Within a few years, consumers in Sydney or Melbourne might contract PNG gas
Australian Financial Review, September 15
Pipeline dreams: $6bn steel pin into Papua New Guinea
By Rowan Callick
Australia and Papua New Guinea are on the verge of agreeing on a $6 billion pipeline project that will fix a stabilising steel pin in the centre of the "arc of instability" running across Australia's north.
It promises to enmesh the two countries in an intimate economic alliance for the next 25 years. It comes as PNG prepares to celebrate its 25th anniversary of independence tomorrow - sore after being battered by corruption, crime and collapsing services through much of that period.
Mr Renagi Lohia, PNG's High Commissioner to Australia, described the pipeline as an "umbilical cord" connecting the two.
Mr Peter Botten, managing director of Oil Search Ltd, the PNG-domiciled company that has played a crucial role in bringing first oil and now gas into production, said yesterday: "We're in the endgame, no question about that. The final piece in the jigsaw is PNG's own equity participation."
This may be resolved at a crucial lunch scheduled between the two sports-loving prime ministers, Mr John Howard and Sir Mekere Morauta, in Sydney framed by the closing sessions of the Olympic Games on September 28.
The pipeline, running 3,500km from PNG's southern highlands, across the Torres Strait and down to Brisbane and absorbing 40 per cent of Japan's entire annual steel output, will be the biggest infrastructure project on Australia's east coast since the Snowy Mountains Scheme 50 years ago.
It will also comprise the final piece in the jigsaw, providing Australia's major centres with competitive sources of power in a vast grid. Within a few years, consumers in Sydney or Melbourne might contract PNG gas.
Mr Botten said: "The project represents another chance for PNG to get it right and reinvest its revenues in health and education" - after 84 per cent of previous resource revenues leaked away, according to the World Bank.
Dr Theo Levantis and Dr Tony Lawson, at the National Centre for Development Studies at the Australian National University, estimate that even if the project does not stimulate new industries inside PNG, and no domestic gas sales are made, it will boost real GDP by 12.6 per cent and government revenue by 10.5 per cent a year.
Senator Nick Minchin, the Minister for Industry, Science and Resources, said the project would bring "extremely significant economic benefits to both countries ... our strategic interest lies in the health of the PNG economy.
"We have indicated that we will do everything we can to facilitate its development, given that we have to be competitively neutral against other pipeline developments."
The chief competitor in delivering gas to the Queensland coast is the considerable resource in the Timor Sea.
Mr Jim Elder, Queensland's Deputy Premier and Minister for State Development and Trade, warned that "although PNG would create a cheap energy source running down the coast ... Timor keeps telling us they are closing the gap" in delivery timing.
"Whether the new power station planned for Townsville, say, is powered by PNG or Timor, that's up to the market.
"Our eggs are not all in one basket" - essential, he said, given the number of other big projects hanging off the introduction of gas.
The Queensland Government established the framework needed for the development of new gas fields, with its policy statement of last May that requires 15 per cent of the State's energy to be provided by gas by 2005, from an insignificant proportion today.
Mr Elder said: "The party which I would like to see more active is the Federal Government. It has been very slow in supporting the project, which is of national significance. If PNG gas doesn't take off, it will hardly be Queensland's fault."
Senator Minchin said Canberra had already provided considerable technical assistance to PNG on gas development. And it has placed about $100 million on the table to facilitate Comalco's proposal - still to be finalised - to build a smelter at Gladstone that would be a major gas customer.
"The sticking point," he said, "is that the developers say that it's not going to proceed without the PNG Government taking 30 per cent equity [the maximum allowed for under PNG legislation], and that the only way this is going to happen is for the Australian Government to bankroll it or act as lender of last resort. We have said that's not going to be easy."
PNG - recently awarded a $500 million structural adjustment program by international agencies, including a $133 million long-term loan from Australia - would need to pay about $725 million for 30 per cent of the gas project.
Canberra would be ready to consider a proposal, but no formal request has been made, the minister said.
He and the Treasurer, Mr Peter Costello, and the Minister for Foreign Affairs, Mr Alexander Downer, have already discussed such a possibility informally.
Mr Botten said that the Morauta Government - which has re-established warm relations with Canberra, after a rocky period with Sir Mekere's predecessors - was understandably cautious about making an approach in case it failed.
The developers - led by Chevron, together with Mitsubishi, Oil Search, PNG's resources vehicle Orogen, and with Exxon also now starting to play a prominent role - were consequently acting as facilitators in helping to resolve the complex issues involving PNG's equity stake, which will bring landowners and provincial governments into the frame.
Equity deals, though on a smaller scale, have helped ensure uninterrupted oil production for eight years, via a pipeline to the sea, alongside which the gas pipe would be laid.
But the size of the upfront cost of the gas project, with its massive pipeline, rules out the PNG Government's gaining a "free carry" from its partners, steadily funded out of forgone profits, as it did in earlier resource projects.
The gas would come initially from the Kutubu field, where its removal would have the handy by-product of stimulating oil flows, prolonging production from 2012 to beyond 2020. In its third year, gas production would also come from the Hides field.
Agreements have been reached with the 26 main indigenous landowner groups down the Queensland coast from Cape York to Gladstone, leaving Torres Strait talks to be concluded.
Mr Botten said that with the market for the gas substantially settled, the focus - "with all processes coming to a conclusion, one way or the other, before the end of the year" - was on establishing how much equity PNG would take, and how it would be divided up and financed.
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