Papua New Guinea pipeline project: From Oil Search Q3 report
Report To The Australian Stock Exchange, October 29
PNG to Queensland Gas Project
Highlights:
Solid progress has been made in bringing the large PNG to Queensland gas project to commercial reality, with the signing during the September quarter of conditional gas sales agreement with Ergon Energy, representing customers primarily in Townsville and Gladstone. This follows the signing of an agreement with Energex for supply of gas over 20 years to customers in Gladstone and Brisbane area. Front-end engineering and design work commenced in August, with a material increase in activities, including preparations for a marine survey of the pipeline route planned for the last quarter this year
PNG to Queensland Gas Project
Full text
Further solid progress was made during the September quarter to bring this project to commercial reality. Following the signing of a conditional gas sales agreement with Energex for the supply of up to 130 pj per year over a 20 year period to customers in Gladstone and SE Queensland, a second conditional supply contract was signed with Ergon Energy in September. This contract, to supply customers primarily in the Townsville and Gladstone areas, is for up to 53 pj per year for 20 years, with a firm volume of 1060 pj committed over this time.
These contracts represent production volumes of between 400 and 450 mmscfd, with option volumes adding up to a further 135 mmscfd. These volumes are likely to be sufficient to underwrite an attractive economic project, subject to formalising capital costs and fiscal terms for the development. A key focus for all stakeholders is the confirmation of these contracts with back-to-back customer arrangements between Energex, Ergon and various gas users. The Queensland Government is presently undertaking a due diligence process on the contracts signed between producers and their energy companies, Energex and Ergon, prior to giving shareholder approval for these contracts. This is expected to be completed in November 1999. It is evident to all stakeholders, gas suppliers, customers and governments that appropriate management of electricity generation capacity, provided by gas and coal, is required, where both important energy industries can co-exist.
It is also clear that gas-fired electricity generation is cost competitive with coal, whilst on environmental grounds gas generation is far superior. Analysis from various published sources indicates that it will be extremely difficult for Australia to meet its objectives, under the Kyoto Accord for greenhouse gas emissions, if coal-fired electricity generation is the only available energy source to meet Queensland growth requirements. It is inevitable that emission controls and associated costs and taxes will be introduced in the coming years and it is recognised by governments and project stakeholders that appropriate management of these State and national issues is required. Material discussions with all concerned parties have taken place and we remain confident that an appropriate management plan will be implemented in the coming months by government where both coal and gas can appropriately co-exist.
Visits by the Prime Minister of Australia to Papua New Guinea in early October highlighted the importance of the PNG to Queensland Gas Project to both countries. Both governments reiterated their strong support for the project and arranged a number of meetings, including those between the Federal and Queensland Governments and PNG representatives, to facilitate the development under their Tripartite Memorandum of Understanding.
A number of reports by the Australian National University, Econotech and ACIL were completed during the September quarter that highlight the massive impact of the project on PNG, Queensland and Australia. The PNG to Queensland Gas Project is large on a world scale, with up to US$3.5 billion invested. Under conservative market growth projections, it is anticipated that over K1 billion per year in export revenues will be derived in PNG, with up to K4 billion possible, if local gas based industries are developed. The project is estimated to generate up to 2800 permanent jobs in PNG with an increase of at least 16% in GDP to 2010, so going a long way to underwriting PNG?s economy over the next 20-30 years. The project has the ability to fundamentally change the relationship between Australia and PNG, with a material strengthening of the economy in PNG, whilst providing a potentially economically healthy and stable neighbour to Australia?s immediate north. This is seen as especially important after recent events in the region.
The project also has a massive impact in Queensland, especially in the north of the State, where industries are developed in this resource rich area. Cumulative capital expenditure is estimated to exceed A$6 billion to 2010, with recurrent expenditure likely to exceed A$2 billion per year. The annual value of production from gas and gas based industries is estimated to be above A$3 billion, with over 3,000 jobs created in the Gladstone and Townsville areas. Commonwealth receipts are estimated to exceed A$280 million per year from this project and associated industries. This project is clearly of national importance to both countries.
Copies of the reports on the impact of the project on PNG and Queensland will shortly be posted on our company web page.
Following signing of conditional gas sales agreements with Energex and Ergon, the project sponsors commenced full front end engineering design which will provide detailed engineering and cost data to facilitate economic analysis and confirm construction timetables.
Preparations are also being made to commence a marine survey for optimal pipeline location. Detailed reservoir analysis for the deliverability of gas from the various fields involved in the project is also being undertaken, in conjunction with development of existing oil fields, to ensure that an accurate view is taken of the amount of oil, condensate and LPG recoveries that will be produced as part of this project. This has strong economic impact on the project.
The PNG to Queensland Gas Project is a massive project, with over 20 stakeholders in the upstream, customer base and governments. There are many outstanding issues yet to be resolved prior to this project becoming firm, however we remain confident that the issues are all manageable, especially given the importance of the project to both countries.
We expect to see progress on the following issues in the next three months:
Shareholder approval and confirmation of gas contracts is a major priority, along with a government plan to manage the electricity generation business that allows both coal and gas generation to proceed. Policies that encompass environmental objectives are also seen as important.
Finalisation of all access principles between producers and APC for the transportation of gas in Australia. Given the importance of the project, we remain confident that appropriate accommodation of tax reform proposals in Australia will not have a detrimental effect on the project economics.
Material progress between various field groups to optimise co-operative and cost efficient development of the fields involved in the project. This should maximise project economics for all the parties. Material discussions on these aspects are expected to continue in November.
Continued progress on finalising fiscal terms in PNG that confirm project viability, along with a co-ordinated approach on financing and project configuration for the PNG portion of project infrastructure.
Continued progress on confirming the abundant market opportunities that still exist in Queensland, not presently covered by the Energex and Ergon contracts. There will also be further progress in defining development opportunities for industry in PNG.
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