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Chinese demand spurs LNG investment in Papua New Guinea

ExxonMobil and partners set to spend $9 billion to expand export capacity

A tanker loads LNG at ExxonMobil's PNG LNG plant off Port Moresby. (Courtesy of Oil Search)

DENPASAR, Indonesia Strong growth in gas demand from China is set to trigger a new round of major investment in cash-strapped Papua New Guinea.

ExxonMobil of the U.S. and Total of France, along with Australia-listed Oil Search, are expected to finalize plans next year for more than $9 billion in investment to expand export capacity of liquefied natural gas in the resource-rich South Pacific nation.

China surpassed South Korea in 2017 to become the world's second-largest importer of LNG behind Japan, and analysts predict greater-than-expected growth in gas demand will lead to expanded global production.

Total, on behalf of partners ExxonMobil and Oil Search, controls the undeveloped Elk-Antelope gas fields project in PNG's southern Gulf Province. Instead of being a standalone export facility, Elk-Antelope will be integrated with the existing ExxonMobil-operated export plant, a development known as PNG LNG, as part of a cooperative approach to save costs, said Chris Meredith, a senior upstream analyst at Wood Mackenzie.

The U.K.-based energy research company estimates that capital spending to develop the Elk-Antelope fields will be $6.1 billion, which would cover the upstream development of gas as well as additional production capacity at PNG LNG -- the country's sole export plant -- to process it.

ExxonMobil, Total and Oil Search will soon present their preferred development option to the PNG government, with final investment approval planned for 2019, Oil Search Managing Director Peter Botten told investors on Jan. 23. Botten said talks were continuing with Total and ExxonMobil on core project financing and marketing arrangements for the gas.

Elsewhere in PNG, ExxonMobil, with joint venture partners Oil Search and JXTG Holdings of Japan, has found more gas at its P'nyang field in the Highlands mountain range. This will be used to underpin an additional expansion of ExxonMobil's PNG LNG export plant, which currently has an annual capacity of 7.9 million tons.

Analysts estimate that capital spending for this expansion, which will be developed simultaneously with the Elk-Antelope fields, will be between $2 billion and $3 billion.

PNG's total proven gas reserves stood at 7.4 trillion cu. feet at the end of 2016, far less than Australia's 122.6 trillion cu. feet. But some analysts estimate that PNG has enough gas resources to support increasing export capacity to as much as 20 million tons per year within the next decade.

PNG is already the fourth-largest LNG exporter in the Asia-Pacific region, and exploration is heating up. There are between 65 and 70 active exploration permits in the country, and at least as many active applications. Explorers are not just tapping the Papuan Basin in the jungles of the Highlands, either. The Western and Gulf provinces are receiving more attention, as are shallow and deep-water acreage in the Gulf of Papua. ExxonMobil and Total have both rushed to snap up deep-water acreage.

China, South Korea and India are driving global LNG demand, which is expected to absorb oversupplies in the market by the early to mid-2020s, according to research company Bernstein. Given the five-year lead time for new production capacity to be built, approvals for new projects are needed soon. Bernstein expects buyers, whose commitments help underpin financing for projects, will have to begin committing to new supplies this year.

"Only one new project was sanctioned in 2017, and we desperately need more projects to reach a final investment decision to help meet the post-2020 shortfall," said Tony Regan, managing director of DataFusion Associates, a Singapore-based LNG consultancy.

Bernstein believes that projects in Qatar and PNG, which have the lowest costs for new supply, have the best chance of moving forward.

Others believe it is too soon to say whether China's strong demand for LNG will trigger a new expansion cycle in the industry as early as this year. "What many planned projects need is buyers to commit to purchase LNG on a long-term basis, and there is little evidence as yet that this is happening," said Andy Flower, an independent LNG consultant.

"Buyers in China are probably waiting to see more evidence that the growth in demand for LNG will continue," he said.

And yet in early February, U.S.-based Cheniere Energy announced the first long-term contract to export LNG to China. China National Petroleum Corp., or CNPC, will purchase roughly 1.2 million tons of LNG a year through 2043.

A large part of China's surplus demand last year was filled by Qatar through fresh sales and tweaks to existing long-term contracts. But Qatar, the world's biggest LNG exporter, has all but sold out of winter supply after committing spare output to China and South Korea, a development that could tighten Asia's gas markets, traders have warned.

Beijing expects demand to rise 8% in 2018 over last year to 41 million tons as the country continues its shift from coal to gas, a move aimed at eliminating the toxic smog that often covers many of its cities.

According to Flower, Chinese demand for LNG must have given sponsors of new liquefaction capacity, including those in Papua New Guinea, increased hope there will be demand for their planned output.

China's own gas output rose 8.5% last year, according to data released in February. This year, China plans to boost its annual LNG import capacity to 62.4 million tons, up from 56.4 million tons in 2017. National oil company China Petroleum & Chemical, known as Sinopec, has just opened a new terminal in Tianjin, while private gas distributor ENN Energy is commissioning a new facility in Zhoushan. China will overtake Japan as the world's largest importer within 10 years, according to Bernstein.

But Regan of DataFusion believes there will still be fairly little interest among buyers in signing the long-term supply contracts that new LNG export plans need in order to move ahead. Instead, project sponsors might have to develop merchant plants, thereby taking the risk of proceeding without long-term purchase agreements, he said.

"Owners will have to put more equity into the project, but this may suit the big guys like Shell, ExxonMobil and Qatar Petroleum. They can afford to take the risks, and it will kill off the weaker projects," Regan said.

For PNG, more LNG exports would give a much-needed boost to government coffers. The country overspent for several years prior to 2014 on the assumption that its maiden LNG export plant would provide large revenues. But global oil prices, to which LNG sales are indexed, collapsed in 2014, the same year the ExxonMobil-led plant began operating.

The country's debt at the end of 2018 is estimated to reach 25.8 billion kina ($7.8 billion), or 32.2% of gross domestic product, according to government data.

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