Although international oil and gas firms continue to face a challenging operating environment, economic expansion in Papua New Guinea has been driven by large-scale energy projects in recent years, with liquefied natural gas (LNG) processing becoming an important catalyst for growth. Although investment has stalled somewhat since 2014, the launch of the PNG LNG project that same year saw exploration, production, transportation and processing facilities receive an injection of resources.

However, there are a number of issues that need addressing, with power generation and domestic gas utilisation representing two key areas for further development. As it stands, the majority of state-owned power assets have almost exceeded their lifespan, leading to intermittent power generation shortages and power outages, highlighting the need for government action to increase services. Despite challenges, however, the sector is expected to play an important role in future economic growth.

Growing Returns

According to the fourth PNG report from industry consultancy EY on the Extractives Industries Transparency Initiative published in December 2017, extractive industries, including mining and the oil and gas sectors, accounted for 84% of all exports and contributed 28% to GDP in 2016. At the same time, they only accounted for 3.2% of government revenues, or PGK321.9m ($100.5m). According to the report, 43% of government revenue from the sector came from taxes, 19% from equity distributions, 14% from levies and fees, 12% from dividends and 11% from resource sales or wellhead value.

This figure is growing, however. Recent estimates from the Department of Treasury (DoT) forecast the extractive industries to generate around PGK679m ($212m) in fiscal receipts in 2018. The DoT also reported that flagship development PNG LNG’s total projected income from 2018 to 2040 would be around $31bn, representing a significant contribution to national income. The state is expected to retain one-third of the total via sectoral revenues, dividends, royalties and infrastructure tax credits. With the DoT’s estimate not taking the PNG LNG third LNG train into account, industry analysts’ predicted revenues could be even higher, particularly given the growing international demand for LNG (see analysis).

Role of the State

The Department of Petroleum and Energy are responsible for energy policy and planning. Meanwhile, supply falls under a vertically integrated monopoly, with PNG Power the primary entity responsible for the generation, transmission, distribution and retailing of electricity.

In 2002 PNG Power acquired all assets, liabilities and personnel of the PNG Electricity Commission and has since been charged with granting licences to electrical contractors, providing certification for models of electrical equipment and appliances, and providing safety advisory services and checks for major power installations.

PNG’s principal consumer watchdog is the Independent Consumer and Competition Commission (ICCC), which is tasked with monitoring the price, quality and reliability of goods and services. The ICCC is in charge of setting electricity tariffs and issuing licences for independent power projects as well as mining companies that own generation and distribution facilities. As a result, third-party access codes are administered by the commission, which provide pricing and technical guidance to power producers.

In 2011 the government developed the Electricity Industry Policy, which recommended introducing competition in electricity generation. This in turn allowed independent power producers (IPPs) to compete with PNG Power, albeit to a limited degree. As PNG Power owns exclusive rights within a 10-km radius of its transmission network, a majority of the IPPs had to enter into power purchasing agreements with PNG Power to supply energy for general consumption.

Gas Management

State-owned oil and gas company Kumul Petroleum Holdings (KPH) is responsible for managing the government’s participation in upstream petroleum projects.

As it stands, KPH is the third-largest shareholder in the $19bn PNG LNG project, holding a 16.8% share, as well as a 20.5% share in four petroleum development licences from a total of nine in the PNG LNG project. The firm also has a 21.4% share in the SE Gobe gas development from when it acquired Cue Energy’s PNG assets in 2014, and an 11.3% share in Moran oil fields development, operated by PNG firm Oil Search, after the licence was transferred from Petromin PNG Holdings in 2016. Adding to KPH’s assets, the firm gained a 10% share in Spanish energy company Repsol’s Stanley oil field project after licences were acquired from Japan’s Mitsubishi in 2017.

Flagship Development

The PNG LNG project has had a profound impact on both the energy sector and broader macroeconomic development since it came on-line in 2014. The project, consists of a two-train LNG plant and 320,000 cu metres of LNG storage capacity, supplying around 8.6m tonnes of LNG per year to the Asia-Pacific region. Valued at $19bn, the project is operated by local subsidiary of ExxonMobil Esso Highlands, which holds a 33.2% stake. The remaining shareholders are Oil Search (29%), KPH (16.57%), Australia’s Santos (13.5%), Japanese firm JX Nippon Oil & Gas Exploration (4.7%) and PNG’s Mineral Resources Development Company (2.8%).

Natural gas for the project is currently sourced from the Hides fields, and later will be sourced from Angore and Juha gas fields in the Western and Hela Provinces as well a number of smaller gas resources in the Southern Highlands. Raw gas is then processed at a plant near the Hides fields before travelling via a 700-km pipeline to LNG facilities just outside Port Moresby. Once processed, the LNG is then piped along a 2.4-km jetty and loaded on to LNG tankers. Four LNG carriers are currently in operation, with capacities ranging between 169,000 and 175,000 cu metres.

The PNG LNG project made a total of 108 shipments in 2017 constituting 8.3m tonnes per annum (tpa). Of the annual shipments, 74 were sold under long-term contracts and 34 on the spot market, according to a report from KPHL. Approximately 6.6m tpa of output have been earmarked for long-term offtake agreements, with Japan, Taiwan and China set to become the main buyers for a period of 20 years. An additional 1.3m tpa of short-to-medium term duration LNG volumes is marketed by ExxonMobil on behalf of the PNG LNG project participants.

However, shipments took a knock in the first quarter of 2018, when production at the PNG LNG project was halted after a 7.5 magnitude earthquake hit the country in February. Substantial damage was sustained at the Hides gas facilities, as well as several Oil Search camps, the Kutubu separation and stabilisation plant and on a number of roads; however, operating facilities sustained only minimal damage and no loss of oil or gas was registered.

As a result of the earthquake, Oil Search had to revise its 2018 production guidance to 23m-26m barrels of oil equivalent (boe). By comparison, production figures were closer to 30.5m boe in 2017 and 30.2m boe in 2016. After extensive repair works and precautionary measures, LNG exports resumed operations in April 2018, which was ahead of initial assessments made directly after the earthquake.


Although much of the focus of the energy sector remains on the upstream segment and its investments, PNG’s downstream segment has made significant progress over the past few years.

PNG’s first oil refinery, Napa Napa, began crude processing in 2002, sourcing crude oil from imports and local fields. The refinery processed 5.8m barrels of crude oil in 2008. With a planned $220m expansion, this number could reach 9m barrels annually by 2035. 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 firm invested $650m in PNG 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 Energy also markets diesel, liquefied petroleum gas (LPG), butane, gasoline and avgas, holding around 60-70% of the LPG market in PNG.

Domestic demand for downstream products is expected to be driven in part by several large-scale mining projects set for expansion in the coming years, as a number of existing mines bring capacity back on-line and expand operations in the wake of the earthquake (see Mining chapter).

Some industry experts believe there is additional value to be gained from focusing on exports, while also meeting the home-grown demand. “The target now is to become a net exporter of fuel to bring in more export earnings for the country,” Jim Collings, country manager of Puma Energy, told OBG. “Downstream product demand in PNG is growing, albeit in the short term and at a relatively slow rate. With additional expansion of the refinery, local demand can be met, while we also ship product into other Pacific markets,” he added.


However, the sector is not without its challenges. Despite significant energy potential, only about 12% of PNG’s population was connected to the national electricity grid as of 2016, which was the lowest rate among APEC members. Total installed capacity that year was around 580 MW, comprised of 230 MW of hydro (39.1%), 217 MW of diesel (37.4%), 82 MW of gas (14.1%) and 52 MW of geothermal (9.1%).

While meeting the energy shortfall will involve a mix of gas and renewables in the short term, the drive to develop alternative sources of power is gaining pace, with long-term government goals stipulating that renewables constitute a 32% share of the country’s energy mix by 2030, and 100% by 2050.

PNG’s national power grid is split into three parts: the Port Moresby system services the National Capital District and surrounding Central Province; the Ramu system services the Morobe and Highlands Provinces; and the Gazelle Peninsula system services the townships of Rabaul, Kokopo and Keravat.

A lack of financial resources still hinders the nation’s power capacity, which in turn impedes PNG Power’s ability to conduct routine maintenance of existing electricity infrastructure. As a result, a number of businesses, residential areas and offices rely on the use of expensive diesel generators. Hydropower could possibly cover this shortfall as only about 5% of the country’s 4200 MW of feasible hydro potential had been developed as of mid-2017.

This underdeveloped power segment presents the country with a unique chance to build up the system in a clean, efficient and cost-effective way. A recent push to develop new power plants under a public-private partnership framework is set to support energy targets, with several new hydro and biomass projects launched recently (see analysis). According to APEC estimates, PNG’s power generation is set to increase from 3.6 TWh in 2013 to 18 TWh by 2020, while total installed capacity is estimated to surpass the government’s 2030 target of 1970 MW by 13%.

Safety & Logistics

Additional challenges include transport and logistics, although large-scale upgrades to roads have been made. The upgraded Highlands Highway that connects Lae, the capital city of Morobe Province and home to PNG’s most important port, directly to the Highlands Region demonstrates the increased focus on logistical connections. However, Port Moresby remains isolated from the rest of the country, and it is often easier to import products directly into Lae Port, than it is to transport goods from Port Moresby by road. Evidently, the infrastructure gap remains a key issue for energy companies.

Security threats also add to problems. “A big issue for operating on the roads in PNG is security,” Allan Poulton, general manager of logistics firm GFS Limited, told OBG. “There is a significant amount of crime on the roads, a situation which poses a threat to the operations of transport companies. This threat is not confined to isolated areas, it also applies to areas around Port Moresby,” he added.

Domestic Obligation

Another central target for government actors is attaining energy self-sufficiency. While completion of the PNG LNG project has seen LNG exports soar, the country still imports large quantities of petroleum products and LPG to meet domestic demand. According to APEC, PNG was 100% self-sufficient in terms of primary energy supply in 2000; however, rapid economic growth and urbanisation saw energy self-sufficiency fall to 70% in 2010 and again to 52% in 2013. APEC estimates that the figure will decline to 47% by 2030.

In an effort to support industrialisation efforts, some domestic market obligations (DMOs) have been made compulsory and non-negotiable. As stipulated in the PNG Natural Gas Policy White Paper, which was approved by the National Executive Council in April 2018, any petroleum-related project that comes on-stream is required make a certain percentage of gas reserve available for the domestic gas market, either to be used in domestic power generation or the petrochemicals industry (see analysis).


With investment in new power plants gradually increasing and the oil and gas industry expected to become a larger contributor to primary fuel supply under an amended DMO agreement, the country’s energy sector is well positioned to contribute to the acceleration of economic growth.

According to Royal Dutch Shell, with global LNG demand expected to rise at a rate at 4-5% per year, new LNG supplies from PNG have come at a crucial time for the global market. However, cost control will continue to be key to the success of local LNG projects as renewables and coal become increasingly cost competitive. “LNG is a key growing sector of gas developments, and the long-term outlook for the LNG market is very promising,” Philippe Blanchard, managing director of Total E&P PNG, told OBG.