Clean, Cheap LNG From Papua New Guinea Will Boost China’s Economic Development

By NRI Contributor

Papua New Guinea is one of the newer emerging gas exporting nations.   Current reserves are currently estimated by the United Stated Central Intelligence Agency at 226.5 billion cu metres, which gives PNG a world ranking in gas reserves of 43 out of 207 countries and territories.   

EXXONMOBIL DEVLOPMENT OF PNG’S LNG PROJECT:   

ExxonMobil has been a joint venture partner in the development of PNG’s oil resources since the 1990’s in which Chevron was the principal stakeholder.   ExxonMobil became the operator in the country’s first natural gas development project, sourcing gas from the Hides, Angore, and Juha gas fields, also obtaining gas from the existing Kutubu, Agogo, Moran and Gobe oil fields.  The LNG gas project is a joint venture partnership, with ExxonMobil the principal stakeholder and PNG stakeholders holding less than 20% of the total share.  

ExxonMobil (operator) (United States multinational)	33.2%
Oil Search (PNG registered, with main offices in Australia)	29.0%
National Petroleum Company of PNG (PNG Government)	16.8%
Santos (Australian registered)	13.5%
Nippon Oil (Japanese registered)	4.7%
MRDC (PNG landowners)	2.8%

Photo-PNG’s oil and associated gas development areas, located mostly in Southern Highlands Province, show almost no tangible development despite over 20 years of oil exports.   The operations run with surprisingly few workers.  Most jobs were short-term, created only for the construction phase, and was heavy in expatriate labour.

EXXONMOBIL CONTROL OF PNG NATURAL GAS:   During the time when PNG’s Michael Somare was prime minister, energy supplying giant ExxonMobil successfully followed a much smaller PNG petroleum extractor, InterOil, in forcing the Papua New Guinea government to sign natural resource agreements that were to the great benefit of the developer and of no real benefit to the citizens.  ExxonMobil effectively took away all rights of the PNG government to use PNG natural gas to meet domestic development needs.   Instead, virtually all PNG’s natural gas resources were to be dedicated to LNG export to serve the development needs of other nations.  Being that the LNG project came on line at a time of cheap natural gas prices, the project was most likely to favour LNG purchasers and least likely to favour LNG sellers, such as the PNG government.  

Photo-PNG’s then Prime Minister Sir Michael Somare and son Arthur Somare (left) were instrumental in creating and signing the LNG export agreement that gave full control of the resource to ExxonMobil.

This lock tight agreement only come into public view in recent weeks with statements by PNG Finance Minister James Marape that ExxonMobil would allow a small amount of “excess gas” to be sold back to PNG to alleviate its chronic power shortages, confirms what is appearing to be a remarkably successful ExxonMobil strategy to take control of its PNG gas fields, making them essentially a sovereign state out of PNG control.   

Photo-PNG’s Finance Minister James Marape admitted recently that the PNG government has to beg ExxonMobil to be able to purchase any gas for PNG’s own domestic needs from the massive PNG LNG gas project.

Although the end result will be less headaches and possibly higher profits for ExxonMobil officials, a significant driving force for the locktight agreement apparently came from company officials’ general disdain for the PNG government and its level of corruption.   As one ExxonMobil employee put it, “PNG leaders over the past 20 years have proven themselves to resemble uncontrollably greedy baboons who can’t keep their hands out of the candy jar. The company wanted to make sure that the Prime Minister and his cronies had no legal control over the resource whatsoever.”  

PAPUA NEW GUINEA AND HOW IT USES ITS NATURAL GAS RESOURCES:  The loss of control over its own gas resource might come as bad news for the people of Papua New Guinea.   PNG has some of the world’s lowest human indicator index values despite years of natural resource extraction in many directions, ranging from minerals to petroleum to timber to tuna.  Government corruption has grown worse with the conventional wisdom rating the current government of Peter O’Neill as the worst ever.  O’Neill’s recent tenure as Prime Minister has been focused on avoiding arrest for an investigation of his involvement in securing a government bank loan that violated government regulations.

Photo-Natural resource wealth development has actually occurred simultaneous to a decline in human development indicators for Papua New Guinea.   

PNG is a country where only a tiny fraction of its population has access to natural gas as a  residential energy source, with those fortunate few paying inflated prices for cylinder compressed natural gas.  Guaranteed hot water for washing is barely present, apart from hotels in its capital city Port Moresby.  For many years, the Hela Province capital, Tari, has existed on erratic small scale diesel generator power, despite nearby power lines transporting electricity from the long-standing Hides gas field-powered generating plant to one of the world’s larger gold mines in an adjacent province.

NATURAL GAS AS A CORNERSTONE FOR CHINA’S DEVELOPMENT:  Having just overtaken the United States to become the world’s largest economy, the Chinese motivation to find cheap, reliable, and ideally emissions friendlier energy sources is at an all-time high.   

Photo-China is now the world’s largest economy, with nearly 1.4 billion citizens aspiring to improve their standard of living.   Importing cheap raw natural resources from poor developing countries is key to China’s own economic development.   

Citizen consumers in China have become an important driving force, as in other countries.  Hundreds of millions of upwardly mobile Chinese now aspire to own their own vehicles and live in modern houses filled with modern electrical conveniences.    Unless it finds secure and ample natural gas supplies, the Chinese government cannot satisfy these aspirations, and civil unrest is always a background threat.  PNG gas has become one of several new and important natural gas importing “open doors” that collectively will enable the Chinese government to meet the development aspirations of its peoples.  

Since 2004, China’s overall economic growth rate has accelerated, peaking at more than 20%.   The Chinese government strongly encourages switching from more polluting coal and oil fuels to natural gas, which was further stimulated by higher oil prices in the mid-2000s.  The result was a major shift by residential and industrial consumers to shift fuel and feedstock from oil to natural gas.  For the last 6 years natural gas has been significantly cheaper than oil and this cost benefit is expected to remain for years to come.  

CHINESE GAS PRODUCTION AND DEMAND:   While China has respectable gas reserves, the discovery of new reserves has failed to keep up with demand and new fields are deeper and more expensive to tap into.   In 2007, China became a net gas importer and imports have risen dramatically in recent years, now reaching more than 30% of domestic demand.  

NATURAL GAS PRICES IN CHINA:    The Chinese government controls the price of energy.  For most of the 21st Century, China used a “cost-plus” based pricing system to keep natural gas prices economical in an effort to encourage its wider use.   Since China became a net importer of natural gas, the costs have come closer to that of international prices.  Starting in 2011, prices have been set at the provincial level.  This allows natural gas prices to remain as low as possible, based upon local mixtures of gas supply sources.  

LNG AND THE CHINESE ECONOMY:  The government started planning for LNG imports in the late 1990s, particularly to satisfy the strong gas demand coming from coastal cities, including Guangdong, often called the “factory of the world”.   In this capacity, LNG would serve a variety of economic development needs.  LNG has been imported from as far away as Africa, which was still considered economically viable.  In this context the LNG coming from Papua New Guinea will be like mana from heaven for China, adding to the LNG mix to reduce prices and boost China’s economic development in several ways.   China looks to be the principal customer of PNG’s LNG for decades to come.  

LNG AND CHINA’S DEVELOPMENT – TRANSPORTING THE PNG LNG:   Chinese government owned ships will make up part of the network to transport PNG’s LNG to China, thus adding immediate value to the cheap raw resource that will benefit China.  Beyond that, China is a major manufacturer of ocean going transport ships.  Shipping PNG LNG in Chinese made, Chinese owned ships ensures that the Chinese economy begins capturing value from the PNG LNG the moment it leaves Papua New Guinea.

Photo:  Thousands of jobs are being created in China and elsewhere building huge LNG carrying ships that will transport cheap PNG gas to China and other world markets.  Japanese ship builder Kawasaki has built a major manufacturing facility in China to build LNG and other transport ships.  

USING LNG TO IMPROVE CHINESE LIVING STANDARDS – POWER GENERATION:   many developing countries have found that the successful development of natural gas markets hinges upon gas-fired electricity generation.  China’s large pipeline and LNG projects are aimed at greatly increasing power generation using natural gas. Gas fired power generation, in turn, is harnessed to improve living standards of people generally, increasing family disposable income which invariably fuels consumer demand for electronic and other electrical power consuming household products.  

Currently, over 50% of the LNG consumed in Guandong Province, where much of PNG’s LNG will be going, is used to generate electricity.  In Fujian Province, the figure is over 80%.   

Photo-The new Black Point natural gas powered electrical generating plant will provide economical power to factories and residents of Hong Kong and nearby mainland China.  It is expected to use imported LNG as part of its fuel mix.

Photo-Although natural gas is normally considered for generating electricity on a large scale, China’s Fuan Kinger Manufacturing in China makes this portable natural gas powered generator.  It is cheaper to run than either petrol or diesel.   This is one of many examples showing how the natural gas resource can stimulate technological spin-offs which themselves generate new jobs and increase export revenue for Chian and its peoples.  

USING LNG TO IMPROVE CHINESE LIVING STANDARDS – COOKING AND HEATING:   For households, natural gas is directly used mainly in cooking food and providing heat and hot water.  It is far cheaper to cook with natural gas than with electricity created from any possible source.  Lower cooking costs free money for other consumer expenses and accelerates economic development for households.

Photo-Natural gas, including LNG, is playing an important role in reducing energy costs for Chinese families, thus freeing money that can be used to buy other consumer goods.

To stimulate the expansion of the Chinese middle class, the China’s government has been on a crash construction programme to improve natural gas line penetration into residences.    Over the past 15 years, the residential sector has been the fastest growing sector in terms of gas demand.  More than 20% of the urban population now has direct access to natural gas via pipelines and this percentage continues to increase.  

LNG AND CHINA’S DEVELOPMENT – DIRECT POWER FOR FACTORIES:   Industrial sale heat and electricity generators fuelled by natural gas, are used throughout China today in factories and promises to assume a more important role in the future.   The steel industry, in particular, is beginning a switch to natural gas in places where coal is expensive.  Lowered energy costs make the finished steel products more price competitive which can result in expanded operations and the creation of thousands of new jobs.

LNG AND CHINA’S DEVELOPMENT – VEHICLE FUEL:   Chinese cities have the world’s worst pollution, with 16 of the world’s worst polluted cities being Chinese, with all its associated health costs.  In this context, natural gas generally and LNG specifically has become essential to China’s development.   Natural gas burns extremely clean compared to diesel and this has encouraged conversion of Chinese urban public transportation to be run off LNG and its equivalent CNG (compressed natural gas).  Also, natural gas is currently 30% cheaper than its diesel equivalent.  

Today, over 1.5 million Chinese cars, trucks and buses in China run off of natural gas, with the Chinese government setting a target of 3.8 million vehicles by 2020.  To achieve this goal, another indirect LNG-boost to the Chinese economy has been the construction of over 4,900 natural gas refuelling stations that will accommodate the huge natural gas fuelled vehicle fleet of the coming decades.  

LNG AND CHINA’S DEVELOPMENT – PUBLIC TRANSPORTATION AND VALUE ADDINGS:   Modern, natural gas fuelled public buses are common sights in all Chinese cities, have proliferated in Chinese cities.   Natural gas powered taxis are found in all Chinese cities today.

Photo-Chinese taxis running off of natural gas now fill Chinese city streets.  LNG and CNG fuel is about 30% cheaper than diesel.  

The Chinese manufacturing capacity for natural gas fuelled buses has improved to the point that large numbers of buses are today being manufactured specifically for export to other countries who are seeking LNG fuelled vehicles for their own efforts to reduce emissions.  This creates yet another layer in the already numerous layers of value adding to LNG, including that coming from PNG, that helps create Chinese jobs and boost China’s export earnings.  . India, Pakistan and Iran are among the fast-growing markets for natural gas-powered vehicles, and China is moving to take advantage of those growth markets.   

PHOTO-The Chinese Golden Dragon company manufactures and exports LNG fuelled buses to other countries seeking to gain the many advantages of using LNG, consumed by vehiclesas Compressed Natural Gas (CNG).

LNG AND CHINA’S DEVELOPMENT – MISCELLANEOUS EXPORT EARNING VALUE ADDEDS:   Overall, China has taken tremendous advantage of its natural gas resource, starting with the natural gas available on Chinese territory, and now embracing the natural gas it imports, through gas pipelines to adjacent countries and through ship-transported LNG.   Numerous smaller scale industries have sprung up  in China around the use of natural gas, creating both jobs and patentable technology that will earn royalties for Chinese companies.   The export earnings from the Chinese-manufactured technology licensing and its natural gas-specialised equipment and vehicles should more than offset the currency drain of importing LNG and contribute to further overall boosting of China’s wealth and improvement of national living standards.  

Photo-Blu, a venture of China's ENN Group. is building natural gas fueling stations across the United States which relies on specialised, Chinese-manufactured equipment, such as the special LNG fuel pump nozzle shown here.  

LNG AND PNG’s LONG-TERM DEVELOPMENT:   In relative comparison to the considerable economic benefits China stands to reap from the PNG LNG resource, PNG’s benefits are meagre.   The PNG’s government’s short-sighted and singular focus on exporting the raw LNG resource will haunt the nation for the next half century or more.  

Photo-PNG’s current government of Prime Minister Peter O’Neill (centre) chose to use the first LNG money as mortgage for a government investment loan rather than using it to start a Sovereign Wealth Fund for Papua New Guinea.   The repercussions of that decision are likely to be felt for the half century projected life of the PNG gas project.

The meagre government earnings from direct sales of lightly processed LNG gas were originally scheduled to be deposited into a National Sovereign Wealth Fund.  The best world model for such funds comes from Norway, which now reaps billions of dollars in interest alone from its Sovereign Fund.  

In a critical report just issued by PNG’s National Research Institute, it is clear that Papua New Guinea has turned aside the Sovereign Weath Fund idea in order to mortgage its initial LNG revenue against a Swiss UBS Bank loan with uncertain investment prospects.  Whether or not a profit can be generated from this strategy, this decision went against the core principle of “saving for tomorrow” that is a prerequisite for successful  Sovereign Wealth Funds.  As a result, the likelihood that PNG will ever have a significant Sovereign Wealth Fund into which all LNG government earnings are deposited, now appears unlikely.  

This report was submitted anonymously by NRI staff because of threatened O’Neill  government interference into the content of reports produced by the National Research Institute (NRI).