Natural gas in Papua New Guinea

Liquid Niugini LNG (PNG LNG)

• 2008 : Cooperating partners came to an agreement. Shareholding in LNG/PNG is distributed as follows: ExxonMobil ; Oil Search ; Kumul Petroleum Holdings, representing the PNG government, ; Santos ; Mineral Resources Development Company, representing landowners, ; JXTG Nippon Oil & Energy. Santos bought Oil Search in 2021 and thus their share in LNG/PNG rose to 42.3%. Santos intends to sell part of its stake in LUN/PNG as it does not want to be exposed in Papua New Guinea and it wants to leave ExxonMobil as the major partner. Prime Minister Marape as well as minister Kerenge Kua indicated that they want to expand government shareholding in LNG/PNG. They expect to acquire a stake for a low price or potentially via a loan.
• 2008 : The fiscal and legal environment was established through a Gas agreement between the participating partners: ExxonMobil, Oil Search, Santos, Nippon Oil, the IPBC, MRDC and the government of PNG. It also laid down the proposed government equity in the project.
• 2008 : An economics impact study was commissioned by ExxonMobil from the Australian consulting firm Acil-Tasman. It outlined many beneficial effects of the project for PNG.
• 2008 : At the end of the year the FEED stage was reached.
• 2009 : In October agreement was reached on environmental impact with the PNG government, The environmental impact statement was based on 16 studies.
• 2009 : Final agreement among partners paving the way for production.
• 2010: Sales and marketing agreements were completed with four major customers: JERA ; Osaka Gas, Sinopec ; CPC Corporation, Taiwan
• 2011: Financing arrangements with the lenders to the project completed. The project was heavily geared. Loan capital was much bigger than share capital These loans were sourced in the first place from export credit agencies and were therefore government-guaranteed. Commercial Banks were the second source for loan capital. Third, Exxon Mobil, the company executing the project, lent money.
• 2009-2014: The construction of the LNG project consisted of a distinct number of sub-projects. Seven gas fields supply the project; the primary field is the Hides gas field in Hela Province. It required drilling eight boreholes 3600 m deep. A gas conditioning plant was built in Hides where the gas is separated from oil and water. The gas is then transported to the coast for shipping, which required a pipeline of 450 km to the mouth of the Omati River. This pipeline was extended under water for 407 km to Caution Bay near where the LNG processing plant is in Port Moresby. At Caution Bay, gas is chilled to -161 °C to liquefy it for transportation. Two processing plants – called trains – were built. Two huge storage tanks were built auxiliary to this. A loading pier for LNG tankers was constructed. The Hides gas field produces a mixture of oil and gas. The oil is separated in the highlands and transported in a separate pipeline to Oil Search's loading facilities for the oilfield at Lake Kutubu: the Kumul Marine Terminal offshore in Gulf Province. The construction of these projects was in extremely difficult terrain consisting either of very steep mountain ranges in the highlands or swamps near the coast. The project built at Hides a special long runway that could take the Antonov An-225 Mriya – the largest cargo planes in the world – to bring in material as road transport could not cope with this. Oil Search acquired the management contract for the Hides installations and Exxon Mobil managed the installations at Caution Bay.

  Project achievements

• The construction of PNG/LNG is a major engineering achievement: it was a massive project in difficult terrain. The project was completed ahead of schedule in 2014, though there was an expenditure overshoot of US$3.3 billion.
• The project required PNG citizens to be extensively trained: 10,000 citizens during the time of construction. The project employed 2,600 citizens after construction and they constituted 82 percent of the workforce; 22 percent were women.
• The project produced above-planned capacity: The original design of PNG/LNG aimed at a capacity of producing 6.9 million tons energy per annum, but the actual output has after the first year of production consistently been above that. In 2017 production was 8.3 MTE. It dropped to 7.4 MTE in 2018 because damage due to an earthquake. This was followed by another record year in 2019 producing 8.5 MTE. Production in 2021 was 7.7 MTE
• The project is an inexpensive producer. According to an analysis by consulting firm Wood Mackenzie and Credit Suisse, the project's break-even price of around $7.40 per million British Thermal Units compares favorably to an average over $10 per million BTU for eight recent gas projects in the region.
• The project does focus on more than the major Hides gas field. Project gas is sourced from seven fields: The Hides, Angore, and Juha gas fields belong to the LNG/PNG concession. Only Hides is fully operational. Angore is in development. Development on Juha has still to be started and the Oil Search-operated Kutubu, Agogo, Moran, and Gobe Main oil fields, provide approximately 20% of PNG LNG Project gas. Gas is also purchased on a third party basis from the SE Gobe field.march
• Gas field reserves were re-evaluated in 2016, which resulted in an estimated increase of 50% when compared with the estimates made before construction in 2009. The size of the Hides field is now estimated between 9 and 11 trillion cubic feet. The life expectancy of the field is estimated to be thirty years from 2014.

  Negative aspects of the project

• Disappointing economic effects. ExxonMobil commissioned a study to Australian consulting firm ACIL-Tasman to calculate the benefits and costs to PNG; they projected large gains for the PNG economy as a result of the project. However, in a study commissioned by Jubilee Australia, two Australian economists – Paul Flanagan and Luke Fletcher – compared the predictions of this report in 2018 with actual outcomes. They found an actual fall in employment, household incomes, employment, government income, and imports where the ACIL-Tasman study predicted increases. GDP was expected to double as a result of LNG/PNG in the ACIL-Tasman study, but the researchers found a mere 10% growth. The Jubilee study has been criticised because the researchers did not produce a credible counterargument: What would have happened in the absence of the PNG LNG project and to what extent are the observed effects related to PNG LNG? Prime Minister Peter O'Neill rejected the Jubilee report and claimed low energy prices as the main factor. ExxonMobil responded by mentioning the social and economic benefits of the project such as stimulating entrepreneurship and supporting local communities.
• Tax concessions are too generous. Specific questions about the depreciation allowed and tax concessions were asked before the project began. Mekere Morauta challenged the exemption of General Sales Tax and interest withholding tax given to LNG PNG in parliament. The exemption of interest withholding tax is important as the project is highly geared and much income is needed to service these loans. Arthur Somare, the relevant minister at the time, stressed that a 30 percent corporation tax on profit remained despite these concessions. A second concern was raised by Aaron Batten while presenting a seminal report by the Asian Development Bank: "Papua New Guinea: Critical Development Constraints". He mentioned the taxation concessions to the LNG project. The Internal Revenue Commission argued that companies need the time to extract, produce, export, and sell their products before they can generate a continuous income that is taxable. However, the Internal Revenue gave no definite and precise information of income flows from LNG PNG. As a result of these concessions, substantial income was not expected until after 2020. The actual arrangements between government and companies are in a secret Resource Development Agreement. However, Flanagan and Fletcher suggested that Exxon and Oil Search should be paying AUD$500,000 to the PNG government every year, since the gas started to flow in 2014. Instead, they are paying a fraction of this amount, partly because of their use of tax havens in the Netherlands and the Bahamas as they do in Australia.
• Conflicts with local communities The project has been plagued by conflicts with landowners -local beneficiaries. Disbursing benefits from the project to local communities was designed in the project during a meeting in Kokomo in 2009. The agreement was signed between the government and representatives of local and provincial government as well as with representatives of landowners. The dispute was thus with the government and not the companies. Loi Bakanı the Governor of the Central Bank declared in 2015 that the funds due to landowners were held in a trust account when these were not paid once the project started in 2014. They were thus held in reserve,)This did not assuage protests in 2016, 2017 and 2018. The management of Oil Search declared at a shareholders meeting that the partners in LNG-PNG paid their dues to the government but that the problem was in the distribution of the money. A few days later, Oil Search claimed that journalists misinterpreted a message where its intent was not to blame the government. The problem was in so called “clan vetting. Incorporated landowner groups had to be formed through this process but it appeared difficult to identify ownership when oral testimony is the only source available to identify descent and territory. It is not surprising that money was first released by 2018 to downstream landowners. This concerned visual assists along the pipeline and in Boera village near the loading bay. The most severe conflicts were in the upstream areas when resources underground and thus not easily identifiable had to be compensated. Threats by landowners threatened to shut down the project never materialised but there was serious vandalism in Angore, Hela province. The most serious clash took place in Angore in 2017 and involved destruction of property. In 2018, protesting landowners destroyed property again and demanded a payment of US$10million as a fee for maintaining security at the plant. This introduced a new element, Payments for that purpose were not foreseen in stakeholders agreements. The company had to suspend construction there. Peace was concluded however in August 2019 and in 2020 payments flowed. Delayed construction was restarted. The conclusion of these conflicts gives some insight in the mechanisms of landowner compensation: the formation of landowning companies was completed, despite these problems. A director had been appointed to each company and a bank account was opened in his name under tutelage of the Mineral Resources Development Company. Total payout to local beneficiaries was Kina 3.76 million for the period 2014-2018, This is to be distributed as follows: 40% to landowner groups, 30% to a Community Infrastructure Trust Fund and 30% to a Future Trust. The landowner group is paid out of the allocated funds for equity. This shareholding gives dividends. Besides that, royalties are paid as compensation for exhausting the resource. There is a dearth of information on the extent to which this process of clan vetting has been completed. The issues surrounding payments to landowners remains a policy problem. Peter O’Neill blamed the governments preceding his Cabinet for the problems. There are calls for revisions to the Oil and Gas Act 2018 to resolve the problem as well as calls for revisions to the entire process of compensation to local communities. A new type of conflict emerged between pipeline and plant site landowners and those of upstream landowners. The latter objected to royalties being paid to the former as royalties are meant to compensate for the loss of resources and not merely the use of land.
• Government income from the project is unsatisfactory. There is in this question, however, not a straightforward set of figures indicating categories and periods on the contribution of the PNG/LNG project to government finance. For example, government mentions a category income from dividend and a category of income from return on capital, One could consider this as one post. Similarly there is a post debt servicing and Oil Search collar related costs. Unless it is clear which debt is serviced and how this relates for example to the Oil Search collar, the meaning of this information is not clear. ExxonMobil presents unambiguous figures. They claim to have paid 5 billion kina in royalties, development levies, taxes, and dividends to the PNG government over the period 2014-2018. This had grown to PGK 14 billionin the period 2014-second quarter 2022. Exxon Mobil predicts that after 2025-2027 the amounts paid will significantly increase. The project is primarily financed by loans, which would eventually be paid off; Income from corporation tax and income from equity would rise as a result. Charles Abel in his capacity of Treasurer said in 2021 that he expected the loans to be repaid in 2024 and this would lead to doubling of government income. He deplored however that payments would flow through state corporations, notably Kumul Petroleum Holdings. In such corporations the income is filtered by the management before it is passed on to government. The Chairman of KPH mentioned in defence that KPH passed 78% of its income on to government. He mentioned as well that Kumul Petroleum's remittances represented over three times the total tax paid by PNG LNG Project to Internal Revenue Commission over the same period.This vindicated in his view the value of government equity in such projects.However LNG PNG was lightly taxed and that needs also to be taken into consideration. Nevertheless, there is strong agreement that the PNG government has been outdone in negotiations with the companies, which inspired an important debate among politicians about the mining and taxation legislation. Charles Abel recommended on the basis of past experience: "We need to develop a mineral and petroleum regime where we take a smaller equity for free and a higher royalty rate, introduce domestic market obligation and local content. We need to understand why a large current account surplus still leaves us with a foreign exchange shortage."