Are these more freebies we are giving away or do these unconventional hydrocarbons not come under our licenses? Either way it's another lose/lose situation for share holders.
In business I hear it's always best to sell everything at the bottom of a cycle and before you prove up what you have on your land.
Papua New Guinea
Shale gas: a new horizon?
The resource-based economy of Papua New Guinea (PNG) has faced mounting problems over the past couple of years as a consequence of the sharp fall in global commodity prices. A strong recovery is not in sight but the government has now signalled its interest in pushing ahead with exploration and development of shale gas—the extraction of gas trapped in shale that requires unconventional production methods. The country's reserves of such resources could be significant. Although liquefied natural gas (LNG) prices remain low, the large price tag that such investment would require may prove a key stumbling block.
At one time PNG was not interested in developing its potential reserves of shale gas. A 1998 Act of Parliament on oil and gas mining specifically stated that it did not apply to the extraction of any substance from coal, shale or rock. However, for the past five years an Australian-based miner with conventional hydrocarbon licences in PNG, South Pacific Resources (SPB), has pressed for a revision of the law. As a result, in February 2016 parliament finally enacted the Unconventional Hydrocarbons Act that opens the country up to this sort of exploration and mining.
Exploration gets the go-ahead
SPB has already undertaken preliminary geophysical surveys of parts of PNG over the past five years, and believes that the country has high-quality reserves of shale gas, much of it at shallow depths and near existing conventional hydrocarbon fields, which would reduce the infrastructure investment that would be required to extract shale gas. The largest area of shallow resources is believed to be in the Elk-Antelope area to the west of the capital, Port Moresby. The company has put in five applications for licences to explore and develop unconventional hydrocarbons over an area of 75,000 sq km. Such efforts bore initial fruit on July 6th, when the government stated that it intended to develop the country's shale gas reserves.
The licences have not yet been awarded, but the Department of Petroleum and Energy has reserved the five licence areas applied for by SPB for five years, allowing the company to begin exploration and preliminary drilling work. The government has stated that the state-owned oil and gas company, Kumul Petroleum, would play the lead role in development. However, SPB has engaged in talks with Kumul, and the government plan specifically envisages a role for investors with extraction know-how and finance.
Major uncertainties remain
Strong claims are being made for PNG's reserves of unconventional hydrocarbons. Media reports have stated that the country has more than 3trn cu feet of such gas. To put this in context, a total of about 9trn cu feet is expected to be produced as part of the PNG LNG project. SPB has said that the shale reserves could be even larger than the country's proven conventional oil and gas reserves. If these estimates turned out to be correct, the implications for the PNG economy in terms of investment activity and eventual export revenue would be significant.
The fact that SPB is already involved in the plan to develop shale gas indicates that there is international interest in the project. But going beyond the exploration phase will introduce significant hurdles, given the large investment required and the weak outlook for global oil and gas prices. SPB is a junior miner, without ready access to the billions of dollars of investment that the development of shale gas in PNG may require. Global oil and gas prices have approximately halved since 2014. Using US natural gas prices, The Economist Intelligence Unit forecasts that annual average prices will decline to US$2.10/m BTUs this year, a far cry from the 2014 annual average of US$4.37. Although we expect oil and gas prices to begin recovering in 2017, we expect these to remain below 2014 levels until 2020 at least, with US natural gas prices expected to creep up to US$2.70/m BTUs in 2017, and US$3.05/m BTUs in 2020.
As more expensive shale gas extraction is priced out of the market in parts of North America, there is the basis for some kind of recovery in prices. It may be that now is the right time to be exploring for reserves in the expectation that, when the time comes to develop unconventional hydrocarbons, prices will be high enough to put together the investment required. The shallowness of some of the country's shale gas reserves may also give PNG a competitive edge against some producers in North America. However, at this stage it seems too soon for PNG to bank on shale gas lifting its fortunes.
