Multi-million gas pipeline project abandoned

Baeau Tai
It was coming...so it was not surprising when the official announcement last month finally hit PNG’s shores that the dream of building an A$8 billion (K20 billion) gas pipeline from PNG to Queensland—that would have been PNG’s biggest ever investment undertaking—had been abandoned.

Sad for Papua New Guinea and the key participants in the project, but there is always a way out...as they say.
Oil Search, the project’s key driver, announced the news last month following a meeting of the joint-venture partners in Brisbane.

Oil Search and Exxon Mobil have shelved the project to focus on more profitable gas projects in the country.

The venture partners of the PNG gas project are working on other higher value options, including building a liquefied natural gas (LNG) facility or constructing a petro-chemical plant.

The change of plan comes as Asian buyers face growing demand for cleaner fuel and a shortfall in Indonesian LNG exports.

“LNG represents a significantly higher return and value equation in the medium and long-term for a major resource owner in PNG,” said Oil Search managing director, Peter Botten.

He said in light of global gas prices, the returns from other developments have the potential to be significantly better than what could be achieved by the PNG gas project.

Projects that are moving ahead in terms of development planning include:
• A commitment by Japan’s Mitsubishi Gas Chemical and Itochu to build a petro-chemical plant in Port Moresby;
• Various proposals for the development of liquefied natural gas (LNG), including an ongoing study involving Oil Search and British Gas; and
• There are plans to finalise an agreement by the middle of this year with India’s Oswal Industries for a world scale fertiliser plant using PNG gas. Work with the British Gas group was aimed at fast-tracking an LNG project in PNG.  

Oil Search said a study completed by Exxon Mobil showed there were sufficient reserves in the Hides and Angora fields to underwrite a single mid-sized train LNG development with the first deliveries targeted around 2013.

Exxon Mobil is the operator of the Hides and Angore fields, which had been earmarked to supply the pipeline. Other stakeholders in the field are Nippon Oil Exploration Ltd, Santos and Mineral Resource Development Company (MRDC), a PNG company representing landowner interests.

Oil Search is the main owner of the gas reserves for the proposed pipeline project, which has been stalled for at least six years due to lack of buyers and rising costs.   

The market had speculated about the project’s demise for months amid blow-outs in capital cost, a boom in coal-seam gas production in Queensland, and the rising price of liquefied natural gas on the international market.

In the local market, there had been uncertainty when the project hit a roadblock last year after AGL, a part owner of the Australian section of the pipeline, said it did not want to be a long-term owner of the asset and cut back on its development.

However, the PNG Government and Oil Search Limited remained committed to the project. With its commitment to actively participate in the commercial development of PNG’s significant gas reserves, the PNG Government set aside K400 million in its 2006 budget for the project and an additional K100 million in the supplementary budget last year.

Shelving of the project has caused the government to reconsider what it will do with the money allocated to the gas project.

It is most likely the government may hand down another supplementary budget of K700 million in this current session Parliament. This money will be used to fund the development budget. 

Quietly and humbly, the PNG Government has accepted the commercial realities of the decision, and will take the lead in exploring other options.

Prime Minister Sir Michael Somare said the people of PNG and resource owners had waited patiently for the development of their valuable resource.

AGL, which pulled out as the main architect for the pipeline project last August, said in a separate statement that the gas supply agreement with the PNG gas partners to buy 1500 petajoules of gas has lapsed following the suspension of the pipeline project.