by
Brian Gomez
Oil problem is a complex
issue
Many people have been disenchanted in
recent times because of the high cost of petrol, diesel and
kerosene, a trend PNG shares with most other countries,
including significant producers of oil.
Clearly much of the pain felt by consumers is caused by the
surge in oil prices in recent years caused by a variety of
supply and demand factors.
One reason prices are as high as they are is provided by the
controls over world supply by the Organisation of Petroleum
Exporting Countries (OPEC), and the dominant role played within
OPEC by the biggest resource owners in the Middle East
countries.
Oil has been greatly politicised but as developing countries,
most OPEC nations are keen to enjoy high export prices to foster
their own economic development.
World demand is dominated by the United States and Europe but
with rapid import growth especially in China.
These are some of the factors that has led to oil prices rising
to highs of around US$70 a barrel, equivalent to almost 160
litres.
That oil has to be processed in refineries to turn it into
usable products, adding to its cost.
PNG is fortunate among Pacific island nations as a producer and
exporter of crude oil.
It also has the only oil refinery in the South Pacific region,
outside of New Zealand and Australia.
This is not a unique situation. Australia is a significant
producer and exporter of crude oil, as is Indonesia, Malaysia
and many other countries, including the United States, the
world’s biggest importer and consumer of oil.
Because of PNG’s position as an oil producer and net exporter,
there have been suggestions that oil products should be made
cheaper for consumer by being sold at less than world prices.
This is a formula tried by some countries in the past and
abandoned as highly impractical over the longer term.
There was a time that Australia supported a higher domestic
price for its crude oil production to foster development of its
biggest single oilfield at Bass Strait, off the Victorian coast.
But this policy was abandoned in the mid-70s after OPEC created
the world’s first “oil shock” and pushed up oil prices
three-fold.
PNG has already been through a period of rapidly falling oil
exploration and production and, were it not for the fact that
Oil Search became operator of the oil and gas fields in 2003,
PNG today is likely to have become a net importer of crude oil.
The high world oil prices has certainly helped but despite the
continued optimism shown by Oil Search, it is becoming
exceedingly difficult to increase the country’s rapidly
declining oil reserves.
The PNG Government is certainly not going to contemplate forcing
the nation’s oil producers to cut oil prices, and suggestions by
politicians and others that this might be so will only cause
additional disquiet among the public.
Cutting the oil price in this way will have a very dramatic
impact on short term production because of the excessive costs
of drilling exploration and appraisal wells.
Each of these wells can cost US$15 million to US$20 million and,
in many cases, there will be no returns because they come up
with “dry holes”.
Oil producers will also have to weigh up whether some higher
cost operations, such as the newly opened South East Manada,
should be shut down because they are loss-making.
Imposing artificially low prices on locally produced crude oil
could quickly return the nation to the pre-2003 scenario of a
virtual total shutdown of oil production by the middle of the
next decade.
Also coming under some criticism has been the 32,000 barrels a
day mini-refinery operated by InterOil at its Napa Napa site in
Port Moresby.
In this case, the Canadian-listed company only agreed to set up
the refinery after getting guarantees from successive PNG
governments that it would be able to sell its petroleum products
at import parity prices.
If this aspect is being properly applied and prices of petrol,
diesel and other locally produced products are equivalent to the
price at which similar products are imported from Singapore,
this is certainly a win-win situation for PNG.
These prices are controlled by the Independent Consumer and
Competition Commission, which appears to be dependent on
InterOil for the correct import parity price and some customers,
including Air Niugini, have claimed imports can be brought in at
a cheaper price.
Contrary to popular opinion high oil prices are a major problem
for InterOil especially since the company is not an oil producer
and has to import all its crude oil needs, or to purchase it
from PNG producers.
This is due to the extremely high financing costs that are
involved with InterOil dependent on the margins created by crude
oil processing, which have improved somewhat in recent
times.
For this and other reasons, including its small scale refining
operation and inability to produce at nameplate capacity, the
Napa Napa oil refinery has been generating losses since it began
commercial operations two years ago.
One reason the Government is unlikely to heed calls to
nationalise oil companies or to reduce oil prices is the
likelihood that foreign investors, who are already somewhat wary
of investing in this country, will be scared off even more.
Oil is part of the global economy that PNG is very much a part
off.
Indonesia learnt a bitter lesson during its 1997 economic crisis
about the huge costs to its budget of providing various oil
subsidies and these have since been slashed.
