Monday, November 10, 2014

Petrodollars: Figuring out what to do with PNG’s new LNG wealth

By John Kingston | November 10, 2014

As Papua New Guinea enters the small fraternity of LNG exporters, it needs to figure out what do with the money the poor nation is going to earn. Christine Forster looks at the issue in this week’s Oilgram News column, Petrodollars.
The start-up in April this year of the ExxonMobil-operated Papua New Guinea LNG project was an historic moment for the small Pacific nation, marking the arrival of the world’s newest player on the global gas market.
At a price tag of $19 billion, the PNG LNG project represents the biggest investment in the country’s history. With the project now up and running at full capacity, and with the prospects firming for the development of a second LNG project at the InterOil-operated Elk-Antelope fields, PNG’s economy is set for a transformation.
But with the oil and gas industry’s increasing importance to PNG’s economy comes an even greater need for transparency, according to Oil Search, a key stakeholder in both PNG LNG and Elk-Antelope and operator of all the country’s producing oil fields.
“We estimate that over the next 30 odd years some $40 billion in total cash flow will come to the PNG government,” Oil Search Managing Director Peter Botten told a recent investor briefing when discussing the returns expected from the emerging LNG industry. “That clearly has to be managed well through a sovereign wealth fund…We need to help, along with ExxonMobil and our other partners in making sure that that those benefits do get delivered.”
The PNG parliament passed legislation in 2011 and 2012 to create a sovereign wealth fund to manage government surpluses from projects such as PNG LNG. But there are still serious challenges for the government to ensure transparency and accountability for the revenues flowing from development.
“Transparency is a very big thing,” Botten acknowledged. “EITI [the Extractive Industries Transparency Initiative] and transparency of where those funds go, the development of the sovereign wealth fund and certainly publishing where all those benefits go is of critical importance in terms of managing community expectations and ensuring we meet those obligations,” he added.
Natural resources already dominate PNG’s export mix, accounting for nearly two-thirds of earnings, headed by oil, gold and copper. ExxonMobil’s project adds to this list export capacity of 6.9 million mt/year of LNG from two production trains at the liquefaction facilities near Port Moresby.
The project is an integrated development that includes gas production and processing facilities in PNG’s Southern Highlands, Hela, Western, Gulf and Central provinces. More than 700 km (434 miles) of pipelines connect the project facilities, including a gas conditioning plant at the Hides field and the liquefaction and storage infrastructure on the coast.
The project delivered its first LNG cargo in May and reached full operating capacity ahead of schedule in late July, following what was reportedly a trouble-free ramp-up. By the end of September, it had shipped 23 LNG cargoes, including the first delivery under its long-term contracts, which cover 95% of capacity and are with China’s Sinopec, Tokyo Electric Power Company and Osaka Gas, and Taiwan-based CPC.
The scale of the project is huge for such a small nation. Since the start of construction in early 2010, the PNG LNG project has employed a total of more 55,000 workers, peaking at a workforce of 21,220 in 2012. Around 40% of the project’s workforce were PNG citizens, and the co-venturers had spent more than Kina 11 billion ($4.2 billion) on local services and supplies by the time production started.
PNG enjoyed its tenth straight year of economic expansion in 2012, when real gross domestic profit rose by 8.1%, according to figures from the Australian government’s Department of Foreign Affairs and Trade. Growth slowed to an estimated 5.5% in 2013 and is forecast to be 5.8% in 2014.
According to the 2014 CIA World Factbook, the massive gas development has the potential to double PNG’s GDP in the near-term and triple its export revenue from the $5.6 billion recorded in 2012. It will boost government coffers, generate local employment opportunities and royalty payments to landowners, and provide infrastructure which could spur further industry development.
That means the oil and gas industry’s already well-established role in PNG’s economy is likely to get even bigger. For its part, Oil Search is already managing a range of significant infrastructure projects on behalf of the government, and is delivering its own community programs in areas such as agriculture and water supply. In addition, the company is the second-largest health service provider in the country.
For PNG, where only 6% of people have access to power and 30% of the population still lives below the international poverty line of $1.25/day, LNG should be a game-changer. — Christine Forster in Sydney

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