financial review article - 12/01, page-2

financial review article - 12/01 The buzz is back about PNG
Author: Rowan Callick
Date: 12/01/2005
Source: AFR
Publication: Australian Financial Review
Page: 45

Asia-Pacific editor Rowan Callick looks at a likely major source of Australian energy for coming decades, in the remote Papua New Guinea Highlands.
More than 2000 metres above sea level, in Papua New Guinea's new gaslands, Stanis Talu, a clan leader in the proud Huli nation of 40,000, calls for silence from the excited crowd of warriors and their families. He puts on a pair of wraparound sunglasses and reads his speech welcoming to the Hides valley the top executives of Oil Search Ltd managing director Peter Botten and country manager Gerea Aopi, a former PNG secretary of finance.

"We are very happy to hear that our gas will go to Australia," he says, "and that the project will get bigger" big enough to boost considerably the royalties and other returns for the Southern Highlands population, which is growing at a near world record rate of 4.2 per cent a year.

Talu is wearing his bilas, or traditional dress yellow and red face and body paint, a grass and leaf skirt, a crescent-shaped wig, bird of paradise and cassowary plumes and carrying a kundu drum.

Botten, a veteran geologist who has spent a dozen years pushing his company, which next year marks 75 often difficult years in PNG, to this point, replies: "We have worked together to build a small garden, and now we look forward to developing a bigger one. That will be dependent on the support of you people in the valley, so we can send a message to customers and investors that we can do it successfully."

It will be some "garden", one whose development will cost about $3.5 billion. Botten, constantly in and out of helicopters as the only way to travel between his company's wells and camps in the mountainous Southern Highlands, says: "This is toys-for-big-boys country. It needs big money to work in."

Its bigger setting is what PNG Treasurer Bart Philemon describes as "a rich-poor country, an island of gold that floats on oil".

One reason that PNG is again attracting large numbers of companies to explore for minerals and oil and gas, is that at the community level, the Huli level, globalisation holds a magnetic, almost visceral attraction.

In the early 1990s, 10,000 people got caught up in a gold rush on the muddy slopes of the barren, 3000-metre high Mount Kare, digging and clawing away in a merry madness, searching for alluvial gold. An Engan squatted next to his pair of scales, weighed an enormous nugget another highlander had extracted from the stream bed, and then tuned in his shortwave radio to the BBC to catch the latest London Metals Exchange price for all to witness. No one in the transaction spoke English, and only a few Pidgin. But they understood the numbers well enough.

Earlier, it had been through village grower enthusiasm rather than big plantations that coffee took off as a major crop. More recently villagers triggered a vanilla rush. As that starts to die down, alert farmers will find fresh opportunities.

As government services, living standards and job opportunities have trended down in PNG, the hold of the centre has also naturally declined. The response to losing access to the big ticket items sealed highways, adequately equipped schools and clinics has been to shift towards local, tribal or community-based action and services, and to reject professional political rhetoric.

Papua New Guineans are eager to learn, especially if this enables them to make money, as long as the routes are opened and the revenues flow directly. This provides a surprisingly accommodating environment for resource developers, who through a tax credit scheme provide schools, clinics and police stations in the area around their mines and oil and gas fields, and help fit out such facilities and fuel police cars.

The Bougainville copper mine closed in part because owner Rio Tinto waited for the national and provincial governments to fulfil service delivery and royalty obligations, and long-accumulated grievances ended up triggering a 12-year civil war. Headaches over environmental errors followed at the Ok Tedi copper mine.

But lessons have been learned swiftly, as they tend to be when the stakes are high. Today, resource project owners focus first on keeping landowners happy, second on the engineering and market challenges. While commodity prices are high, they can go some way to buying such happiness, despite constantly rising expectations. At Oil Search operations, for instance, they help transport coffee to markets as back-loads for vehicles that have brought equipment and supplies up the Highlands Highway.

Bougainville will probably never reopen, but Ok Tedi has been operating more profitably than ever since BHP Billiton pulled out, and its innovatory trust ownership structure is winning applause.

The Porgera gold mine, about 70 kilometres across craggy mountains from Hides, whose gasfield is generating its power, is set to produce a million ounces this year. The oilfields around limpid Lake Kutubu, to the south-east of Hides but still in the Southern Highlands, have not missed a delivery target since they began production 12 years ago.

Exploration, which dwindled to five mining applications in 2002, is booming, climbing to 15 in 2003 as new tax incentives kicked in, and 48 in 2004, when 20 new petroleum licences were granted.

Reinforced by the China-driven global commodity boom, the regular PNG resources conference in Sydney last month was over-subscribed. Organiser Greg Anderson, executive director of the PNG chamber of mines and petroleum, said: "The buzz is back." This is good news for a country which depends on resources for 70 per cent of its earnings.

In 2005, construction is expected to start for gold mines near Wau in Morobe province, at a New Ireland island near Lihir, and near Rabaul. The Kainantu mine in Eastern Highlands is being built and construction is to begin of the first Chinese built and operated mine outside China in the Asia-Pacific region, Ramu Nickel in Madang province.

At the Sydney conference, the expensively suited leaders of two Southern Highlands groups competing for primacy in relation to the gas pipeline, spoke from the floor, describing their claims but stressing their support for the project. Such jockeying will continue, but should be manageable. Petroleum and Energy Minister Moi Avei says: "We have to shield the project from the vagaries of PNG politics."

The owners of the PNG Gas Project (operator ExxonMobil owns 39 per cent, Oil Search 54.2 per cent, the PNG government's Mineral Resources Development Corp 3.4 per cent on behalf of the landowners and Nippon Oil Exploration 3 per cent) recently decided to shift up a gear into front-end engineering and design (FEED) costing up to $130 million.

Although more customers are needed, this effectively shoots the starter's gun for the project, which aims within four years to pump gas 3000km down the Queensland coast to Brisbane and possibly inland to Mt Isa and Moomba.

As the output from the Cooper Basin falls, eastern Australia will depend for its growing gas needs on supply from the Exxon-operated Bass Strait fields to the south and from PNG to the north.

The stalling of one of PNG's major likely competitors, the Greater Sunrise field in the Timor Sea, is another bonus for the PNG project. Greater Sunrise is bogged down by the collapse of sea boundary talks between East Timor and Australia. Operator Woodside has said it will soon redeploy staff to alternative projects.

Once the gas is flowing in the Southern Highlands, more oil will be extracted together with the gas, providing a massive, reliable source of revenue for 30-40 years, and binding the neighbouring countries in mutual dependence. At present gas is being injected back underground because of a lack of market, limiting the capacity to extract the oil.

A new pipeline will take gas from Hides to Kutubu, site of the other PNG gas fields, and from there it will run alongside the existing oil pipeline, down from the highlands and across the jungles of Gulf province, ending at the concrete Kumul platform in the Gulf of Papua where tankers have been loading oil for a dozen years already. Instead of terminating there, the new gas line will continue under the Coral Sea to Cape York and points south.

Oil Search is today the source of 14 per cent of PNG's gross domestic product. A year ago it took over from ChevronTexaco the operation of all the oil fields in PNG, and is likely to continue to run the PNG end of the gas pipeline, while operator ExxonMobil leads the marketing in Australia and the final negotiations with governments there and in PNG. Australian Pipeline Corp, a consortium led by AGL and Petronas, will design, own and operate the Australian section of the pipeline.

Bob Reed, the project's gas commercialisation manager, says that despite the angst in recent years over whether the project would proceed, "looking at gas projects around the world, the length of time that it has taken to get to this point is relatively short" compared with Sakhalin in far eastern Russia or the Chad-Cameroon pipeline, first discussed 25 years ago.

He says what keeps him awake at night is mobilising the customers. "Ours is a problem of timing, of when the customers want it and will commit to buy it." For PNG Petroleum and Energy Minister Moi Avei, awaiting the final go-ahead means more than losing sleep. "For us in PNG, it's virtually a life and death decision," he says.

The project involves 7 trillion cubic feet of gas, but the reserves are bigger than that, Reed says, providing "a basis for gas consuming industries in PNG as well as further opportunities in Australia".

Oil Search is thus considering building an ancillary pipeline along the seabed east to Port Moresby, where at Napa Napa next to the new InterOil refinery, it might produce dimethylether (DME), a low-polluting alternative to diesel and liquefied gas, primarily for export to Japan. It is also talking with New Zealand about shipping compressed natural gas there, possibly produced at Gladstone after being pumped down from the Southern Highlands, because New Zealand starts running out of its own gas in 2009.

But Australia and PNG will be the fundamental beneficiaries. Botten, whose Oil Search is investing more than $US200 million ($265 million) in PNG on exploration and development in 2005, says: "If you want to change the scope of PNG's economy, this is the only way you can do it. You can't protect all your assets out here, though, so we're only here because these guys" and he gestured at the Huli warriors leaping and drumming energetically "want us to be here. Getting community relations right is the key."

He tells another group of people, at Kaipu village near Lake Kutubu: "We can't replace government. But your problem with government is often ours too, so we do what we can to help."

If Talu and his fellow clansmen, and others in the Southern Highlands and the adjacent, coastal Gulf province, help provide the stability the project needs, then the vast reserves of gas beneath their traditional land can provide Queensland, and possibly NSW and businesses as distant as WMC Resources' Olympic Dam in South Australia, with a reliable energy resource for decades.