Exxon Mobilizing Papua New Guinea

Via The Wall Street Journal, a report on a decision by Exxon Mobil Corp. and several other companies to proceed with a US$15 billion natural-gas project in Papua New Guinea which underscores the energy sector’s rising tolerance for risk as demand recovers in Asia. As the article notes:

“…Exxon Mobil said Tuesday it had approved the project, the largest-ever foreign investment in Papua New Guinea, pending finalization of financing and sales agreements to gas buyers. The company said those terms would likely be wrapped up by early next year.

The project has the potential to transform Papua New Guinea, an impoverished South Pacific nation better-known for jungles, violence and corruption, into one of the world’s newest significant energy producers. By some estimates the gas shipments, which would likely begin in late 2013 or 2014, would triple the country’s export revenue.

The project also would be a vote of confidence in a country with major untapped deposits of minerals, potentially opening the door to further investments.

But experts on Papua New Guinea warn about the dangers. A former Australian colony of six million people, Papua New Guinea is plagued by lawlessness. Roving gangs known as “raskols” have periodically terrorized Port Moresby, the capital, with machetes and other weapons.

The Economist Intelligence Unit in 2005 rated Port Moresby one of the worst cities in the world measured by stability, infrastructure and other indicators, behind Lagos, Nigeria, and Dhaka, Bangladesh. The country also is one of the world’s most corrupt according to Transparency International.

Papua New Guinea also has minimal infrastructure outside of Port Moresby and companies typically must negotiate terms with local landowners to gain access to resources—a knotty problem in a country with hundreds of ethnic groups and more than 800 languages. Experts say deals reached with tribal leaders run the risk of unwinding later. The Panguna copper mine on the island of Bougainville was shut down in 1989 after attacks on the mine and its staff amid a wider armed insurrection.

“There are multiple things that could go wrong” with the Exxon project, says Jenny Hayward-Jones, an expert on Papua New Guinea at the Lowy Institute, a Sydney think tank. “The risk of it being like every other mess in PNG is high.”

But Exxon Mobil has considerable experience in challenging environments and one of its partners, Australia’s Oil Search Ltd., long has had operations in Papua New Guinea. Other partners include Santos Ltd. of Australia, Nippon Oil Corp. and the Papua New Guinea government.

Exxon, with a 33% stake, is likely to contribute in excess of US$5 billion into the project. Oil Search is the next biggest partner, with a 29% stake. The government has nearly a 17% stake.

“I think people recognize there are inherent risks with PNG, but the combination of Exxon Mobil’s experience with complicated oil and gas projects and Oil Search’s experience on the ground is about as good a combination you can get,” says gas analyst Frank Harrisat consulting firm Wood Mackenzie.

Papua New Guinea also stands as one of the few places in Asia, along with Australia, that can promise large new supplies of natural gas when energy demand in the region is rising again. The International Energy Agency forecasts that Asia’s natural-gas demand will grow 3.8% a year through 2030. While the U.S. has a surplus of available gas, supplies are still fairly tight in Asia and buyers are scrambling to lock up supply.

In recent days, the Exxon Mobil project wrapped up deals to sell two million tons of gas annually to China Petroleum & ChemicalTokyo Electric Power Co. Exxon said it expects soon to finalize two more deals to underwrite its full capacity of 6.6 million tons a year. Corp. and 1.8 million tons a year to

Exxon Mobil officials agree the project will be challenging. The gas is located in remote areas and must be transported to the coast by a 190-mile, 32-inch pipeline that will traverse rugged terrain up to 650 feet above sea level. From the shore, it will then be transported by a 250-mile subsea pipeline to a gas-processing terminal before being shipped to customers in Asia.

“We’re in a rugged and remote area, we’re seismically active, the annual rainfall here is some of the highest in the world, and we’ve got very long supply chains,” Decie Autin, a manager for the project, said at a conference earlier this year.

Exxon Mobil spokeswoman Rachael L. Moore said by email that the Papua New Guinea government “is stable and has made significant progress recently in strengthening the legal and institutional systems.”

Attempts to reach the government for comment were unsuccessful. In a written statement issued by Exxon Mobil, Prime Minister Michael Somare welcomed the investment and said “cooperation between the public and private sectors will create value for the Papua New Guinea society.”

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