LNG projects need close government scrutiny
Utilisation of Papua New Guinea’s
massive gas resources has entered a critical phase following the
cancellation early this year of the project to pipe natural gas to
Australia.
As indicated in previous columns much attention needs to be given
by the government to rational and early development of an
liquefied natural gas project as the only likely current
alternative.
The opportunity to extract and sell gas that has been discovered
in previous decades will result in big increases in government and
export revenue and in new opportunities for wider economic
development.
Except for a small amount of gas that is presently used to fire
the power station that supplies electricity to the Porgera gold
mine, there are many trillion cubic feet of reserves waiting to be
tapped to provide a valuable income stream for the companies, its
shareholders, the government and for thousands of landowners.
There are three advanced projects on the table at present:
*ExxonMobil’s proposal to build a 5-6.5 million tonnes a year LNG
plant based on gas from Hides, Angore and Juha, and possibly from
Kutubu and other fields;
*Oil Search study together with British Gas to build two trains
that will each produce 3.5 million tonnes a year of LNG; and
*InterOil proposal to build a nine million tonnes/year facility.
All are in various stages of planning but none have entered the
critical front end engineering and design phase (FEED) that could
involve spending of around K300 million in each case.
Both ExxonMobil and InterOil are understood to have begun
discussions with the government on possible terms of development,
and British Gas is likely to follow soon.
Bottom Line believes the government should try to strenuously
avoid the granting of long tax holidays for any of these ventures
because there is enough incentive contained in high world oil and
gas prices for development to proceed.
Companies building big projects have a natural buffer in this
regard because it takes many years for them to recoup their
massive expenditures prior to achieving returns on their
investments.
For example, the government did provide the Chinese builders of
the Ramu nickel project with a 10-year tax holiday. However, in
the normal course of events, the operation may not be ready to pay
such taxes in that time frame.
After nine years of production, Lihir Gold has yet to pay
corporate tax. Ok Tedi Mining took 11 years after commencing gold
and copper exports before it made its first company tax payment.
The companies building LNG plants should also be made to shoulder
all the costs of environmental impact studies and to ensure best
practice is maintained in construction and operation of these
facilities.
At this point in time, it appears the greatest amount of certainty
in terms of the three projects is provided by the ExxonMobil, Oil
Search and Santos joint venture, which clearly has adequate gas
reserves for their proposed LNG plant.
This is not the case as yet with InterOil although it could only
be a matter of weeks before InterOil and its two offshore partners
will have a reasonable level of assurance about the quantity of
gas in the Elk field in Gulf province.
It appears that the British Gas-Oil Search venture is also in the
same category as InterOil. Its largest known reserve base at
Kutubu only contains 1.5 TCF of gas out of the 7-8 trillion cubic
feet that would be needed.
Government negotiators need to be aware they are dealing with
massive uncertainties with the three groups and, at this stage, no
one can be fully confident that ExxonMobil will itself proceed to
FEED and subsequent construction.
Much will depend on what ExxonMobil’s parent company in America
decides on its priorities and, with the global choices at hand.
The commitment of ExxonMobil cannot be relied upon until they
fully commit to construction.
For this reason, Oil Search will certainly not want to ‘leave all
its eggs’ with ExxonMobil and its joint studies with British Gas
is certainly insurance against anything going wrong on that score.
Furthermore, analysts suggest that British Gas has a well
established reputation as one of the world’s best builders and
operators of LNG plants.
Oil Search managing director Peter Botten has intimated that BG’s
projected PNG construction costs could be 30-40% lower than
ExxonMobil and, presumably, the InterOil venture.
From the point of view of company taxes, this should mean that the
Oil Search-BG project, if it goes ahead, will make contributions
to the government on a shorter timescale than the other two
ventures.
Among the companies involved, Oil Search has the greatest
incentive to capitalise on LNG because its PNG gas reserves almost
equivalent to a billion barrels of oil, a potential resource that
can create additional wealth for its shareholders and for Papua
New Guinea.
InterOil also has much to gain from turning its gas resource at
Elk to an exportable commodity especially since its relatively
small crude oil refinery at Napa Napa continues to make financial
losses and appears to be a marginal operation at best.
In this equation, government negotiators will also have to
consider the needs of the Japanese-proposed dimethyl ether/
methanol plant and the Indian proposed ammonia/urea fertiliser
plant.
Both the latter are being pursued by Oil Search in conjunction
with Japanese and Indian investors.
Superficially at least it would appear that these petrochemical
plants could be far more valuable to the PNG economy than export
of LNG because of their ability to create greater employment and
value-adding potential.
This is one area where the interest of the State may not match the
interest of corporate players that are likely to get maximum
benefits from LNG rather than through sale of gas as feedstock for
petrochemical producers.
