With the LNG project just starting, the opportunities are numerous

The near future will bring positive change for the energy sector and the economy as a whole as the investment and construction phase of the $19bn Papua New Guinea liquefied natural gas (LNG) project winds down and the first shipments of gas begin to flow from the ExxonMobil facility. Even with the optimism surrounding this signature achievement, focus is already being shifted onto the next generation of projects and the development of other oil and gas plays in the country. Progress is also being made in the utilities sector, with major rehabilitation and power generation projects, and expansion of water and sewage network.

The billions invested in PNG LNG have trickled down across nearly all sectors of the economy, from services to real estate, as the country waited for export revenue streams to come to fruition. But the government will now start to see a more direct impact on its bottom line as LNG exports begin to move. The mining and petroleum tax, for instance, is projected to increase from PGK815.7m ($331.5m) in 2013 to PGK1.01bn ($407.23m) in 2014, in addition to PGK133m ($54.06m) from mineral and petroleum dividends and another PGK600m ($243.9m) in asset sales, according to the Department of Treasury (DoT). The PGK600m ($243.9m) will be a one-time revenue boost from an equity sale in the PNG LNG project in 2014, which will reduce the government’s 22.5% stake in the venture. In addition, non-tax revenue is projected to rise significantly to PGK1.64bn ($666.66m) in 2015, an increase from PGK1.26bn ($512.2m) in 2014, primarily as the result of the inclusion of the LNG dividend from the project.


Present on a commercial scale since the 1980s, petroleum output in PNG has been on the decline over the past decade as the country’s oil fields continue to mature. Oil output declined each year from the 2007 starting point of 46,689 barrels per day (bpd) to 28,421 bpd in 2012, before rebounding by 4% in 2013 to 29,604 bpd, according to the country’s sole petroleum producer Oil Search (OSH). The central highlands are the centre of production, primarily the Southern Highlands Province. As of 2013 there were nine active petroleum prospecting licences (PPL): Kutubu, SE Gobe, Gobe Main, Moran, NW Moran, Hides-04, Angore, Juha, SE Mananda and the Hides gas-to-electricity project. The largest producer remains the Kutubu licence, which produced an average of 15,848 bpd in 2013, up 6.6% over 2012 output. This was followed by Moran with 11,295 bpd, up 9.7% over the previous year’s production; SE Gobe at 1412 bpd, down nearly 34%; and Gobe Main at 982 bpd, down nearly 8%.

Condensates from the Hides gas field contributed another 325 barrels of oil equivalent per day (boepd), up 5.8% over 307 boepd in 2012. Natural gas production from the Hides field amounted to 15.11m standard cu feet per day (scfd) in 2013, up 5% from the 14.39m scfd registered in 2012.


Overall energy production and exports should experience a dramatic uptick in 2014, when the first gas shipments from the PNG LNG project begin to flow. When fully operational, the plant boasts a capacity of 6.9m tonnes per annum (tpa) from its two trains, along with condensates. The project began its first shipments in late May 2014 – months ahead of schedule. Feedstock for the pipeline will be sourced from the Angore and Juha gas fields in the Western and Hela Provinces, with additional supplies to be derived from associated gas resources in the operating oilfields of Hides, Kutubu, Agogo, Gobe and Moran. Natural gas produced in these fields will be processed at the Hides conditioning plant in the highlands and pumped into a 700-km pipeline connected to the liquefaction and storage terminal on the coast. Additional third and fourth trains, which could bring the total output to more than 10m tpa, are being considered depending upon the availability of adequate supplies of supplementary natural gas.

Project operator ExxonMobil is also PNG LNG’s largest stakeholder with a 33.2% share in the project through its subsidiary Esso Highlands. Other participants include OSH with a 29% interest; the Independent Public Business Corporation (IPBC) subsidiary National Petroleum Company (formerly Kroton No 2) holds 16.6%; Santos has 13.5%; JX Nippon Oil and Gas Exploration with 4.7%; PNG landowner group Mineral Resources Development Company holds 2.8%; and Petromin PNG Holdings, which is in the process of being transferred to Kumul Petroleum Holdings, with 0.2%. A series of cost overruns caused by a wide variety of issues ranging from currency depreciation to poor weather and landowner disputes have also pushed investment costs up from the original estimates of $15.7bn to around $19bn.

As of the end of 2013, piping for the first LNG train had been completed along with the trestle for the LNG jetty used to transport the gas offshore for loading onto tankers. The first gas was delivered in August 2013 from the Kutubu field, while work had also begun at the Hides conditioning plant supported by 88 Antonov flights to the 3.2-km-long runway at the Komo Airfield. The entirety of the plant’s production has already been allocated under long-term purchase agreements that have been inked with the Chinese Petroleum Corporation, Taiwan (1.2m tpa), the Osaka Gas Company (1.5m tpa), Tokyo Electric Power Company (1.8m tpa), and China Petroleum and Chemical Corporation subsidiary Unipec Asia Company (2m tpa).


Under the framework laid out by the 1998 Oil and Gas Act and the 2002 Oil and Gas Regulation, exploration and production is regulated by the Department of Petroleum and Energy (DPE). One of the DPE’s key responsibilities is to issue PPLs and petroleum development licences (PDL). The former of these covers the exploratory phase of development and is good for a period of six years with a conditional five-year extension possible. If extended to the full 11 years, 50% of the original tenement size must be relinquished. If sufficient resources are discovered and the operator wishes to move on to the development and production phases, a PDL is good for 25 years and it is possible to extend it for up to 20 more years. Other permits issued by the DPE include the petroleum retention licence (PRL), processing facility licence and pipeline licence.

In The Pipeline

Encouraged by the success of the PNG LNG venture and enticed by the untapped potential spread across the rest of the country, companies are scouring PNG in the hopes of developing the next big oil and gas play. The most developed of these is the Liquid Niugini Gas project, sourcing gas from the ElkAntelope fields in the southern highlands near the PNG LNG gas fields (see analysis).

Another major project is taking shape in the Gulf and Western Provinces led by Calgary-headquartered Talisman Energy. Talisman has already acquired significant stakes in nine petroleum exploration licences across the wet-gas-rich area to supply its LNG aggregation strategy. One of the most developed oil and gas plays within this project is the mid-sized LNG project focused initially on the Stanley gas field located in PRL 4. Talisman holds a 40% share, along with original licence holder Horizon Oil (30% share) and more recent entrants Mitsubishi (10%) and Osaka Gas (20%).

According to Horizon Oil, the Stanley field is expected to be on-stream in 2015. First discovered in 1999, initial production will focus on separating condensate for storage and export from a terminal along the Fly River. Crude oil will also be piped to the terminal in the town of Kiunga via 15-cm pipelines and then transferred to 4.5-tonne, 33,000-barrel-capacity tankers for transport down the Fly River and ultimately the Napa Napa refinery. The natural gas will initially be reinserted at high pressure back into the formation for commercialisation in the future either as feedstock for a LNG export project or a gas-fired power plant. The concept of a gas-powered thermal power plant fuelled by natural gas from the Stanley field has been explored for some time, with strong demand for electricity from the nearby Ok Tedi Mine. The LNG prospects for the fully utilised project estimate a mid-scale facility with an output between 2m and 4m tpa of LNG, combining different resources located in the vicinity.

Further Afield

Other resources which could likely tie into the project are the Elevala and Ketu fields and the most recent discovery at Tingu-1. These three plays are currently around one to two years behind the Stanley field in the developmental schedule, according to Horizon Oil. These latter resources are located in PRL 21, which is split between Talisman (32.5% equity), Horizon Oil (27%), Osaka Gas (18%), Kina Petroleum (15%) and Mitsubishi (7.5%). Other PPL licences in the vicinity in which Horizon Oil has a stake include PPL 259, PPL 430, PPL 372 and PPL 373. Talisman also holds part or all of nine PPLs and five PRLs, including PPL 235.

In 2012 drilling was completed on five exploration and appraisal wells, three of which increased Talisman’s gas resources in the country. The Weimang-1 exploration well in PPL 235 was suspended as a gas discovery in 2013 after a successful appraisal well, Elevala-2, was drilled at the end of 2011 on the Elevala discovery in PRL 21, according to Talisman. In the same licence area, the Ketu-2 appraisal well also increased the extent of the Ketu discovery, and in the PPL 235 area the Puk Puk-2 appraisal well did not encounter gas, but identified the gas water contact in the Puk Puk discovery, resulting in an increase of the field’s resources. The Aiema-1 well in PPL 235 was plugged as a dry hole.

Another major partner in the development of Western Province gas is Canadian exploration company Eaglewood Energy, which holds five licences spread across the country. Three of these – PRL 28, PRL 259 and PRL 430 – are located in the immediate area of the Stanley gas field. Situated between PPL 4 (Stanley field) and PRL 21 (Elevala, Ketu and Tingu-2), PPL 259 is operated by majority stakeholder Eaglewood with a 45% share, along with Horizon Oil (35%), Osaka Gas (10%) and Mega Fortune (10%). A new exploration well is planned for the licence area in 2014 as 300 km of new seismic data has been acquired over last four years, according to Eaglewood. The company was also awarded licences to construct and operate a gas condensate processing facility and pipeline in March 2014, which will help to secure the way forward as infrastructure works for the project begins.


PNG’s only domestic refinery is the 36,000-bpd-capacity Napa Napa plant operated by InterOil. Situated just up across the harbour from Port Moresby since it was shipped from its original home in Alaska back in the 1970s, the refinery produces the usual array of products, including petrol, jet fuel and diesel, for the local market. With no established petrochemicals industry to speak of domestically, the company also exports by-products of naphtha (light and mixed grades) for use primarily as petrochemical feedstock in other countries. The other significant output of the refining process is low sulphur waxy residue, which does have a use on the local market and is sold for power generation and local bunker fuel, although the majority of this is also exported overseas to more sophisticated refineries for use as a cracker feedstock.

In 2013 the refinery produced a throughput of 27,999 bpd, up 14% over 24,483 bpd in 2012, and an annual operating capacity of 72% in 2013 compared to just 58% the previous year, according to InterOil’s annual report. InterOil sold 9.4m barrels of petroleum products in 2013, consisting of 51% to the refinery and 49% retail sales. Domestic sales edged out exports by a rate of 57% to 43%. Making full use of its vertically integrated business operations, InterOil is also by far the largest retailer and distributor for refined products. This marked the third consecutive year of sales increases, up 10.5% over the 8.5m barrels sold in 2012 and 27% over 7.4m barrels in 2011. In spite of downstream sales of 738m litres of petroleum products in 2013, the firm’s midstream refining operations incurred losses on the year due largely to $37.15m in foreign exchange losses. Downstream sales margins increased as the average sales price rose from PGK2.32 ($0.94) per litre in 2012 to PGK2.48 ($1.01) per litre in 2013, allowing the business segment a profit of $29m in spite of declining sales as work on the PNG LNG project winds down.


Although heavy investment in the country’s oil and natural gas sector has led to a surge in domestic hydrocarbons production in recent years, only a small amount remains in PNG, with the lion’s share destined for lucrative exports. As such, the majority of new power plant development in PNG is focused on alternative power generation, mostly through hydropower projects. While still relatively underdeveloped, the country’s electricity sector has been making progress in recent years to boost both generation capacity and electrification. As of early 2014, the country’s combined installed capacity totalled approximately 500 MW, around half of which is derived from hydropower plants.

Providing Energy

The majority of power is generated and transmitted by the national power company PNG Power, with the second-largest participant in the sector, OK Tedi Mining, serving the mine and surrounding populations in the Western Province. Other smaller population centres not connected to the main power grids are served by smaller dedicated distribution networks through small-scale, localised power generation derived from diesel generators and small-scale biomass, hydro and solar plants.

Aging infrastructure, challenging terrain, landownership issues and a lack of investment have historically stifled efforts at expanding both the distribution and generation capacities of the power sector, although a number of electrification extension programmes and large power generation projects are now being successfully implemented.

A state-owned enterprise (SOE) falling under the jurisdiction of PNG’s IPBC, the vertically integrated PNG Power operates three separate primary power grids around the country, as well as generation, distribution and retail sales operations. In 2012, the latest year for which data was available, PNG Power supplied approximately 91,000 customers with 1061 GWh of electricity. Both sales and the amount of power generated by the company have increased steadily each year, rising from 781 GWh in 2007 to 1018 GWh in 2011, while sales rose from 648 GWh to 820 GWh over the same time period. The discrepancy between generation and sales is due to a number of technical and regulatory issues, ranging from loss during transmission to difficulties in collecting payment for distributed power.

Power Up

The largest of the country’s transmission and distribution networks covers the greater Port Moresby area; the Ramu system serves Lae, Madang and the Highlands; and the Gazelle system covers the Gazelle Peninsula area on New Britain Island and Rabaul. The four units comprising the Rouna hydropower station situated on the Laloki River provide the majority of power to the Port Moresby grid with 62.2 MW of installed capacity. This is supplemented by electricity generated at PNG Power’s 30-MW diesel power plant at Moitaka, as well as the independent power producer Kanudi thermal power station supplying 24 MW of diesel-fuelled capacity. Like the Port Moresby system, the Ramu power network derives most of its electricity from hydropower generation. The Ramu Hydro Power Station situated on the Yonki Dam provides 75 MW, although it is currently being upgraded, while the Pauanda run-of-river hydropower plant located in the Western Highlands Province provides 12 MW.

Lastly, the Gazelle Peninsula System serves the townships of Rabaul, Kokopo and Keravat on New Britain Island. The primary power generation to the grid consists of the 10-MW hydropower plant at Warangoi and the 8.4-MW Ulagunan diesel-fuelled thermal power station. The company also provides electricity to 16 regional centres, predominantly with electricity supplied by 75 diesel-powered thermal generation units. The most recent additions of small-scale, remotely located operations include Tari in the Hela Province and Arawa on Bougainville Island.

Network Upgrades

A key component within PNG’s Medium Term Development Plan 2011-15 is to improve the country’s inadequate infrastructure to foster both economic growth and an improved standard of living for its population. In the electricity sector, the low electrification ratio and frequent power disruptions are being addressed through a number of programmes designed to modernise the transmission and distribution network (see analysis). To extend power to the perpetually expanding National Capital District (NCD), the government and the Asian Development Bank (ADB) have rolled out the Port Moresby Power Grid Development Project, which is designed to extend the reach of the grid and increase distribution and generation efficiency. The programme’s six projects are expected to require a total investment of $83m. These projects include: the construction of the Kilakila substation and an associated 6.1-km-long, 66-KV transmission line from Six Mile to Kilakila; substation capacitor and stat-com augmentation; upgrade of the 11-KV distribution system between substations to increase reliability; loss reduction studies and technical support; Rouna 1 Hydropower Station refurbishment and upgrade; and upgrades for the Sirinumu Toe-of-Dam Hydropower Plant. Following the completion of feasibility studies for the projects in October 2012, the IPBC, PNG Power and the ADB signed a loan agreement in May 2013 and all projects are scheduled to be completed in 2016. In early 2014 PNG Power signed an agreement with German company Fichtner to oversee the project, manage the procurement process and select contractors.

A similar programme kicked off in August 2013 for the Ramu system, this time with the Japan International Cooperation Agency (JICA), which signed an agreement to provide a loan of up to $81.65m for the Ramu Transmission System Reinforcement Project. The main objective of the project is to reinforce the 132-KV transmission line between the Ramu hydropower plant and the Taraka substation in Lae via the Erap substation. The government is also overseeing the Town Electrification Investment Programme. The project is being funded by a multi-tranche finance facility provided by the ADB, with the PNG government footing 20% of the bill. Estimated at $72m, the first tranche will be used for three projects. The first is for the construction of the 3-MW Divune hydropower plant in Oro Province and 100 km of distribution lines. The other two projects involve a 145-km-long transmission line between the existing Lake Hargy hydro station and Kimbe in West New Britain, and the construction of the 3-MW Ramazon hydropower plant and 50 km of power lines in the Autonomous Region of Bougainville.


Endowed with extensive hydro resources, PNG’s latent water supply is so abundant that studies have been carried out on the potential to pipe water from PNG to its considerably drier southern neighbour, Australia. In fact, PNG boasts nearly five times the renewable water supply of Australia at approximately 119.5m litres per capita, according to the UN Food and Agriculture Organisation’s Aquastat, with only 3% of its cultivated land is used to grow water-intensive cash crops for export. But with less than one-third of the population serviced by improved water infrastructure, there remains room for improvement in the delivery of water and sanitation services, particularly in rural areas.

The delivery of services falls to Water PNG ( formally known as the PNG Water Board) under the Water Supply and Sewerage Act of 1986, which mandates the SOE to carry out services in both urban and rural areas. In addition, the Department of Health (DoH) is also allocated responsibility for ensuring the quality of drinking water and septic tank regulations under the Public Health Act of 1973. Water services in the NCD have since been privatised and are run by Eda Ranu, and in Goroka services are managed by the Goroka Urban Authority. Eda Ranu is operated by Malaysian firm JCKRTA and government-owned company Water and Sewage on a 22-year contract. As an SOE, Water PNG is tasked with a cost-recovery and profit mandate to supply metered water and sanitation services outside of the NCD. However, the company has in fact delegated responsibility for the majority of its districts towns – those with populations of less than 1000 – to the DoH, according to a 2013 report by the International Water Association. As a result, Water PNG services three of 89 district towns, as well as 12 provincial towns.

Changing Strategy

Seeking to unify the regulatory framework under an overarching policy, the Department of National Planning and Monitoring and the DoT are currently undertaking an overhaul of the national water policy. As part of this strategic review, the government is moving to corporatise Water PNG as it has previously with other SOEs now owned by the IPBC. “We are still waiting for the corporatisation process to be completed and hope to have it completed within the year,” William Sweet, the chairman of Water PNG, told OBG. “When this is finalised, this should allow Water PNG to become much more efficient in its operations.”

Sweet also said Water PNG and Eda Ranu could be merged in the future. At the very least, there is a strong possibility that the two firms will cooperate on future projects, with Water PNG acquiring the rights to a significant water source to serve as a backup for the NCD or to cater to growth in the area. Known as portions 647 and 648, the new source is derived primarily from an overflow pond at the convergence of the Laloki and Brown rivers, and produces 7.4bn litres of water per day.

Managing Distribution

Although securing new water sources is crucial, one of the largest challenges to extending and maintaining services to these more remote areas, as well as the growing suburban areas surrounding Port Moresby, is the substantial amount of non-revenue water (NRW) lost each year. These NRW losses account for roughly half of the water produced by Eda Ranu and around one-third for Water PNG. Although NRW loss is incurred for both technical and commercial reasons, the latter accounts for the lion’s share by far in PNG. Commercial losses in 2013 were around 20m litres per day, or more for settlements outside the city, according to Paul Gore, the general manager of commercial services at Eda Ranu.

In order to address the issue, Eda Ranu has been aggressively engaged in reducing commercial losses in a number of different ways. One of these is to work with settlements to set up an official water distribution point that replaces any ongoing non-sanctioned water disbursement. While these remote control disbursement points provide substantially less revenue because they charge rates at a fraction of tariffs in centralised urban areas, they do allow for the recovery of some money and, more importantly, establish a system to effectively monitor consumption. In theory, these points can then establish a precedent for legal water dispersion in the future when rates can be normalised with the rest of the system.

In addition to developing this water source, another major ongoing project is the Port Moresby sewerage system upgrade. A joint venture between the IPBC, JICA and Eda Ranu, the $135m project consists of new trunk sewage main and branch sewers, new pump stations and refurbishment of existing stations, a new treatment plant, a new ocean outfall and new sludge drying beds. The project broke ground in January 2014 and is expected to be completed within three years.


The first highly anticipated shipments from the PNG LNG project signal a new stage in development for the energy sector as the country begins to reap the rewards. The ExxonMobil project may only be the tip of the iceberg, however, and numerous international petroleum companies continue to vie for a slice of future resources, such as the Total-led Elk-Antelope fields and the continued development of the Western Province oil and gas plays. Both of these projects should take major steps forward in the coming years, with production expected out of the Stanley field as early as 2015. An entire year of full production at the PNG LNG facility will also bump up overall output. Development is under way in the utilities sector as well, with substantial progress being made in increasing the electricity system’s reliability and generation capacity, while water and sanitation works are also being extended. Lesieli Moala Taviri, the country manager for Origin Energy, told OBG, “The skills gap is the biggest problem faced by the downstream industry in PNG. Partnering with major corporations like Total is the way to go in my opinion.” Indeed, how much progress takes place and how rapidly it occurs may rely in large part on government cooperation with the private sector and on the end result of ongoing alterations to the regulatory framework.

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The Report: Papua New Guinea 2014

Energy chapter from The Report: Papua New Guinea 2014

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