Avei: ‘It underpins everything’


With its abundant gas reserves and strategically located in the fast growing Asia Pacific region, Papua New Guinea is poised to become a major player in the global gas industry.

The PNG government’s gas commercialisation policy is designed to capitalise on these advantage and to ensure PNG is active across the whole gas industry value chain, from exploration and development through to value adding and electricity generation.

The gas commercialisation policy is an integral component of the government’s medium term development strategy, which will provide the revenues to fund government’s strategic priority programmes.

It will promote the economy’s transition to one more heavily based on value-adding. It will create jobs and training for PNG people and help modernise the economy and workforce.

The policy will also promote gas-fired electrification and distribution of liquefied petroleum gas (LPG) for household use.

However, the backbone of this new policy is the U$2.5 billion PNG Gas project, which will export gas to Australia from 2009 and will be PNG’s biggest ever investment undertaking.

PNG’s Petroleum and Energy Minister Sir Moi Avei said PNG’s proven gas reserves are currently “stranded” in the Southern Highlands province.

The PNG Gas project will finance the infrastructure that is necessary to enable this gas to be commercialised for both export and domestic downstream processing.

The project will also signal to overseas investors that PNG can deliver multi-billion dollar projects.

“The public must have a clear understanding of this essential point. The PNG Gas project is, and must remain, the backbone of the gas commercialisation policy.”

“If the project does not proceed, there will be no prospects for downstream processing and only limited options for gas-fired electrification,” he said.

An LPG plant is a central component of government’s plan for downstream processing. In negotiating the PNG Gas project with private partners, the government has demanded that the project accommodates third party investors who wish to invest in downstream processing industries, including LPG.

“We have achieved this by successfully negotiating workable gas off-take and access arrangements. Negotiations are also underway to ensure that competitively priced gas is made available to domestic downstream processors.”

Avei said that in negotiating the sales contracts with potential gas buyers in Australia, including Santos Ltd, the government has given in-principle approval for the sale of a very limited quantity of LPG-rich gas for a limited period of between five to six years.

The decision was necessary in order to improve the economics of the PNG Gas project and help ensure it receives the go-ahead.

It is estimated that the in-principle decision on the sale of the LPG-rich gas will account for only 10% of the LPG available in the 6 trillion cubic feet of gas that has been committed to the PNG gas project.

“This is a small percentage that will have no negative impact on the viability of a domestic LPG plant or a domestic downstream processing industry more generally.”

Substantially greater volumes of LPG will become available from the gas fields not committed to the PNG Gas project,” he said.

“I should add that in making the decision, the government resolutely rejected proposals for the sale of wet gas over a long-term timeframe. It is important to appreciate that LPG will not be given away; they will be sold to Australian customers for an additional 3% royalty. This money will accrue only to the PNG stakeholders and not private investors”.

Avei said far from compromising the LPG project, the in-principle decision on the limited sale of the LPG-rich gas improves the prospects for downstream processing because it improves the economics of the PNG Gas project.

The PNG Gas project is essential to PNG’s future growth prospects and for the development of a domestic downstream processing industry.

Early this month, major oil company Oil Search Ltd and Indian-based Oswal Projects signed a Memorandum of Understanding (MoU) for the supply of natural gas to the world’s largest ammonia and urea fertiliser plant in Port Moresby.

Oswal Projects will build the plant at Konebada Petroleum Park that will produce 2600 tonnes of ammonia and 4500 tonnes of urea (fertiliser) per day. The plant would cost about U$1 billion and about 4000 jobs will be available once the plant is up and running in 2010.  

The MoU provides the commercial framework for the negotiation of a comprehensive Gas Sales Agreement (GSA). Subject to the successful completion by Oswal of a comprehensive feasibility study, commencement of gas sales to the plant is targeted for 2010.

Oswal Projects is affiliated with the Oswal Group of Companies in India and is the primary stakeholder in the recently commissioned Burrup fertiliser facility in Western Australia.

Oswal Projects is a part of the Oswal Group which is a large conglomerate in India with a combined asset base of more than A$2 billion.

“We are pleased to have signed this agreement with Oswal Projects, a group which has proven ability to develop large scale fertiliser projects,” said Peter Botten, Oil Search managing director.

“The natural gas required by the ammonia and urea plant, together with the gas requirements of the proposed methanol/DME facility of Itochu and Mitsubishi Gas Chemical of Japan, provides the critical mass necessary for the development of a petrochemical hub to be located within the proposed Konebada Petroleum Park,” he said. 
Botten said it also helps to underpin the economics of the proposed spur pipeline from the PNG gas project pipeline to the Port Moresby area.

Pankaj Oswal, chairman and managing director of Burrup Fertiliser Ltd (and promoter of Oswal Projects), said: “We are delighted to have signed this agreement with Oil Search, which is leading the efforts for in-country gas development in PNG.

“Oswal Projects is keen to repeat the Burrup success story in PNG,” he said.

Avei said the agreement between Oswal and Oil Search is “concrete evidence” that the government’s gas commercialisation policy is firmly on track to deliver a major gas-based downstream processing industry in PNG.

The three components of the policy are the PNG Gas project, the domestic downstream processing of gas, and the development of a major gas-fired electricity grid.

“Companies such as Oswal Projects were attracted to PNG because they are confident the PNG Gas project would receive the go-ahead and they were confident in the government’s commitment to the development of a downstream processing industry.

He said a number of other credible companies were actively exploring investment options across a range of downstream processing activities, including Methanol/DME, liquefied petroleum gas (LPG), liquefied natural gas (LNG) and gas-to-liquids.

He said combined with the methanol/DME proposal from Itochu and Mitsubishi, the proposal from Oswal Projects should ensure there’s sufficient foundation customers to justify the construction of the Konedobu Petroleum Park and the auxiliary gas pipeline.

“The auxiliary pipeline will tap into the PNG Gas project pipeline in the Gulf province and will deliver gas feedstock to the park,” he said.

Early last month, he met with a high powered delegation from one of the world’s largest methanol producing companies, Methanex Corporation of Canada.

The delegation was in PNG on a fact-finding mission and has shown interest in the possible development of a methanol plant in the country. Methanex produces and manages first class supply chain operations of over 20 terminals and storage facilities worldwide. It is looking to PNG as a cost-effective location to establish a methanol plant.

“To have an industry leader such as Methanex eyeing investment in PNG is a huge vote of confidence in the government’s policies, not only in the mining and petroleum sector, but more widely in providing a stable and attractive investment environment,” he said.

“It’s been hard work getting the gas project to where we are today, but seeing world class companies showing interest in investing in PNG as they are today makes it all worth it.”

He said “for these investments to occur”, the PNG Gas project must be delivered first because that is the backbone of other developments.

“We first need to get the gas project over the line as it underpins everything,” Avei said.