The push to build a gas pipeline from Papua New Guinea to north-eastern Australia is gaining momentum
Sydney Morning Herald, May 8
Just a pipe dream?
The push to build a gas pipeline from Papua New Guinea to
north-eastern Australia is gaining momentum. But should a vital energy
supply line be linked to the fate of our nearest neighbour? Sue Lecky
and Kate Askew report.
Last October, a delegation of executives from the Queensland energy company
Energex came face to face with the realities of doing business in Papua New
Guinea.
The scene was a gas plant nestled at the foot of the majestic Hides Mountain,
deep inside the country's remote southern highlands.
Hides is classic frontier land. The site of one of PNG's richest oil and gas finds.
It is also home to the colourful Huli tribespeople, famed for their elaborate wigs
and facial decorations.
The lush hillsides surrounding the gas plant are a patchwork of market gardens
tended by Huli villagers.
The team from Energex had been helicoptered in by Oil Search, one of the
owners of the Hides field and a key player in the push for a $US3.5 billion ($5
billion) gas pipeline linking PNG with northern Queensland.
Energex was a potentially valuable customer for the vast deposits of gas in
Hides and the nearby Kutubu fields.
But before the Energex executives had even made it through safety briefings
they found themselves swamped by tear gas wafting through the compound
gates - the result of police action to break up an overly zealous card game
among locals.
Here was a snapshot of every stereotype about business PNG-style.
But what loomed as a public relations nightmare turned to Oil Search's
advantage as the gates were thrown open and a crowd of Huli villagers
swarmed forward to greet the visiting mastas and speak with them about the
pipeline project.
As Oil Search chief executive Peter Botten recalls, "it was one of those life
experiences" for the Energex team.
Perceptions about investment in PNG still reflect the bitter experience of
Bougainville Island, and incidents of violence at the Porgera goldmine and
BHP's protracted dispute with OK Tedi landowners.
Oil Search and its partners have a particular interest in ensuring good relations
not just with the Huli tribes but with all landowners alongside that portion of the
2,655 kilometre pipeline to carry gas to the coast. The pipeline would then go
under Torres Strait and on to the central Queensland town of Gladstone.
If the pipeline goes ahead, Australia will for the first time be physically tying its
energy requirements to a Third World country - one notoriously politically and
geographically unstable.
That carries with it obvious risks, not the least of which is disruption to supply.
It is one thing for the operations of an individual goldmine to be interrupted by
an act of vandalism or terrorism.
It is quite another for the flow of gas fuelling power stations that feed industry
and homes in a neighbouring country to be severed.
And as the residents of Victoria know only too well, the continuity of the flow
of energy is vital.
The very fact that energy supply here could be hostage to completely unrelated
events, whether political, climatic or to do with land ownership issues, is
unprecedented for Australian consumers.
The pipeline partners - Oil Search, Santos, the US-based Chevron, Mobil,
Mitsubishi Oil, Orogen Minerals and the PNG Government itself - dismiss the
risk of interruption to supply from vandalism, at least, as minimal.
Botten points out that the pipeline will be buried underground alongside the
existing Kutubu oil pipeline, which has been in operation for eight and a half
years without incident.
The fact that landowners have a stake in the pipeline - albeit a small one -
should also go some way to discouraging insurgency.
There is also an economic risk associated with sourcing so much of our energy
requirements from offshore.
The most obvious risk is the detrimental impact on Australia's balance of
payments.
All of this raises the question of why the Queensland and Federal Governments
have thrown their weight and a combined $200 million behind the project.
The Queensland Government's enthusiasm - Premier Peter Beattie has
described the PNG pipeline as the most important project in Queensland for a
generation - reflects the potential of the project to unlock development
opportunities in the State's north.
Estimates put the number of possible new jobs created by the project at 5,000,
and the level of capital investment in the State's north between now and 2010
at $8.1 billion.
The pipeline - and new power stations that would spring up beside it - also
would solve energy continuity problems for the region, where development has
been hindered by unreliable supply arrangements.
According to forecasts provided by the project operator, Chevron, demand
for energy in Queensland is burgeoning.
It estimates that the annual average growth in demand for gas between now
and 2010 will be 3.5 per cent, compared with forecast total energy
consumption growth of 1.7 per cent a year.
At present, most of the State's gas supply is sourced from the Cooper and
Eromanga Basins, controlled by a Santos-led consortium.
Reserves from these areas, however, are not considered sufficient to underpin
demand into the next century.
Says Bill McLaughlin, group corporate affairs manager for AGL which, with
Malaysia's Petronas, will build, own and operate the Australian leg of the PNG
pipeline: "If we didn't bring gas in from PNG we would have to look at bringing
it in from the Timor Sea.
"There is gas left in Queensland but it is not sufficient to meet the long-term
demands for some of the large infrastructure projects that are planned,"
according to McLaughlin.
"Those companies are looking for 20-30 years of supply certainty. The only
way they can be guaranteed of that supply is for the gas to be brought in from
PNG."
Aside from $100 million in Queensland Government financial assistance
pledged to Comalco if it agrees to site a new $1.4 billion alumina plant in
Gladstone - ensuring a guaranteed market for PNG gas - State-owned
agencies such as Ergon and Energex are expected to commit to long-term gas
contracts.
These government-sponsored contracts could account for a sizable two-thirds
of the gas flow required to make the pipeline economically viable.
Government sources argue that aside from the economic benefits associated
with opening up the gas market to competition, the pipeline would place
State-owned power companies in a stronger position to capitalise on future
opportunities to supply southern States.
While under current plans the pipeline will go only as far as Gladstone, AGL's
pronouncement of a tariff 50 per cent lower than expected, changed the outline
of the project.
Several pipeline companies, including AGL, have expressed interest in building
an additional leg from Gladstone to Brisbane.
"Once the pipeline goes to Gladstone, it will go to Brisbane," according to
Deputy Premier Jim Elder.
Jumping in ahead of the pack, a consortium of companies which includes Oil
Search, Ergon Energy and NRG Asia Pacific has announced an alliance to
market PNG gas throughout Queensland.
A range of options are being canvassed. These include back-hauling gas to
Brisbane from Gladstone down an existing pipeline owned by Duke Energy.
The cost of installing spur lines is not prohibitive - as has been demonstrated in
the northern region of Western Australia - with new lines potentially taking gas
into regional centres such as Mackay and Rockhampton.
It is significant that, in January, Santos - with its monopoly increasingly looking
vulnerable to cheaper PNG gas - put aside initial reservations about the
pipeline to buy a strategic stake in the Hides gas field.
In the meantime, Santos's undeveloped Barrolka complex in south-east
Queensland, which would have provided the most obvious competition to
PNG gas, appears to have become a lower priority.
Analysts estimate that the Santos-led monopoly sells gas to its Brisbane
customers for around $4.25 a gigajoule, including the pipeline tariff.
AGL has set its tariff for foundation customers at 97.79c a gigajoule for
carrying the gas as far as Gladstone. Analysts say an additional $1 a gigajoule
would get gas from Gladstone into Brisbane.
Even with an estimated $2 a gigajoule charge to get gas from PNG into
Brisbane, PNG gas is still undercutting the existing monopoly.
"It brings gas-on-gas competition into Queensland, it opens up the region,"
says Elder.
The prospect of a more open gas market is likely to have been at least partly
responsible for the Federal Government's decision earlier this year to also back
the project with a pledge of $100 million in financial assistance for Comalco's
alumina refinery.
The pipeline, however, appeals at a Federal level for other reasons. For
starters, a healthy injection of 300 million kina ($219 million) - the amount
estimated in royalties that PNG will receive from the project - would go a long
way to bolstering the PNG economy and reducing its reliance on aid from
Australia.
Last year, the Australian Government devoted about $300 million to PNG in
foreign aid, or about one-sixth of its annual national budget.
"You should get the milk bottle out of PNG's mouth and establish a long-term
commercial relationship," says Orogen Minerals managing director Charles
Lepani, a PNG national.
"PNG and Australia can start cutting out foreign aid on the basis of a very
strong umbilical cord that is the pipeline ... it will have the long-term impact of
balancing our relationship, which then becomes more constructive and more
mature."
The pipeline has its critics.
Some in the industry claim alternative sources could yield enough gas to meet
on-going demand more cheaply to taxpayers. The most talked about
alternative is coalbed methane.
This is extracted by drilling holes deep below surface level into coal beds.
Gas pressure then builds up slowly until it flows at commercial rates.
While technology for coalbed methane has been proven to work well in the US
and Canada and while large reserves exist locally, there are very few
commercial operations in Australia.
As one industry commentator observes: "The problem is getting it out at a
sensible cost and making sure it is reliable."
In Queensland, BHP has a demonstration project underway at its soon-to-be
sold Moura coalmine.
Danny Price, of consultancy London Economics, believes that the PNG
pipeline as a stand-alone venture is uneconomic and argues that the potential of
coalbed methane and other gas reserves should be more fully explored.
"It [PNG] is a very expensive option and will require large up-front and
on-going subsidies to keep the thing going, not least of which will be the cost to
the Queensland taxpayer for having to bankroll the new power stations that will
have to be built to support the pipeline," he says.
"This is a big-project mentality. You can get the same big projects but at a
much lower cost with a local source such as coalbed methane, or alternatively
from developing existing fields.
"There are sufficient reserves for limited new supply but it requires
augmentation of existing pipeline. But those sorts of costs need to be set
against the costs of building a whole new pipeline."
While the future of the PNG pipeline is by no means a certainty, it appears to
have too much momentum now to be derailed.
Certainly there are powerful financial incentives for the various partners to
ensure it proceeds.
Finding a market for the vast reserves of gas in Kutubu would provide the
partners with an important second revenue stream.
At present the operators are being forced to reinject gas into the Kutubu
reservoir as part of the oil extraction process.
Says Chevron's John Powell: "We've got the gas that would otherwise be
stranded. We need to commercialise these reserves."
There are also technical implications if the gas is not extracted, which have
more to do with maximising returns from Kutubu's more valuable resource -
oil.
There is a view that by re-injecting the gas the rate of oil production is reduced.
The quicker the gas can be extracted, the more oil can be pulled out, the better
the operation's rate of return.
Hype surrounding the pipeline has been building in recent months, fuelled by a
series of announcements, including one that Australia largest petroleum player,
Woodside Petroleum, had come aboard.
Woodside, operator of the $12 billion North-West Shelf gas project off
Western Australia, has taken an indirect stake in the project with its decision to
stump up $118 million for a 15 per cent stake in Oil Search.
Viewed as being at a short arm's length from its major shareholder, the
international heavyweight Royal Dutch/Shell, Woodside's participation has
delivered much-needed backing to the project.
The most significant booster, however, came with the announcement in April
that Oil Search had reached agreement with the US oil giant Exxon to augment
gas supplies in Kutubu with reserves from the Hides field.
This development removed any uncertainty about the project partner's ability to
sign long-term supply agreements.
Based on Kutubu and the outlying Juha and P'nyang fields, the project's gas
reserves stood at about 3.5 trillion cubic feet of gas.
By bringing Hides into the equation, total reserves are closer to 8 trillion cubic
feet.
However, the pipeline sponsors must still turn existing memoranda of
understanding for gas supplies into formal contracts before progressing the
project to a bankable status.
Without those contracts a cloud continues to hang over the pipeline's economic
viability.
"The markets are the key," says Powell. "The preliminary contacts that have
been made have been extremely positive. There is a lot of good momentum
around."
There are four informal agreements in place representing between 100
petajoules and 139 petajoules of gas, which compares with the estimated
baseload that is needed for the project of about 120 petajoules.
The most significant of these is that signed with Comalco. Negotiations on the
terms of a formal contract have been protracted and Comalco recently has
been waving a Malaysian site option at the pipeline sponsors.
A decision on the location of the alumina plant is due next month.
Until formal customer agreements are in place, financing for the project cannot
progress. Even then, the process will not be straightforward.
Banks will not lend against the project without political risk insurance, which
covers such occurrences as civil war and asset expropriation, while also
covering currency risks.
The problem, according to some potential lenders, is that there are only limited
sources of political risk insurance for a project of this size.
Says one: "My negativity is mainly about the fact there is a lot of project
documentation still to be done before the financing can happen.
"You cannot underestimate how complex that financing will be because of the
country risk."
All this aside, Chevron is pushing ahead with an ambitious timetable aiming to
have the first gas flowing into Queensland by the second half of 2001.
If the momentum can be sustained and Chevron is able to meet its target, there
is little doubt that householders in northern Queensland will be keeping a much
closer eye on the political climate of our closest neighbour.
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