LNG Project Papua New Guinea

Liquified Natural Gas (LNG) is natural gas that has been chilled to liquid form, reducing it to one-six-hundredth of its original volume for transportation by ship to destinations not connected by pipeline.

The PNG LNG project aims to exploit gas resources of the PNG Southern Highlands and sell the resulting LNG (Liquified Natural Gas) on the open market, particularly to Asia. This will be the largest industrial/development project in PNG’s history - it is projected to completely transform the PNG economy. It is one of the largest, if not the largest, development project in the Pacific region, excluding Australia. The official economic impact survey commissioned by the project sponsors claims that it will double the size of the PNG’s Gross Domestic Product.

The project will draw on the gas resources of the Hides, Angore, Juha, Gobe, Moran and Utubu fields. It is expected to have a life-cycle of 30 years with production beginning in 2013. The US$15 billion project involves construction of:

• A gas pipeline running onshore from Juha to Hides, then to the coast near Kopi, then offshore to the LNG plant site.
• New onshore production facilities in the highlands, including a production facility at Juha and a conditioning plant at Hides where the condensate from the gas will be collected and transported by pipeline to Kutubu.
• A LNG processing and liquefaction plant near Port Moresby, plus a nearby export jetty and numerous marine offloading facilities.

Full construction is planned to commence early 2010 and first LNG sales are due early 2014. Long-term supplies have been secured to CPC Corporation in Taiwan, Osaka Gas Limited Company, Tokyo Electric Power Company Limited, and Unipec Asia Company Limited, a subsidiary of China Petroleum and Chemical Corporation. The project will have a capacity to produce 6.3 million metric tons of the fuel a year. 

On December 15, 2009 the Italian export credit agency, SACE agreed to cover 900 million Euro for contracts to Saipem and Nuovo Pignone, which are financed by Banca Intesa and Unicredit. Thus SACE is financing the project through the project finance component.

On December 15, 2009, The Japan Bank for International Cooperation (JBIC) signed a loan agreement in the aggregate amount of up to 1.8 billion US dollars to be implemented in Papua New Guinea (PNG) with its project company, Papua New Guinea Liquefied Natural Gas Global Company LDC. The loan, provided in project financing is co-financed with a commercial bank syndicate (including Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, Ltd. and The Bank of Tokyo-Mitsubishi UFJ, Ltd.) and overseas export credit agencies (including The Export-Import Bank of the United States, The Export-Import Bank of China, SACE S.P.A. in Italy, Export Finance and Insurance Corporation in Australia) and Nippon Export and Investment Insurance (NEXI).

On December 8, 2009, the Australian goverment agreed with a $US500 million loan. The loan is to be provided to the project sponsors through Australia's Export Finance and Insurance Corporation (EFIC).

On December 8, 2009, the final deal between the project sponsors and the PNG government was signed, the day of the Final Investment Deadline (FID).

On December 4, 2009 the U.S. Ex-Im Bank’s approved the project and the provision of $US3 billion in financing subsidies to Exxon. -readmore-

In October 2009 JBIC (Japan Bank for International Cooperation (JBIC), a big player in the global energy finance sector, signed an understanding with the Papua New Guinea Government to support the development of the multi-billion project. The MoU now puts PNG on the list of JBIC beneficiaries and comes with just over a month left before developer ExxonMobil makes its final investment decision. Read more.

On October 28, 2009 the PNG government approved the Environmental Impact Statement for the PNG LNG project. The project continues to be dogged by disputes with local landowners who are supposed to also have a stake in the project.

In July 2009 the sponsors of the project were still seeking $2 billion in project finance bank debt to partially fund the deal. They were proposing a 15-year deal, comprising a five-year construction phase and a 10-year pre-completion phase. The average life after completion is 7.75 years. Project financing is just one part of an $11.7 billion multi-sourced senior debt package needed to fund the project, expected to be the largest oil and gas project in the Asia Pacific region when completed. The project is seeking to raise approximately $11 billion in debt financing and anticipates a final investment decision will be taken in late 2009. In addition to the project financing deal, the sponsors are planning to raise up to $2 billion in bonds and $4.2 billion from export credit agencies in the form of direct loans or guarantees.

In January, 2009, the LNG-PNG project sponsors organized a visit to the site of a new liquefied natural gas facility for participating ECAs from Ex-Im, Italy (SACE), Japan (JBIC), Korea Ex-Im, KEIC (Korean Export Insurance Corporation) and EFIC (Australia), as part of the lenders' fact-finding "due diligence" process.

On 22 May 2008, the Project joint venture participants and the PNG State formally signed and executed a Gas Agreement.  The Gas Agreement establishes the fiscal regime and legal framework by which the PNG LNG Project will be regulated throughout its lifetime.  It also sets the terms and mechanism for State equity participation in the Project. 

The Gas Agreement was signed on behalf of the State of PNG by the Minister for Petroleum and Energy, the Hon. William Duma MP and by the Project’s joint venture participants at a ceremony in Parliament House.

On 18 September 2008, the National Parliament passed, unopposed, bills to amend legislation as agreed under the terms of the Gas Agreement.  The bills update the various Acts to reflect the terms of the Agreement.

The project´s Social Impact Assessment (SIA) indicates that an estimated 80% of the construction workers will be expatriates, meaning a large influx of workers can be expected to pose the same risks as were manifested on other similar projects of this scale. The influx of thousands of mostly male workers who are necessary to construct the project can lead to an increase in violence and sexually transmitted diseases in local communities and an increase burden on community health, human services and other social infrastructure.

The impact of HIV/AIDS can be a two-way catastrophe, with increased exposure from expatriate workers to local people and from local people to expatriate workers who then move on to infect other people in other countries once they leave the project area.

The PNG LNG project will result in involuntary resettlement, including resettlement of indigenous people. Up to date an involuntary resettlement plan and a draft Indigenous Peoples Resettlement Plan has been completed, despite the fact that irreversible project decisions may have already been made and construction is soon to commence, if not already started.

Onshore pipleline impacts
Construction of the onshore pipeline will have significant and irreversible environmental impacts on the existing environment. Environmental impacts from construction of pipeline Right of Way (ROW) include stripping of native primary forest and other vegetation of varying conservation value, exposure of top soil causing erosion and potential soil contamination from the construction process.

In order to install the onshore pipeline a total of approximately 2,809 ha of land will be cleared, half in areas not previously disturbed by oil and gas developments. A Right Of Way (ROW) of 30m to 60m will be required and the pipeline will cross 26 major water crossings, 138 minor water crossings and will cross the Kutubu Wildlife Management Area.

A 10m ROW will be retained for access road to the pipeline after completion of the pipeline. 1055 hectares of primary tropical forest will be cleared and an estimated 86% of primary tropical forest losses and 82% of losses in Classes A1 and A2 (1,220 ha) are concentrated in five broad vegetation groups.

Erosion is specifically an issue in areas of step grades (20%-50%) and may result in increased sediment in waterways and erosion.

Offshore pipeline impacts
The PNG LNG project also proposes a 407 km offshore pipeline from Omati River Landfall to Caution Bay and a new LNG facility in Port Moresby. The pipeline will traverse the Gulf of Papua. Impacts from the laying, testing and operation of the pipeline include increased sedimentation rates resulting from trenching. Increased sedimentation reduces light penetration and stunts growth of marine biota.

Plant and Infrastructure impacts
LNG liquefaction plants typically rely on their own supply of gas as a source of power to supercool gas for export. The use of this gas as a power source results in pollution emissions of NO2, SO2 and PM10.

The PNG LNG project is anticipated to have significant greenhouse gas emissions, contributing to climate change.

Security concerns
Papua New Guinea (PNG) landowners and other non-state actors have increasingly expressed frustration over the PNG LNG project’s potential impacts and lack of adequate benefits sharing. The recent incident of landowners commandeering a gas plant obviously raises the potential for similar or more direct action aimed at PNG LNG that the company and the PNG government could perceive as a security risk. Invariably, under such circumstances private or public security services will be retained to protect perceived assets. Unfortunately, there is a long history of such security forces committing severe human rights abuses, especially on extractive industry projects, including by some of the corporate actors associated with this project. Such a potential for violence and human rights abuses also greatly increases a diverse set of risks for potential public and private financiers.

Corruption concerns
Recently, a front end engineering and design contract was awarded to Eos, which is a joint venture of the Australian firm, WorleyParsons, and the US firm, Kellogg, Brown and Root (KBR). On September 3, 2008, Mr. Stanley, a former CEO of KBR, pleaded guilty to helping orchestrate a scheme involving $182 million in bribes paid to secure engineering, procurement and construction contracts for the Nigeria LNG project, Bonny Island, Nigeria. In February 11, 2009, KBR pled guilty and agreed to pay jointly with Halliburton $579 million in penalties in the second largest Foreign Corrupt Practices Act criminal fine in history.

Now, KBR is playing a similar contractor role on PNG LNG. Potential funding of the project will benefit KBR and will send a message that corruption is being rewarded, rather than punished.

PNG is already one of the most corrupt countries in the world, and the oil and gas sector is, along with the forestry sector, beset with corruption. So far, the PNG government has steadfastly refused to sign the Extractive Industries Transparency Initiative (EITI), the international standards that require signatory governments to publicly report revenues from oil, mining and gas ventures so as to decrease the opportunity for corruption and waste by state officials. By remaining a non-signatory of these standards, the PNG government officials are keeping themselves outside of any requirements to be transparent about how to spend the windfalls that will be coming to PNG.

Oversight for the LNG Project is in the hands of Arthur Somare, Public Enterprises Minister and son of the Prime Minister Michael Somare. In theory, the PNG Governement’s 19% stake in the deal is supposed to be controlled by the state-controlled oil and gas corporation Petromin.

However, control of the PNG LNG project has been handed over to the Independent Public Business Corporation (IPBC). The IPBC, it is alleged, is controlled by Arthur Somare, who will therefore be able to control be able to direct the dispersal of the revenues once they start to flow into the country. Somare was able to raise the PNG Government’s stake in the project by securing a billion-dollar loan from the Abu Dhabi Government, for which he has been criticised.