Papua New Guinea Oil and Gas Report Q2 2011

Report Summary

The new Papua New Guinea (PNG) Oil & Gas Report from BMI forecasts that the country will account for just 0.13% of Asia Pacific regional oil demand by 2015, while providing 0.36% of supply. Regional oil use of 21.42mn barrels per day (b/d) in 2001 will have reached an estimated 27.28mn b/d in 2010, then rises to around 30.80mn b/d by 2015. Regional oil production was around 8.35mn b/d in 2001, and will have averaged an estimated 8.82mn b/d in 2010. It is set to increase slightly to 8.85mn b/d by 2015. Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion. In 2001, the region was importing an average 13.07mn b/d. This total will have risen to an estimated 18.46mn b/d in 2010, and is forecast to reach 21.96mn b/d by 2015. The principal importers will be China, Japan, India and South Korea. By 2015 the only net exporter will be Malaysia.

In terms of natural gas, in 2010 the region is expected to have consumed 493bn cubic metres (bcm) and demand of 647bcm is targeted for 2015. Production of an estimated 412bcm in 2010 should reach 548bcm in 2015, implying net imports rising from around 81bcm to 99bcm. This is thanks to many Asian gas producers being major exporters. PNG’s share of gas consumption in 2010 was an estimated 0.03%, while its share of production is put at 0.04%. By 2015, its share of gas consumption is forecast to be 0.04%, with the country accounting for 6.57% of supply.

Preliminary data suggest that the 2010 full year outturn will have been US$77.38 per barrel (bbl) for OPEC crude, which is expected to have delivered North Sea Brent and West Texas Intermediate averages of around US$79.40/bbl. The BMI price target of US$77 was reached thanks to the early onset of particularly cold weather, which drove up demand for and the price of heating oil during the closing weeks of the year. The oil market is now in a bullish mood, in spite of the economic uncertainty facing the world in 2011.

Global GDP growth in 2011 should exceed 3%, but is unlikely to match the level seen in 2010. Slower economic expansion in China and Japan is set to undermine a potentially unchanged rate of growth in the US and eurozone. Oil prices seldom reflect underlying macroeconomic trends, but the case for surging energy demand and spiralling fuel costs is far from convincing. Ample oil inventories and increasing OPEC supply are likely to keep the price of crude in check - and we are sticking with our forecast of an average US$80/bbl for the OPEC basket.

PNG’s real GDP growth in 2010 is assumed by BMI to have risen by 8.0%, with an average annual increase of 6.8% forecast for 2010-2015. There is indirect state involvement in the upstream oil and gas industry, as the government is a minority owner of leading producer Oil Search, which is responsible for the country’s current oil and gas supply, as well as being a partner in a planned gas export scheme that is due to enter production by 2013/14. We are assuming that oil and gas liquids production will shortly rebound, but then fall to around 32,000b/d by 2015. Consumption is forecast to increase by around 5% per annum, implying demand of at least 41,000b/d by 2015. The import requirement will therefore be around 9,000b/d by the end of the forecast period.

Between 2010 and 2020, we are forecasting a decrease in PNG oil production of 17.5%, with crude volumes falling to 26,000b/d by the end of the period. Oil consumption between 2010 and 2020 is set to increase by 62%, with growth averaging around 5% per annum during the forecast period and the country using 52,000b/d by 2020. Gas production is expected to rise rapidly, from an estimated 0.2bcm in 2010 to a possible 38.0bcm by 2019/20. Even with demand growth of 135.3%, this provides export potential rising to 37.6bcm, all in the form of liquefied natural gas (LNG). Details of BMI’s long-term oil and gas outlook can be found at the rear of this report, including regional and country-specific forecasts to 2020. PNG now holds fifth place, ahead of the Philippines and Malaysia, in BMI’s composite Business Environment (BE) league table. The country is now ranked fourth, ahead of Malaysia, in BMI’s updated upstream Business Environment ratings, benefiting from its strong gas production/export potential, an attractive licensing environment and a lack of state involvement. PNG is considerably further down the league table in BMI’s downstream Business Environment ratings, reflecting its limited size as an energy market with its more restricted growth potential. It holds 14th place, above only Taiwan, but may be able to challenge Malaysia above and make a near-term move up the rankings.