Papua New Guinea's new government seeks to boost returns from resource projects for the broader economy

After a series of delays and missed deadlines, the government signed a deal with France’s Total, US-headquartered ExxonMobil and Papua New Guinea-based Oil Search in April 2019 for the development of a $13bn greenfield liquefied natural gas (LNG) project known as Papua LNG. The news was welcomed by foreign investors and marked a milestone for the country ‘s energy sector. Setting the terms for the extraction of natural gas from the Elk-Antelope fields located in the Gulf Province, the deal allows the joint-venture partners to start the front-end engineering and design (FEED) phase and make a final investment decision (FID) in 2020. In early September 2019 the government made an official announcement that the project had been cleared for implementation; however, Total had yet to publicly comment. Production at Papua LNG is expected in 2024, which, together with increased output at the country’s first LNG facility, PNG LNG, would double the country’s LNG production capacity from the current 8m tonnes to 16m tonnes per year.

New Agenda 

Prime Minister Marape, who replaced former Prime Minister Peter O’Neill in May 2019, has committed to maximising gains from the country’s natural resources. In his first few days in office Prime Minister Marape appointed Kerenga Kua as the new minister of petroleum and energy. Kua had been one of the most vocal critics of the Papua LNG project and has sought for a renegotiation of the deal.

Many of the concerns stem from a mismatch between the commitments of the joint-venture partners and the expectations of landowners and communities, whose lives would be impacted by the project. Total is the operator of the Elk-Antelope onshore fields, with the largest stake in the Papua LNG project, at 31.1%, while ExxonMobil and Oil Search hold 28.3% and 17.7%, respectively. The remaining stake is held by the government and customary landowners. Although the joint-venture partners had pledged to work with landowners and involve local businesses in the Papua LNG project, the lack of transparency in the process of negotiation raised concerns about the benefits that would eventually flow from the project.

Past Experience

Concerns partly stem from the experience of the flagship $19bn PNG LNG project, which raised expectations of a windfall when it first started production in 2014. A 2008 economic impact study by Australian energy consultancy ACIL Tasman forecast that the PNG LNG project would see GDP double, household incomes rise by 84% and employment increase by 42%. On top of that, the study predicted that 7500 full-time jobs would be created in the first phase of construction alone, and nearly $31.7bn in total direct cash would flow to the government and landowners over the 30-year lifespan of the project. Since 2014 the project has proven to be a technical success; however, its impact on government revenue and local communities has fallen short of expectations and projections. Critics blame this on fiscal terms that allow for accelerated depreciation and tax credits.

Political Risk 

Papua LNG has placed the spotlight on the political risk of prioritising business ahead of development, a delicate balance that developing economies face as they ready their focus on managing their extractive sectors. Despite having abundant resources, PNG remains one of the world’s least-developed countries. While multinational energy firms have made significant investment in social programmes and community infrastructure, and have also created jobs for PNG citizens, communities living around oil and gas facilities remain especially poor. The situation makes it difficult for politicians to cede control of the country’s natural resources to potential foreign investors. Prime Minister Marape staked his leadership on a promise of meeting expectations of those who have yet to see the benefits of the wealth generated from these resources. But delivering on those promises will not be straightforward, as the prices of oil and gas are subject to forces beyond the government’s control.

Papua LNG will remain attractive to energy supermajors such as Total and ExxonMobil only as long as anticipated returns outweigh investment risks. At a time when a sizeable amount of new LNG projects are set to compete with PNG for capital investment, LNG off-take and construction contracts, any uncertainty for the timely execution of the project could be costly.

If the government starts to make excessive demands, investors might look elsewhere. UK-based consultancy firm Wood Mackenzie expects a record number of FIDs on LNG projects globally in 2019, including a $27bn Arctic 2 LNG project in Russia. There are also plans to expand Australia’s Gorgan and Woodside gas projects.

Compromise 

In September 2019 the government announced that Papua LNG was cleared for implementation in accordance with the terms of the related gas agreement signed in April that year, though the statement also noted that “this government is committed to doing things differently from the past”. Prime Minister Marape has made it clear that he does not intend to break any of the existing agreements, but some deals may be renegotiated to ensure that local communities are adequately compensated and the economy reaps the maximum benefits. As of early September 2019 Total had yet to publicly comment on the government’s latest approval of Papua LNG.

One possible area of compromise could be the P’nyang gas agreement, which is still under discussion by the government, ExxonMobil, Australia’s Santos and Oil Search. This is part of the proposed expansion of the existing PNG LNG project, whereby an additional train would be underpinned initially by gas from the existing Hides field and subsequently from P’nyang. The current timeline places a FID in 2020, the same year a FID for the Papua LNG project is expected. It remains in the interest of all the stakeholders that the P’nyang gas agreement and Papua LNG progress quickly to take advantage of a gap in global LNG supply in the mid-2020s, predicted by international oil and gas firm Shell. Global LNG demand grew by 6% in 2018, and the forecast remains bullish until at least 2030.

Positive Impact 

The infrastructure proposed under the Papua LNG project includes two well pads with up to eight wells, a produced-water reinjection well, a multiphase gathering system, a central processing facility and a 320-km pipeline. It also includes two LNG trains – each with a capacity of 2.7m tonnes per annum – which are set to leverage the existing PNG LNG terminal near Port Moresby. At an estimated cost of $13bn, Papua LNG is the second-largest foreign direct investment project in the country’s history and is expected to have a positive multiplier effect on the economy. After enduring the impact of a 7.5-magnitude earthquake in February 2018, the economy is in need of a spark that could help rejuvenate growth.

Despite some controversy, the PNG LNG project has had a net positive impact on the non-resource economy during its construction and operations phases. The project may have not had the anticipated level of returns initially expected, largely due to global commodity prices, however, the project has had an accelerated ramp-up, exceeding expectations. As infrastructure development gathered pace between 2009 and 2014, demand for accommodation, transport, security, health and hospitality accelerated growth in the non-resource sector and helped to transform Port Moresby’s skyline.

If managed properly, the two LNG projects could help boost GDP as well as generate jobs for nationals. “Up to possibly 70% of staff running the PNG LNG facility are young PNG nationals, who are defining a new future for the country,” Jonathan Bloch, head of strategic banking in the resources, energy and infrastructure division at Australia and New Zealand Banking Group, more commonly known as ANZ, told OBG.

As the administration explores a different approach to resource projects, establishment of a clear policy framework for future projects aimed at ensuring better returns for locals is a possibility. Stricter compliance with codes such as the Extractive Industries Transparency Initiative may also be likely as the government looks to revise and enhance sector laws.

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The Report: Papua New Guinea 2019

Energy chapter from The Report: Papua New Guinea 2019

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