Commentary by: Michael McWalter
Michael McWalter reflects on natural gas utilisation in Papua New Guinea with reference to the United Kingdom, his country of birth, and explains the difficulties of deciding how to exploit this important natural resource for the benefit of the Nation.
Early Gas Supply in the United Kingdom
When I was a child in the United Kingdom in the 1950s, my mother made delicious fruit cakes in our kitchen oven. It was fuelled by gas, but not natural gas, nor Liquefied Petroleum Gas (LPG) that we buy nowadays in a pressurised steel bottle. The gas was town gas made from the coking of coal in the local gasworks. Every house in our street had piped gas supply, as did the whole town and every town across the country; only rural homes and farms used LPG. The United Kingdom had no reservoired natural gas at that time. The United Kingdom despite being economically battered by the Second World War was still a highly-developed nation and sought to deliver energy to everyone by the supply of town gas.
The making of this gas involved the heating of coal in the absence of air to a temperature of about 1,000 degrees Celsius. This gave rise to coke, which is almost pure carbon, and various liquid and gaseous products. A typical coking operation produced by weight: 80% coke; 12% coke gas; 3% tar; and 1% light oils. Up until the 1960s, in the United Kingdom almost all gas for fuel and lighting was manufactured from coal. This town gas was primarily methane with other hydrocarbons, and carbon monoxide and hydrogen. It had a gross heating value of about 18 megajoules per cubic metre (MJ/CM) as compared to pure methane, which has a gross heating value of 39.8 MJ/CM.
Coal was our main fuel in the UK for many years, but it was ever so dangerous to mine and dirty to use. Its burning released abundant particulates, toxic acid gases and, of course, carbon dioxide. It provided our early gas supplies in the form of town gas primarily for lighting, cooking, and industrial fuel. Coal gas alongside coal was born out of the British industrial revolution. Yes, indeed, even our street lights were fuelled by town gas, and they were lit every evening by the lamplighter; it was quaint, but decidedly Victorian. Town gas was supplied to households via municipally-owned piped distribution systems.
In the United Kingdom, the discovery of large reserves of natural gas led to the expensive conversion of the burners of most of Britain's gas cookers and gas heaters during the 1970s. This conversion was due to the leaner composition of North Sea gas, which had a greater proportion of methane and less inert gases within it than coal gas; it thus had a much higher heating value.
A feature of such an early gas industry was railway trains hauling coal around the country from the coal fields where it was mined to municipal gasworks. Located adjacent to these gasworks there were massive and ugly containers called gasometers to provide for storage of the gas at ambient conditions. The volume of the container followed the quantity of stored gas, moving up and down with pressure coming from the weight of a movable cap. They were clearly an eye-sore and potentially very dangerous.
The Switch to Natural Gas
With the advent of natural gas supply from the North Sea, the UK town gas plants were abandoned and users were all supplied with reticulated natural gas through a National Transmission System (NTS). This was developed incrementally over time between the 1960s and the 1980s. This discovery of large accumulations natural gas transformed our lives and society. The NTS is still being augmented with feeder pipelines and spur pipelines, and transmits natural gas around the United Kingdom in large diameter high-pressure pipelines. It now comprises over 7,600 kilometres of welded steel gas pipelines. This system not only brings natural gas ashore from the North Sea gas fields, but also receives imported Liquefied Natural Gas (LNG) at three terminals from various exporters around the world, generally from within the Atlantic area.
Natural gas is thus readily available in the UK for residential use for cooking and home heating, commercial applications, industrial heating and chemical use, and for power generation, and coal is no longer mined in the UK. Of the UK’s total annual energy need (2023) of 6.95 ExaJoules (equivalent to 1.93 trillion kilowatt hours), some 33% is supplied by natural gas. This gas usage equates to about 2.17 trillion standard cubic feet of gas (TCF) per annum. One may consider this amount versus the development of the gas fields in PNG for LNG export. The PNG LNG Project seeks to produce about 11 TCF over more than 20 years of project life which would be enough to supply the UK with natural gas for just five years.
Lessons for PNG
This story of UK’s use of town gas born from an intensive coal industry with plentiful supply of domestic coal for carbonisation in gasworks, and the UK’s progression to the use of natural gas using appropriate technologies may have lessons for PNG, though not exactly the same, but perhaps indicative. It is a story of necessity, improvisation, and technology applied with much planning to recoup, sustain and grow a developed economy. Whilst ingenious at times, it has always been one of pragmatism and economic utilisation of domestic resources.
The finding of several large accumulations of natural gas in Papua New Guinea over twenty years ago came at a time when PNG’s energy demand was quite meagre due to a lack of commercial and industrial development and the preponderance of people living in the rural environment in a subsistence economy. This is somewhat different to the UK which endured an industrial revolution from the late 18th century well into the 19th century, which brought about innovative mechanisation and deep social change. This process saw the invention of steam-powered machines, which were used in factories in ever-growing urban centres, and the emergence of coal as the dominant energy source providing 95% of the UK energy needs in 1905, including its town gas supplies.
This begs the question: where is PNG’s industrial revolution, and how can PNG develop its economy based on its natural gas resources? Unlike Europe, Papua New Guinea is not generously endowed with vast coal deposits, but we do have substantial gas accumulations. Can we use that gas as energy to foster and fuel National development? PNG is not like the UK now, nor even the UK of the 1960s. PNG is almost twice as large in area as the UK, and currently has just about 20% of the UK’s population. The UK is a developed economy with high socio-economic living standards in a well-organised welfare State, with ample infrastructure. PNG is a struggling developing Nation emerging from isolation of thousands of years in a rural subsistence culture with extensive tribal connections, and with little infrastructure, but with enormous aspirations to embrace better living standards. The task for the UK is powering and maintaining an established lifestyle of modern residential living, commerce and industry, whereas the task for PNG is primary development of its people through the provision of health and education services, governance, and agricultural, industrial and infrastructure development - transitioning from the former subsistence culture to modern living.
The opportunity provided by the discovery of natural gas accumulations in PNG is to fuel that development and transition. Natural gas can be used in two ways. It can be exported and sold for cash which can underwrite national goals, and/or it can be used as a direct ingredient in national development to make fertilisers, make electricity, provide industrial heating, displace harmful biomass use, make chemicals, etc. An impediment to such use is the need for substantial investment and the realisation of a price for that gas to the gas producers that will enable their exploration, development and production efforts to be rewarded. If the petroleum fiscal regime is focused on the collection of resource rents to fill the Treasury and a consistent desire to just make more and more money, it will be hard to encourage domestic utilisation of natural gas. It is, of course, for Papua New Guinea and its Government to lead the way in the choice of the use of its natural resources, such as natural gas, which, unlike gold, does not just represent monetary value, but does represents energy to develop a Nation.
The point that I wish to make here is that energy fuels development as was the case in the UK’s industrial revolution and its reconstruction after the Second World War. Coal replaced the water mills of the early industrial revolution, whilst natural gas from the North Sea replaced coal and eventually fuelled growth in the latter part of the 20th century. Both the coal and the natural gas supply were from local sources obviating the need to finance imported fuel. The UK used its own energy, as dirty and foul as it may have been at times. Alas, the UK now faces the problem of depletion of its gas reserves upon which it has depended for the last 50 years, and increasingly, the UK is importing Liquefied Natural Gas (LNG) at great cost from exporting nations in the Atlantic basin.
Whilst LNG consuming nations provide the market for LNG exporters like PNG, one has to ponder what gas might be left for economic development in a nation such as PNG when LNG exports have consumed the bulk of the reserves. This is a salutary lesson for any nation that commits to any gas development. We can produce and export LNG to make money, but then that money has to be dedicated to national development, and certainly not flittered away or wasted on servicing international borrowings. Then, as development progresses and energy demands grow, what will we use to energise our growing economy?
A measure of the durability of a nation’s natural gas production is the gas reserves to gas production ratio (R/P ratio) measured years. If we assume that overall gas production in PNG (currently dominated by the PNG LNG Project) is an average of 1,300 million standard cubic feet per day (MMSCFD) and that the proven and probable gas reserves are around 27 trillion standard cubic feet (TCF), the R/P ratio for PNG is about 58 years. When we add the production from the imminent Papua LNG Project, aggregate natural gas production will rise to around 2,200 MMSCFD, reducing the R/P ratio to just 34 years.
Of course, the gas fields supplying the PNG LNG Project have been producing for ten years already, and the Papua LNG Project has yet to make a Final Investment Decision and commence construction. The P’nyang gas field development will likely take-up ullage in the PNG LNG Project infrastructure. However, it does seem the clock is already ticking, and that PNG’s gas resources are being rapidly depleted. There is nothing intrinsically wrong with that, provided PNG receives it just and agreed return on the development of its gas resources and that the money earned wends its way into national development. If an active and prosperous gas industry is promoted, there will surely be more large gas accumulations that will be discovered; one might hope that such might prolong PNG’s age of gas, and hopefully fuel the Nation!
PNG Energy Use
PNG’s energy usage is very modest, to say the least. We have all heard about various aid programmes seeking to address the chronic lack of penetration of electrical supply to the people of PNG, such as the USAID Papua New Guinea Electrification Partnership (PEP). As of 2020, approximately 15% of the PNG people had access to electricity through the national grid, a modest improvement from just 2.6% in 1996, but access to electricity remains very low indeed by global standards. Grid connection varies significantly between urban and rural dwellers with an estimated 40% of urban households being grid-connected while only an estimated 11% of rural households are connected.
USAID’s January 2022 report: Papua New Guinea Electrification Partnership: Off-Grid Market Assessment cites that an estimated 60% of the population owns at least one off-grid solar product, such as a solar home system or solar lantern. Solar may be appropriate for disparate rural societies, but it is not likely going to fuel urban-based industry and its vast needs without extensive transmission and storage infrastructure, and the associated development costs.
Little of PNG’s currently-produced natural gas is used for domestic purposes. PNG seems to have followed a path of large-scale commercial exploitation of its natural gas resources based on export of the gas as Liquefied Natural Gas to the energy-deficient developed economies of East Asia. This is essentially like cash-cropping: growing a crop for its commercial value, rather than for use by the grower. PNG has done little to develop its natural gas resources for its own use. However, the very first gas production at the Hides gas field in 1991 was indeed a domestic utilisation project to provide gas to fuel the electrical power plant of the Porgera Gold mine, nowadays rated at 75 MW.
The Hides Story
The Hides Gas Project was truly a domestic utilisation project that mitigated the import of fuel oil for the mine operations and the very expensive and difficult transport of such fuel up the Highlands Highway to the mine in Enga Province.
The first licence granted in Papua New Guinea by the Government for the development of an oil or gas field was Petroleum Development Licence No. 1 to British Petroleum and Oil Search Ltd in what was then the Southern Highlands Province (now Hela Province) on 27th September 1990 for the small-scale development of the Hides gas field. The Hides gas field is a large gas field discovered by British Petroleum in 1987, that was subsequently shown to hold as much a 7 trillion standard cubic feet (TCF) of gas.
At that time, the large Porgera gold and silver mine in Enga Province was being developed by Placer Dome and its subsequent operations were forecast to have enormous energy requirements. The usual method of supply would have been by electricity generation using imported diesel fuel transported into the interior of the Highlands by road all the way from the port of Lae in Morobe Province, a distance of 654 kilometres. This was a formidable and costly journey making fuel very expensive by the time it reached Porgera.
A clever scheme was devised by BP and Placer Dome in collaboration with the Dept of Minerals and Energy to use local natural gas from the Hides gasfield to fuel gas turbine-powered generators located at Nogali next to the Hides gas processing plant, and to transmit the electricity along a 75-kilometre transmission line to the mine site. Since 1991, about an average of 14 million standard cubic feet per day (MMSCFD) have been produced to provide fuel for power generation of over 50 MegaWatts (MW). The elegance of this scheme was that it has used Papua New Guinea’s hydrocarbon resources for domestic and local use, and voided the import and costly transportation of liquid fuels from overseas. It has thus saved foreign exchange, reduced project operating costs, and advanced the profitability of the Porgera Project, and so enabled improved tax revenues to the State.
It thus made clear economic sense, but it was to support another extractive industry project, in this instance, the Porgera gold mine, rather than broader economic and human development. Synergies were not developed to build upon this base load and commence other usage for residential, commercial and industrial usage. Perhaps, it was too easy to say that the gross lack of development of the people and their economy at that time did not warrant additional offtake of gas for electric power generation for non-mine community use. However, were one to commit to such a project today, one would most likely negotiate a domestic offtake agreement for such non-mine community use.
It is always difficult to foresee electrical power demand especially in a situation of primary development. Which comes first, the demand, or the market? One might say that economic growth and human development is inevitable when people are emergent from customary living that has endured for thousands of years into modern times, and that having a base load such as the Porgera mine power supply should have warranted more foresight for local electricity supply. Only now are people realising that there may indeed be a substantial and growing demand for electricity in the Highlands of PNG where development ensues at a pace. Such foundations of economic development are not necessarily about profit, but about making the best use of the endowment of natural resources that PNG has.
Gas-Fired Power Generation for Port Moresby
In 2001, the Dept of Petroleum and Energy commissioned a study from Gutteridge, Haskins and Davey Pty Ltd of Australia called the Port Moresby Pipeline Option Pre-Feasibility Study and Gas Report. This study was predicated on what was then the curernt scheme of development for offshore processing of gas gathered from gas fields in the Highlands and its pipeline transmission to various and disparate markets, primarily in Queensland, Australia. It perceived a potential gas market in Port Moresby for:
- Conversion of existing thermal power stations
- Replacement of aging and existing hydroelectric poerer generation with new gas-fired power generation
- Substitution of LPG; and
- Substitution of wood fuel usage.
An eight-inch diameter gas pipeline was envisaged, designed to carry about 24.6 million standard cubic feet of gas per day, equivalent to 10 PJ per annum of energy for a gas. Economic analysis showed that at an inlet price of just US$ 1.25 per Giga Joule (GJ), and a pipeline tariff of between US$ 1.23 to US$ 2.23 per GJ, natural gas supply to Port Moresby clearly beat electricity and LPG energy supply that were then priced at about US$ 16 per GJ. It seemed even to be highly competitive versus diesel and fuel oil then priced at US$ 6.1 per GJ. This was very encouraging, save for the fact that the anticipated prices for the gas were very low indeed. Necessarily, if one can buy cheap natural gas, of course, it is most likely to be highly competetive against other energy supply.
This was the case for domestic natural gas offtake from a PNG scheme that sought to supply gas to Australia, variously called the Gas to Queensland Project, the Gas to Australia Project, and the PNG Gas Project. This scheme eventually died as the gas price that was available in Australia yielded little if any profit for such an endeavour; indeed, the only value for PNG remained in the export of the associated condensate liquids, whilst Australia would have secured an enduring very cheap supply of natural gas. Morover, so low were the gas prices in Australia that the netback price of gas at the welhead would have been almost zero. The scheme at one time had some 4,300 kilometres of pipeline hanging off PNG providing an effective gas grid in the north east quadrant of Australia at the expense of PNG gas!
Alas, PNG gas development was re-conceived, and the licensees returned to the notion of liquefied natural gas (LNG) development as the Government had sought in the early 1990s, focusing instead on East Asian markets, where a premium price could be achieved for PNG gas. It would require the establishment of liquefaction facilities at great expense to cool the gas to liquid form, but much better prices could be achieved for gas delivered to the more dynamic markets of East Asia.
As a result of this better pricing for PNG gas, the net-back price for gas that was provided to an LNG plant was raised, and as a consequence this made PNG-produced gas more expensive for any domestic utilisation. No more could one envisage payment of just a few dollars per GJ. Gas prices of the order of US$ 10 per GJ might be required. Domestic gas use might now only be partially competetive. Also, a gas producer that has invested a collosal amount in establishing a liquefaction plant would naturally wish to keep that plant as full as is technically possible and would wish to restrict gas offtake for other purposes, unless buyers were willing to pay the netback price (or higher) of gas feedstock to that LNG plant. Thus, in deciding to support LNG development to optimise the value of selling PNG gas as LNG, one created a value for the gas feedstock that somewhat precluded consideration of domestic gas utilisation options. This is an intrinsic problem of large-scale export-oriented gas development.
We have nevertheless subsequently seen two domestic gas utilisation projects develop: the NiuPower Ltd’s Port Moresby power station, jointly owned by Kumul Petroleum Holdings Ltd and Santos Ltd, and the Dirio Gas and Power Port Moresby power plant, owned by parent company the Mineral Resources Development Co. (itself owned by landowners and provincial governments from the Southern Highlands, Hela, Gulf, Western and Central Provinces).
The NiuPower plant is rated at 58 MW and was PNG’s first dedicated grid-connected gas-fired power plant and is powered by two high efficiency Wärtsilä W20V34SG gas engine generators. It commenced development in 2017 at a cost of over U$ 100 million, and came online in 2019. The Dirio plant is rated at 45 MW and uses three 15 MW Titan Solar turbines.
Such is the precarious nature of electrical power supply to the National Capitial District that both of these power plants have found a niche to replace old and expensive fuel-oil supplied generation facilities, and to preserve water, currently used in hydro-electric generation, for city water supply.
These power plants near Port Moresby are a great start, and plans to expand electricity generation at Hides to provide for local markets make much sense, but how can more be done to liberate the energy of natural gas to aid development.
Potential Domestic Utilisation
There have been several schemes of development proposed over the years for so-called domestic utilisation of PNG natural gas by chemical conversion to products such as ammonia, methanol, urea, etc. Many gas development options have been evaluated over the years, either as a replacement for the former Gas to Australia projects, or in lieu of, or adjunct to LNG development.
In the early 2000s, Japanese companies: Mitsubishi Gas Chemical Corp. and Itochu reviewed the feasibility of building a world scale methanol/di-methyl ether plant. It was envisaged that such a plant would produce 2.5 million tonnes per annum of products requiring a gas feedstock of about 220 million cubic feet per day of gas for 20 years, at a cost of cost around US$ 500 million (in 2004 US dollars). It was even suggested that this might be augmented with a further 100 MMSFD for the production of meth-ammonia (methyl amines).
Studies were undertaken with US-based Syntroleum Corporation to review the feasibility of a barge-mounted Gas-to-Liquids (GTL) facility, located near the Gulf of Papua. Syntroleum Corporation envisaged the conversion of natural gas into synthetic oil producing a nominal 20,000 barrels per day of liquids using up to 190 million cubic feet per day of gas feedstock.
The opportunity to export compressed natural gas (CNG) from PNG to New Zealand and other potential regional customers was examined, and gas for power generation for alumina smelting was also considered.
The manufacture of gas derivatives by chemical processing requires considerable amounts of energy. What would-be gas-to-liquids developers of methanol, ammonia and synthetic oil all forget to advise the Government is that they want very cheap gas feedstock and the synthesis process itself consumes about 40-45% of the gas feedstock, giving liquid yields of between 50-60% only, on an energy equivalence basis. By comparison, liquefaction in an efficient LNG plant may only consume about 7-8% of the feedstock to fuel cryogenic processes.
In the nexus of the first decade of this century when the notion of gas development by transportation of gas to Australia was waning, and was eventually abandoned in favour of LNG development, every mode of natural gas utilisation was examined. Not only did industry examine many options, but the Dept of Petroleum and Energy also commissioned comprehensive studies on gas utilisation from Worley Ltd, a reputable Australian energy consulting firm, including: studies on the Potential for Manufacture of Ammonia and its Derivatives; LNG Supply/Demand; Alternate Gas Development Options and Domestic Usage - Liquefied Petroleum Gas. LNG development was nevertheless seen to be superior in economic terms.
Recent Policy Initiatives
Recent Domestic Market Obligations (DMOs) negotiated in some Gas Agreements between petroleum licensees and the State have provided for specific proportions of domestic gas offtake from future gas projects at discounted prices. These are classic DMOs of the type deployed in Indonesia. They are not the Domestic Market Obligations of the Oil and Gas Act, Section 67. Those refer to the sale of gas being required of a licensee on equivalent export terms to a bona fide willing PNG purchaser at a parity purchase price. The new DMOs introduced as policy during negotiations may provide useful offtake of natural gas if these obligations can be matched up with willing investment in appropriate gas utilisation. These are genuine and brave efforts to encourage domestic utilisation, but may be geographically constrained in their implementation.
Ideas for the Future
In so far as LNG development likely provides the best economic return amongst gas development options, one has to be worried that the resource revenue that emanates for the Nation from such endeavours will be carefully cherished and used wisely. As an alternative to monetary value which has the intrinsic potential to be wasted through lack of diligence and rectitude in the expenditure of the National budget, one might indeed prefer to forego some of such lavish National incomes and instead persevere with domestic gas utilisation schemes. This is a resource policy issue and the matter has to be very carefully evaluated by extensive planning, not only of gas development and the degree of domestic utilisation achievable, required and desirable, but also long term gas resource planning.
PNG has shown itself to be highly petroliferous, but it is also a remote frontier area for petroleum exploration. If there is to be an enduring future for gas development and its domestic utilisation, then more gas accumulations need to be discovered, and that requires exploration now for future field development. A comprehensive projection of gas production and likely gas field discovery and field development, including export and domestic utilisation options needs to be made for the next fifty years.
One of the problems that have bedevilled domestic gas utilisation in PNG, aside from potential gas markets being highly disparate and very small, is that the costs of exploration and development in PNG have been very high, necessitating relative high produced gas prices. This is exacerbated by the quest for a greater and greater take by the State from gas resource development. This is a natural desire of any Government in respect of export-based projects that provide natural gas for use in other economies, but perhaps domestic gas utilisation needs alternative thinking.
When the natural gas is consumed in the domestic economy, it creates greater opportunities for residents, commerce and industry. Gas consumed in country, induces multiplier effects, which should in turn enhance State fiscal revenues. The stumbling block is the price that producers need to develop a gas field. If somehow this can be reduced, whilst they still make a reasonable return on their investment, domestic gas developments might be encouraged. The only way to do this is to reduce the fiscal and commercial burden on domestic gas production for instances where the gas is consumed in country. One might propose that the current tax rate of 30% along with other commercial aspects in favour of the Government might be adjusted downward in proportion to the gas producer lowering the price of produced gas proportionately.
The notion of consumption in PNG could be attested by any gas utilisation that breaks the chemical bonds of the natural gas in PNG. The idea is that the breaking of the chemical bonds of the gas for its utilisation and consumption in PNG might receive a reduced tax rate or other concession as compared to exporting the gas where its chemical bonds will be broken overseas. This reduction would only be in some proportion to the agreed reduction of the gas price into the domestic market. This may not work for high capital and operating expenditure projects like a complex methanol project, but it is likely to work well for a relatively constrained smaller-scale upstream gas production projects.
Basic analysis shows that for upstream gas development projects with low costs, significant reductions in gas price may be produced by foregoing some of the fiscal and commercial imposts of the State. Naturally, such incentives for domestic utilisation might come at the expense of revenue, but they may significantly spur national development.
One is, nevertheless, equally mindful that whilst technically and economically feasible development of petroleum resources may be a goal, the resulting revenues can be readily squandered. This was the case in the United Kingdom when our then Prime Minister, Mr Thatcher used North Sea oil and gas revenues to reduce the tax burden for the wealthy and industry – essentially, her supporters. Perhaps, there are lessons to be learnt from the UK after all. The wise thing is to consider all gas development options and remember that it is never too late to plan!
