Interview: Hiroshi Hosoi
How do long-term supply contracts for liquefied natural gas (LNG) in the Asian market affect the energy sector in Papua New Guinea?
HIROSHI HOSOI: The LNG development project in PNG includes a large number of long-term sale and purchase agreements (SPAs), which have historically been used to determine the sources of project financing. However, we recognise that the current trend is away from SPAs and towards agreements like spot sales. This new preference will cause the LNG market to shift many long-term contracts towards medium- and short- term contracts, which will affect the LNG market as a whole.
Regardless, we don’t believe that this will happen overnight, particularly since new LNG projects still require project financing and long-term deals. Infrastructure is important, and as long as local LNG projects maintain their high quality standards, we do not believe the trend in spot sales will negatively affect the sector.
At the same time, PNG must be aware that there are projects available in emerging markets worldwide. The competition is tough, and signing new agreements relating to expansion cannot take too long. In the short term, we would like to prioritise optimising the operation and maximizing the value of the new LNG project.
What is the role of PNG’s LNG in Japan’s energy mix?
HOSOI: LNG from PNG is a very important and stable source of energy for Japan. Our LNG producers have long-term SPAs with Japanese firms and have been delivering on them since operations began in 2014. The 2018 earthquake damaged some of PNG’s gas infrastructure and was an enormous challenge for both countries. However, the downturn lasted for just a couple of months, which is evidence of the high standards maintained by the local companies involved.
We are proud that our LNG is such a reliable source of energy for Japan. This does not mean that Japan is not considering other energy sources, but LNG will continue to play an important role in the near term. The development of renewables is very expensive, and the role of nuclear power plants remains unclear. At some point, these nuclear projects will be restarted, but we anticipate that this will take some time, and LNG is a perfect buffer until then. Japan is not energy-rich and cannot depend on any single energy product.
In what ways can government policy make LNG exploration activities more appealing to investors?
HOSOI: From the viewpoint of investing in PNG, it is important to note that the domestic licensing system for exploration and development under the Oil and Gas Act of 1998 is easy to understand. The same is true for the aspect of the tax imposed as part of the Income Tax Act. These are both key to attracting investors.
However, shortening the processing time for licence issuance would enable exploration activities to begin sooner. License processing has been delayed in some cases, even though the required forms were submitted well in advance of the commencement of exploration activities. We have also seen the development of smaller gas fields has get delayed due to infrastructural shortcomings. Roads and pipelines are necessary to upgrade any given project, but their construction can be very costly, due to the remoteness of some projects and the nature of the local market.
The development of larger fields like Elk-Antelope and P’nyang will definitely benefit smaller fields. The growth of LNG infrastructure, including the construction of three new pipelines, will create additional opportunities for investment in the areas surrounding these sites. Furthermore, there might be possibilities to collaborate on the development of several fields.
Although smaller fields will benefit from infrastructure development, pipeline availability is not the only factor that makes smaller fields appealing; we must also ensure that these proposals are economically fruitful. Overall, even with these logistical challenges, the stable licensing system makes PNG attractive to investors.