P'nyang gas deal highly bullish for PNG LNG exports: Fitch Solutions
The signing of the P'nyang gas deal in Papua New Guinea (PNG) is highly bullish for the country’s LNG exports outlook, Fitch Solutions said in a report.
“The breakthrough for P’nyang after years of delays is highly bullish for PNG, given its dependence on revenues generated from exporting its hydrocarbon resources,” the report said. “According to the Extractive Industries Transparency Initiative (EITI), the extractive sector continues to be pivotal for PNG despite limited attempts at economic diversification, accounting for 8% of the government’s revenues, 28% of its GDP and 88% of total exports.”
In February, the PNG government and ExxonMobil reached a long-delayed agreement to develop the P’nyang gas field. The plan to develop P’nyang was initially a part of a three-train expansion for the existing 6.9mn metric tons/year PNG LNG export terminal at Port Moresby that was proposed in 2018, along with TotalEnergies’ Elk-Antelope gas field (Papua LNG).
However, the plan had suffered years of delays due to the inability of key stakeholders including the new PNG government under James Marape and Exxon to agree on financial terms. In contrast, the plan for Papua LNG gained the go-ahead in 2021, with TotalEnergies believed to have made several concessions in favour of the government, Fitch Solutions said. Papua LNG will see two additional LNG production trains each with a capacity of 2.7mn mt/year being built between now and 2027, nearly doubling the capacity at the existing PNG LNG terminal.
P’nyang will underpin the addition of a 2.7mn mt/year capacity LNG production train at PNG LNG. Together with additions to be made from Papua LNG, this will see PNG’s LNG export capacity increase by some 117% between the two projects.
“PNG's total LNG export capacity after factoring in Papua LNG and P'nyang is forecast to be 15mn mt/year, based on current known plans for each of the projects,” Peter Lee, senior oil & gas analyst, Fitch Solution told NGW.
The proposed development timeline for P’nyang is for activities for it to start after the start of gas production at Papua LNG. The latter is due to come online in 2027. A final investment decision for P’nyang is expected immediately after in 2028, followed by about three to four years of construction activities. This will mean the first gas from P’nyang will only materialise after the end of 2031, even under the most optimistic of scenarios, Fitch Solutions said.
P’nyang secures highly favourable terms for the government
According to Fitch Solutions, the agreement for P’nyang secures highly favourable terms for the government, including a stake-take of profits of 63%, considerably higher than 49% and 51% agreed for PNG LNG and the Papua LNG project, respectively, and a production levy of 3%, also higher than 2% for Papua LNG, and a domestic market obligation of 5%.
“This is in line with prime minister James Marape’s insistence on better returns from natural resource project negotiations, as part of his broader promise to ‘take back PNG’ from the hands of foreign investors,” the report said.
In addition to a higher share of profits, state oil and gas vehicle Kumul Petroleum will exercise its rights to acquire a 32.5% interest in the project. In response, Exxon will reduce its holdings by 12% while interests held by the other project partners Santos and JX Nippon will also be reduced proportionately.
Strong growth in gas output
Among Asia’s five net LNG exporters, PNG is set to see the strongest average annual growth in gas production over the next decade, while growths in others stabilise in the lower single digits or even begin to decline.
“The main driver of the strong gas production growth forecast in PNG will be these new projects coming online and ramping up to optimal output rates, with a strong surge in regional LNG demand providing the incentive for production to remain elevated,” Lee said.
China eyes PNG gas
China is looking for alternative LNG sources, more so as it attempts to rein in the overdependence on Australian LNG, and also to offset declining and oftentimes unpredictable flows from Central Asia and Myanmar.
According to Fitch Solutions, PNG’s LNG relations with China could deepen over the coming years, as the latter’s dependence on gas increases as part of the national decarbonisation and clean fuels transition. The two are believed to have agreed to deepen LNG relations on the sidelines at the Winter Olympics that was held in February, during which Chinese premier Li Keqiang encouraged Chinese firms to increase investments into PNG’s oil and gas sector, and expressed interest in off-taking future LNG from Papua LNG and P’nyang expansions.
“China, through Sinopec, did mention an interest in getting more involved in upstream oil and gas projects in PNG. As indicated in our report, Chinese firms, in general, were also encouraged to invest in PNG's oil and gas sector. It's possible for Chinese firms to pick up stakes in PNG gas projects including those still in the exploration phase,” Lee said.
Lee added that it is still unknown if Chinese companies will farm into the three main LNG exports projects, as no partner has indicated an interest in shaving down their interests and as gas exports from PNG continues to be highly lucrative.
“Acquiring a share of interests held by the government is possible although not likely, as the PNG government remains keen to control a larger share of, and in turn, acquire a larger share of profits, its resource projects,” Lee added.
Constructive outlook for Asian LNG demand
Lee said that the outlook for LNG demand growth across Asia is still constructive, with many having identified gas as the fuel to replace coal and lead domestic energy transition efforts.
“And given that gas production in many has stalled or declining, LNG imports have to be sought, although this, in turn, exposes the region's markets to higher prices and import dependence. At the moment, we are forecasting LNG prices to remain elevated through to 2025, which is when we expect global supply additions to accelerate,” he said.