

Estimates of recent oil production vary. APEC reported that oil production fell from an average of 30,100 barrels per day (bpd) in 2011 to 27,500 bpd in 2012, and 28,250 bpd in 2013, noting that the PNG LNG project is supposed to have augmented capacity as its wells also extract liquids and condensates, which added an estimated 20,000 bpd of production to existing capacity. The US Energy Information Administration (EIA) reported that oil production picked up in 2014, the same year PNG LNG came on-line, with production rising above 30,000 bpd during the year, exceeding 40,000 bpd in 2015 and averaging 56,000 bpd as of October 2016. The country exported an estimated 6080 bpd in 2013, according to APEC data, with oil exports accounting for a relatively small share of mineral exports. PNG imports much of the oil processed at Napa Napa, its sole refinery, and while the exact volume of imports has not been published, APEC reported that the country’s primary energy self-sufficiency ratio fell from 100% in 2000, to 70% in 2010 and 52% in 2013. Primary energy imports are forecast to increase over the next 25 years, with APEC projecting the country’s primary energy self-sufficiency ratio will fall to 47% in 2030, before improving to 53% in 2040.

Natural Gas 

Production of natural gas has become the driving force of PNG’s energy development, and will have a much more significant impact on future development than oil production. Although international oil companies were aware of significant gas fields present in the country, natural gas production did not fully begin until 1991 when companies began development and production activities in the Hides gas field, which was used to supply electricity to the Porgera gold mine. “Overall, when one looks at oil versus gas endowment, there is at least 10 times more gas than oil. The Kutubu oil fields brought everyone into PNG. In the year following the first major commercial discovery at Kutubu in 1986, PNG was an important player in the international oil industry. Investment from oil companies was around $250m annually, with 25 new wells drilled each year. But after Kutubu, only the smaller Gobe and Moran oil fields were found. Everything else was gas, and the large Hides gas field was the jewel in the crown,” McWalter told OBG.

PNG LNG

The $19bn PNG LNG project has had a profound impact on both the energy sector and broader macroeconomic development. The largest energy project ever delivered in the country, PNG LNG proved the country can deliver a complex, multi-year, integrated energy production and export project. This then opened the door for future energy sector development and significantly augmented macroeconomic growth. The project was first conceptualised in 2004 when an ExxonMobil affiliate began developing a project to commercialise the Southern Highlands Province’s gas reserves with plans to transport production to Australia via a 3000-km pipeline.

Although the original concept was scrapped in 2007, stakeholders then began working on an LNG project, which would be located entirely within PNG. The following year, initial PNG project partners signed a joint operating agreement, and an independent economic impact study was commissioned to highlight the project’s economic benefits. In May 2008 project venture participants signed a gas agreement with the government of PNG formally establishing the project’s fiscal regime and legal framework. Environmental impact statements were granted approval from the PNG government in October 2009, and four major sales and marketing agreements for the gas were signed with Sinopec, Tokyo Electric Power Company, Osaka Gas and Chinese Petroleum Corporation between December 2009 and March 2010. In that same month, the project reached financial close, and construction began.

Operations & Export 

Natural gas for the project is sourced from the Hides, Angore and Juha gas fields in the Western and Hela Provinces, as well as associated gas resources in the Kutubu, Agogo, Gobe and Moran oilfields of the Southern Highlands. Gas is processed at the Hides plant before travelling via a 700-km pipeline to LNG facilities just outside of Port Moresby. The 700-ha coastal site includes a two-train LNG plant and 320,000 cu metres of LNG storage capacity. After processing, the LNG is piped along a 2.4-km jetty managed by Esso Highlands, the ExxonMobil subsidiary which spearheaded the project in 2004. From there it is loaded on to LNG tankers, with total shipping capacities ranging from 125,000 to 250,000 cu metres.

The PNG LNG project was completed several months ahead of schedule. It began production in April 2014, and its first LNG shipment was exported the following month. The project is operated by Esso Highlands, which holds a 33.2% stake, followed by local firm Oil Search holding a 29% stake, KPH with a 16.6% share, Santos with 13.5%, JX Nippon Oil & Gas Exploration (4.7%), the Mineral Resources Development Company (2.8%) and Petromin PNG Holdings (0.2%). APEC reported that PNG’s gas production has soared in the years since, rising from 928,600 barrels of oil equivalent (boe) in 2013 to 49.3m boe in 2015. The PNG LNG project accounted for approximately 93.1% of total gas production in 2015, with production at the Hides gas-to-electricity project and the SE Gobe gas project accounting for the remainder. In December 2016 Andrew Barry, managing director of ExxonMobil PNG, told international media that the PNG LNG project delivered over 56.4m barrels of LNG in 2016, and forecast production would exceed 57.1m barrels in 2017.

Future Revenue Stream 

Estimates of the project’s exact financial benefits for the country vary. APEC reported that LNG exports should significantly increase the country’s total export revenues, noting that those from the PNG LNG project are expected to triple total export revenues by 2040 from the $5.6bn recorded in 2012. GDP is forecast to rise more than fivefold between 2013 and 2040, from $22bn to $115bn, with the LNG sector playing the most significant role in boosting macroeconomic expansion.

The Department of Treasury (DoT) reported that, without taking a third potential LNG train into account, PNG LNG’s total projected income to 2040 is estimated at $31bn, with PNG expected to retain one third of the total through tax revenues, dividends, royalties and infrastructure tax credits – although 10% of this will be used for operational costs.

In May 2014 local media reported that the government’s near-term annual LNG revenue forecasts anticipated between $600m and $775m of annual revenues until the early 2020s, when the project’s development costs will be absorbed, following which revenues should rise to $1.58bn annually. In April 2017 Nixon Duban, minister for petroleum and energy, reported that the country earns PGK160m ($50.7m) for every shipment of LNG exports. The country shipped 250 cargoes between May 2014 and December 2016.

Managing Expectations 

Some stakeholders report that the sheer size and economic impact of the project during its construction phase has given rise to the idea that its immediate, near-term financial benefits are more significant than they are in reality. “Only 25% of PNG LNG’s $19bn budget came from equity, the rest is debt. The financing was very well managed by Exxon-Mobil, but there are also unrealistic expectations about the amount of revenue it should be generating for the country. The debt and equity has to be paid down first, but later it should become extremely lucrative for the companies and government alike,” McWalter told OBG.

Earnings have also been impacted by depressed global commodities prices, with the DoT reporting that revenues from PNG’s mining and petroleum tax were forecast to fall from PGK195.4m ($61.9m) in 2015, to PGK129.9m ($41.2m) in 2016, a figure later recalculated to PGK88.8m ($28.1m). Under current projections, mining and petroleum tax revenues are expected to drop further in 2017 to PGK77.1m ($24.4m).

The outlook for royalties and tax is more positive, however, with PGK54.9m ($17.4m) in revenues expected, a PGK14.4m ($4.6m) increase over 2016’s realisation and an increase over 2015’s PGK51.3m ($16.3m). The central bank, meanwhile, reported that LNG export receipts dropped by 32.3% in the third quarter of 2016 to PGK1.55bn ($491.4m), against PGK2.29bn ($725.9m) in the same period in 2015 due to lower international oil and gas prices. The value of condensate exports rose by 16%, however, to hit PGK414m ($131.2m) in the third quarter of 2016, an increase on the PGK356.9m ($113.1m) recorded in the previous quarter.

In addition, the PNG LNG project is having an unsustainable inflationary effect on local wages. “When Exxon came in for PNG LNG, salaries skyrocketed and put a lot of pressure on other businesses to match those wages. The issue persists as expectations have not come down. Of course, this is good for the individual but not the company,” Allan Poulton, general manager at Global Freight Solutions, told OBG.

Papau LNG 

The country’s next major planned LNG project will source gas from the Elk-Antelope field within the Petroleum Retention Licence (PRL) 15 area in Gulf Province. This field is believed to be PNG’s largest undeveloped gas fields, containing an estimated 6-7trn standard cu feet (sfc) of recoverable natural gas. Surrounding structures, including the Raptor, Bobcat and Triceratops fields, could also add some additional reserves to the overall total.

Total, which holds the largest interest in PRL 15, had initially planned to construct liquefaction facilities to uncover more significant gas reserves. Gas from the fields would be processed at an upstream facility located close to the Purari River west of the Herd Base, and transported to a facility in Caution Bay, 20 km north-west of Port Moresby, via 340 km of pipeline. The project is expected to take at least five years to build, with the first LNG exports expected in either late 2020 or early 2021. “Ideally there will be a government funded pipeline that stretches from Western Province through to the Gulf Province into Port Moresby. This way all new gas discoveries can feed into this pipeline where significant efficiencies will occur and encourage more exploration,” Wapu Sonk, managing director at Kumul Petroleum, told OBG.

PRL 15 Developments 

However, the PRL 15 block has had a string of ownership shakeups in recent years, making the development of a standalone greenfield LNG project less likely to move forward. PRL 15’s original stakeholders included InterOil, Pac LNG Group, Oil Search, ExxonMobil and Total.

Total acquired a 40.1% interest in PRL 15 after purchasing shares from an InterOil subsidiary for $401m in March 2014. InterOil then maintained a 35.5% interest, followed by Oil Search, which acquired a 22.8% interest in the block after its 2014 acquisition of Pac LNG Group. The remaining 1.6% is held by indirect participating interests. InterOil acquired approximately two-thirds of these shortly after the Total deal, bringing its entire share of interests to 36.5%.

In May 2016 Oil Search offered $2.2bn for InterOil’s stake in PRL 15. Meanwhile, in July 2016 ExxonMobil announced InterOil had agreed to an acquisition valued at approximately $2.5bn-3.6bn, depending on the extent of gas reserves in the Elk-Antelope field. The transaction, which also gives ExxonMobil access to InterOil’s larger resource base including six licences covering 1.62m ha, was finalised in February 2017.

With ExxonMobil now holding a significant stake in the Elk-Antelope fields, industry stakeholders are increasingly calling on the two companies to work together in expanding capacity, arguing that given the current global operating environment, a greenfield LNG project is less likely to move forward than a brownfield expansion of existing PNG LNG facilities.

New Trains 

Papua LNG’s development will also depend on ongoing exploration activities in the Hides, Elk-Antelope and P’nyang fields, which will clarify the country’s long-term production capacity.

ExxonMobil signed a memorandum of understanding to build a third train at the existing PNG LNG Port Moresby facility in February 2015. The case for an additional train was further strengthened in December 2016, when the company announced it had discovered significant new gas reserves just 21 km away from the Hides oil and gas field.

The government has publicly supported both the PNG LNG’s expansion and the Papua LNG project, although stakeholders, including Oil Search, which holds an interest in both projects, have called on ExxonMobil and Total to combine operations and process Elk-Antelope gas in partnership. “Front-end engineering and design work will take place once all efforts have been made to design a cost-effective project. Given the current global climate, the PRL 15 joint venture is also examining whether it could create more value for stakeholders to build new trains in the existing PNG LNG plant,” Philippe Blanchard, managing director at Total PNG, told OBG. In September 2016 Wapu Sonk, KPH’s managing director, told media that PNG has sufficient capacity to justify three additional trains by 2023-25.

Downstream Production 

PNG’s first oil refinery, Napa Napa, began crude processing in 2005, sourcing crude oil from imports and local fields. The refinery processed 5.8m barrels of crude oil in 2008. APEC reported that with expansion this number could reach 9m barrels annually by 2035. A recent campaign to improve employee training, safety and operational efficiency has had a positive impact on activity. Napa Napa’s total refining output stood at 32,000 bpd as of April 2017, compared to an average of 27,500 bpd in 2016.

In June 2014 global energy company Puma Energy acquired InterOil’s downstream assets for $526m, including the Napa Napa refinery. The company has invested $650m in PNG since then and currently accounts for 80% of the country’s total fuel storage capacity, with 250m litres of capacity and a 65-day reserve cover. Puma also markets diesel, liquefied petroleum gas (LPG), butane, gasoline and aviation fuel, holding around 60-70% of the LPG market. Local refining should help reduce the cost of fuel across sectors. “Fuel prices in the aviation industry are very high. This leads airliners to refuel outside PNG,” Henry Elias, general manager of Pacific Energy Aviation, told OBG.

Expansion Potential 

In November 2014 Puma Energy announced a $220m upgrade of the Napa Napa refinery to facilitate exports and more reliable domestic supplies of petroleum products. The expansion project would enable the refinery to process all of PNG’s domestic crude and oil condensate, which is currently obtained from the Kutubu oil fields; support a 68% increase in capacity, from 25,000 bpd to 42,000 bpd; add 10 MW of electricity production; build new storage facilities; and upgrade to the site’s existing jetties.

The Puma Energy refinery expansion project was on hold as of April 2017, owing in part to an ongoing foreign exchange shortfall brought about by subdued macroeconomic growth and low global commodities prices. Enabling purchasing Kutubu crude in PNG kina rather than US dollars is seen as a key alternative to positively impact the foreign exchange liquidity position, and deliver positive self-reliant and sustainable energy outcomes for the country.

“While we wait for the large-scale projects like Total LNG and Wafi mining projects to come on-line, the best approach at present to managing the forex liquidity issue is continued interventions by the central bank, and enabling Kutubu crude to be purchased in PNG kina. Existing operations like the Ok Tedi mine and Harmony Gold are providing strength in exports along with palm oil and coffee production uplifts, which all help improve the forex situation,” Jim Collings, Country General Manager at Puma Energy, told OBG.

Puma Energy has in its plans to build a new condensate splitter at Napa Napa’s existing facilities, which would maximise the use of the increased condensate produced as the local PNG crude fields shift in composition to produce more condensate. An investment of between $100m and $150m on refinery processing equipment and additional storage facilities will enable the refinery to process the additional condensate.

Electricity Overview 

Ongoing hydrocarbons exploration coupled with the country’s existing short supply of renewable energy resources should also boost the country’s utilities sector. PNG’s power sector is split into three large regional grids: The Port Moresby system, serving the National Capital District and surrounding Central Province; the Ramu system, serving the Morobe and Highlands Provinces; and the Gazelle Peninsula system, serving the townships of Rabaul, Kokopo and Keravat. Demand for electricity has risen considerably in recent years as urbanisation and industrialisation gather pace (see analysis). The government has announced plans to boost total installed capacity to 1970 MW by 2030 and provide 100% of its energy needs with renewable energy sources by 2030.

It has already made significant strides towards these goals, with several new hydropower projects launched in recent years. Although, expansion of the country’s capacity is facing significant financial obstacles, according to Asian Development Bank, which reported that PNG Power is constrained in its ability to conduct routine maintenance for existing electricity infrastructure. This has led many businesses, residential areas and offices to rewire backup, diesel-powered generators.

Investment 

However, a recent push to develop new power plants under a public-private partnership (PPP) framework is already meeting with some level of success. The Pacific Legal Network reported in February 2017 that two major hydro projects – the 180-MW Ramu 2 hydropower project and 1800-MW Karimui hydrodam project – are both being developed by Kumul Consolidated Holdings (KCH), the statutory body responsible for large-scale government infrastructure projects. KCH is expected to develop the Ramu 2 project under a build-operate-transfer or build-own-operate-transfer modality (see analysis).

With investment in new power plants gradually improving and the oil and gas industry expected to become a more significant contributor to primary fuel supply, the country could be set to meet its 2030 targets. According to APEC, PNG’s power generation is forecast to increase nearly five-fold from 2013 to 2020, rising from 3.6 TWh to 18 TWh, while total installed capacity is forecast to exceed the government’s 2030 target of 1970 MW by 13%.

It is also important to look beyond the numbers. “Local content is and integral part of mega-projects here. It is important to realise in PNG that when the locals are happy, your investment is safe. Working with the community on development is almost as important as the project itself,” Tuguyawini Libe Parindali, chairman of Hides Gas Development Company, told OBG.

Outlook 

Although energy sector development faces a challenging operating environment, the sector is nonetheless expected to become an increasingly important growth driver for the country. LNG revenues will increase in the early 2020s, while investment in exploration, production, transportation and processing facilities should provide a welcome economic injection.

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The Report: Papua New Guinea 2017

Energy chapter from The Report: Papua New Guinea 2017

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