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Using gas to develop Papua New Guinea’s economy

Exporting all future PNG gas extract for income may not be the best use of this remarkable resource. LNG should also be used for domestic power consumption and petrochemical feedstock to boost industry and provide much-needed jobs, argues Petroleum Operations Advisor to the World Bank, Michael McWalter.

The PNG LNG Project is a great achievement.

The project leaders have turned remote, distressed and valueless gas resources into commercially viable and producing gas reserves aimed at the energy deficient markets of East Asia where customers are prepared to pay a premium for LNG delivered to their shores.

It is always lovely to have a success, but the proof of PNG’s ability to develop and improve the lives of its people this century requires repeated successes, taking into account the lessons of the project.

Those lessons are reflected in the pragmatism and patience exercised throughout the gestation of the project by political figures, landowners, ExxonMobil executives and customers, like the Japanese.

By engaging first-class local staff and learning so much about our society, ExxonMobil has become part of PNG.

With more LNG projects in the pipeline, it is timely to consider how to develop those fields, and get the best value from their output.

Stocktake

The country’s first LNG Project will produce about 9.5 trillion standard cubic feet of gas over its life.

There may probably be another 30 trillion standard cubic feet to develop and proven reserves amount to about 20 trillion standard cubic feet.

This is only a rough estimate.

So firstly, we need a new stocktake of the petroleum resources and reserves to be undertaken by the Government, preferably with the help of the various licensees and experienced assessors. We can then make better assessment of what do to with the gas.

Order of development

It seems several more LNG trains may be established, preferably in synergy with the ExxonMobil-led PNG LNG Project.

For instance, InterOil and its partners could bring gas from the Elk-Antelope gas field down to Caution Bay into LNG processing trains on the same site, and use the same storage and marine terminal.

The same applies for other gas fields even as distant as those in the Western Province; the gas may be transported by pipeline across Papua to the existing Caution Bay site.

So which gas fields need to be developed next?

One notion is for a series of LNG Projects: one near Kerema to serve the Elk-Antelope field and any other nearby gas resources; and one at Daru Island to serve and process gas from the fields within the Western Province.

The fundamental problem with these ideas is the main reason why the current PNG LNG Project is located at Caution Bay to serve the Highlands gas fields.

It is all about suitability of the coastal location to accommodate the large footprint of an LNG Plant, the availability of supplies of labour and goods from Port Moresby, access to harbours and airports, and the ability to build a marine terminal into deep enough water to accommodate LNG carriers.

Bringing gas by pipelines is considerably easier than establishing multiple plants along the Papuan coast.

Planned development

It seems as though the licensees are allowed to haphazardly develop the gas resources within their licences according to their own commercial agenda, rather than in accordance with a properly devised gas development plan of the Government.

For example, the Juha gas field, in the northern Western Province, is scheduled for development only after 10 years into the current PNG LNG Project. But why should such a distant gas field be given a place in the gas development queue?

The same applies to the P’nyang gas field (also located in the northern Western Province), the development of which the PNG LNG Project companies are proposing to support a third train at Caution Bay.

The nearer gas fields such as Elk-Antelope need to be developed first.

Domestic usage

Future gas production need not necessarily be solely for export and cash revenues.

While we can obtain an excellent premium value for gas sold as LNG to energy hungry markets, we might also be able to accumulate just as much value if the gas is used as petrochemical feedstock for petrochemical projects at home and feeding that output into much needed industrial activity.

The value chain needs to be examined most carefully.

Downstream development seems to be hard to achieve when operating costs in PNG are so high and operations face a fiscal regime, which was designed to capture fifty per cent of the net value of the produced gas.

Tax incentives

Feedstock could be made cheaper, if the fiscal and commercial regime was eased for all petroleum production that is processed in PNG.

By assessing tax liabilities, on value adding and profit through the gas processing stream, and on into any manufacturing process, we might be able realise benefits even be greater than those received from simple export of the gas as LNG.

A similar story might also be told for gas, and indeed petroleum, in general, when used for power generation.

More than 120,000 youngsters join the population each year, but often not the workforce.

And there is the emerging middle class, who want a better life in Papua New Guinea.

So there is an opportunity to plan for the optimal use of PNG’s petroleum resources, and in doing so, improve the lives of people, rather than simply throw cash into the economy and its communities.

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