With gas production from the US$19 billion PNG LNG project due to start next year, Peter Graham, Managing Director of Esso Highlands Limited, talks exclusively to Business Advantage PNG about the long-term impact of the project.

Business Advantage PNG (BAPNG): The project is still aiming for first gas exports in 2014. What are your key challenges for 2013?

Peter Graham of Esso Highlands

Peter Graham (PG): At this stage, we are 75% or thereabouts through the project, and the challenges looking forward are really much the same as we’ve been dealing with to date, law and order being the major concern.

Most of the construction work at this point in time has already been contracted out, the contractors are selected and it’s basically heads down now to complete the construction and get the gas to customers in 2014.

BAPNG: Has the Enterprise Centre, set up with the Institute of Banking and Business Management to support local contractors for the project, been a success?

PG: It’s been a great success in our view. It’s been a single contact point for businesses seeking to understand what opportunities exist on the project directly or through EPC contractors and sub-contractors.

The Enterprise Centre has also done a lot of capacity building, particularly for landowner companies, to help them understand what it takes to be successful and win contracts on a project.

It has helped that other resources projects in PNG have recognised the value and they are providing some ongoing support to the Enterprise Centre. I think it’s a very worthwhile resource centre for PNG generally.

BAPNG: Cost blows-outs for the project have been widely reported. Have there been any issues trying to manage the blow-out with your financiers?

PG: It’s a disappointment for us that we have experienced a cost increase. It’s not that we didn’t anticipate the issues that are sitting behind the increase in cost; it’s the magnitude of the challenges we faced that were unexpected.

While we expected heavy rain, we’ve experienced levels that haven’t been seen for 20 years or more.

The currency drivers are very difficult to forecast too; likewise, the impact of inflation in the country.

The sheer expenditure we’ve made in PNG has been a double-edged sword. It’s good news we’ve spent US$5.7 billion in the country but the bad news is this level of expenditure tends to create some inflationary pressures.

BAPNG: From what other businesses are telling us, the stress placed by the project on the country’s infrastructure is finally starting to come off?

PG: It’s our sense as well.The infrastructure and government processes have for the most part delivered what was needed, when it was needed.

The Highlands Highway is a good example. We’ve worked very closely over the last several years with the Department of Works and they’re able to respond much more rapidly to issues when they do arise on the highway. For the past six months or more we’ve met or exceeded our target of 500 truckloads along the Highway, which is really quite an extraordinary achievement.

What we’d like to see is the capacity we’ve built in our workforce—workers who have done a fantastic job for us—move across to Government projects or other projects elsewhere in PNG.

The problems on the highway physically haven’t been solved, but the responsiveness of everyone to get in and fix them has certainly improved dramatically. If there’s a landslip along the highway, it’s cleared up overnight and temporary measures are put in place. It’s a credit to the Government.

The ports likewise: they’ve done an exceptional job in making sure our contractors are not sitting waiting with bottlenecks on the docks. Movement of materials across the docks and along the Highlands Highway has passed the peak and is now diminishing.

BAPNG: With your project getting close to production in 2014, workers who have been engaged in your project are coming back onto the labour market. That in turn appears to be taking some of the pressure off employment costs in others sectors of the economy …

PG: One of the opportunities and challenges we do see going forward is the impact of demobilisation of the construction phase work force.

It’s an area that we’ve put a lot of planning and thought into already, talking with the Government and industry particularly about transitioning these skills to work elsewhere.

The government has provided Infrastructure Development Grants, for example, which are worth 120 million kina a year. What we’d like to see is the capacity we’ve built in our workforce—workers who have done  a fantastic job for us—move across to Government projects or other projects elsewhere in PNG.

BAPNG: The long-term prospects for LNG seem to have changed somewhat since the PNG LNG project started, in terms of projected global demand. Would you agree with that, and does that make the prospect of new developments in PNG more likely and more attractive to ExxonMobil?

PG: PNG is well positioned regionally to access growing markets.

The PNG LNG project has served to strengthen infrastructure in the country and also the Government capacity to deal with major projects. If you wrap those things together, it does bode well for PNG to access growth in the LNG market. For everyone, it’s really about aggregating sufficient gas to underpin those next steps.

That’s the challenge in front of all players in the gas sector—to progress further exploration and hopefully record successes.

Realistically, you can’t access the market without sufficient proved gas reserves to underpin sales. We have an active exploration program underway in PNG and are in the early stages of evaluating potential expansion options.

Esso Highlands is a subsidiary of ExxonMobil.