PNG inches towards more LNG [Gas in Transition]
With the world’s biggest LNG markets on its doorstep in East Asia, untapped proven gas reserves and experienced developers, all the ingredients are in place for Papua New Guinea (PNG) to expand its LNG capacity. US major ExxonMobil, France’s TotalEnergies and Australia’s Santos seem committed to the country, and it looks likely that a final investment decision will be taken on at least one new planned project next year.
The existing LNG project, PNG LNG, began production in 2014. ExxonMobil had originally investigated the possibility of piping gas 3,000 km south to Australia, presumably for LNG production on the north coast, but the Papuan government preferred domestic liquefaction to retain more of the project’s economic benefits within the country. The fact that PNG LNG involved tapping onshore gas fields gave the government’s argument more weight than the similar debate in Timor-Leste over domestic liquefaction or piping gas south to Australia.
The liquefaction plant was eventually built at Caution Bay, 20 km northwest of the capital Port Moresby, on the south coast of PNG’s Central Province. ExxonMobil PNG operates the facility with a 33.2% stake. The remaining equity is held by Santos (42.5%), PNG state-owned Kumul Petroleum Holdings (16.8%), JX Nippon Oil & Gas Exploration Corporation (4.7%) and another PNG state firm, Mineral Resources Development Company (2.8%), which represents landowner equity interests in both the mining and hydrocarbon sectors.
Santos increased the size of its stake last year when it completed the takeover of original investor Oil Search. However, Kumul, which is owned by the National Petroleum Company of PNG (Kroton), offered Santos $1.4bn for an additional 5% in late September. The Australian firm must decide before 31 December 2022 whether to accept the offer. The deal is dependent on Kumul’s ability to raise the necessary finance and on no pre-emptive rights being exercised.
The managing director of Kumul Petroleum Wapu Sonk said that the purchase would “ensure a boost in our annual cash flow and significantly raise national ownership in the project”. The Kumul deal would increase the state’s interest in PNG LNG to the level that it is now automatically permitted to purchase in any gas project that has not yet been completed, as stipulated under legislation passed since the PNG LNG plant was completed.
The plant was originally built with two trains producing a combined 6.9mn mt/year, but improvements have boosted this to around 9mn mt/year. It is supplied with 1bn ft3/d of gas from fields in Hela Province via a 697 km pipeline, of which 407 km runs offshore to avoid mountainous terrain and culturally significant sites. Mitsui O.S.K. Lines operates a fleet of four LNG carriers on behalf of PNG LNG to ship the gas to the project’s four main customers: Osaka Gas, Tokyo Electric Power Company, Sinopec and CPC Corporation.
Additional trains will now be added to the PNG LNG Caution Bay site by a separate consortium, although with some of the same equity investors. The Papua LNG consortium incorporates operator Total E&P PNG with a 40.13% stake, alongside partners ExxonMobil (37.03%) and Oil Search (22.84%), although it is likely that the state, possibly in the form of Kumul Petroleum Holdings, will take an equity share at some point.
The project will comprise two 2.7mn mt/yr trains, which will be supplied by a 320 km pipeline from Total’s Elk and Antelope onshore fields on licence PRL 15. The project is to include carbon capture and sequestration technology to re-inject CO2 from the fields themselves back into the reservoirs. The project consortium has been keen to highlight their efforts to minimise greenhouse gas emissions.
Project negotiations were held up during the COVID-19 pandemic, requiring the licence to be extended in February 2021. However, this July, TotalEnergies announced that it would launch the first phase of front-end engineering design (FEED) studies for the project’s upstream production facilities, while the downstream FEED studies are already underway. In August, Total awarded the FEED contract for the upstream facilities to Technip Energies.
The consortium aims to launch the integrated FEED by the end of 2022. The final investment decision on Papua LNG is due about the end of 2023, with first production timetabled for end-2027. The addition of extra capacity at the existing LNG plant will require wider infrastructural improvements, including the extension of the existing terminal quay and the construction of additional LNG storage capacity and condensate tanks.
Julien Pouget, Senior Vice President Asia Pacific for Exploration & Production and Renewables at TotalEnergies, said: “The Papua LNG project is well positioned to contribute to growth in LNG supply worldwide, especially for customers in Asia seeking to decarbonize from coal to gas, in line with our strategy to lower global greenhouse gas emissions.”
There are also plans for a third 2.7mn mt/yr train, which would be supplied by the P’nyang Field in Western Province, which has estimated reserves of 4.36 trillion ft3 of gas. After years of uncertainty, the P’nyang consortium of ExxonMobil (49%), Santos (38.5%) and JX Nippon (12.5%) signed an agreement in February with the PNG government relating to the project’s fiscal terms.
ExxonMobil is in talks with the government over the latter’s interest in buying equity in the project. The partners have already to ring fence up to 5% of P’nyang for domestic power generation, probably in Western Province, which was one of the government’s main aims. The development consortium has agreed to as much local procurement as possible, as well as a range of training programmes for local people and social investment initiatives.
In a statement, ExxonMobil said that work on the project will “commence following the Papua LNG project”, in order to provide a “phased approach to gas development”. Papua LNG is due for completion by the end of 2027 and ExxonMobil estimates that construction work on P’nyang will take four years, so first production is likely sometime after 2032.
As required under the Papuan Oil and Gas Act, Santos CEO Kevin Gallagher said: “The P’nyang project will provide landowner benefits under a benefit sharing agreement to be negotiated in the future. Development of P’nyang will create local and regional jobs and business opportunities, provide training and skills development opportunities and help build stronger communities.”
Although negotiations between oil and gas companies and the government have often been prolonged, existing investors seem interested in further gas development. ExxonMobil has said that it believes there is “significant remaining potential for the discovery of new resources” to allow the construction of more LNG production capacity.
Japan seems a likely destination for much of the new LNG. The country faces a shortfall in generation capacity as it closes coal-fired plants over the coming decade. PNG Prime Minister James Marape visited Tokyo in September to hold talks over potential increased involvement in the Papuan LNG sector by Japanese companies, whether as customers, or direct investors in further LNG projects. There have been unconfirmed reports that Japanese companies have been offered first options on new gas projects.
Greater transparency needed
The government of PNG has been criticised for how little the country’s population has benefited from its LNG industry, which already accounts for almost 6% of GDP. PNG LNG said that the PNG government received PGK2.2bn ($608mn) from the project in 2021, taking the total to more than PGK14bn in the form of royalties, development levies, taxes and the state’s equity share.
It is perhaps notable that ExxonMobil PNG Managing Director Peter Larden said this gave the government “the opportunity to promote sustainable, long-term economic development”, rather than saying that it had actually benefited the wider population.
However, the government appears to be listening to criticism over the lack of connection between LNG investment and the rest of the economy. It insisted on local procurement in the original Papua LNG deal it signed with TotalEnergies in 2019 and again in the more recent P’nyang agreement.
Given the central place of LNG in the country’s economic strategy, it seems reasonable for the government to insist that future gas investment should benefit the wider national economy. The oil and gas companies say that hundreds of local businesses now act as contractors in the industry.
However, Extractive Industry Transparency Initiative (EITI), a natural resources NGO, called for more transparency in how revenues from PNG LNG are used in its second PNG validation report, which was published in November.
EITI international secretariat director Mark Robinson commented: “More public information about how the rest of those revenues are allocated across government to benefit citizens will be extremely beneficial...We also think there is room to improve the transparency of contracts — future contracts entered into by the government with foreign companies in oil, gas and mining.”