Gas Pipeline Owners Take Crucial Step

Papua New Guinea's prospects are beginning to look up, after years of a shrinking economy and rising crime and corruption.

The country's most important confidence booster is the crucial step taken in late June towards the building of a long-planned A$3.5 billion gas pipeline from the Southern Highlands of Papua New Guinea to Brisbane in Australia.

Key executives from the four owners of the Highlands Gas Project met in Melbourne and agreed to take back to their boards a $100 million budget and plan for front-end engineering design (feed) for the pipeline, which is likely to take 12 to 18 months.

At the same time, the joint venture is seeking to pin down a final foundation customer, the refinery at Gladstone of Queensland Alumina, which is owned by Comalco and Alcan, and recently completed the doubling of its capacity. About 20 other customers are lining up to talk to Highlands Gas once the engineering design is announced.

The support expected from the boards of Oil Search Ltd (54.2 percent), the operator ExxonMobil Corp (39 percent), the PNG government's Mineral Resources Development Corp (3.4 percent, on behalf of landowners) and Nippon Oil Exploration (3 percent) will, in effect, signals the project's go-ahead after years of uncertainty.

This will be a huge boost for the board of Oil Search, which lost its chairman, Trevor Kennedy, after 10 years, last November, when he quit seven boards following The Australian Financial Review's reports on a Swiss bank scandal involving flamboyant, jailed Sydney stock broker Rene Rivkin. He was replaced by the recently retired Rio Tinto Australia managing director Brian Horwood.

Alternative projects for supplying Australia's hungry market, which have involved the Timor Sea, the Cooper Basin and coal-seam methane in Queensland, failed to capitalise on the problems that have been associated with the Highlands Gas project in the past few years. ExxonMobil‹whose vice-president business development gas and power, Robert Franklin, chaired the crucial meeting in Melbourne last Wednesday‹is looking to tie up the major markets, locking out Western Australian gas for the next decade.

The project gained a second wind after the January 1 fire at the Moomba gas plant in South Australia, which disrupted production there for four months.

It was also strengthened, steadily, by the purchase by Oil Search of ChevronTexaco's PNG oil assets last July for $141 million.

This move enabled Oil Search to dominate PNG's oil industry, and has improved the gas project's economics by transforming it into more of an integrated gas and oil play, and will enable production from two gas fields‹Kutubu and now Hides‹to come on stream from day one.

Queensland's massive Aurukun bauxite deposit on the west coast of Cape York is another factor in the revival of Highlands Gas. The Queensland state government is pressing for its development, having taken the lease back from the French firm Pechiney. If value is to be added, as Queensland wants, this would require a massive energy input, which the PNG pipeline would be in a strong position to supply.

The PNG government retains the right to buy, at market value, 22.5 percent of the Highlands Gas Project, which would mean a pro-rata reduction in the other owners' stakes.

Francis Kaupa, managing director of the PNG government's MRDC, a veteran engineer in the country's resources sector, who attended the executives' meeting said: "We've argued for some time that once we commit, that certainty will attract more customers to commit, too. Once we go to feed, it would be hard to stop the project going the full way. That will be a red letter day for PNG." Since independence from Australia almost 30 years ago, Papua New Guinea has relied for its survival on mining and oil, which have provided 80 percent of its revenues.

But through the 1990s the industry's prospects turned bleak from a combination of extra taxes, corruption, crime, political uncertainty and global rationalisation. Explorers looked elsewhere.

Bougainville Copper had closed forever due to civil war. The three biggest remaining mines, Porgera, Misima and Ok Tedi, had seen their best days. And the oil fields in the Highlands were starting to run down.

But suddenly the outlook is much brighter for the industry and the country.

The four-year national depression has ended and PNG is starting to grow again economically. The government, led by founding father Sir Michael Somare, has received cautious approval from the private sector.

Canadian junior miners and South African majors‹like Durban Roodepoort Deep, which is also taking over the Emperor gold mine in Fiji‹are acquiring exploration tenements. Ok Tedi, now PNG-owned, has taken on a new lease of life since BHP quit. China is set to invest A$855 million in the Ramu nickel mine. An oil refinery has been built in Port Moresby.

And now the giant project that dwarfs the whole economy looms: the $3.5 billion gas pipeline across the Coral Sea to Brisbane.

The formal announcement of moving to front-end engineering design would provide a huge confidence boost, not least for Sir Moi Avei, the minister responsible, who has been plugging the project for years.

Greg Anderson, executive director of the PNG Chamber of Mines and Petroleum, told Islands Business recently that the gas pipeline would underwrite the hydrocarbon sector for the long term, and would open the prospect of new domestic industry onshore.

Agriculture, PNG's dominant employer, is also bullish. Vanilla has become a new wonder crop, and palm oil is prospering, with leading producer New Britain Palm Oil forecasting a healthy pre-tax profit for 2004 of $A54 million.

But Australia's Export Finance and Insurance Corp warns in its latest Market Watch report that "governance and law and order problems plus political instability act as big brakes on entrepreneurial risk-taking and growth." The shift to preferential voting, requiring candidates to cooperate rather than compete, as demonstrated in four peacefully conducted recent by-elections, is one answer.

The expected approval by PNG's Parliament in early July of the $A850 million Enhanced Cooperation Programme with Australia is another.