LNG's brightest star leads to poor Pacific Nation with cost edge

[SYDNEY] Papua New Guinea ranks among Asia's poorest nations. In the battered liquefied natural gas sector, it's one of the most promising. Ventures tapping the country's resources are attractive even after a 67 per cent collapse in Asian gas prices because development costs can be half those in neighboring Australia, the world's third-largest LNG exporter. Such are the market's prospects that Oil Search Ltd- which has operated in Papua New Guinea since 1929 - rejected an US$8 billion bid from Woodside Petroleum Ltd last month in what would have been the biggest energy acquisition in Asia Pacific.

The nation is a bright spot in an industry where canceled LNG projects litter the energy landscape from the Arctic to Africa amid a fuel glut. Buyers in Japan, the world's top consumer, will probably turn to the South Pacific nation when they need new supplies early next decade, according to FGE, a consultant to oil and gas companies and banks.

"By that time, if you're sitting in Papua New Guinea, you're better off than anywhere else," Fereidun Fesharaki, chairman of London-based FGE, said in a phone interview.

Plants there can break even with prices of US$6 to US$8 per million British thermal units, compared with about US$10 in the US and US$11 or US$12 for Woodside's planned Browse venture in Western Australia, according to Macquarie Group Ltd. Asian LNG has tumbled to as low as US$6.45 per million Btu from a peak of US$19.70 last year amid a surge in supply, especially from Australia.

The advantage for developers in Papua New Guinea stems from lower taxes and cheaper labor in the nation of about 7.5 million people, according to Credit Suisse Group AG. Along with natural gas, the nation also produces a sought-after light crude oil, offering a second source of revenue from LNG projects, the bank said.

The World Bank estimates that almost 40 per cent of Papua New Guinea's populace lived below the poverty line as of 2009. Gross national income per capita was US$2,030 in 2013, similar to Bhutan's. Australia's was more than US$65,000.

The country has 5.3 trillion cubic feet of proven gas reserves, according to the BP Plc's Statistical Review of World Energy. One trillion cubic feet is enough to heat 15 million homes for one year, according to the U.S. Department of Energy. The UK has about 8.5 trillion.

Oil Search is one of the keys to Papua New Guinea's LNG future. The company, which owns more than a quarter of the Exxon Mobil Corp.-led PNG LNG venture, is a partner in two other projects on the drawing board. One is an expansion of PNG LNG, which began production in 2014 with a capacity of 6.9 million metric tons per year. It's also part of a Total SA-run group planning the country's second gas-export plant.

Exxon and Total are considered by analysts as potential suitors for Oil Search, which rebuffed the Woodside offer as too low. The offer is "very competitive" and "fully-priced," Woodside Chief Executive Officer Peter Coleman said Thursday in Vancouver. The Perth, Australia-based company is considering a "modest" increase in its bid for Oil Search, the Australian Financial Review reported Wednesday, citing unidentified people familiar with that matter.

The Exxon and Total projects may be able to reduce their costs to about US$2,000 for each ton of capacity, compared with US$2,750 a ton in the initial phase of PNG LNG, according to Bloomberg Intelligence estimates. That was already less than five LNG developments in Australia, including US$4,048 per ton at Inpex Corp's Ichthys LNG, the data show. It could make Papua New Guinea financially viable despite low oil prices.

Oil Search says it expects PNG LNG to decide on the expansion plan by the end of 2017. Committing to the Total project - known as Papua LNG - the same year looks "very challenging," Managing Director Peter Botten said in August. These could slip into 2018, with the ventures starting by about 2023, FGE estimates.

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