Here is a report from the presentation on the PNG Gas project. Dont forget the report made by Oil & Gas a few days ago detailing 3 companies willing to purchase gas from PNG and how even the Queensland government backs the project and to all those cynics of the project dont bag a great enterprise which is going to benefit everyone. Mark.
PNG Gas Project A presentation by Dr Doug Schwebel PNG Gas Project Director ExxonMobil Exploration Director JBWere Resources Conference Sydney 2 August 2002
I am very pleased to be here this afternoon on behalf of ExxonMobil and the other PNG Gas Project participants to talk to you about the Project. As a concept, the PNG Gas project has been around since about 1996. It is seen by the owners of the large gas resources of PNG's Southern Highlands as the best means of developing these reserves in the near term. The project is by far the biggest and most complex resource development ever contemplated in Papua New Guinea and it would be of major economic significance to both that country and Australia. The total cost of the project is estimated to be somewhere between A$ 6 - 7 billion and includes the necessary facilities to produce, treat and transport the gas. These include: · The conversion of the existing oil fields to gas production · The development of the Large Hides gas field · The integration of a gas processing facility with the existing Kutubu oil production facilities · The installation of a wet gas pipeline to an LPG separation and fractionation facility in the Gulf of Papua · And the installation of a dry gas export pipeline to Australia. In Australia, APC (a consortium made up of AGL and Petronas) will build, own and operate the dry gas pipeline system that will deliver gas to markets in Queensland and elsewhere. Overall, the pipeline would be nearly 4000km long and would stretch from the PNG highlands across Torres Strait to Cape York from where it will deliver gas to its ultimate customers within and outside Queensland. The PNG Gas Project is a massive undertaking, involving a number of upstream joint ventures, a separate pipeline consortium, a diverse group of gas customers, two national governments and at least 2 state governments. The PNG Gas Project is operated by an ExxonMobil affiliate, Esso Highlands Limited. We assumed this role in April 2001. Our joint venturers in this project are Oil Search, ChevronTexaco, MRDC (which is a PNG company representing landholder interests) and Japan PNG Petroleum. We also anticipate that by the time the Project is sanctioned there will be a substantial level of PNG ownership in the Project. ExxonMobil is active in all aspects of the petroleum industry -- from exploration to development to production. We have upstream operations in more than 40 countries. We have 44 major projects currently under development and 50 more in the planning stage. Our upstream capital spend in 2001 was US$8.8 billion. 3 Within this framework, our gas business includes Liquefaction and Gas-to-Liquid conversion, pipeline and marine transportation, LNG terminals, storage, and gas-fired power generation. Our worldwide gas reserves exceed 185 trillion cubic feet of gas and our gas sales are in excess of 10 billion cubic feet per day. We are the world's largest non-government marketer of equity natural gas. In short, we have extensive experience in developing complex, multi -billion dollar projects like this. We have the financial strength to fund our share of a project like this and we have the commercial and technical expertise to structure the project so that those in the gas chain who will require funding will be able to attract it. The PNG Gas Project offers the opportunity to put in place an integrated gas system, which can supply large volumes of competitively priced gas to southeastern Australia and much of rural, regional, and metropolitan Queensland. By "integrated gas system" I mean a pipeline that runs essentially the length of Queensland with the potential to supply regional centres where it is economically attractive to do so, and interconnects with existing natural gas pipeline systems. The pipeline system installed for the PNG Gas Project would provide competitive energy prices in Queensland because it would offer existing and new gas customers access to a new, major gas supply source. The availability of this competitively priced energy supply would allow further regional development of major energy dependent projects. North Queensland, in particular, stands to benefit since economic development in that region has, to date, been hindered by lack of a competitively priced energy. This Project has significant implications for both PNG and Australia. Over the life of the Project, we expect to see a direct boost to PNG's economic output of some US$5 billion. Annually, some US$250 million will flow through to local stakeholders; to the national government through taxes, to the landowners through royalties; to equity participants through project revenues. These monies should go a long way towards aligning the various PNG interests with those of the Project. Should PNG be successful in developing new industries based on gas the benefits may be more significant. Overall, the project should provide a framework to help the PNG government deliver economic stability to the country. Australia, will also enjoy significant benefits. Recent economic modelling by ACIL found that during a typical operating year, the PNG Gas Project would increase Queensland's economic output by A$1.22 billion and provide more than 2,200 jobs. It would also increase regional income by more than A$350 million per year in the form of wages, profits and supplements*. * ACIL Consulting (April 2002) The PNG Gas Project: Economic Impacts at National, State and Regional Level. (Full report is available at www.pnggas.com) 4 In our view, alternate energy projects in Queensland such as Coal Seam Methane do not offer the long term, low cost supply option available from the conventional gas fields of PNG, and are therefore less likely to underpin the regional development aspirations of the Quensland government. Reserves estimates for Coal Seam Methane would suggest it has a role to play in Queensland's energy supply mix, provided sustained production can be achieved at a cost which leads to economically attractive delivered prices. Like elsewhere in the world, we believe there is room in the Queensland market for both energy supplies. We also believe that regional development will be best served by the installation of major infrastructure that provides the opportunity for access to the many different energy supply options at competitive prices. I am aware that after six years, customers, analysts and commentators are cynical of the PNG Gas Project. That is understandable, but by the same token, the sheer scale of this development and the fact that it is a gas resource, selling into a non-liquid market, makes it almost inevitable that it takes more time than any of us would like to see. I need only refer you to the elapsed time between the discovery of the North West Shelf gas fields and first LNG production; or the time since the discovery of Gorgon, Sunrise-Troubador and Evans Shoals, none of which are currently in production. There are a number of key factors that must be considered when critically assessing the advancement of a major project like this. Large gas projects typically require substantial capital investments with a number of years of investment between project conception and first gas production. They require billions of dollars of financing, the provision of insurance, and the aggregation of multiple financial institutions. Where they involve multiple parties through the gas delivery chain and transit international and state borders, and multiple jurisdictions, it simply takes time. All of this increases uncertainty, which translates to risk, which needs to be managed and mitigated. As a rule of thumb ExxonMobil, and any sensible investor, requires the following to be in place prior to commencing a major development such as this: 1. Experienced and reliable developers with sufficient reserves for contracted deliveries 2. A co-operative approach to ensure all infrastructure, from resource to customer, is in place for startup 3. Assured viable long term sales contracts with creditworthy customers. 5 The location of the resource in Papua New Guinea is also a concern to some observers in Australia. PNG does have its own unique domestic issues but nevertheless, we consider these challenges eminently manageable. I can assure you, we operate in and manage tougher locations than PNG. ExxonMobil's downstream business has been operating successfully in PNG for many years. ChevronTexaco has successfully maintained oil production from the Kutubu oil project for the past 10 years. As we look to the future, we have the certainty of the Gas Agreement which has now been formally executed with the PNG government. This Agreement sets out the legal and fiscal framework for the development of gas reserves for this project. I would like to look now at our assessment of the market for PNG Gas. Worldwide, gas currently represents around 20% of total energy demand and is expected to grow to 25% by 2010. Queensland, at around 10%, has the lowest gas use as a proportion of primary energy consumption of all of the Australian States shown here. At present coal and petroleum products make up the vast majority of energy consumption in Queensland. Given the increasing size of Queensland's population, these figures indicate there is a significant potential for gas consumption to grow in the State. This growth will be enhanced by the Queensland government's energy policy, which is oriented towards increasing gas usage. The Queensland Government's recent decision to establish a gas fired power station in Townsville is consistent with this policy. The Queensland government also supports the PNG Gas Project, which will bring major gas infrastructure and supplies to the State. However, its decision not to use PNG gas for the Townsville power station was disappointing. In the light of that decision we undertook a formal review of the viability of the project and we conducted a detailed analysis of where we see the opportunities for other gas sales in Queensland and South Eastern Australia. We already have in place a conditional sales agreement with AGL to provide 50 petajoules per year (that is 150 million cubic feet per day) for twenty years from 2006. This gas will be sold outside of Queensland. It was our decision, and we announced it on 9 July, that we believe there are sufficient customers in the market, without Townsville, for the project to progress. The pipeline will go to where the committed customers are. They are a must for upstream and pipeline financing and for reasonable economic returns for the project owners. "Field of Dreams" projects and pipelines don't provide that. However, 6 whatever the initial pipeline configuration, it will not preclude gas getting to other customers in the future if it is economically feasible to do so. If the PNG Gas Project is to proceed, now is its time! I know you have heard that before, but let me explain why the "now" is different. These types of Projects need substantial early cash flows which means they need committed customers with early demand for gas. We anticipate that the construction and commissioning phase should take approximately 36 months. Therefore, in order to meet the AGL requirement for first gas during 2006 we must make the decision to commence FEED (Front End Engineering and Design) work at the beginning of 2003 and commence construction in 2004. During FEED, those project participants requiring financing will need to secure those arrangements. Thus, we are now working towards a decision to enter FEED around the end of this year. In order to be positioned to make that decision we are currently increasing the level of engineering and technical work. Once the FEED study is completed the successful conclusion to this phase is Financial Close & Board Approval which signals full project commitment by all parties. I can't say this enough: the time really is "now" for the PNG Gas Project. We are moving forward and believe there is room in the Australian energy market for this Project. What we are offering in terms of potential economic development for Queensland and alternate long term gas supplies for Australia is unrivalled by any other projects currently in the market or on the drawing board. However, this Project needs a combination of understanding, willingness to take acceptable risk and above all commitment by all stakeholders to move on from here. ExxonMobil and the PNG Gas Project are ready, we hope the gas customers are too. Thank you. I welcome your questions.
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