Reproduction forbidden

Commissioned by the Ministry of Economy, Trade and Industry

The Study on Compact Motor-driven LNG Plant in Papua New Guinea

January 2010

Japan External Trade Organization (JETRO) Hitachi, Ltd. Toyo Engineering Corporation Arabian Oil Company, Ltd. LNG Japan Corporation

1.1 Purpose and Background of Study The supply and demand of LNG in Japan shows that the existing contractual volume exceeds the presumed demand from 2009 to 2010 due to the influence of the world recession since autumn last year. The existing contractual volume from 2011 onwards, however, will decrease year by year and there will be a gap between supply and demand now predicted. It is necessary for Japanese buyers to conclude new LNG supply agreements in order to fill this gap. Several LNG projects are under way in the Asian and Pacific areas but there are potential concerns and uncertainties concerning long-term and stable procurement of LNG because it is forecasted that the demand by new buyers including China will increase while the ongoing LNG projects themselves may be delayed or suspended. From the viewpoint of feasibility, the main stream of present LNG projects is the development of large gas fields, but it is necessary to pay attention to the commercialization of small and medium gas fields which are left behind from large scale commercial development in order to decrease such uncertainties. Commercialization of small and medium oil fields results in the development of a new market called the small and medium LNG market. This study targets the small and medium gas fields in Western Province of Papua New Guinea (PNG). In order to find out all the risks accompanied by commercialization of a compact motor-driven LNG plant, the following was studied. (1) Technical review accompanied by systemization of a compact motor-driven LNG plant suitable for small and medium gas fields (2) Evaluation of feasibility of a compact motor-driven LNG plant  CAPEX (Capital Expenditure)  OPEX (Operating Expense) (3) Market analysis of LNG (4) Study of tax system/environment/landowner-related regulations in PNG

1.2 Content of Study The study was conducted, concerning the status, systems and environmental and social aspects in PNG, gas fields, an LNG plant and surrounding facilities, project cost, finance arrangement and LNG market required for the preliminary study of a compact motor-driven LNG plant in Western Province. (1)

Study of the outline of Papua New Guinea and government organs, etc. of PNG

(2)

Study concerning gas fields

(3)

Study concerning natural gas refining equipment and pipelines

(4)

Study concerning an LNG plant and shipping equipment

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Chapter 1 Summary

(5)

Study concerning power generation system

(6)

Study concerning project costs

(7)

Study concerning schedule of the project

(8)

Study concerning profitability of the project

(9)

Study concerning related-laws

(10) Study concerning finance arrangement (11) LNG market study

1.3 Implementation method, structure and schedule of study Surveys were carried out by direct hearings from companies and bodies working actively in PNG and governmental organs of PNG and, at the same time, aerial surveys for gas field development sites, plant construction candidate sites and pipeline route candidate sites were conducted. In carrying out hearings, site surveys were carried out in two (2) times including the aerial survey of the fields at the first site survey. The targets to which we conducted hearings are as follows:

Target bodies of hearings Investment Promotion Authority Department of Environment & Conservation Department of Labor and Industrial Relations Department of Petroleum & Energy PNG Ports Corporation Limited PNG Power Ltd National Maritime Safety Authority PNG National Weather Service PNG Sustainable Development Program Ltd Petromin PNG Holdings Limited PNG LNG Talisman Energy Inc. Santos Ltd Sasol Petroleum International (Pty) Ltd Oil Search (PNG) Limited Horizon Oil Limited Clough Limited

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Figure 1-1 shows the study implementation structure this time and Table 1-1 shows the study schedule.

(Figure 1-1) Study Implementation Structure

(Source: Study Team)

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Chapter 1 Summary

(Table 1-1) Study Schedule 2009 Aug.

Activity

2010 Sep.

Oct.

Nov.

Dec.

Jan.

In Japan Preliminaly Study ,Planning, Preparation Further Study, Issue Analysis

Draft Report Submission

Solution Finding, Final Report Planning Fianl Report Submission

Final Report Writing In Papua New Guinea The First Site Survey The Second Site Survey Final Presentation

(Source：Study Team)

1.4 Results of Study (1) LNG Plant Study was originally planned according to the LNG plant of 1.5 million tons in terms of LNG as the basic case, but, as a result of the study of gas field reserves, slightly more gas reserves were expected than presumed, and so it was judged that the proper capacity of the LNG plant would be 2 million tons per year in terms of LNG as the basic case for this study. Therefore, the liquefaction process of the LNG plant is a parallel structure of four trains with one train of LNG production: 500,000 t/y per train as a basis. Motor-drive SMR compressor configuration showed the highest performance in consideration of operability, reliability and life-cycle cost. An electrically-operated machine is controlled by Variable Frequency Drive (VFD) so that it may start smoothly and adjust production by variable speed control. On this occasion, the problem of and measures for high frequency in inverter control are also studied. The natural gas (Feed Gas) of Western Province contains certain amounts of nitrogen and is relatively low calorie. Power Generation System that has a capability of burning such characteristics gas is needed.

(2) Power Generation System The Power Generation System consists of five simple cycle, 35MW class heavy-duty type gas turbine units. The fuel of the gas turbine is a combined gas of feed gas, gas exhausted from the LNG plant and BOG (boil-off gas). Characteristics of this Power Generation System are fuel savings

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and environment-friendliness with the use of plant exhaust gas that is usually thrown away and BOG.

(3) Cost Calculation of Project Cost is estimated based on the assumption that the LNG plant and the Power Generation System will be built in the suburbs of Daru.

(4) Evaluation of Project Profitability 1) Judging from the cash flow calculation, the profitability rate of the said project estimated to be 14.6%. 2) As a result of sensitivity analyses, variation in sales prices of LNG and plant construction costs are found to have more influence on profitability than purchase prices of feed gas.

1.5 Use of Study Results and Prospect The study results will be presented to the potential project developer as a LNG business plan. A compact motor-driven LNG plant has a unique concept and high potential of differentiation. By adopting the study results, it can be expected that Japanese power companies and gas companies could participate in the LNG project as the LNG buyers on a long and stable basis which are the most important and difficult for the operating body of the project. In addition, if Japanese companies participate in the project in various forms, it is possible for the operating body to use favorable financial programs. By emphasizing these advantages, realization of this project shall be promoted based on the study results.

1.6 Consideration of Environmental and Social Aspects It is presumed that the LNG plant and the Power Generation System will be built at the industrial complex to be made in the suburbs of Daru. Therefore, it is expected that construction of such plants may not accompany large scale deforestation and resident transfer problems. In connection with pipelines, it is necessary to pay attention to any influence on natural environments in planning the routes and executing construction because the pipelines will go through the under-developed areas such as the wet areas and tropical rainforests. In connection with the air, water quality and wastes, law regulations and environment guidelines are prepared, and proper measures should be taken accordingly. It is considered that the direct and indirect impacts by implementation of the project on social aspects, including power supply to the surrounding areas, are large. On the other hand, however, it is concerned that, if rapid population inflow and movement between tribes are

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Chapter 1 Summary

activated at the expected site of the plant of Western Province with many under-developed lands, there are influences on the traditional living environment and risks of minority languages disappearing. In addition, the measures against an increase in traffic accidents and crimes, and spread of epidemics, etc. should be taken into consideration. In connection with “the Environment Checklist” of the Japan Bank for International Cooperation (JBIC), we checked three fields of pipelines, chemical industry and thermal power. Taking steps according to the environmental rules and regulations, there is no problem concerning the environment, and the actual environmental impact assessment (EIA) is made by the operator of the project.

The governing agency of environmental policies including the EIA is the DEC (Department of Environment and Conservation). The standards, legal systems and procedures concerning EIA in

Papua New Guinea are stipulated in the Environment Act, 2000, and, if large-scale development including deforestation and mining is made, the Act stipulates that EIA shall be made in advance. As special circumstances of the site, the following should be noted: there are many under-developed areas in Western Province and so we need to pay special attention to any influence on the natural environment; there are many cases where registry recording landowners does not exist and it is very difficult to identify the real landowners. In connection with the latter in particular, it is important to respect the landowners, repeat consistent negotiations with the landowners, in cooperation with the local government and the provincial government, and obtain understanding from local residents.

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