"We declare our first goal to be for every person to be dynamically involved in the process of freeing himself or herself from every form of domination or oppression so that each man or woman will have the opportunity to develop as a whole person in relationship with others".

- Papua New Guinea National Goals and Directive Principles

Monday, 6 June 2011

Global Insights claim 2014 LNG start "seems challenging"

Source: Tom Grieder, Global Insight
Date: 3 June 2011

In a rare interview with Radio Australia, Peter Graham, managing director of ExxonMobil subsidiary Esso Highlands, has confirmed that the PNG LNG project is on-track for commencing exports of LNG in 2014. In the interview, Peter Graham stated that ExxonMobil planned to sell its first LNG cargo out of Caution Bay by the fourth quarter of 2014, which a report from Citigroup stated was towards the end of ExxonMobil's long-standing guidance for commercial start-up of 2014. In the report, Citigroup estimates that a delay in the launch of commercial cargoes from the project to October 2014 would probably be accompanied by a cost increase of around 10% to USD16.5 billion. The day after Citigroup issued the report, Miles Shaw, an ExxonMobil spokesman in Papua New Guinea (PNG) stated that Peter Graham misspoke in the interview, and that it was "still too early to narrow the start-up window" beyond the year 2014.
The company's retraction of Peter Graham's comments are probably aimed at reducing the concerns of project investors, who have loaned around USD10.25 billion to the project. However, the comment betrays the personal opinion of the managing director regarding the construction schedule. Peter Graham commented in the interview that one of the major challenges to delivering the project on time is access to land. To support land-acquisition activities, ExxonMobil spent six weeks negotiating and executing the "PNG LNG Umbrella Benefits Sharing Agreement" in a process completed on 23 May 2009. Under this agreement, landowners recognised by the government and owning land within a petroleum-development or pipeline licence, and those who own land within a buffer zone up to 5 km from a pipeline or LNG processing facility, are eligible for benefits from the project.
Nevertheless, certain groups and tribes have rejected the benefits-sharing agreement process undertaken by Esso Highlands and the PNG government. The 26 Tuguba clans which own land in Petroleum Development Licence (PDL) 1 and PDL 7 near the Hides gas-conditioning plant are not happy with the agreement, and have submitted other grievances to the PNG government such as non-payment of money for indigenous business development, or for infrastructure development promised under the memorandum of agreement (MoA). Following the recent death of Tuguba chief Himuni Homoko--who the tribe claims died trying to secure benefits from the project--members of the Tuguba descended onto the Hides project site demanding compensation, with some reports stating that there were attempts to block access to the facilities. Esso Highlands then asked all engineering contractors to cease work at the facility, reportedly out of respect for Himuni Homoko, although health and safety issues associated with the large number of people around the project site might have influenced the decision.
ExxonMobil's strategy of signing agreements with umbrella companies to secure business opportunities for landowners in project areas has also encountered opposition. In October 2009, ExxonMobil signed service outline agreements with the Hides Gas Development Company Ltd and with Laba Holdings Ltd allowing these companies to carry out labour, equipment and freight, catering, and equipment hire in two different areas of the project. Despite entering into a number of joint-venture agreements, the selection of the umbrella companies perceived to take the lion's share of the contracts from the project may have created grievances among landowners backing rival companies, which were not selected by project partners. ExxonMobil also faces issues in effectively distributing benefits-sharing agreement money due to corruption in PNG, and a lack of government capacity to handle funds. Validating landowner benefit claims is also problematic, due to a lack of clarity about landowner identities, and it will also be necessary to develop an efficient mechanism for recording and addressing landowner grievances. These problems are unlikely to be resolved in the immediate term given their complexity, while releasing funds to representatives from the Tuguba tribe might simply encourage rival tribes to step up their demands.
Outlook and Implications
At the end of the first quarter of 2011, Esso Highlands reported that a ground-breaking ceremony had been held for construction of the LNG processing trains, that 67% of the pipeline route had been surveyed, and that a number of supporting infrastructure projects had been completed. While progress on the project is clearly under way, the first quarter of this year saw an invasion of approximately 150 people at Wellpad A Camp, which resulted in non-threatening injuries to project workers, the relocation of non-essential personnel, and operations suspended for worker safety reasons.
These kinds of difficulties for the PNG LNG project are likely to intensify in the years ahead. In 2012, the project will move into the heavy construction phase, which will mean greater impacts on landowners in the project areas. If landowners' benefit demands remain unfulfilled, then an intensification of protests against the project or clashes between rival groups over benefit distribution could be the outcome. The PNG government is trying to react to the latest concerns voiced by the Tuguba tribe--notably by appointing the Minister Assisting the Prime Minister on Constitutional Affairs, Francis Potape, to attend negotiations with the family of the deceased chief, Himuni Homoko, to resolve their grievances.
However, issues like establishing rights to land or recovering lost benefit-sharing money appear very difficult to resolve in the near term, while in mid-2012 PNG is set to have a parliamentary election. Political attempts to manipulate landowner grievances over the PNG LNG project to win support are a possibility, and violence against the project during this time is a possibility. Meanwhile, US Secretary of State Hillary Clinton has commented that China is trying to undermine the project. In February 2011, it was reported that an unidentified Chinese investor was in talks to try to develop gas reserves above the initial reserve base that ExxonMobil had committed to developing. The Chinese investor also reportedly agreed to pay the Tuguba clan around 1 billion kina (USD416 million) in business development grants (BDGs), placing pressure on ExxonMobil to match the payments or lose the tribe's support. Achieving the 2014 target for exports of LNG therefore seems challenging, raising the risk of cost overruns--the difficulties ahead may account for ExxonMobil's determination to keep its commercial export launch date vague, and not to commit to a quarterly start-up target.

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