With shipments of gas from the PNG LNG project under way, Business Advantage PNG talks exclusively to Peter Botten, CEO of venture partner Oil Search Limited, about the future of Papua New Guinea’s largest company and hydrocarbons in PNG.

Historic sight: the ‘Spirit of Hela’ loads up with Papua New Guinea’s first ever LNG exports last week. Credit: ExxonMobil

BAPNG: What will first shipment of gas from the PNG LNG project mean for Oil Search?

Peter Botten: The delivery of PNG LNG Train 1 and Train 2 represents close to 15 years of work in terms of aggregating the gas resource, bringing the right joint venture people together with the right operator, and choosing the right development plan and then financing and building the project.

Oil Search’s Peter Botten

But what it means for Oil Search is that, for the next twenty odd years, we will have a very strong legacy cashflow that emanates from the sale of LNG. That cashflow, which is likely to be in excess of US$1.5 billion per year, underwrites an ability to continue LNG growth and growth in our oil business, primarily in Papua New Guinea.

And it provides us with a platform to invest in high returning projects such as the expansion of the PNG LNG project and the development for LNG of our Elk/Antelope resource, as well as providing the opportunity to provide our shareholders with healthy returns through dividends and other capital management programmes.

BAPNG: Oil Search also has some new oil reserves coming through—the Manunda field in Southern Highlands Province, for example. What are the prospects of current oil production continuing, or even growing?

Peter Botten: Certainly, our oil business has been core to our viability, and core to our ability to support and help the development of PNG LNG.

Previous owners Chevron-Texaco did an absolutely outstanding job in building the oil fields and creating Kutubu. In their last years in Papua New Guinea, they didn’t spend any money, however, and the fields were in 20% annual decline.

‘That cashflow, which is likely to be in excess of US$1.5 billion per year, underwrites an ability to continue LNG growth and growth in our oil business, primarily in Papua New Guinea.’

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When we took over operatorship, we invested in the oil fields, and we found substantially more oil. We’ve been able to keep the production actually flat against what is a natural decline of 20% for seven or eight years. We anticipate that the production of oil will continue to remain more or less flat for the next three to five years.

That means we have to find more oil and smarter ways of extracting it, obviously, because we have to make up the 20% decline. It seems likely that the Mananda field will provide a small addition to production and with other appraisal successes in our main fields, we’re very confident that we can maintain our oil production, certainly for the foreseeable future.

BAPNG: You are currently in dispute with InterOil and Total SA over the development of the Elk-Antelope gas fields, in which Oil Search has a 23% stake. What would be the ideal outcome of those discussions be?

Peter Botten: The processes we’re discussing with our joint venture partners are designed right now to understand how we’re going to work together, who does what and how in the development, and how the development can come together, along with how exploration and other gas may be brought in in the future.

BAPNG: Do you have a sense of a timeframe?

PB       I wouldn’t say it’s open-ended, but obviously I think we’re all committed to make sure it’s done in a timely and expeditious way.

BAPNG: There’s other exploration going on in PNG with Oil Search. You’ve got the P’nyang field in Western Province, and also some undersea discoveries as well. How big are they, compared to Elk/Antelope?

Peter Botten: Part of the 2014 objective is really to understand where our reserves and resources are, and there are a number of programmes aimed at doing that.

The first is concentrated in the Hides field. There are a number of wells going on in Hides that can potentially increase our reserve base there.

The aim is all about understanding how much there is in Hides, how much there is in P’nyang, how much there is in the oilfields, and then deciding how best to develop that resource base, and it’s almost the same in Elk/Antelope.

The drilling programme in Elk/Antelope is designed to narrow the range of the resource base, again so we can sit down early next year and understand the size and shape, how many trains—one train, one large train, two smaller trains—and the size and shape of the potential development on Elk Antelope. So more drilling information is required to ensure that we optimally develop and optimally size the next phase of LNG growth.

Gas-fired electricity in PNG within three-to-five years

At present, all PNG’s gas is set for export. Peter Botten gives his thoughts on the potential for using gas domestically.

Oil Search is very committed to working with the national and provincial governments and PNG Power to develop options for power in Papua New Guinea. Everybody who lives there recognises that reliable power is very important to their lives, but it’s also important for future economic growth outside the oil and gas industry.

A recent survey that we carried out in Lae, for instance, indicated that there were substantial industries that would look at serious expansion if they could be guaranteed a reliable power supply at a reasonable cost, and we’ve been looking at a number of ways of being involved in power generation in PNG.

Working with PNG Power

In Lae, we’ve been working very hard on a biomass power generation station—something in the 30 to 35 megawatt range—which would provide very competitively priced power for the Lae and north coast area. We’re working with PNG Power on that.

We’re very confident it is feasible, and would involve some 2500 to 3000 local landowners growing trees to provide fuel for the power station.

Highlands and Moresby

We’re also working with the government on power in the Highlands, both at Hides and at Kutubu, and looking at a number of opportunities and joint venture partners for increasing power generation in the Port Moresby area.

I have a very strong view that if you’re in the Tari Valley, it’s quite reasonable to expect that power, water, decent hospitals and schools would be provided as a benefit, especially with Hides providing gas and power for northern Asian markets.

There’s a very constructive dialogue going on with the Government about how that might be achieved, but it does require some long-term thinking and long-term investment in infrastructure.

Over the next three to five years you will see a number of significant developments under way in the Highlands and the north coast, and certainly extra power in Port Moresby. It may be earlier than that.

BAPNG: One of the areas that you may not necessarily be completely of the same mind as the Government is on the fiscal regime for oil and gas development, which is under review at the moment. Do you have any concerns about that review?

Peter Botten: It’s the fourth review I’ve been involved in since I’ve been in the country. The approach of this review and the previous ones has been one of consultation.

 ‘The issue is to make sure that the benefits that do come from Papua New Guinea’s mining and petroleum projects are effectively distributed across the beneficiaries.’

I think the track record in Papua New Guinea has been that the Government has taken very measured approaches to fiscal changes, and I don’t anticipate that that will be any different now.

I do think the broad population in Papua New Guinea feels like it may not be getting the full value from resources projects. The issue is to make sure that the benefits that do come from Papua New Guinea’s mining and petroleum projects are effectively distributed across the beneficiaries.

BAPNG: How much of that can be done by you, and how much really is in the hands of Government?

Peter Botten:  It’s a balance between the developer and the Government. Some parts of the benefit streams are in the developer’s hand, but much, as you point out, are in the hands of the Government and I think it’s up to developers to help the Government in their distribution processes.

One area would be the Infrastructure Development Grants, for instance, which need improvement because much of the already money paid out for infrastructure development has not resulted in infrastructure development on the ground. This is a source of some serious frustration for the people in the villages on the ground who have expectations of these things being built.

BAPNG: Oil Search also has its own Health Foundation and has made a commitment to sustainability. What is your view on what a responsible company ought to be doing in this sector in PNG?

Peter Botten:  As PNG’s largest company, we genuinely believe that we have to play a role in ensuring benefits and the services that people expect in Papua New Guinea are effectively delivered. That’s an unusual position, because many companies don’t get into those areas, and leave them to Government.

The reality of life in Papua New Guinea is that there are areas of government that are particularly challenged in terms of delivery of services. There are areas where we think we can utilise our skills to work with Government to help deliver some of those services, such as in the health and power areas.

The Health Foundation is significantly funded by Oil Search and run by Oil Search people, with the donations we’ve got from The Global Fund and Gates Foundation, Australian Aid, etc. Using these funds, we’re able to provide important HIV/AIDs management programmes, child/maternal health programmes, a range of health initiatives across now six provinces, which helps deliver those services to a broad range of the population.

‘This is a new type of public-private partnership which we think will be effective in addressing some of the expectations of the PNG people for the delivery of some of their needs.’

We also are involved in tax credit projects which helps the Government deliver roads. We’re refurbishing a government office building, Marea Haus—the ‘Pineapple Building’—which will help efficiency in government services. We’re also refurbishing the Lloyd Robson Stadium in Port Moresby into a national stadium.

We’re also looking at helping the Hela provincial government in refurbishment of Tari Hospital, providing medical support and capacity building for the Government to run an effective, efficient and well-managed hospital in one of our key operating areas.

We believe we can help, recognising some of the challenges the government have in doing that effectively; doing it without corruption; doing it without leakage of money, and in an efficient way. This is a new type of public-private partnership which we think will be effective in addressing some of the expectations of the PNG people for the delivery of some of their needs.

I think you’ll see us expand some of those activities over the next few years across the rest of the country.

BAPNG: Finally, on a personal note, I think your Chairman mentioned succession planning in Oil Search’s most recent annual report. What are the plans for Peter Botten?

Peter Botten:  I did say to our investors that I’d review my position around the time of the first LNG shipment. I’ve done that, and I’ve decided that I will continue on for a little while longer, and certainly steer the ship for a few more years.