PROJECTS

Natural Gas Development: Open Access and On-Shore Uses, Papua New Guinea

The problem

Papua New Guinea had developed its off-shore natural gas fields through contracts allowing global oil and gas companies to develop large self-contained schemes which pipe gas directly to LNG plants for export in tankers. However, this model did little for on-shore industrial development and inhibited the development of smaller gas fields whose size did not justify the cost of a dedicated offshore pipeline.

How we helped

Castalia assisted the Government of PNG with a new ‘domestic supply obligation’ which requires a portion of output over the life of the field to be sold domestically. To maximize value from the domestic supply obligation, we recommended that the domestic gas be priced at the net-back value (that is, the value of LNG export less the cost of shipping and liquefaction) and that gas exporters should be allowed to ‘bank’ domestic supply obligations, so if domestic demand was not adequate in one year, the obligation could be met in a later year. Together these two mechanisms ensure that value received for the gas is never less than the value it would command on the world market, while allowing for the progressive development of on-shore uses of gas. We also developed an open access regime, requiring pipeline owners to agree to connect their pipelines and transport gas for other users, in exchange for a cost reflective transit fee. New pipelines would be developed on open access principles and would be sited to optimize service to all potential users, rather than just to major LNG project promoters.

Impact

The Government issued a Policy White Paper adopting the policies we had recommended for regulating the gas pipeline industry and creating a domestic market for gas.