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World Bank Document 4 9 -~~~~~~~~~~~~~~~~~ .. ~ ~ ~ ~ ~ . .... ..... .... ..... ..... .... .. Public Disclosure Authorized t.~~~~~t Public Disclosure Authorized ~~..,I I W~~~~~~~~.7I 2%fip- Public Disclosure Authorized Public Disclosure Authorized PAPUA NEW GUINEA ISSUES AND OPTIONS IN THE ENEPGY SECTOR CURRENCY EQUIVALENTS Currency Unit = Kina (K) 1 Kina = US$1.05 (April 1991) 1 Kina = 100 toea (t) FISCAL YEAR January 1 - December 31 ABBREVIATIONS ADO Automotive Diesel Oil (Gas Oil) BBLPD Barrels per day BCL Bougainville Copper Ltd. CSA Commercial Statutory Authority DEC Department of Environment DME Department of Minerals and Energy DOT Department of Transport ELCOM Electricity Commission EPU Energy Planning Unit GWH Gigawatt-hour LPG Liquified Petroleum Gas MJ Megajoule MMCF Million Cubic Feet MMCFD Million Cubic Feet per Day MW Megawatt = 1,000 KW NAIDA National Investment and Development Authority PDL Petroleum Development License PNG Papua New Guinea PPL Petroleum Prospecting Licenses REAED Rural Electrification and Alternative Energy Development TCF Trillion Cubic Feet TOE Tons of Oil Equivalent This report was prepared by a mission team that visited PNG in February 1991, and consisted of Messrs. K. Jechoutek (Mission Leader, Sr. Ecoaomist), S. Igiwaja (Hydrocarbons Specialist), G. Baines (Environmental Specialist), K. Venkataraman (Power Engineer), M. Mendis (Renewable Energy Specialist) and S. Tsukahara (Hydroelectric Engineer). FOR OMCIAL USE ONLY Pacific Islands Series Report No. 1 Volume 8 PAPUA NEW GUINEA ISSUES AND OPTIONS IN THE ENERGY SECTOR August 31, 1992 Abstract Papua New Guinea is the largest of the 'lacificisland countries, with an expanding energy sector. This expansion is placing a strain on the professional staff of the Department of Minerals and Energy (DME). The report recommends a comprehensive human resources program to build up DME's capacity, which will be particularly useful in the hydrocarbons subsector, where the level of development activity is increasing. At present, petroleum product importers and distributors enjoy high margins in their operations, but a gradual reduction in the margins, and even retail prices, is possible if the regulators encourage cost reductions, such as the reduction of handling costs. stock holding, and accounts receivable. Since ELCOM has sufficient installed capacity to meet the load growth likely during the 1990s, ELCOM should focus on cost minimization, such as improving system efficiency, reducing fuel expenditures, and reducing system losses. In order to take advantage of economies of scale, ELCOM should consider aggressive ways of broadening its customer base. The management of the environmental and social impact of hydropower appears to be well thought out, and ELCOM's compensation package could be a model for other sectors. However, there is a need for a more vigorous regulation of the environmental effects of oil and gas development, pipeline construction, and marine pollution. Industry and Energy Operations Division Country Department III East Asia & Pacific Region This document has a restricteddistribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without WorldBank authorization. PAPU mNEWGUINEA TABLE OF CONTENTS Eare No. EnergYCnmn.............................................................. i Policy and InPtitutioralIssues ........... v............................v I. ECONOMIC AND INSTITUTONAL FAERK.....-................. 1 Energy andthe Economy .............................................. 1 InstitutionalStructure I.e.............. ............................ 2 II.ENERGY CONSUMPTION ................... 5 The Structure of Energy Consumption .................................... 5 Consumptionof Petroleum Products and Natural Gas ..................... 7 Electricity Consumption ..................... .... *.... * .**... 9 The Consumption of Biomass Fuels go ....... * 9 IIIENERGY SUPEL-Y .............................l Overview ..................................................... ** Petroleum Procurement and Distribution ................ o.... oI2 flydrocarbonReserves, Explorationand Development ..... .... 13 Power Supply ......................................16 Biomass Energy Supply ..................................... ........... 21 Other New and Renewable Sources of Energy ............................22 IV. POLICY AND INSTITUTIONALISSUES ..................................... 26 EnvironmentalIssues ........................ Pricing Issues ..................... *........... ....... 30 Institutionaland Strategy Issues ...................................33 V. INVESTMENT AND TECHNICALASSISTANCE PRIORITIES ......................... 38 Public Investment Program ..................... 38 Power .............................. 39 Petroleum ...... New and Renewable Sources of Energy ...................................40 Annexe Annex 2.1: Energy Balance 1990 Annex 2.2: Energy Consumption Patterns 1990-2000 Annex 2.3: Petroleum Products Imports Annex 2.4: Details of "C' Centers as of 31 December 1990 Annex 2.5: ELCOM's Load Development Annex 2.6: Details of ELCOM's Energy Sales Forecast Annex 3.1: Supply of Petroleum Products Annex 3.2: HydrocarbonDiscoveries in Papua New Guinea Annex 3.3: Kutubu Petroleum DevelopmentProject Government Cash Flow Annex 3.4: Details of ELCOM's Installed Generating Capacity Annex 3.5: List of Existing Hydropower Stations in PNG Annex 3.5: Small Hydropower Development Annex 3.7: ElectricityCosts vs. Diesel Price Annex 4.1: Petroleum Products Price Structure Annex 4.2: ELCOM's Financial Projections Annex 4.4: Indicative Terms of Reference for Diesel Plant OptimizationStudy Annex 4.5: Indicative Terms of Reference for DistributionOptimization Study Annex 5.1: Energy Sector Public Investment Program CONVERSION FACTORS Density Net Cal. Value Tonne of Oil Equivalent (MJ/kg) (TOE) Light Distillates 0.68 44.5 1.063 Gasoline 0.73 44.1 1.053 Avtur/Kerosene 0.78 43.5 1.038 Distillate 0.83 42.6 1.018 Residual Fuel Oil 0.97 40.4 0.965 Methanol 0.796 19.95 0.476 Coal (Australian) 27.64 0.660 PAPUA NEW GUINEA SUMMARY Main Recommendations 1. HydrocarbonsDevelopment. The increasinglevel of developmentactivity in the oil and gas sectorrequires a higherdegree of regulatoryoversight than currentlyavailable. Vigorous monitoring of the Kutubuand Hides developments, increasingthoroughness in the negotiationof explorationand development licenses,and the formulationof a clearand transparentregulatory framework for the developmentstag8 of hydrocarbonsactivity in the countryare essential. 2. DME Strengthening.The increasingburden of oil and gas regulation, the expansionof rural energyactivities, and the monitoringand regulationof ELCOM developmentis placingexcessive strain on the smallprofessional staff of DME. A comprehensivehuman resourcesdevelopment program needs to be put in place,supported by substantialadvisory help to build up the capacityof DME to tackleits expandingportfolio and responsibilitiesas an effectiveregulatory agency. 3. Gas Development.The country'srich endowmentof natural gas is difficultto exploiton an economicallyfeasible scale. A major effortshould be devotedto studying,evaluating, and promotingappropriate domestic and export possibilitiesfor gas use. This shouldinclude a thoroughexamination of the potentialrole of gas in the power sectur,and the active mobilizationof investorsin an export-scaleLNG project. 4. ELCOM Cost-effectiveness.As a small,urban-based utility, ELCOM has difficultiesin keepingunit costs low. The main aim duringthe consolidation phase of the 1990s shouldbe to (i) bid aggressivelyfor large industrialand mining consumers,perhaps by means of marginal-cost-basedprice offers, to broadenthe consumerbase and reduceunits costs,and (ii) designlow-cost ways to serve peri-urbanand rural areas,which now cannotbe suppliedbecause of insufficientrecovery of costs that reflecthigh urban supplystandards. 5. PetroleumProduce Prices. The high margins enjoyed by petroleum productimporters should be examinedcarefully for theireconomic and commercial justificationand the price regulationof such importsshould be focusedon incentivesfor cost reduction. 6. Environmental Monitoring. More vigorous regulation of the environmentaleffects of oil and gas development,pipeline construction, and marine polutionwould be beneficial. A more consistentcoordination between differentGovernment offices in this respect,and clearerenforcement guidelines are necessary. Overviewagod Prioritles 7. The energy sector of Papua New Guinea exhibits several dominant featuresthat influencethe formulationof an energystrategy: (i) PNG is richlyendowed with energyresources, such as substantial reserves of oil and g*a, ample hydro potential,geothermal potential, and a large supply of biomass. This is in stark contrastto the smallsize and fragmentednature of the domestic energymarket. While oil reservescan be extractedand experted, non-tradeableresources such as raw naturalgas, hydropower,or geothermalpower are not easilydeveloped economically on a small scale. Domestic energy needs are decentralized,while hydroelectricand gas-using facilities would benefit from economiesof scale. (ii) The cost of developingenergy resources and supplyingenergy to final consumers is high. The factors contributingto this include (a) the generalinaccessibility and ruggedterrain of much of the country,(b) the decentralizednature of energydemand, requiring smalland high-costpower supplyor hydrocarbonsfacilities, (c) the increasingcost
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