Lower taxes, cheaper labor make Papua New Guinea an LNG leader

By JAMES PATON and BEN SHARPLES
Bloomberg

Papua New Guinea ranks among Asia’s poorest nations. In the battered liquefied natural gas (LNG) sector, it’s one of the most promising.

Ventures tapping the country’s resources are attractive even after a 67% collapse in Asian gas prices because development costs can be half those in neighboring Australia, the world’s third-largest LNG exporter. Such are the market’s prospects that Oil Search -- which has operated in Papua New Guinea since 1929 -- rejected an $8 billion bid from Woodside Petroleum last month in what would have been the biggest energy acquisition in Asia-Pacific.

The nation is a bright spot in an industry where canceled LNG projects litter the energy landscape from the Arctic to Africa amid a fuel glut. Buyers in Japan, the world’s top consumer, will probably turn to the South Pacific nation when they need new supplies early next decade, according to FGE, a consultant to oil and gas companies and banks.

“By that time, if you’re sitting in Papua New Guinea, you’re better off than anywhere else,” said Fereidun Fesharaki, chairman of London-based FGE.

Plants there can break even with prices of $6 to $8/MMBtu, compared with about $10 in the US and $11 or $12 for Woodside’s planned Browse venture in Western Australia, according to Macquarie Group. Asian LNG has tumbled to as low as $6.45/MMBtu from a peak of $19.70 last year amid a surge in supply, especially from Australia.

The advantage for developers in Papua New Guinea stems from lower taxes and cheaper labor in the nation of about 7.5 million people, according to Credit Suisse Group. Along with natural gas, the nation also produces a sought-after light crude oil, offering a second source of revenue from LNG projects, the bank said.

The World Bank estimates that almost 40% of Papua New Guinea’s populace lived below the poverty line as of 2009. Gross national income per capita was $2,030 in 2013, similar to Bhutan’s. Australia’s was more than $65,000.

Gas Reserves

The country has 5.3 trillion cubic feet of proved gas reserves, according to the BP’s Statistical Review of World Energy. One trillion cubic feet is enough to heat 15 million homes for one year, according to the US Department of Energy. The UK has about 8.5 trillion.

Oil Search is one of the keys to Papua New Guinea’s LNG future. The company, which owns more than a quarter of the ExxonMobil-led PNG LNG venture, is a partner in two other projects on the drawing board. One is an expansion of PNG LNG, which began production in 2014 with a capacity of 6.9 million tpy. It’s also part of a Total-run group planning the country’s second gas-export plant.

Exxon and Total are considered by analysts as potential suitors for Oil Search, which rebuffed the Woodside offer as too low. The offer is “very competitive” and “fully-priced,” Woodside CEO Peter Coleman said Thursday in Vancouver. The Perth, Australia-based company is considering a “modest” increase in its bid for Oil Search, the Australian Financial Review reported Wednesday, citing unidentified people familiar with that matter.

Woodside and Oil Search declined to comment on the report. Anne Rix, a spokeswoman for Exxon in Port Moresby, also declined to comment. Total didn’t respond immediately to a request for comment.

The Exxon and Total projects may be able to reduce their costs to about $2,000 for each ton of capacity, compared with $2,750/ton in the initial phase of PNG LNG, according to Bloomberg Intelligence estimates. That was already less than five LNG developments in Australia, including $4,048/ton at Inpex Corp.’s Ichthys LNG, the data show. It could make Papua New Guinea financially viable despite low oil prices.

Oil Search says it expects PNG LNG to decide on the expansion plan by the end of 2017. Committing to the Total project -- known as Papua LNG -- the same year looks “very challenging,” managing director Peter Botten said in August. These could slip into 2018, with the ventures starting by about 2023, FGE estimates.

The projects would still be able to provide LNG to Japan as contracts come up for renewal and the nation seeks to diversify its sources of supply, according to Fesharaki at FGE. Japan wants to reduce its reliance on Australia, which is forecast to surpass Qatar this decade as the world’s largest exporter, he said.

“They think they are over-committed to Australia,” Fesharaki said.

New LNG projects in the country -- whose $15 billion economy compares with Australia’s $1.5 trillion -- face formidable hurdles. Among them, the ventures need to find customers and line up financing, while lower energy prices threaten to erode returns. Construction also presents challenges, with the first stage of PNG LNG costing $19 billion.

“PNG is worth the risk,” said David Lennox, an analyst at Fat Prophets in Sydney. “The reward, especially when you look long-term, is that natural gas should start to play a much bigger role in the energy mix.”

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