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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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The Last Oil & Gas Frontier Is Facing Major Challenges

Upon hearing Papua New Guinea, very few us associate it with LNG – some might recall that it is one of the most heterogenous nations of our planets with more than 850 endemic languages, some might automatically think of the islands’ inimitable flora and fauna, its manifold lost tribes or bring to mind its fragile political situation. Still, Papua’s LNG development drive is progressing against all odds, several companies want to replicate the hitherto successful story of PNG LNG which was commissioned in mid-2014. Often labeled the last frontier of oil & gas development in the Australasian region, Papua New Guinea presents a profound head-scratching conundrum for those brave enough to invest in it, yet one thing is indisputable – its hydrocarbon reserves.

At first sight, Papua New Guinea’s (PNG) proven gas reserves might seem smaller than those of regional competitors, including neighboring Australia, standing at 7.4 TCf (210 BCm) in 2017. This is, however, mainly due to the undeveloped nature of PNG’s resource potential. Illustrating this trend is Exxon Mobil’s P’Nyang field, the proven reserves of which increased by 84 percent (to 4.36 TCf) after the successful drilling of the P’nyang South-2 well this winter, thus raising at one stroke the total reserves count to 10 TCf. A similar story might unfold with the 2016 Muruk discovery, some 20km away from the country’s leading gas field Hides, the Toro sandstone section of which is very similar to the latter. If appraisals confirm the find, another 2 Tcf of gas reserves would be added to the 2P reserves tally.

The fact that PNG has plentiful hydrocarbons is by no means a novelty, the first oil seeps were recorded there in 1911 – the unvarying problem has been how to get them out and where to market them. Some factors severely hindering the development of PNG’s resource potential have been cleared along the course of the 20th century. Albeit still having Queen Elizabeth II as the head of state, Papua New Guinea acquired independence after a tumultuous sequence of German colonization, Australian trusteeship and Japanese WWII invasion. Thus, it can now decide on its own how to develop its resources, ideally taking into account the interests of Asia’s poorest populaces. The issue of selling the gas also became obsolete, as geographically PNG is one of the best-placed gas-producing nations to supply Asia with LNG. Related: Chinese Oil Demand Growth Could Slow Down Soon

Unfortunately for oil companies, commercially viable gas fields are located mostly in the western and southern Highlands of PNG. This represents a substantial challenge, for not only geological conditions are difficult, drilling in the midst of a jungle brings its additional difficulties. For instance, it is more expedient to conduct exploratory drilling during the dry season as monsoon-induced river floods and soil erosions in November-March can really make a difference, especially as flying (and, as consequence, drilling pad servicing by helicopters) is all but possible in these periods when visibility is reduced to zero. Add to this that PNG is one of world’s tectonically most active places, with several plates pushing it to different directions, and you can grasp the complexity of the challenge. Earthquakes remain a massive scare – a 7.5 earthquake this February, with its epicenter right next to Hides, killed dozens of workers and led to the shutting down of PNG LNG for almost two months.

Yet there is a way out, as demonstrated by the ExxonMobil-led PNG LEG project which soon starts its fifth year of operation. Sourced from the 5 TCf Hides gas field and adjacent fields (Juha, Angore etc.), PNG LNG has exceeded past expectations by producing 20 percent above its nameplate capacity in 2017 (6.9 mtpa vs 8.3 mtpa). It has to be stated that, as stated above, PNG LNG’s source base is still far from being fully prospected and tapped into, the 10 TCf usually quoted as undeveloped reserves will inevitably increase in the future as exploratory drilling continues. Having shipped 110 LNG cargoes in 2017, the project is almost fully covered by long-term contracts with Sinopec, CNPC, Osaka Gas and Tokyo Electric Power. Oddly enough, the project transformed into an LNG one after the previous concept of constructing a pipeline was to Australia was dismissed in 2007.

The $19 billion PNG LNG project was an extremely costly one by Asian standards, even if one is to account for all the infrastructure erected – a 700 km pipeline, a gas conditioning plant and several processing facilities, an LNG terminal etc. Yet ExxonMobil and PNG-focused Oil Search intend to bring online another liquefied gas project, Papuan LNG, located significantly closer to the seashore and the LNG export terminal near Port Moresby. Sourcing its gas from the Elk/Antelope fields, in which ExxonMobil is also a shareholder, Papuan LNG might see itself fused into an expansion or continuation of PNG LNG. But there is also a significant conflict risk as the third shareholder (and operator) of the Elk/Antelope fields, the French major Total, wants a separate LNG train, as it is not a part of PNG LNG and thus has no liquefaction share in it.

Cost-wise it would be expedient not to construct a new LNG terminal and use (and potentially expand) the existing one, however, for this, ExxonMobil and the rest would have to farm out a fair amount of shares. Companies have also been moving offshore, a complete terra incognita of hydrocarbon opportunities – after intensive drilling these past months, the Pasca field is on the brink of becoming PNG’s first offshore producing asset. Yet there is an underlying weakness in the development of all above projects – political frailty. Local population has been increasingly vocal in protesting against gas developments across the country and seizing assets; not because of environmental concerns, rather due to unpaid royalties. Related: Surprise Crude Oil Build Sends Oil Prices Down

Several media-run stories have accentuated that PNG LNG so far failed to provide the economic boom it promised to the peoples of Papua New Guinea, a feeling that is expected to entrench itself even further in the minds of the local populace. In part reacting to popular pressure to squeeze more money out of oil & gas majors (the other reason is that PNG still lacks a coherent hydrocarbon development policy), the Papuan government intends to implement a new gas policy, including domestic content requirements, domestic market supply obligations and a third-party access regime for strategic pipelines and infrastructure. The Petroleum Ministry even went so far as to halt new license issuing until the new framework is up and running, further aggravating investor fears that the government might become increasingly predatory in the future.

Luckily for those already operating in the country, the proposed reform will not be retroactive. Cognizant of the deficiencies of a new gas policy, the Papuan government shall do its utmost to placate investors by offering competitive terms. It is counter-productive to expect that within a couple of years, world’s least explored country would skyrocket into a developed economy – it takes a lot of time for any significant social development to emerge. Through every possible means, Papua New Guinea should avoid the fate of Guyana, where a sense of impending affluence has created social expectations which are impossible to meet. A tough task in patrimonial Papua New Guinea, yet the only one worth ploughing through.

By Viktor Katona for Oilprice.com


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