Papua New Guinea - Energy assessment status report

Joint UNDP/World Bank Energy Sector Management Program Activity Completion Report No. 006/83 Country: PAPUA NEW GUINEA Activity: ENERGY ASSESSMENT STATUS REPORT July 1983 Report of the Joint UNDP/World Bank Energy Sector Management Program This document has a restricted distribution. Its contents may not be disdosed without authorization from the Govemment, the UNDP or the World Bank.  Energy Sector Management Program The Joint UNDP/World Bank Energy Sector Management Program is designed to provide a rapid and flexible response to governments who request assistance in implementing the policy, planning and institutio: al recommendations of the Energy Assessment Reports produced under another Joint UNDP/World Bank Program, or in carrying out prefeasibility stud-es for energy investments identified in these reports. The Energy Sector Management Program can provide the following types of assistance for countries which have had assessments: o assistance to improve a government's ability to manage its energy sector, for example by defining staffing and work programs, evaluating management information needs, identifying sources of public and private finance, developing a medium-term investment plan; o prefeasibility work on priority irnvestment plans, especially those which will improve the efficiency of energy use, bring about economic fuel substitution, or provide enough affordable energy to rural areas; o specific short-term assistance in institutional and manpower development, both at the sectoral and agency levels. The Program aims to supplement, advance and strengthen the impact of bilateral or multilateral resources already available for technical assistance in the energy sector. Funding of the Program The Program is a major international effort and, while the core finance has been provided jointly by the UNDP and the World Bank, important financial contributions to the Program have been made by the Governments of the United Kingdom, the Netherlands, Denmark, Finland, Norway, Sweden, Australia and New Zealand.  PAPUA NEW GuINEA ENERGY ASSESSMENT STATUS REPORT July 1983  PAPUANEw GunINA ENERGY ASSESSMENT STATUS REPORT 1/ I. BACKGROUND AND SUMMARY 1.01 Papua New Guinea imports virtually all of its commercial energy in the form of petroleum products even though it has a diverse and potentially very large indigenous energy resource base. This paradox is due to two factors. First, the indigenous energy resources have not been adequately defined, and second, the small and fragmented nature of domestic energy markets makes the economic development of these resources additionally complicated. The principal focus of the energy assessment mission which visited PNG in November 1981 was to help define a strategy to overcome these difficulties. The two main strands of this strategy as recommended in the mission's report 2/ were: (i) to _ccelerate the identification and development of PNG's petroleum potential for domestic markets and/or for export; and (ii) to analyze the various options for electric power generation and thus to put into place a revised power supply system which would result in a cheaper and more reliable supply of electricity. 1.02 The report also made a number of other recommendations including the rationalization of the previously excessively large and diverse program to develop nonconventional, renewable energy sources, and the strengthening of the institutional framework for the energy sector to enable the Government to effectively address the above issues. 1.03 The Government's response to the issues identified by the energy assessment report has been remarkably quick and wide ranging. Work has begun on most if the studies and further analysis required to define a strategy for petroleum development and utilization and for the preparation of a least cost power development plan. The renewable energy development program has been further scaled down and reoriented to technologies which are likely to have earlier and more certain payoffs * for the country. However, on the institutional question while progress has been made on strengthening the policy and technical capability at the sectoral level, its pace has been slow and further action is urgently required. This is particularly so in the petroleum sector, where the existing institutional structure and staffing will soon become inadequate 1/ This report was prepared by a mission comprising Messrs. M. Ahmed and N. B. Prasad which visited Papua New Guinea in June 1983. 2/ Papua New Guinea: Issues and Options in the Energy Sector, June 1982. Report of the Joint UNDP/World Bank Energy Assessment Programme.  -2- to cope with an Lncreasing level of private exploration and development activity. Support for institutional strengthening should therefore be a high priority in the future technical assistance programs of donor agencies. In parallel, the Government will also need to make a substantial reallocation of its own staff resources to the energy sector and to reoise and streamline the existing institutional arrangement for the management of this sector. II. ENERGY SECTOR DEVELOPMENTS, NOVEMBER 1981 - JUNE 1983 2.01 The major developments in the energy sector since the November 4 1981 assessment mission are summarized below. On the demand side, the consumption of both petroleum products and electricity stagnated in 1982, partly because GDP fell by an estimated 1% and partly because of the sharp rise in electricity tariffs in January 1981. Total petroleum product consumption in 1982 is estimated at 644 ktoe (1981: 675 ktoe) and total electricity generation in the public system was 442 GWR (1981: 460 GWR). Because of continued poor rainfall thermal generation accounted for 36% of total generation (the same as in 1981). The oil import bill in 1982 (K147 million) was also the same as in 1981. Despite the fall in crude oil prices, 1983 oil imports will not cost significantly less because of the devaluation of the Kina in March 1983 (about 10% against the US dollar). After increases of 70% in the period November 1980 - December 1981, electricity tariffs remained constant upto May 1983. In June 1983 the tariff structure was revised to provide a uniform national tariff of 16.0 toea/KWH (average sales price in 1982 was about 13 toeaKMWH). The new tariff structure results in a serious disparity between costs and tariffs for the various independent supply grids because the costs of power supply in these grids are very different. 2.02 On the supply sides, the main developments have been in the petroleum sector. There has been an increase in exploration interest with Shell/Amoco applying for a license in the North New Guinea basin and some smaller companies applying for licenses in the Gulf area (south of Pasca) and in areas adjoining the Barikewa concession. Some preliminary seismic and geochemical work has also been undertaken in the Cape Vogel basin, There has been a gas and condensate discovery by Gulf oil at Juha in the Southern Highlands. The potential of this deposit (initial flows 8.3 MMCPD of gas and 58) barrels/day of condensate) is being invest1gated. An Important negative development has been the blowout of the second Pasca well in February 1983, which has still not been stemmed. The inadequate and slow response in dealing with the blowout problem has highlighted the urgent need to streamline and strengthen the Government's capability for managing petroleum exploration and development. This is reinforced by the need to formulate quickly a comprehensive strategy for the utilization of proven gas resources.  -3- 2.03 In the other energy subsectors, important developments include the commissioning of a second 20MW gas turbine ln the Port Moresby system. The Ramu ethanol project is progressing according to schedule and agreements have been reached with the oil companies to market a 20% ethanol blend gasoline in the Lae area when production starts later this year. Finally, as discussed in Sectlon IV below, considerable progress has bee-n made in Identifying and realizing the potential for improved energy efficiency in the industrial and commmercial sectors. III. ON-GOING TECHNICAL ASSISTANCE ACTIVITIES (i) The World Bank: Assistance is being provided under a Petroleum Exploration Technical Assistance Project (cofinanced with the OPEC Funtd) to strengthen the monitoring and promotion capability in the petroleum sector. In addition, the Bank has been closely involved with the broader follow-up to the energy assessment. A July 1982 mission assisted in the preparation of terms of reference for a variety of coal and power subsector studies which have since been started. Subsequently, a March 1983 mission reviewed and commented upon the drafts of many of these studies and proposed additional work required to complete them. The Bank's regional projects staff continue to be involved in the final stages of this work. (ii) The New Zealand Govarnment is funding the foreign exchange costs (about K150,000 over 1 year) for a mini-hydro resource inventory; this may be renewed for another year. (iii) A number of regional assistance programs may provide financing for small renewable energy and conservation projects. These include the EEC (administered by the South Pacific Bureau for Economic Cooperation), UNDP 's Pacific energy program, and Commonwealth Heads of Government Regional Meeting Special Energy Funds; and bilateral assistance from the Australian and New Zealand Governments. IV. STATUS OF ENERGY ASSESSMENT RECOMMENDATIONS Petroleum (i) Induce oil companies Work programs proposed for new to accelerate their licenses and for renewal of exporation activities existing licenses are being to firm up reserves reviewed to this ead by and reach agreement on Petroleum Resources Assessment the development of Group (PRAG) and its consultants. discovered gas fields. Recent onshore find at Juha (gas/condensate) being evaluated. See below for development activities.  -4- (ii) Carry out utilization Pasca: Consultant prefeasibility studies on onshore/ study of field development offshore gas fields completed April 1983; utilization study for petro-chemicals completed April 1983; suggests production of ammonia-urea onshore as most promising but still marginal prospect; private study on barged transport of pressurized LNG to Bougainville a Copper Mines received May 1983 and being reviewed; however all further work on hold because of e well blowout. Barikewa: Desk study by Elcom on using this deposit for power supply to Ramu grid is being reviewed by Government and may need to be reworked using more recent information on costs and reserve potential provided by consultant studies financed through the Petroleum Exploration Technical Assistance Project. In particular feasibility of using slim hole drilling to reduce cost needs to be considered. Electric Power (iii) Analyze options for The following studies have Ramu and Port Moresby been completed by consultants grids and prepare least employed by Elcom: cost power development program a) Port Moresby 25MW coal fired station costing study (March 1983). b) Port Moresby System - xnvestigation of hydro power U alternatives (interim report, December 1982). c) Ramu System - Investigation of Hydro power alternatives (interim report, January 1983) d) Barikewa Gas - preliminary assessment (in house Elcom Study, February 1983).  These studies are now being reviewed by the Bank and by Elcom's resident consultants who will also prepare a least cost development program for the power system. This analysis will also take into account the utilization of large size slow/medium speed diesel and of interconnecting the Ramu/Port Moresby systems. (iv) Compile an inventory Work has begun with financial of major hydro sites assistance of the Bank. About 60 and introduce gauging sites of 30 MW or more will be stations on small hydro covered in a two year inventory; sites for which there gauging network is expanding but are no flow records. shortage of counter part funds is slowing down both efforts. (v) Investigate use of Economic potential for using wood and wood wastes wood waste for supply to Elcom for power generation. grid appears smaller than initially envisaged; evaluation of smaller sized plants (direct burning and gasifiers) being done to supply rural industry. (vi) Analyze economics of No decision has been reached shifting Bougainville on Bougainville's future copper mines power energy supply mix because the generation from oil costs and feasibility of to coal. generating electricity from Laluai hydro scheme and Pasca gas (LNG/LPG) are still being evaluated. (vii) Carefully analyze Further Government analysis of this economics of Rouna 4 project continues in view of project before potential bilateral concessionary embarking on it. financing that is tied to it, Coal (viii) Analyze commercial In-house study carried out by viability of developing Geological Survey in Purari coal deposit. early 1983 indicates that such development would not be commercially viable at this time.  Conservation No specific recommendation. Energy audits completed on 4 hotels, a hospital, a brewery and several other sites. Savings of 20-50% on energy bills identified in most cases; partial or complete implementation of recommendations proceeding (payback periods 0-3 years). Demonstration projects on lighting, air conditioning and waste heat recovery commencing in public sector. Cogeneration No specific recommendations. Highly economic private sector cogeneration applications identified in breweries, other industries and hotels. Investment may not proceed because of uncertainty over Elcom standby tariffs. This question needs to be analyzed urgently to permit economic cogeneration to proceed. Renewables (ix) Restrict investment Ramu project is nearing in ethanol to the completion. Baiyer River project Ramu project and has been cancelled. No other evaluate critically ethanol projects are all other proposals. planned. (x) Halt or reduce No further investments made in investments in biogas and pyrolysis; biogas, pyrolysis and photovoltaic investments are photovoltaic experi- being limited to proven mental projects. applications and to demonstration projects where tied aid is involved. A significant program for the demonstration of power gasification is envisaged with EEC support. (xi) Continue to support Solar water heaters continue solar water heaters to flourish. The current in the residential/ installed number is about commercial sectors. 7,500 of which 90X are in residences.  Institt ions (xii) Strengthen the Some progress has been made institutional through the establishment of PRAG capability for dealing and the assistance provided by with the oil and gas the Bank assisted Petroleum sector and consider the Exploraton Technical Assistance eventual establishment Project. The institutional .2 of a separate oil and gas structure and staffing in this agency. area need to be reviewed (see Section V below). (xiii) Reorient work of Given the cutback in the Energy Planning Unit renewable energy program the Government to focus on all energy has decided not to create sources and create a separate unit for this a separate unit for area. The mission agrees the implementation that this is not a high of renewable energy priority now. EPU's focus is and conservation also being broadened to cover measures. conventional energy sources, including petroleum. Energy demand forecasts and alternative supply scenarios have been prepared. However, as noted below, EPU's staffing needs to be considerably strengthened to enable it to discharge those broader responsibilities effectively. V. PRIORITIES FOR TECHNICAL ASSISTANCE (i) Institutional Review of Energy Planning 5.01 The two most important components of the energy sector in. PNG are petroleum and power. The most significant development noted by the mission since the publication of the Assessment Report has been the acceleration of activity in the petroleum subsector. This acceleration has put increased strain on the three Divisions of DtE involved in the petroleum sector (viz,.Mines, Policy and Planning, and Geological Survey) and has highlighted the difficulties of coordination between those Divisions. These difficulties also extend to the interface between DME and the Electricity Commission on the evaluation of various options for the use of indigenous gas reserves (Barikewa, Pasca and most recently Juha) for power generation. 5.02 It has been agreed by the Secretary of DME that a comprehensive review of institutional responsibilities and capabilities in the energy sector is now urgently required ito avoid the prospect of DME itself  -8- becoming a bottleneck on the near-term development of PNG's petroleum resources both for export and for domestic use. This review would encompass all relevant Divisions of DME, their interrelationship, as well as their relationship with other energy agencies such as the Electricity Commission. In the petroleum subsector the focal point of the review would be the Petroleum Advisory Board, chaired by the Secretary of DME. This review would define the respective responsibilities of the various parts of the DME in the area of energy sector management and planning. It would also identify the staffing and technical assistance that would be needed to help DME carry out these tasks effectively. The review would also define the training required to ensure progressive build-up of an indigenous energy planning capability within PNG. 5.03 The Government has requested, and the mission strongly supports, that such a review be carried out urgently under the Energy Sector Management Program. The required input is estimated at two to three man- months. (ii) Co-generation and Auto-generation 5.04 At the time of the Assessment Report it was felt that the Government's policy on energy pricing had resulted in a broadly appropriate structure of incentives for energy production and consumption. The mission notes that a system of uniform national tariffs for electricity has since replaced the previous cost-based structure and, as a result, a number of fuel substitution anomalies have recently arisen. In particular, the present combination of electricity tariffs and standby charges appears to be preventing the development of a number of economic options for cogeneration and auto-generation in the private sector. 5.05 To resolve these issues, and to promote a balanced development of private and public sector least-cost energy supply options for both heat and power, a study is required of the structure of tariffs and regulations governing cogeneration. This study would be based on a review of time-pattern of production costs in each of the Electcicity Commission's supply grids. 5.065 Again, the Government has requested and the mission proposes that this study be funded under the Energy Sector Management Program, with the required input estimated at 6 - 8 staff weeks. (iii) Itformation Base for Energy Planning 5.07 The mission notes that considerable effort has been made recently to fill in gaps in the energy data base and to exploit this information for systematic planning of medium-term energy options. This activity now appears to be constrained by a shortage of suitably-trained staff and by the limitations of manual data processing.  -9- 5.08 It was agreed that the ins tiutional review (in (i) above) could usefully define how thep^ needs could be met thLough a range of data processing options (both hardware and software components). ESMP funding for implementing these optio J is not envisaged but some funds may be required to assist the PNG Government to find a suitable source of funding. r , t