Oil and Gas in the Capitals

Energy companies around the world are adjusting their E&P strategies to take advantage of oil rebounding from the price slump of 2015–2016. For some, this means getting into natural gas to rebalance global portfolios that have been heavy with liquids. And since demand for LNG is supposed to rise 1.6% to 1.9%/year for the next 20 years, the projected ROI from gas projects is attractive. This has triggered a surge of both E&P and M&A in Papua New Guinea (PNG) by several energy companies, especially Exxon Mobil.

Background. A poor country with few governmental services and high crime, PNG is blessed with gas reserves totaling 5.3 Tcf. Its oil reserves are less impressive at 175.2 MMbbl, but it’s still a net positive regarding employment and tax revenues. Aside from the country’s resources, energy companies like PNG because of its proximity to Asia’s gas consumer market, low taxes, and cheap labor. Energy companies gamble that these factors will, in the long run, offset momentary LNG price slumps.

Exxon Mobil’s path. Operating in PNG since the 1930s, Exxon Mobil is the country’s biggest LNG player. XOM operates at least seven production fields that feed the $19-billion PNG LNG facility, which produces 7.9 million tonnes of LNG each year—a million tonnes more than originally expected. With 33.2% ownership, Exxon Mobil is the biggest investor. Partners include Mineral Resources Development Co., Santos, Kumul Petroleum, Oil Search, and JX Nippon. Production fields feed the facility via 435 mi of pipelines. They include the onshore Hides, Angore, and Juha gas fields in Southern Highlands Province. Exxon Mobil’s upstream strategy for PNG is simple: 1) efficiently exploit existing fields to provide for PNG LNG, and 2) identify new fields to supply additional feedstock.

Having Oil Search onboard likely helps this strategy. Oil Search is Australia-based, but it’s 17% owned by the PNG government; it operates all oil fields in the country; and it is partnering on several gas fields. Oil Search says it will increase E&P capex in PNG this year to between $360 million and $460 million—double its past investments—and it has plans to explore the P’nyang gas field in 2017.

A key facet of Exxon Mobil’s surge in PNG was its $2.5-billion deal to buy PNG-based InterOil. The deal was finalized in February 2017. This acquisition has provided Exxon Mobil with six exploration licenses covering four million acres of the PNG highlands, plus the highly touted Elk-Antelope field. Elk-Antelope, located onshore in Gulf Province about 40 mi north of a coastal town called Luku, is estimated to hold 6.43 Tcfg, and some believe it might hold even more gas, approximately 3 Tcf. Total operates the field.

Exxon Mobil’s InterOil acquisition also secured it a 35.5% stake in PNG’s next big gas processing plant, Papua LNG. Construction begins in 2018. Partners Total and Oil Search aim to pipe gas from the Elk-Antelope field into the facility.

Exxon Mobil in September 2016 acquired a 40% stake in two offshore petroleum-prospecting licenses, PPLs 374 and 375, from Gini Energy Limited. Gini is a CNOOC Ltd subsidiary. The acreage covers 9,627 mi² in the Gulf of Papua. Oil Search is partnering and owns 40% of the project.

In December 2016, Exxon Mobil discovered natural gas in high-quality sandstone reservoirs in PPL 402, 13 mi northwest of the Hides Gas Field, via the Muruk-1 well. Operator Oil Search began drilling there in November 2016, eventually reaching 10,630 ft. More wellbores are being drilled, and testing is ongoing to ascertain the find’s size and commercial viability. Rough estimates are that the area might hold 1–3 Tcfg. Santos is also involved in the project via its subsidiary, Barracuda Ltd.

Total forges its own presence. The other major company in PNG is Total. It began operating there in 2014 by securing a 40.1% stake in Block PRL-15, which includes the Elk-Antelope field. In April 2017, Total, along with its partner, Oil Search, had deepened its Antelope 7ST1 well down to 3,226.5 m. It encountered carbonate at 2,766 m and is also optimistic that more hydrocarbons are at deeper depths. Exxon Mobil is also a partner here, with 36.5% of the project.

Over the first half of 2017, Total will consider how it and Exxon Mobil might cooperate to increase efficiencies at the planned Papua LNG facility by utilizing facets of the existing PNG LNG plant.

All is not well in PNG, however, and protest violence threatens to impede operations. Highlands landowners are up in arms over not receiving 2% of royalties from PNG LNG’s profits, per the terms of the project’s Umbrella Benefits Sharing Agreement (UBSA), signed in 2009. The UBSA royalty figure is estimated to be $14 million. The government says payments have been delayed over the difficulty of determining exactly who the rightful landowners are. Landowners assert government corruption. The impasse has triggered scattered protests at PNG LNG from August 2016 forward.

The belligerents have, on occasion, blocked access to the plant, set fire to surrounding buildings and shut off gas taps at several wells. PNG security forces have clashed with protesters, and scores have been wounded. Some clan leaders have threatened to attack PNG LNG with armed force. Exxon Mobil, which is not a signatory to the UBSA, has urged both sides to resolve the dispute peacefully and fairly. Resolution is critical for safe plant functioning, and for the benefit of the energy companies, the PNG government, and the local population. If the government cannot resolve this issue, both Exxon Mobil and Total government affairs executives might  hasten the process. Their ROI is at stake. 

About the Authors

Jeff Moore

Contributing Editor

Jeff Moore runs Muir Analytics, a risk consulting firm specializing in deciphering threats in conflict zones. He is author of the book, Spies for Nimitz, which depicts America’s first modern intelligence agency. He holds a PhD from the University of Exeter in the UK.