4 9 -~~~~~~~~~~~~~~~~~ .. ~ ~ ~ ~ ~ . .... ..... .... ..... ..... .... .. . t.~~~~~t ~~.., I I W I ~~~~~~~~.7 2%fip- 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 'lacific island 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 restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PAPU mNEW GUINEA TABLE OF CONTENTS Eare No. EnergY Cnmn.............................................................. i Policy and InPtitutioral Issues ...........v............................ v I. ECONOMIC AND INSTITUTONAL FAERK.....-................. 1 Energy and the Economy .............................................. 1 Institutional Structure I.e.............. ............................ 2 II. ENERGY CONSUMPTION ................... 5 The Structure of Energy Consumption .................................... 5 Consumption of 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 flydrocarbon Reserves, Exploration and Development ..... .... 13 Power Supply ...................................... 16 Biomass Energy Supply ..................................... ...........21 Other New and Renewable Sources of Energy ............................ 22 IV. POLICY AND INSTITUTIONAL ISSUES ..................................... . 26 Environmental Issues ........................ Pricing Issues .....................*........... ....... 30 Institutional and Strategy Issues ...................................33 V. INVESTMENT AND TECHNICAL ASSISTANCE 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: Hydrocarbon Discoveries in Papua New Guinea Annex 3.3: Kutubu Petroleum Development Project 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: Electricity Costs 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 Optimization Study Annex 4.5: Indicative Terms of Reference for Distribution Optimization 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. Hydrocarbons Development. The increasing level of development activity in the oil and gas sector requires a higher degree of regulatory oversight than currently available. Vigorous monitoring of the Kutubu and Hides developments, increasing thoroughness in the negotiation of exploration and development licenses, and the formulation of a clear and transparent regulatory framework for the development stag8 of hydrocarbons activity in the country are essential. 2. DME Strengthening. The increasing burden of oil and gas regulation, the expansion of rural energy activities, and the monitoring and regulation of ELCOM development is placing excessive strain on the small professional staff of DME. A comprehensive human resources development program needs to be put in place, supported by substantial advisory help to build up the capacity of DME to tackle its expanding portfolio and responsibilities as an effective regulatory agency. 3. Gas Development. The country's rich endowment of natural gas is difficult to exploit on an economically feasible scale. A major effort should be devoted to studying, evaluating, and promoting appropriate domestic and export possibilities for gas use. This should include a thorough examination of the potential role of gas in the power sectur, and the active mobilization of investors in an export-scale LNG project. 4. ELCOM Cost-effectiveness. As a small, urban-based utility, ELCOM has difficulties in keeping unit costs low. The main aim during the consolidation phase of the 1990s should be to (i) bid aggressively for large industrial and mining consumers, perhaps by means of marginal-cost-based price offers, to broaden the consumer base and reduce units costs, and (ii) design low-cost ways to serve peri-urban and rural areas, which now cannot be supplied because of insufficient recovery of costs that reflect high urban supply standards. 5. Petroleum Produce Prices. The high margins enjoyed by petroleum product importers should be examined carefully for their economic and commercial justification and the price regulation of such imports should be focused on incentives for cost reduction. 6. Environmental Monitoring. More vigorous regulation of the environmental effects of oil and gas development, pipeline construction, and marine polution would be beneficial. A more consistent coordination between different Government offices in this respect, and clearer enforcement guidelines are necessary. Overview agod Prioritles 7. The energy sector of Papua New Guinea exhibits several dominant features that influence the formulation of an energy strategy: (i) PNG is richly endowed with energy resources, such as substantial reserves of oil and g*a, ample hydro potential, geothermal potential, and a large supply of biomass. This is in stark contrast to the small size and fragmented nature of the domestic energy market. While oil reserves can be extracted and experted, non-tradeable resources such as raw natural gas, hydropower, or geothermal power are not easily developed economically on a small scale. Domestic energy needs are decentralized, while hydroelectric and gas-using facilities would benefit from economies of scale. (ii) The cost of developing energy resources and supplying energy to final consumers is high. The factors contributing to this include (a) the general inaccessibility and rugged terrain of much of the country, (b) the decentralized nature of energy demand, requiring small and high-cost power supply or hydrocarbons facilities, (c) the increasing cost of assuring the security of transport and facilities, (d) issues connected with the negotiation of land acquisition and compensation in an environment of customary land use rights, and (e) the strong reliance on expatriate expertise while national skills are being developed. These features cause high construction cost, delays, and high recurrent expenses. (iii) The inadequate staffing of the Department of Minerals and Energy (DME) with energy sector professionals inhibits the monitoring of ongoing sector activity, creates a generally weak negotiating position for the Government in current and future exploration and development activities, and prevents the consistent formulation of strategies and an informed review of policy options. Opportunities may have been missed or delayed. In order to be effective, the ongoing reorganization of DME will have to include a strengthening of the energy sector skills and experience available to the DHE, to avoid a purely reactive Government stance vis-a-vis the major investors in the sector. 8. Features (i) and (ii) of the sector require an above-average sophistication in the planning of energy strategies, and in the monitoring of energy sector developments. This is inhibited by the staffing problems of DME. In the medium term, while skills and staffing are being developed, the Government must aim for the highest possible efficiency in the utilization of the limited planning and monitoring resources available. This would include (i) reliance on the human resources of ELCOM in the development and implementation of power sector strategies, (ii) the channelling of technical assistance into high- priority areas of DHE activity such as the negotiation and regulation of hydrocarbons development, and the optimization of 4.solated rural energy supply, and (iii) the design of a strategy to utilize the country's natural gas resources. i i- 9 The development of a Sas use strategy links the power, mining, and hydrocarbon. sectors, and involves regional considerations of potential export of LNG. In the short run, the large-scale use of gas for power generation. appears remote, as the volume of demand and the location of gas fields do not provide adequate cost ircentives for a gas development program. Where gas and mininS development can proceed in close proximity (such as in the Hides/Porgera project area), gas can be a competitive fuel for the power needs er gold and copper mines, even to the point of being more attractive than ELCOM supply. However, new mines under consideration are unlikeiy to be near ga fields, and the power supply choice will be between own diesel generation, ELC0l supply, or perhaps geothermal steam (in the case of the proposed Lihir mine). Numerous options for domestic and export gas utilization have been studied, and further analysis should focus on those possibilities where sufficient private investor interest seems to be present: this could be the case with LNG exports from the substantial offshore and onshore gas finds to date, where international oil companies have already investigated markets and development costs. Energy ConsumDtion 10. The use of biomass and petroleum products dominates the final consumption of energy in PNG, together accounting for almost 90Z of the total. Biomass alone accounts for almost 50Z, primarily consisting of fuelwood use in the household and agriculture sectors. High-income households, particularly urban ones, consume primarily commercial fuels such as electricity, LPG, and kerosene, and use equipment such as solar water heaters. Rural and low-income households are fuelwood users. The agroprocessing industry utilizes about 50Z of the agricultural waste available from their operations, a significant part of energy use in the agriculture sector. 11. While the biomass and electricity consumption growth for the 1990s is likely to follow past trends, the increase in petroleum product consumption will be accelerated by the major new mining and hydrocarbon development projects that will experience the peak of construction activity in the early 1990s. After these projects come on stream by the middle of the decade, overall energy consumption growth should settle into a more balanced pattern, as the enclave nature of the projects mainly implies an effect on Government revenue rather than on overall economic activity. Generally high energy prices are contributing to a careful weighing of options by final consumers of energy: a significant expansion of rural electricity supply, for instance, can only take place if supply costs are reduced by alternative technologies or more efficient operations in the supply system. Energy SuDplv 12. Petroleum Products. Three international oil companies import and distribute petroleum products in PNG. The sales are geared mainly towards large consumers such as mines, ELCOM, agroprocessors, airlines, and local distributors. Retail sales are handled by area distributors and their sub-distributors, who supply rural areas. Regulation of the industry is restricted to price controls: appropriate maximum margins for handling, transport, and other distribution costs are agreed with the Government price controller, and added to the regularly monitored import price. This arrangement provides sufficient incentive for the -iv- companies to seek efficiency. Although competition between the three companies is limited, all are represented throughout the country and market shares are shifting at the margin continously. Given the high-cost nature of distribution in PNG, the supply syotem ie working well. 13. Hydrocarbon DeveloDment. Exploration activity has been going on in PNG for some time, encouraged since 1984 by the Bank-assisted Exploration Promotion Project. Although substantial gas reserves had been identified earlier, hydrocarbons activity received a boost with the discovery of exportable crude oil in the Southern Highlands by a Chevron-led consortium. The already significant exploration expenditures that were necessary to firm up the reserve estimates to prove the commercial attractiveness of the oil finds, are now being dwarfed by the massive development investment for the Rutubu oil export project, eatimated at US$ 1 billion. From late 1992 onwards, Chevron will produce about 130-150,000 barrels per day, and export them through a pipeline to a marine tanker loading terminal in the Gulf of Papua. A mini-refinery for the project's consumption of diesel and jet fuel will be constructed, which could be expanded somewhat to provide major petroleum products for the Highlands. Although the life of the identified fields does not extend beyond the year 2000, the Government will receive about US$ 300 million per year from tax, royalty, and equity during the peak production years in the mid-1990s. 14. On a smaller scale, the BP gas discovery at Hides (close to the Kutubu project in the Highlands) is being developed for the supply of fuel for power generation for the Porgera mine. The production of about 15 NMCFD of gas for this purpose will result in the availability of about 300-400 barrels of condensate per day: these products could be added to the production of the Kutubu min'- refinery, could be used unprocessed in the Highlands, or could add to the fuel supply for Porgera mine. 15. Electricity. About 50Z of the total installed generating capacity in the country is own generation in two major mining operations, Ok Tedi and BCL (Bougainville), of which the latter has been out of operation for some time. Most of the remainder, about 250 MW, are accounted for by ELCOM, the main public utility. Large numbers of small isolated private and public diesel and hydro facilities complete the picture. ELCOM's system is centered around two separate grids, one serving Port Moresby and the surrounding area, the other supplying the Highlands and the port of Lae. Both grids are primarily hydro-based, and ample capacity is available throughout the 1990s (the aggregate peak demand served'by ELCOM in 1990 was 110 MW). All other ELCOM supply is from small diesel and hydro facilities serving provincial towns. The about 80 even smaller generating plant operated by local public works departments (C-Centers) supply remote administrative centers, apd are maintainea by ELCOM. 16. While the operation of the two main ELCOM grids, primarily supplying urban areas, can be managed cn a financially sound basis, the isolated ELCOM and public works centers are lossmakers. High operating costs of small diesel plant can not be recovered through the uniform national ELCOM tariff, or through the C-Center tariff, which suffers in addition from a poor collec(tion effort. This feature, together with the ELCOM mandate for financial soundnse of investments, effectively prevents the expansion of electricity supply to rural areas under the current circumstances. The incentive for the utility is to restrict its oper-tions to the urban ateas whoel the high unit costs of operating a small system can be recovered. Consequently, system investment plans are modest, and focus on maintaining adequate capacity to supply the slowly growing demand in the existing grids. The main feature of this program is the timing of an eventual connection between the Port Moresby and Highlands grids, which is unlikely to be economically justified before the year 2005. At that time, major new hydra capacity in the Ramu basin can be added to replace some of the Port Moresby thermal genration. Any futuro expansion of supply to rural areas will havo to be conducted by utilizing all cost-reduction methods available, such as different supp"y standards, the use of new and renewable energy resources where economically justified, etc. 17. New and Ren2ntable Energy. PNG is amply endowed with biomass resources, including fuelvood, sawmill and logging residues, and agricultural residues. Although not all of the potential is economically exploitable, there is a large -eserve of biomass to be tapped in appropriate areas where it appears economically attractive. For both economic and institutional reasons, some options such as power gasifiers, b_ogas, or ethanol do not appear justified. However, plans for energy supply to remote areas should include options such as heat gasifiers for crop drying, direct combustion of biomass in mobile units, cogeneration at agroprocessing facilities, and photovoltaic electricity supply. Given the high cost of delivering petroleum products to remote areas, such options could be cumpetitive on a case-by-case basis. Solar hot water heating is already widespread in PNG, and is economically attractive. Any proposed mini- hydro schemes, however, should be evaluated carefully whether their overall cost is competitive with alternatives including diesel generation: although fuel costs .savings are evident, the lifetime cost of mini-hydro facilities tends to be high. Policy and Institutional Issues 18. The main issues arising in the development of the energy sector of PNG are those concerned with energy Pricing and cost reductions. the management of the hvdrocarbons development proaram, the weakness of the regulatory caDability of the Government, and the environmental and social impact of energy development: (i) Pet7:oleum product importers and distributors enjoy comfortable margins in their operations, sanctioned by the Price Controller's Ofiice. A Sradual reduction of the margins could be arrived at if t!ie regulatory activity would focus more strongly on the encouragement of cost minimization, such as reduction of handling costs, stock holding, and accounts receivable. A vigorous effort in this area may yield some retail price reductions. (ii) ELCOM's high average costs of supply affect its competitiveness in obtaining new large electricity consumers such as mining operations, and in providing electricity to rural areas. Own generation by new mines can be achieved at similar or lower cost than ELCOM grid supply, thus restricting the utility to a small urban system with limited economies of scale. Given the comfortable capacity reserve of ELCOM during the 1990., a marginal-cost-based pricing offer to potential large consumers could be attractivo if compared to self-generation. On the other -vi- hand, marginal cost of grid extension or isolated supply to rural and remote aream is high, and the approach for rural electrification has to focus on the reduction of supply cost through lower standardsp higher efficiency, or innovative solutions for energy sources and administration. (iii) The period of consolidation for ELCOM during the 1990. can be used to good advantage to improve system efficiency, reduce fuel expenditure, extenid the life of diesel plant, automate isolated facilities, decrease transmission and distribution losses, and reduce consumer costs. At the same time, a clear strategy for future major investments needs to be developed, focusitng on the optimal mix of hydro, gas-fired, and diesel generation, and on the best timing for the interconnection of the two major grids. Any geothermal potential should be evaluated in areas where joint use of power and steam would make the use of this resource more efficient. (iv) As the development of hydrocarbon resources accelerates, and the develt- ment of a strategy for rural energy supply becomes essential, DME is crippled by a shortage of energy sector skills that are vital for this phase. An inadequately small number of professionals in DME is faced with the responsibility for negotiating and monitoring major oil and gas investments, and taking over the operation of a large number of rural electricity supply centers. Without the rapid addition of positions and necessary skills, investors in the oil and gas sector will. proceed without adequate regulatory oversight, and the efficiency of rural energy supply will deteriorate further. The ongoing DME reorganization needs to be streamlined and supplemented by a substantial strengthening in staffing, so that regulatory responsibilities in both the hydrocarbons and electricity sectors can be discharged satisfactorily. (v) ELCOM has made significant progress during the 19801; n reduring their staff, and reducing the reliance on e.&patriates. Nevertheless, this effort needs to be continued, as staff costs are a significant element in the generally high cost of energy supply. In particular, staffing in the isolated ELCOM systems appears to be higher than necessary, and more efficient technological and institutional solutions need to be found. Both in ELCOM and DME, there is a need to accelerate the skills development and task responsibility of PNG nationals, in order to decrease the need for massive expatriate support in the long run. (vi) Apart from the Kutubu and Hides developments of the oil and gas reserves, the strategy for the further utilization of the country's hydrocarbon reserves is unclear. The small scale of any domestic options for gas use prevents cost-effective local solutions for the development of the gas resource, but an inventory and promotion campaign would yield some feedback from international investors about the attractiveness of gas exports. Interest in the investor community in such a venture is growing, and a coordinated effort could trigger serious study of an LNG project. Similarly, small domestic projects can be attached to major export-oriented projects at the margin, such as an expansion of the Kutubu mini-refinery for supplying the Highlands. (vii) The management of environmental and social impact of hydropower development in PNG appears to be well thought out, and the compensation packages designed by ELCOM for this purpose could be a model for other sectors. In spite of this effort, compensation for land rights is a ifficult matter throughout PNG, and creates delays and cost incceases for energy sector development. The development of oil and gas resources at Kutubu and Hides, including the pipeline to the Gulf, is facing similar problems. The overlap of environmental responsibilities between different Government agencies, and the omnipresent staff shortage, have prevented an effective regulatory response to the new resource development issues, and a more vigorous monitoring of potentially hazardous activities in the sector is necessary. In particular, the issues of potential oil spills in the Gulf, and the impact of the pipeline on water flows in low-lying areas need to be addressed. I. ECONOMIC AND INSTITUTIONAL FRAMEWORK Eneral and the Economv 1L 1.1 Papua New Guinea (PNG) is the largest of the Pacific Island countries both in terms of population and in terms of economic size. Nevertheless, per capita income is relatively low, particularly if the effect of the enclave mining operations is removed. The population, estimated at about 3.9 million in 1989, is growing rapidly at close to 3Z per year, while the mining output fluctuates and the non-mining economy grows only slowly. The closure of the Panguna mine on Bougainville Island in 1989 reduced both GDP and Government revenue by significant amounts, and obliged the Government to take austerity measures while encouraging the acceleration of new mineral development, and to place more emphasis on the development of the non-mining sector. 1.2 The economy has a pronounced dual nature: the modern sector, employing about 152 of the labor force and based in urban centers and mining enclaves, is dominated by mining and Government services (the latter accounting for about 35S of formal sector employment). The remainder of the population lives in rural areas and engages in subsistence farmiig with occasional surpluses from cash crops. The remoteness and inaccessibility of many rural areas has so far prevented a significant integration of large parts of the population into the modern sector. Many higher-level positions in the public and private sectors are held by expatriates, which raises overall labor costs significantly. The high level of wages in the formal sector limits the demand for additional labor, thus contributing to unemployment and underemployment of the growing labor force. This lack of alternative employment opportunities creates pressure on land in some provinces, has led to some local deforestation, and compounds the serious law and order problem that hampers investor confidence. 1.3 Energy sector operations in remote areas, such as petroleum development, hydro projects, or transmission line construction, suffer from the security problem in terms of increased costs and de'lays. At the same time, the customary landholding structure leads to complicated and protracted compensation negotiations for land use rights, right of way, and similar sector needs. The combined effect of inaccessibility, high labor cost, security problems, and compensation issues is a generally high cost of delivering energy to consumers. 1.4 During the 1980s, the non-mining component of GDP (about 901) was growing only slowly, eclipsed by the high growth of mining production and exports. In 1989/90, the closure of the Bougainville mine created a break in mineral GDP growth, compensated to a certain extent by increasing construction activity for new mining and petroleum projects. The outlook for the early 19908 calls for a brief but intensive minerals boom, caused by the coming on stream of several new major projects, mainly the Porgera mine, the Kutubu oil production, and the Hides gas development. From the mid-90s onwards, mining sector growth is expected to I/ For a more detailed analysis of PNG's economic situation and prospects, see Papua New Guinea: Structural Adjustment, Growth, and Human Resource Development, World Bank Report No. 9396-PNG, May 1991. - 2 - taper off and even turn negative, while the non-mining sector will pick up momentum (Annex 1.1). Notwithstanding the mining sector's fluctuations, GDP growth during the 1990s is likely to maintain an average growth rate of about 3? p.a., carried by mining in the early years, and by services and construction in the later years. 1.5 PNG's external account reflects the split of the economy into mining and non-mining sectors (Annex 1.2). Mining exports (copper and gold) account for about two thirds of total exports, while the mining sector imports about one third of total imports (equipment, fuel, etc.). Imports of petroleum products during the late 1980s accounted for about 10? of all imports, and for a similar share of total exports, a manageable proportion. Export earnings and the net balance of payments contribution of the mining sector both peak just after the middle of the 1990s and drop-off sharply thereafter, mainly owing to declining oil exports. After increasing noticeably in 1992, fiscal revenues originating in the minerals sector would rise again in 1993 before jumping in 1994 when large oil revenues begin accruing to the Government. 1.6 The balance-of-payments impact of the oil and gas projects alone is significant: direct investment for the Kutubu project development amounted to about Kina 130 million in 1990, and investments in hydrocarbons and mineral exploration will be made at an annual rate of about Kina 110-140 million per annum during the next years. Direct imports for the Kutubu project in 1991 are expected to reach about Kina 260 million, while the indirect effect of oil development could raise general imports by at least 10Z. Offshore expenditure for the oil and mining sectors in 1991 is likely to constitute a capital outflow of about Kina 80 million. By the mid-1990s, exports of crude oil from Kutubu could peak at about 150,000 barrels per day, easily exceeding the petroleum product imports anticipated t.. be about 20,000 barrels per day at that time. For some time, PNG will turn from an importer to a net exporter of petroleum. 1.7 The high cost of energy development and supply is the dominant feature of the sector. This plays a role in the decisions whether and where to develop hydrocarbon resources, in the pricing of petroleum products delivered to the Highlands, or in the question of linking the two major electricity grids by a transmission line across difficult terrain. The country's topography, dispersed population, and lack of a diversified industrial structure compound the cost problem by making it difficult to exploit economies of scale. This leads to the need to establish small isolated diesel-powered power supply systems that can not recover the high unit cost of suppl;, and to the lack of domestic opportunities to use the country's oil and gas resources efficiently. Rather than relying on economies of scale prematurely, energy suppliers need to explore cost minimization strategies that include unorthodox alternatives such as new and renewable sources of energy. Institutional Structure 1.8 The PNG energy sector is characterized by a weak Governmental regulatory and monitoring function, but well-functioning (albeit high-cost) and independent suppliers of petroleum products and electricity. The Department of Minerals and Energy (DME), charged with the overseeing of energy sector planning, strategies, and operations, is short of qualified energy professionals. Recent restructuring -3 - measures in DME have resulted in the establishment of a new Electricity Division alongside the existing Policy and Coordination Division (which looks mainly after the mining sector rather than energy). The Electricity Division is to manage the numerous small rural power supply grids (C-Centers), and engage in a strategy and regulatory dialogue with the main power utility, the PNG Electr4.city Commission (ELCOM). Petroleum subsector issues are dealt with by the Petroleum Branch, a part of the Geological Survey within DME (for exploration and development issues), and by the office of the Price Controller (for the pricing of petroleum products distributed in the country). 1.9 Both the departmental structure and the staffing of the existing units are inappropriates the Petroleum Branch operates in isolation from the remainder of energy staff in DME, and the Policy and Electricity Divisions have a shortage of energy specialists. Although the recent shift of the responsibility for management of the C-Centers from the Ministry of Finance to DME will make rural energy supply planning easier to coordinate within DME, the Electricity Division will need to be staffed appropriately to discharge this function. Similarly, the shift from exploration to development activities of the major oil companies active in PNG places a greater monitoring burden on DME than the understaffed Petroleum Branch can bear. 1.10 In contrast to the weak regulatory institution, ELCOM is a well-operated public utility with ample staff. ELCOM is a statutory authority established under the PNG Electricity Commission Act of 1961. In October 1983, ELCOM became a Commercial Statutory Authority (CSA), i.e., a publicly owned enterprise. Under a policy framework established by the Government for the CSAs, ELCOM is responsible for the efficient management of its power supply facilities, investment planning, electricity pricing, borrowings in the domestic and international capital markets, and mobilization of domestic resources through payment of taxes and dividends. Government supervision is exercised primarily through the ELCOM Board, rather than by the DME. The Minister for Minerals and Energy, who is in overall charge of ELCOM, exercises control over policy matters in consultation with ELCOM's Board of Commissioners. As a CSA, ELCOM is required to earn a financial tate of return of 102 on all the projects undertaken by it. This effectively excludes most rural electrification projects from its scope, except in marginal cases where the Government provides the required subsidy by way of grant or equity. 1.11 International oil companies and consortia engaged in petroleum exploration and development, or in the import and distribution of petroleum products, are subject to loose regulation, which is limited by the inadequate staff of the Petroleum Branch and the Price Controller. Companies importing and marketing petroleum products do not require any license or permission with the exception of the registration with the National Investment and Development Authority (NAIDA), which is mandatory for all foreign businesses operating in PNG. The Price Controller's office reviews landed petroleum product costs at the major ports monthly, and the distribution, freight and profit margins less frequently, in order to set ceiling prices. The PNG Department of Labor issues licenses for storage of flammable liquids in accordance with Australian safety standards and codes of pract.ces. Storage facilities are inspected periodically by local government, but no legislation concerning the safety standards or the responsibilities of the individual parties involved exists. Exploration and -4 - development licences for companies and consottia ate negotiated and issued by DME as prospecting licenses that follow standard international practice, and clearly identify the responsibility of all parties in the exploration and development process. - 5 - II. ENERGY CONSUMPTION The Structure of Energy ConsumDtion 2.1 Total energy consumption in PNG in 1990 is estimated at about 1,420 mtoe. This represents an increase of 56Z from 1980 Ut or equivalent to a 4.51 annual growth rate. The increase in population during this period is estimated at about 2.51 per annum. Cf the total final energy coneumntion, biomass fuels (pr4lmarily fuelwood) account for 491, petroleum fuels for 40G, and electricity and solar for about 112 (Annex 2.1). 2.2 Domestic/Household Sectort The domestic or household sector accounts for the largest component of energy consumption, equivalent to approximately 431 of the national total in 1990 or about 600 mtoe. The primary component of household energy consumption is biomass fuels which account for 85Z of the total energy consumed by this sub-sector. Elec%ricity consumption makes up 92, petroleum fuels (LPG and kerosene for cooking) 21 and solar energy (for hot water heating) nearly 41. Annex 2.2 presents a summary of the distribution of the projected household energy consumption in PNG from 1990 to 2000. 2.3 The majority of biomass fuels used in the household sector is fuelwood equivalent to 492 mtoe in 1990. Fuelwood and agricultural residues are used almost exclusively as cooking fuel in rural households. In the urban households, fuelwood remains the primary fuel for low income households. A recent survey of household energy use in Port Moresby indicates that over 801 of the low-income households utilize fuelwood and kerosene exclusively for cooking while approximately 501 of the high-income households continue to use some fuelwood for cooking as well U. 2.4 There is little reliable quantitative data available on household energy consumption in PNG. As a result, there is very little understanding of the dynamics of household energy consumption in PNG. A couple of recent surveys do exist, however, on general energy consumption patterns in the household sub- sector UL. These surveys indicate that household energy consumption patterns are sharply differentiated by urban and rural and high- and low-income households. On the one extreme, urban high-income households consume primarily commercial fuels dominated by electricity, LPG and, in some cases, kerosene. There is also a relatively high penetration of solar hot water heaters in the high income households in both the urban and rural areas. At the other extreme, low-income households consume primarily fuelwood for cooking and small quantities 2/ 1980 estimate derived from Papua New Guinea: Issues and Options in the Energy Sector, Report No. 3882-PNG, The World Bank, June 1982. 3/ Household Energy Use in Port Moresbv". Renort to the Policy Division. P,G Department of Minerals and Eneray. by M. Hedter and M. Levett. University of PaDua New Guinea. March 1991. 4/ A rural "Energy Consumption Survey" was conducted by GTZ in July 1998 and reported in GTZ report PN 78.2247. 1-03.200. of kerosene, primarily for lighting and as a back-up cooking fuel. In the highland provinces, fuolwood that is used for cooking in small traditional homes also serves for space heating, and the resulting smoke for insect fumigation. 2.5 Commercial Sectors The commercial sector consumed approximately 73 mtoe in 1990. This consisted primarily of 59 mtoe of electricity (or 80Z of the total) for lighting, air conditioning and refrigeration. Biomass fuels consumed by the commercial sector were estimated at 5 mtoe primarily for cooking in rural schools, hospitals and coffee shops. Approximately 3.0 mtoe of LPG is also estimated to be consumed by the co-nercial sector for cooking and hot water heating while 6.0 mtoe of equivalent solar energy for hot water heating was attributed to the sector (Annex 2.2). 2.6 Industrial and Minina Sector: The industrial (including the mining) sector in PNG accounted for 280 mtoe in 1990, or about 20Z of the total national energy consumption. Petroleum fuels accounted for the primary component of energy consumption equivalent to 72Z of the total.energy consumption by the industrial sector (In 1988, before the closure of the Bougainville mine, the total petroleum product consumption was about 200 mtoe greater than 1990). Biomass fuels (primarily bagasse in the sugar industry) accounted for about 15 mtoe while electricity consumption from the grid was estimated at about 16 mtoe. (Annex 2.2). 2.7 Transport Sector: The transport sector in PNG consumed 282 mtoe in 1990. The majority of the fuel consumed by this sector was gasoline (171 mtoe) and ADO (82 mtoe). Jet fuel and aviation gas accounted for 25 mtoe while ethanol, derived from molasses and blended with gasoline, amounted to approximately 3 mtoe. The transport sector accounted for almost half of the total petroleum fuels consumed in PNG in 1990 (Annex 2.2). 2.8 Aaricultural Sector: The agricultural sector consumed about 165 mtoe in 1990 equivalent to about 121 of total national energy consumption in PNG. Of this total, 153 mtoe, or 901, was in the form of biomass fuels. Of the total biomass fuels, 111 mto. was comprised of agricultural residues generated within the industry. This represents approximately 501 of the energy value of the usable agricultural residues produced by the sector. Fuelwood used by the agricultural sector amounted to 42 mtoe. Petroleum fuels, primarily ADO used for running diesel generators at isolated locations, amounted to approximately 12 mtoe (Annex 2.2). 2.9 Consumption Projections: The driving force of energy consumption growth in the first half of the 1990s is going to be the rapidly expanding mining sector, where several major development projects are proceeding. Petroleum products consumption, therefore, is likely to expand at about 101 p.a., followed by slower growth in the late 1990s. Electricity consumption is likely to show a more steady growth of about 51 p.a. during the coming decade. Although some of the commercial energy demand growth is dependent on an early gradual re-opening of the Bougainville mine, other mineral sector developments are likely to take up much of the slack. Biomass consumption growth is unlikely to exceed the population growth rate of about 21. -7 - Consumption of Petroleum Products and Natural Gas 2.10 PNG relies entirely on imported petroleum products to meet its hydrocarbon needs as its own oil and gas resources have not yet been developed. The consumption of these products is predominantly influenced by the activities related to minerals exploration, development and production. Gas oil and fuel oil are the major petroleum product imports (comprising about 80Z of the total in 1988 i.e., just before the decline and shut down of Bougainville Copper, Ltd. (BCL) production); the others are gasoline, jet fuel, kerosene, aviation gasoline and light/medium petroleum oils. 2.11 The demand for petroleum products rose from about 760 megaliters in 1984 to over 900 megaliters in 1987 and 1988 mainly due to upsurge in mining activities and petroleum exploration. It declined to a little over 600 megaliters in 1989 due to decline in the production of BCL (since May 1988 and complete stoppage since November 1989). In 1990, the demand increased to about 700 megaliters (despite complete closure of BCL) largely due to increased petroleum exploration and development activities (Annex 2.3). 2.12 The mining and transport sectors are the major users of petroleum products accounting for about 402 and 50% respectively of the total consumption. Most of the fuel oil imports are consumed for power generation. The transport sector accounts for about 30-402 of the gas oil imports (Table 2.1). Table 2.1: Petroleum Product Sales 1990 Gas Oil Gasoline Kerosene Jet Fuel Other/a Total -_(--__-------------(megaliters)---------------------- Misima 15 - - 15 30 Ok Tedi 70 - - - 70 Porgera 25 - - - 25 Chevron 10 - - 5 - 15 Elcom 30 - - - 30 50 Air Transport - - - 80 15 95 Service Stations & Wholesale Agents 140 100 24 - - 264 Other Large Consumers 101 7 2 - 32 142 Govt 11 1 - - 6 18 Total 402 108 26 85 88 709 Source: Petroleum Product Marketing Companies. /I Fuel oil, AvGas, LPG, light oils, etc. . - 8 - 2.13 In the years 1991 through 1993 an upsurge of investments is expected in Misima and Porgera mines and the Kutubu oil project. Looking further ahead, between 1993-96, the Lihir gold project is expected to commence around 1993 with full production starting 1995 or 1996 and there appear to be good prospects that ongoing exploration efforts will find further hydrocarbon, gold, or base metal deposits suitable for development in late 1990s. According to preliminary estimates of the mission, the total demand for petroleum products will increase from about 671 thousand toe in 1991 to about 1528 thousand toe in the year 2000 (Table 2.2). Table 2.2: Petroleum Products Demand Proiection 1991 1995 2000 -('---------( 000 toe)- Av. Gas 11 13 . 18 Gasoline 90 117 154 Jet Fuel 72 91 115 Kerosene 14 17 22 Gas Oil 407 535 663 Fuel Oil 30 382 484 LPG 4 5 6 Others 1/ 43 51 66 Total 671 1,211 1,528 Source: Mission ostimates. 1/ Light and medium petroleum oils and white spirit. 2.14 The underlying assumptions include: (a) BCL vL will return to full production by 1995, (b) the demand for power generated by Elcom OL will grow at an average rate of 5.4Z per annum, (c) the product demand for transport sector will remain closely related to the growth in mineral exploration and development, and (d) the mining sector U (including petroleum) will grow at an average rate of about 52 per annum over the next ten years. If BCL remains closed, the total consumption of petroleum products in 1995 and 2000 is likely to be about 200-300 mtoe less than in the base case, primarily due to lower fuel oil consumption. 5/ Peace agreement signed in the first week of February 1991. 6/ Elcom's recently updated forecasts. 7/ The Bank's 1991 Economic Report on PNG. 9 - Electricity Consumation 2. 15 The power sub-sector consists of s (i) the power supply facilities of ELCOM, which supplies electricity to most of domeatic, commercial and industrial consumers; (ii) Government-owned power supply facilities (mostly based on small diesel generating units) providing limited power supply to important rural centers ("C" Centers); and (iii) privately-owned captive generating plants. The total installed generatilig capacity in the country by the end of 1990 was about 595 MW, including ELCOM and all other operators of generating plant. There are about 80 "C" centers (see Annex 2.4 for details). These were under the Ministry of Finance until 1990 when the Ministry of Minerals and Energy took them over. At present, the power supply facilities in the "C" centers are being maintained for the Government by ELCOM on a cost pltks basis. ELCOM has also been gradually taking over such of the "C" centers which can meet the cost recovery criteria, if necessary with a compensating government grant/subsidy. 2.16 ELCOM's sales increased from 463 GWh in 1981 to 551 GWh in 1989 at an average annual growth rate of 3.4Z (see Annex 2.5 for details). In 1990, however, its sales deciined to 529 GWh, mainly due to the closure of BCL and the downturn in the country's economy. The peak load correspondingly increased from 87.4 MW in 1981 to 114 MW in 1989 and then declined to 110.4 MW in 1990. 2.17 Recently, ELCOM carried out a comprehensive system planning study under technical assistance provided by Asian Development Bank with the conaultancy assistance of Electricite de France (EdF). The 1991 load forecast of ELCOM, based on an update of the EdF study, envisages the energy sales to increase from 529 GWh in 1990 to 891 GWh by the year 2000, an average annual rate of growth of about 5.351 (Annex 2.6). The system peak load is expected to increase from 110.4 MW in 1990 to about 196 MW by 2000. It should, however, be noted that these projections exclude potential mining loads such as the proposed Hidden Valley gold mine with a demand of 15 MW and an annual energy requirement of 82 GWh. The above projections also do not include the demand (about 3 MW) of a cement plant proposed in the Lae area. The Consimition of Biomass Fuels 2.18 Total biomass fuel consumption in PNG in 1990 is estimated at almost 700 mtoe which was equivalent to 55Z of t0e total energy consumption. Of the total biomass fuel consumption, fuelwood accounted for 540 mtoe or equal to 781 of the biomass fuel. Agricultural residues, primarily coconut husks and shells, coffee husks, oil palm fiber and shells and sugarcane bagasse, accounted for and additional 150 mtoe. Approximately 3 mtoe of ethanol is produced annually from waste molasses from the sugar industry. 2.19 Domestic Cooking: The majority of biomass fuels are consumed by the household sector. In 1990, the household sector consumed 517 mtoe of biomass fuels (492 mtoe of fuelwood and 25 mtoe of agricultural residues) which was equivalent to 75Z of the total biomass fuels consumed in PNG. Domestic cooking accounts for the majority of the biomass fuels consumed in this sector. Fuelwood and agricultural residues remain the sole source of energy for a majority of the rural population. -10- 2.20 Very little accurate data exists on the actual energy consumption patterns of both rural and urban households. Biomass fuels used by the household sector are generally collected free of costs and therefore are not a commercially traded fuel. Where fuelvood is traded in the market it is sold at approximately 2 Kina for a 25 kg bundle or the equivalent of 80 Kina per tonne. Recent surveys of household energy consumption indicate that less than 16% of households are forced to buy woodfuels L. Even in the urban areao, over 80% of low-cost households were fourd to use fuelvood for cooking at least part of the time 2t Estimates of fuelwood consumption are based on the assumption that urban households consume approximately 6 MJ/capita/day and rural households consume 16 NJ/capita/day 10. 2.21 Agricultural residues, primarily coconut husks and shells, are used in the rural areas to supplement fuelvood for cooking. There is, however, no reliable data on the actual quantities of agricultural residues used for domestic cooking. For purposes of this analysils, the mission estimates the consumption of agricultural residues for domestic cooking to be approximately 5% of household fuelvood consumption. 2.22 Crop Dryina/Processina: Biomass fuels are used extensively for crop drying and process heat especially on the larger estates and mills in PNG. Total biomass energy consumption by the agricultural sector is estimated at 153 mtoe in 1990. This consists primarily of 42 mtoe of fuelvood, 65 mtoe of coconut husks and shells, 17 mtoe of coffee husks and 29 mtoe of palm oil vastes. An additional 14 mtoe sugarcane bagasse i8 estimated consumed by the sugar mill at Ramu. (A detailed analysis of the agricultural residue production and consumption in PNG is presented in Annex 2.1). 2.23 Ethanol: PNG is estimated to produce 4 million liters of ethanol from molasses each year. The ethanol is reported to be used for motor spirit blending and is used primarily in the Ramu valley. At present, the commercial value of molasses is low at the Ramu site and the cost of petroleum fuels in urban areas in the Ranmu valley is high due to a lack of distribution infrastructure. As this constellation may not prevail in the long run, ethanol is unlikely to play a major role in the energy mix of PNG. 8/ "Energy Consumption Survey - Evaluation of Results". GTZ Special Energy Program. Report No. PN 78.2247.1-03.200. Eschborn. July 1988. 9/ M. Hedger and L. Levett. "Household Enerav Use in Port Moresby". ReDort to the Policl Division. PNG Department of Minerals and Energy. University of Pavua New Guinea. March 1991. 10/ Newcombe. et al. 'Energy Develolment. the Enerxv Policy Papers of the Lae Proiect". 1980. -11- 111T ENERGY SUPPLY Overviq 3.1 The 1990 astimated gross supply of energy in PNG is 1,657 mtoe. Approximately half of the gross energy supply in PNG is from petroleum Imports amounting to 809 mtoe in 1990. Bliomass (fuelvood and agricultural residues) accounted for 422, hydropower for 72 and solar ener8y for 22. An illustration of the 1990 distribution of gross energy supplies in PNG is presented in Figure 3.1. Date on the estimated 1990 gross and net energy supplies is presented in Annex 2.1. Gross Energy Su.pply 1s01t~ ~ ~~91O C41.0 l.dr@ C7.M Fifture 3-1: PNG Distribution of Gross Energy Supplv - 1990 -12- Petroleum Procurement and Distribgtion 3.2 Three IlL international oil companies (Shell$ Mobil and BP) supply tho market for petroleum products in PNG. The bulk of the products (over 95S) is imported through fiv, main ports, Port Moresby, Las, Madang, Rieta and Rabaul. The regions served through these ports and the major consumers supplied are listed in Annex 3.1. 3.3 Each company has storage facilities at the aforementioned ports. Shell and Mobil obtain supplies from Singapore and Australia. They have a joint supply arrangement, whereby about half the supply voyages are mode by the tankers of each company but all the voyages deliver product for both of them. Tankers of 30,000 ton capacity are usod, combining the supplies of PNG and Solomon Islands. BP obtains supplies from Australia using its own tankers. While the tankage at company installations at the five main ports has sufficient capacity to hold stocks equivalent to about three months consumption at the current demand levels, actual storage is equivalent to approximately six 2 week consumption (except for aviation fuels which is equal to *bout three months). The supply arrangements for the PNG market are therefore not constrained by the availability of storage at the main ports. 3.4 The distribution of products from the main ports is organized throu h depots owned by the companies at the coastal towns (outports) and inland towns EL using coastal tankers (1,000 ton capacity) and road tankers respectively. Small quantities of products are also directly imported at the outports. From these depots, the dealers and service stations in the interior of country are supplied through road tankers and 200 liter drums carried on trucks and barges owned and operated by transport contractors. The marketing of the products may take one of the three forms: (a) direct sales, on contract, to large consumers and Government departments; (b) retail sales through service stations; and (c) 3ales through agente. 3.5 The sub-depots and service stations are either owned and operated by the agents or owned by the company and leased to agents. The marketing of gasoline, kerosene and gas oil is shared between all the three companies, the marketing of aviation gasoline and jet fuel is shared between Mobil and Shell 141 and Shell 11/ A fourth company Wagai Dinford has set up some storage facilities in Lao but has not started the import and marketing of products. 12/ Four weeks in the case of Port Moresby. 13/ Prominent outports are Kavieng in New Ireland, Kimbe in West New Britain, Alotau and Samarai in Milne Bay, Oro in Oro Bay, Daru and Kiunga (a river port) in Western province, Wewak and Vanimo in East and West Sepik, Lorengau in Manus (Admiralty islands). Prominent inland towns with depots are Kainantu, Kundiawa, Goroka, Mount Hagen, Mendi and Wabag in the highlands. 14/ Except that the jet fuel requirement of Porgera gold mina is supplied by BP. -13- is the sole marketer of fuel oil of which Bougainville copp.r is by far the largest consumer (consuming over 902 of the import). The market shares of the three companies on the basis of 1990 sales are given in Table 3.1. Table 3.1s Petroleum Product Sale. 1990 (2 market share) Mobil Shell B Av. Gas 35 65 - Gasoline 35 45 20 Jet Fuel 35 65 - Kerosene 35 45 20 Gas Oil 40 40 20 Fuel Oil - 100 - Total 38 42 20 Source: Petroleum Product Marketing Companies. Hydrocarbon Reserves. Exploration and Development 3.6 Geolo:vs Papua New Guinea comprises 461,691 km2 on the eastern half of the world's largest island lying at the east end of the Indonesian archipelago, adjacent to Australian continental and Pacific ocean plates. It has experienced a stratigraphic and structural history conducive to the generation and entrapment of hydrocarbons. Its five main sedimentary basins are: Papuan basin (212,000 km2), North New Guinea basin (93,000 kmZ), Cape Vogel basin (26,000 km2), Bougainville basin (4,400 km2), and New Ireland basin (56,400 km2). Among these the Papuan basin is the most explored and largest sedimentary basin in the country. It is effectively the continuation of the Carpentaria basin in North Queensland, Australia. All the elements necessary for the generation and entrapment of hydrocarbons are present in most areas of this basin. These include a wide range of structural and stratigraphic traps, good source rocks at sufficient burial depths, good to excellent reservoir rocks, and suitable cap rocks. 3.7 Exploration: The search for oil in Papua New Guinea dates from 1913 when oil seeps were found near the mouth of the Vailala river 60 kms northeast of Kerema in the Gulf Province in Papua basin. Since then, some 214 wells have been drilled, all in the Papua basin, with 19 oil and gas discoveries with possib.e reserves estimated at 400 MHBBL oil and 14 TCF natural gas. These discoveries, along with the possible reserves estimates are listed in Annex 3.2. 3.8 Among these, the prominent discoveries are Iagifu (160 WHBBL oil and 0.8 TCF gas); Hides (77 MMBBL condensate and 2.9 TCF gas); Pandora (1.6 TCF gas); and Angore (69 MMBBL condensate and 2.8 TCF gas). The Iagifu-Hedinia structure inclusiie of nearby Agogo and Usano fields would account for possible reserves -14- of about 200 MhBBL ol' and 1.35 TCF gas; and Pandora together with adjacent reefal accumulations could provide gas reserves of 5 TCF. 3.9 The interest of the international oil industry in Papua New Guinea's petroleum exploration, particularly in Papuan basin, remains strong. At the end of 1990, there were 40 active Petroleum Prospecting Licenses (PPL's), covering about 233,000 oq km, and 8 applications. Out of the 40 PPL's, one was in Cape Vogel basin, four were in North New Guinea basin and 35 were in Papuan basin. The highlights of petroleum exploration since 1985 are summarized in Table 3.2. Table 3.2: Petroleum ExDloration Highlights 1985 1986 1987 1988 1989 1990 1991 a/ New PPL's granted b/ 1 11 17 7 4 4 - Total No. of PPL's 12 20 33 40 38 40 - Approx. Expenditure 36 50 83 130 167 253 191 (US$ million) Wells Drilled 2 3 5 15 23 24 12 Discovery Wells 1 2 2 8 14 8 - New Field Discoveries c/ 0 1 2 2 2 4 - Source: D-partment of Minerals and Energy /a projeceions 'b excludes any PPL which expired or was surrendered during the year Le 1986-Iagifu; 1987-SE Hedinia, Hides; 1988-Hedinia, Pandora; 1989-Agogo, Usano; 1990-Angore, Elevals, Tarim, P'nyang. 3. 10 Development: Commercial Development of ;-ydrocarbon resources in Papua New Guinea commenced in thu last quarter of 19Q0 with the grant of Petroleum Development Licenses (PDL 1 and PDL 2) a.or the development of Hides condensate/gas field and Iagifu oil field in the Southern Highland province. These developments are briefly described in follnwing paragraphs. 3.11 The Hides Development Proiect is owned by a joint venture consisting of British Petroleum (95Z) and Oil Search Ltd (5Z).15L The project is based on the supply of about 10 MHCFD of natural gas over a period of 19 years to a 42 NW gas turbine power generating station to be located near the field for supply of electricity to Porgera mines through a 75 km long power transmission line. The power station and transmission line will be owned by the gas purchasers l.e., Porgera Joint Venture. The Hides development facilities will consist of two production wells, linked by 8 km of gas pipeline to a processing plant and condensate storage in Tagari Valley. These facilities, which are estimated to 15/ The Government has deferred its decision to take equity in this project. -15- cost about US$40 million, JAL will be designed to produce upto 15 MMCFD of natural gas with about 300-400 BBPD of condensate. The plans for the utilization of condensate are in the -process of being finalized. The PDL operator (British Petroleum) hiz however, undertaken not to flare any liquids. First gas was produced in 1991. The options being investigated for the utilization of the condensates include: (i) establiahment of a comiercially viable mini-refinery at the Hides San processing plant or possibly elsewhere in Southern Highland Province; (ii) trucking to Kutubu, for spiking into the main oil line or for use as feedstock to the proposed refinery. This option will not be available until the Kutubu access road has been built and an agreement has been reached with the Kutubu Joint Venture; (iii) distribution of raw condensate to users in the Southern Highlands and other provinces, subject to identification of an appropriate market; and (iv) combustion as fuel in Porgera Joint Venture power plant. The technical viability of this option requires further verification and an agreement with Progera Joint Venture would be required. 3.12 The Iagifu development project, called the Kutubu Development Project, is owned by a joint venture comprising the State of Papua New Guinea and six international oil companies, JI with Chevron as its operator. It is based on the production and export of oil from Iagifu and the nearby fields of Hedinia, Usano and Agogo. Initially, Iagifu and Hedinia reserves will be developed and linked with a central production facility in the vicinity. The oil will be exported through a 20-inch diameter, 260 km long pipeline linking the central production facility with a marine loading terminal in the Gulf of Papua. The pipeline will be capable of a gravity feed throughput of about 150,000 BBLPD which could be raised to 270,000 BBLPD with the installation of two pumping stations. Initially about 130,000 BBLPD of oil is planned to be produced which may be increased to 150,000 BBLPD with the linking of Agogo field. To meet the fuel requirement of the construction phase, a mini-refinery will be installed in the project area to produce 3b0 BBLPD of diesel and the same amount of jet fuel from a total throughput of 1,500 BBLPD (balance 900 BBLPD will be re-injected) and after the completion of construction phase these products will be locally marketed. The associated gas (about 128 MHCFD for an oil production of 128,000 BBLPD) is planned to be re-injected. The Government has allowed gas flaring for a maximum of one year during which period the re-injection facilities have to be 16/ The up-to-date exploration expenditure is estimated to be about US$52 million. 17/ The State - 22.52 (carried interest); Chevron Niugini - 19.38X (operator); British Petroleum - 19.382; Ampol Exploration - 16.46Z; BHP Petroleum - 9.682; Oil Search Ltd - 7.76Z and Mitsubishi - 4.84X. -16- installod and operative. The project is estimated to cost about US$,000 million lt and the production of first oil is expected by mid-1992. Through royalty, taxes and equity, the state is expected to receive about US$1,100 million by the year 2000 (Annex 3.3). Power Su1pvy 3.13 ELCOM currently serves 26 urban centers through 18 independent systems. The major ystems,, Port Moresby system serving the national capital region, Rumu system serving the highland. and the Gazelle Penineula system serving the Rabaul area are mainly hydro-based with diesel support. By the end of 1990, ELCOM's installed generating capacity totalled 249 KW (out of a total capacity in the country of 595 MW, Table 3.4) of which hydropower accounted for 162 MW (651), diesel 68 MW (271), and gas turbines the balance 19 MW (8Z) (Annex 3.3). In 1990, ELCOM generated about 594 GWh from its generating plants and purchased about 2 GWh (Table 3.4). 18/ Not including the exploration expenditure, estimated to have been about US$440 million. -17- Table 3.3: Details of Installed Generating Capacity Hydro Thermal Total ----------------- M. --------------- I. ELCOM 162.0 86.8 248.8 II. IC" Centers 0.5 5.4 5.9 III. Private Sector - BCL a/ - 196.0 196.0 Ok Tedi 52.2 45.9 98.1 PNG Forest 5.5 - 5.5 Others 0.5 40.2 40.7 Total 220.7 374.3 595.0 Source: ELCOM, DME a/ BCL is currently shut down. Table 3.4: ELCOM's Generation in 1990 GWh X of total Hydro 515.4 86.5 Thermal 76.0 12.8 Gas turbine 2.5 0.4 Purchase 2.0 0.3 Total 595.9 100.0 Source: ELCOM 3.14 ELCOM's transmission system by the end of 1990 comprised 918 km of high voltage (66 kV and 132 kV) lines - (i) 235 km of 132 kV single circuit lines operated at 66 kV and 479 km of 66 kV lines in Ramu system, (ii) 95 km of 66 kV lines and 33 km of 33 kV lines in Port Moresby system and 76 km of 66 kV lines in Gazelle Peninsula system. The distribution system comprised 2,176 km of medium voltage lines (11 kV and above) and 1,005 km of low voltage secondary lines. There were 1,867 distribution transformers installed with an aggregate capacity of 301.7 MVA. -18- 3.15 By the end of 1990, 51,233 consumers were connected to ELCOM's systems, with the domestic category accounting for about 80Z of the consumers. The total sales in 1990 were about 529.4 GWh. '9/ The total system peak load of ELCOM (aggregate of individual system maximum demands) in 1990 was 110.4 MW. The average system load factor was 61.6Z. The system losses including station use accounted for about 12? of the energy generated. 3.16 System Expansion Program: The details of the generation expansion program developed for Ramu and Port Moresby systems, the two largest systems, based on the recent system planning studies, which covered a period of 25 years from 1990, are summarized in Table 3.5. The program assumes that the two systems (Ramu and Port Moresby) will be interconnected by the year 2005. Table 3.5: Generation Expansion Program for Ramu - POM Systems Year Capacity Additions 1998 1 x 12 MW diesel unit at Port Moresby 2000 1 x 12 MW diesel unit at Port Moresby 2 x 8 MW hydro - Yonki Toe of Dam 2003 1 x 19 MW gas turbine at Port Moresby 2005 91 MW hydro - Ramu 2 Source: EdF Study 3.17 For the other systems, which are relatively small, ELCOM is proposing only additional diesel units with the exception of Popondetta system where it is proposed to construct a 3 MW hydropower project (Divune hydropower project) with financial assistance from Asian Development Bank and Commonwealth Development Corporation. In the Gazelle Peninsula, ELCOM is also considering harnessing the potential geothermal energy resources in the area. 2 3.18 Financial constraints have, however, led ELCOM to investigate less capital- intensive options to meet the projected load growth. In particular, ELCOM is currently evaluating the viability of gas-based power generation alternatives which have low first-costs. In this context it is proposed to undertake a gas- based power generation study in 1991 for which the Government and ELCOM have requested technical assistance from the Asian Development Bank. ELCOM is also considering extending the life of the existing diesel power plants and improving their operational efficiency with a view to reducing the capital expenditure on replacements as well as the operating costs. 19/ This excludes the units delivered but not billed in the Bougainville area due to the prevailing civil disturbances. 20/ The technical feasibility and the economic viability of the geothermal power potential in PNG is yet to be established. -19- 3.19 Since the completion of the system planning studies carried out with the assistance of EdF, the load forecast has been revised downwards taking into account the impact of BCL closure and other factors affecting the economy. As a result, and taking into account the rehabilitation of the existing gas turbine unit in Moitaka, ELCOM does not propose to install additional gas turbine capacity in 1994 as previously planned. Further, ELCOM has also deferred consideration of the generation and transmission projects pending the completion of the gas study when the viability of the gas-based generation option, particularly for Port Moresby system, will be known. 3.20 Hydropower Potential: A large part of PNG is mountainous and receives a substantial amount, of rainfall. According to the current results of the Hydropower Resources Inventory Study (now in the final stages of execution under a World Bank loan), the total hydropower potential of the country, as the sum of 90% dependable outputs with about 10 MW or larger capacity, exceeds 15,000 MW. The largest potential in the country exists in the Gulf Region: the largest river in hydropower potential is the Purari river, followed by the Kikori, Fly and Sepik rivers. Sizable potential with a number of medium size sites is found in and around the large demand centers of Port Moresby, and Lae, Madang and highlands regions. The above potential is mostly based on run-of-river developments and would greatly increase if dams are constructed for flow regulation. The exploitable potential of small output sites with capacity below 10 MW is likely to be considerable. However, development of large projects for general power demand will not be justifiable in the foreseeable future considering the present level of power demand. 3.21 All of Elcom's major power systems (Port Moresby, Ramu and Rabaul), are supplied mainly by hydropower (Annex 3.5). The total installed capacity of each system in 1990 was larger than the system peak demand. For the Port Moresby and the Ramu systems, storage reservoirs of substantial capacity exist upstream of the series of power stations, and major power stations are provided with regulating ponds to meet the daily variation of power demand. The hydropower station of the Rabaul system is of a run-of-river type and various technical troubles (silting, seepage, etc.) are reported for this project (Annex 3.5). The construction of the Yonki dam (Ramu System) was completed in January, 1991 and no hydropower project is under construction for Elcom at present. 3.22 According to the results of the recent long-term least cost power development study, only two hydropower projects are conceived to be developed by 2010 for the combined Port Moresby-Ramu system; the Yonki Toe-of-Dam project (16 MW) in 2000 and the Ramu 2 project (92.5 MW) in 2005. (1) The Yonki Toe-of-Dam project envisages utilization of 51 m at maximum available net head between the Yonki reservoir and the Ramu 1 intake pond, and is planned to be constructed at the foot of the Yonki dam. (2) The Ramu 2 project will utilize the discharge of the Ramu 1 power station and 240 m of head which can be obtained by leading water through a 2.54 km long tunnel. 3.23 The locations of these two projects are close to the existing -20- installations, most of the infrastructure for construction is ready, and the construction costs will be low due to the favorable topography. The study indicates that the cost difference between this strategy and that of the development of the Naoro Brown or Udava projects near Port Moresby justifies the construction of a 220 kV Port Moresby-Ramu interconnector and transmission of the Ramu 2 power to Port Moresby, soon after the year 2000. 3.24 Geothermal Potential: Two major areas of volcanic activity exist in PNG: a northern zone, following the geological plate boundary that runs along New Britain, New Ireland and Bougainville; and a southern zone stretching from Lamington (Popondetta) to the D'Entrecasteaux Islands. Only limited data on the geothermal potential of these areas have been collectep so far, and no conclusions are possible yet. However, a comparison with similar geological data in other countries (e.g., the Philippines) indicates that there is a strong possibility of a significant high-temperature geothermal resource, although with some unusual features such as acid fluids and seawater influence. Pending further investigations, it appears that the examination of the potential should focus on areas where there is demand for both power and heat, to improve the efficiency and lower the unit cost of geothermal steam. Such consumers could be found among the agroindustrial enterprises of New Britain, or the mines on Lihir and Bougainville Islands. In particular, the Lihir gold mine development will depend on the careful management of the geothermal system that underlies the mine. It is recommended that further selected geological investigations be conducted in areas that are likely to show a potential demand for geothermal steam. 3.25 Rural Electrification: At present, only about 102 of the rural population (which accounts for 85Z of the total population of PNG) have access to electricity, mostly from diesel-based generation. There are at present about 80 rural "Government C-Centers" nZ in PNG which, until 1990 were managed by the Department of Finance and Planning (now under DME) and are maintained, under contract, by ELCOM. The C-Centers exists as government rural administrative centers which provide agricultural, health, education and other extension services. Most consumers are government employees who are not required to pay the actual costs of the power supply but are given power in order that the government may provide acceptable living standards in these remote rural areas. In addition, many businesses, institutions (like schools and clinics) and some private households also generate electricity for their own use or for sale as allowed under Section 64 of the ELCOM Act. Service is part time only, with daily supply time of 8 hours at most stations and the maximum duration of 12 hours, throughout the night time, at several important stations. This service duration is shortened when the fuel supply is not sufficient. 3.26 At present, consumers at the C-Centers are charged a flat rate for power which does not generally reflect the full cost of the electricity. The rates are designed to raise about K1.2 million which is the approximate annual cost for just maintaining the C-Centers. In practice, revenue collection by the Bureau of Management Services is reported to amount to KO.1 to 0.2 million. As a 21/ ELCOM operates 'A' Centers (connected to the grid) and "B" Centers (isolated supply). -21- result, the Department'of Finance 'has to provide about K3 million per annum to operate and maintain the C-Centers which results in a cost of K500 to 600 per consumer per year. Essentially, the system is operated as an almost-free service. 3.27 Present plans for extension of ELCOM's grid to supply rural areas will not significantly increase the percentage of the rural population that has access to electricity. Grid extensions for rural electrification in PNG are very costly. ELCOM has estimated that approximately 32 C-Centers can theoretically be connected to its grid. The resulting number of customers connected would be approximately 2,600 at cost of 27 million Kina. This would result in a cost of over K10,000 per consumer which is clearly uneconomic. The remaining 53 C- Centers are in many cases only accessible by air with fuel and spare parts having to be flown in periodically, and cannot even be considered for grid connection. 3.28 The need to maintain basic electricity services to these C-Centers while reducing recurrent costs has led the Department of Minerals and Energy to consider introducing alternative sources of energy for power generation. Given the abundant hydro-power resources, biomass and solar energy in PNG, the DME has evaluated these options and has decided to embark on a pilot development program for small scale hydro-power in the interior highland regions and solar photovoltaic energy in the coastal regions of PNG. The mini-hydro development program is targeted at demonstrating the use of small-hydro resources to replace C-Center diesel generators. Under this program, a 320 kWe mini-hydro project was completed at Tari in 1988 with grant aid from the EEC. At present, a 100 kWe mini-hydro project at Telefomin in W. Sepik and a 60 kWe micro-hydro project Woitape in the Central Province are under construction and expected to be completed by July 1991. A five year program encompassing seven additional small- hydro projects and including training of national engineers has been proposed by the DME Eor funding through donor assistance (K8.5 million from the EEC-Lome IV and K2.7 million from Germany) (Annex 3.6). The DME has also proposed to investigate the use of solar photovoltaic systems for small-scale isolated rural electrification at 10 costal C-Centers. The DME has requested K1.8 million from the EEC to undertake this effort. Both programs currently do not appear to be justified economically or financially on a total cost basis, and are a result of the Government's effort tc reduce the recurrent diesel cost by utilizing grant aid to cover the capital cost of the alternatives. Biomass Energy SUDP1Y 3.29 Fuelwood: The primary source of fuelwood in PNG is the natural forest. The total land area of PNG is estimated at 46 million ha. Of this, there are some estimated 36 million ha, or 78Z of the nation's land area, is under closed forest cover.22 Preliminary surveys of the natural forests indicate between 15-25 m3/ha of useful timber but do not provide any estimate of total volume of wood per hectare. Assuming a net annual growth of 10 m`/ha/yr in PNG translates to approximately 360 million m3/yr of wood. This is equivalent to approximately 252 million tonnes of wood/yr or over 125 times the current estimated annual consumption of fuelwood in PNG. Assuming that only 1OZ of annual forestry growth 22/ Papua New Guinea Department of Forests, "Facts and Figures - 1985." -22- is available for fuelwood consumption still results in a total supply of approximately 8 mmtoe/yr which is approximately 13 times greater than the present consumption of fuelwood in PNG. Thus, there does not appear to be an immediate shortage of fuelwood in PNG, especially in the rural areas. In the urban centers of Port Moresby, Lae, Goroka, Mt. Hagen, etc., where 15% of PNG's population is located, fuelwood is beginning to appear in the marketplace, possibly as an indication of the onset of diminishing freely available supply sources in the vicinity of these urban centers. 3.30 Sawmill/Logging Residues: Total logs cut in PNG in 1990 were estimated at 2.9 million mn. This represented an increase of 68Z in logging since 1986. Total sawn-timber production ir. 1990 is estimated at 50,000 in. The resulting sawmill residues from this production are estimated to be approximately equal to 35,000 tonnes and the logging residues are approximately equivalent to 1.4 million tonnes of wood. Usable wood residues are assumed to be only available at the sawmills. Thus, the estimated total residues in PNG in 1990 are equal to approximately 35,000 tonnes or in terms of potential energy value equivalent to 12 mtoe Z/ 3.31 Agricultural Residues: Agricultural residues represent a major source of energy in PNG. Primary sources of agricultural residues are coconut husks and shells from copra production, coffee husks from coffee production, oil palm residues from palm oil production and sugarcane bagasse from sugar production. The stem-wood of senile coconut and rubber trees is an additional potential source of biomass fuels which currently is not widely used in PNG. Considering just the accessible agricultural residues, the 1990 production is estimated at 702,000 tonnes or approximately equal to 211 mtoe. Approximately 502 of the agricultural residues that are accessible are consumed for crop drying and process heat by the agricultural sector. Details on the estimates of agricultural residue production and consumption are presented in Annex 2.1. Other New and Renewable Sources of Energy 3.32 Biomass Gasification: Several biomass power gasifier projects have been initiated in PNG over the past decade. However, to date no successful power gasifier systems are reported to be operating in PNG. The primary reason for the failure of power gasifiers in PNG appears to stem from the fact that they require considerable technical skills and trained manpower to orerate successfully. This has been clearly demonstrated in Vanuatu and other regions of the world a-. As a result of the need for skilled operators and a reliable maintenance infrastructure and given the technology's previous track record in PNG, it is not recommended that biomass power gasifiers be actively promoted in PNG at the present time. 23/ Assumes 0.7 tonne wood/in wood and 0.34 toe = 1.0 tonne of wood at 30% mcwb. 24/ Observations obtained from the ongoing World Bank/UNDP "Global Biomass Gasifier Monitoring Program". -23- 3.33 However, a large number of heat eaaifiers have been successfully introduced into PNG to provide process heat for crop drying. At last report, there were over 80 "Waterwide" heat gasifiers in operation in PNG W. The heat gasifirs have, in general, been used to replace diesel fuel burners in the copra, cocoa, coffee and tea industries. While heat gasifiers have significantly penetrated the crop drying process, they are still reported to have some minor problems that result from improper operation and maintenance of the systems. The most significant problems reported include smoke contamination with resulting lower quality product, fire hazards and reduced worker safety. Most of these problems, when detected, have been resolved through better operation and maintenance procedures. 3.34 Heat gasifiers are financially attractive in PNG. Available data indicate that they have a payback period of as little as four months when operated at full load. Annual savings, when converting to coconut husks and shells, at a copra factory producing approximately 2,000 tonnes per year are estimated at between R78,000 to K88,000 W. Given the relatively low costs of biomass heat gasifiers, their continued use should be encouraged in PNG. Efforts to improve operation and maintenance of these systems should be encouraged along with standards to improve safety for workers. 3.35 Biomass Direct Combustion: Small-scale(200 to 1,000 kWe) direct-combustion biomass power generation systems are a potential option for isolated power generation in PNG. However, systems based on high pressure steam would face similar technical and trained manpower problems as that faced by the biomass power gasifier systems. More recently, packaged, trailer-mounted biomass power systems utilizing hot-air turbines have been commercially developed for use in isolated areas where water quality considerations would preclude the use of steam based systems. These systems cost about K3,850 per kWe and are generally easier to install and operate than steam based power systems. A simple analysis of the costs of a biomass direct combustion system as compared to a diesel system for a 200 kWe generator system is presented in Annex 3.7. The results indicate that at delivered diesel prices of K0.90/1 the resulting cost of electricity is about 55 toea/kWh as compared to 50 toea/kWh for biomass based system using fuelwood at K20/tonne. The results also illustrate that the price of electricity from the biomass based system is not very sensitive to the wood price. The C-Center program of DME should investigate this option, and compare it to other proposed alternatives such as mini-hydro and solar. 25/ Henry Sanday, "Market Assessment of Biomass Gasifiers in the Pacific", University of the South Pacific draft report to the World Bank for the UNDP Biomass Gasifier Monitoring Project, November 1990. 26/ Diesel costs: 2,000 tonnes of copra/yr x 135 liters diesel/tonne of copra x 34 toea/liter diesel - K91,800 /yr. The biomass system costs are basically the initial investment of approximately K40,000 and the additional labor which are estimated currently at K4,000/yr. Assuming no fuel costs, the annual savings are K87,800 and the pay back period is about five months. Assuming K10/tonne of fuelwood rosults in an additional annual costs of K10,000 and a resulting annual savings over the diesel system of K77,800 or a little over six months for the payback. -24- 3.36 Biomass Co-generations Several opportunities for biomass co-generation exists in PNG. Primary among them are opportunities at the sugar mill at Ramu, the major palm oil factories and possibly at the lager sawmills. To date, no major co-generation projects have been undertaken in PFG. However, some discussions have been underway about a possible co-generation potential at the oil palm factory at Popondetta. It was not possible to obtain the necessary data to review this option. A more detailed analysis is needed to determine if the co-generation option at Popondetta is economically attractive. 3.37 Biogas: The potential for energy production through the biogasification of wastes materials such as pig, cow and chicken manure, human wastes, and other agro-industrial wastes exists in PNG. However, not much experience has been obtained with this technology in the Pacific to date. During the early 1980s, a "large' municipal biogas plant was initiated in PNG to produce 270 ml of methane per day from urban sewage and abattoir wastes. The project was scrapped due to high costs and major operating problems. Given the abundance of fuelwood and other combustible biomass waptes and the relative complexity of the biogas technology, it is unlikely that anaerobic digestion in the form of biogasification would be both competitive and a reliable source of energy for development in PNG. 3.38 Ethanol: PNG currently produces 4 million liters of ethanol from waste molasses. In the past, a small ethanol plant producing 2 million liters per year from cassava was designed to be constructed at the Baiyer River in the Western Highlands. However, this project was never completed due to rising project costs and difficult social problems. The project was finally abandoned in the mid 1980s. Ethanol production, other than from waste molasses at the sugar factory at Ramu, is unlikely to be cogt effective. Therefore, it is not recommended that any further attempts to institute ethanol projects be carried out in PNG. 3.39 Solar Energy: Solar energy represents one of the largest potential sources of energy in PNG. The average annual insolation in PNG varies widely from around 2,300 hours in costal areas and island provinces to significantly lower values in the highland provinces. The average intensity factor for PNG is approximately 6 kWh/m2/d. The heat from direct solar energy is presently utilized to a certain extent in PNG. The most predominant use of solar energy in PNG is for some copra, cocoa and coffee drying, primarily by small-holders. Another increasing use of direct solar energy in PNG is for hot water heating primarily by high- income households both in the urban and rural areas. The alternative for hot- water heating in these homes is either electricity or LPG. Past government regulations banned the installation of electric hot-water heaters in new homes and also provided tax incentives for retrofit of existing electric installations. As a result, solar hot-water heaters were extensively adopted in many high-income homes in PNG to the point where it is estimated that solar hot-water heating is the equivalent of 26 mtoe. At current costs for electricity and LPG, solar hot- water heaters are more cost effective and as a result have been widely adopted in the domestic sector. Opportunities for use of solar hot-water heating still exists in the commercial sector especially for hotels and hospitals where they can be used in conjunction with conventional water heating systems to reduce overall energy costs. 3.40 Solar Electricity: Solar PV electricity, especially in isolated rural -25- areas, where small diesel generators (less than 10 kWe) are used, can be considered for housing and community lighting, television, radio and some refrigeration. The economic viability of such a case is dependent on the costs of the PV systems and the price of diesel. A comparison of a solar PV community electricity system with a 2.5 kWe diesel system indicates that the solar PV system is significantly more expensive than the diesel system, diesel prices of 33 toea/l. At this price of diesel the cost of electricity is estimated at 43 toea/kWh from the diesel system, compared to 81 toea/kWh from the solar PV system. This does not take account of the fact that the PV system has a greater reliability. Annex 3.7 illustrates the sensitivity of the diesel system to the price of diesel fuel. It can be seen that at approximately 85 toea/l for diesel the solar system becomes competitive. In many remote locations of PNG, the financial and economic prices of diesel, if transportation costs are accounted for, are likely to exceed 85 toea/l delivered by local retailers. In such cases, the potential to use solar PV systems should be carefully evaluated. -26- IV. POLICY AND INSTITUTIONAL ISSUES Environmental Issues 4.1 Even though energy sector development activities in PNG have had significant impact on both natural and social environments, the institutional capacity to deal with these impacts is weak. In view of firm statements in the national constitution regarding environmental protection and special provision for the preservation of traditional lifestyles this is not as expected. Development of the energy sector has been less orderly as a result, and still faces uncertainties. There are some indications of improvements in the situation, through environmental assessment and through the continuing search for more effective means of invelving customary landholders and of distributing benefits to them and to Provincial governments. However, entrenched institutional weaknesses, .nd poor interdepartmental coordination hinder prospects for improvement. The task of institutional reform is made much more difficult by political uncertainties and law and order problems. 4.2 Case Studies: Yonki and Kutubu. In the course of a general environmental review of the energy sector attention was focused on two major developments as a basis for assessing PNG capacity to address environmental and social issues - the Yonki hydropower scheme and the Kutubu oil field exploration and development. The former is in an area whose original forest cover has been extensively altered and where no significant species or biodiversity protection requirements have been indi'ated. The major issues there are socioeconomic. On the other hand the Kutubu project encompasses tracts of land and sea which are of some considerable environmental and social significance - an area of lower montane tropical rainforest from which customary landholding groups derive their identity and on which they are primarily dependent for subsistence; a narrow corridor of land which is very sparsely populated and which has wilderness value; and, at the coast, tracts of swamp forest and mangroves which have important roles in the maintenance of ecological processes and the natural production of food and materials. 4.3 Accepting that the Yonki scheme has had a protracted and difficult history it is clear that a great deal has been achieved in terms of an "accommodation" with the affected customary landholders. A program of environmental rehabilitation is proceeding well. It is noted that the implementing agency itself (Elcom) recognizes that an environmental program should be an integral part of the project and that this both enhances the project as such and, importantly, contributes to the resolution of difficulties posed by such projects on or about customary land. A mutually supportive relationship between Elcom and the Department of the Environment is a particular strength in this respect. The work of Elcom's Community Relations Division is obviously of critical importance for the future of the Yonki scheme. Commendable efforts have been made to encourage and support meaningful involvement by customary landholders in economic and social development activities appropriate to their circumstances. Difficulties continue, but this effort to provide "compensatory development packages' for landowning groups provides a model which could guide other agencies. -27- 4.4 The Kutubu project has been the subject of a broad environment6l assessment. An Environmental Plan which addresses most of the issues, including socioeconomic, prepared by the project proponent has been accepted by PNG as a basis for an Environmental Management and Monitoring Plan, and for an Oil Spill Contingency Plan. If these Plans are implemented in accordance with principles and guidelines expressed in the Environmental Plan then there is the prospect of a sound environmental program. There is, however, doubt about the cepacity of involved government agencies to effectively monitor the natural and social environment of the project area and to regulate the developer's activities. 4.5 The difficulties arise from: (i) overlap in environmental responsibilities between DME, Department of Environment (DEC), a i Department of Transport (DOT); (ii) poor coordination between DME and DEC; (iii) an inevitable conflict of interest in DME between its promotional and regulatory functions; (iv) inadequate staff in both agencies, neither having individuals with any experience in the specialised environmental aspects of the petroleum sector; and (v) political involvement in technical matters that weakens provisions for environmental monitoring and regulation. These factors substantially -edutce the prospects for PNG to guide the development of the petroleum sector so as to maximize benefits for the country while minimizing environmental and social costs. In this respect, the capacity of DEC to carry out its function of social impact assessment also needs to be strengthened. 4.6 Enginoering difficulties with the first section of the Kutubu pipeline are compounded by the ecological complications which coul arise where the solid fill access causeway which lies adjacent to the pipeline obstructs overland exchanges of water in the lower section. PNG has no engineering capacity to monitor and regulate pipeline construction. Nor has provision been made for studies of overland water exchange as a basis for designing pipeline access so as to minimise interference with the natural processes which sustain the swamp forest. The inadvertent destruction of patches of swamp forest through drying and/or waterlogging outside the pipeline corridor could become yet another basis for compensation claims and dispute. 4.7 Kutubu area customary landholders have approached DEC with a request to have an extensive area of their forest declared as a Wildlife Managemertt Reserve which they themselves would manage. The overall objective is to protect traditional hunting grounds. It is probable that the landholders also envisage that the legal backing that this would provide them would strengthen the prospects of this area serving as a buffer against the adjacent oilfield development. This would be in the interests of all parties and could be developed as a meaningfu) -xample of protection of tropical rainforest biodiversity, subsistence re eu.rces and cultural values in a dekelopment context. 4.8 Social Issues in Energy Sector Development. Social considerations in energy sector development are of particular importance in PNG, and the complexities of compensation rights and claims and the apparently intractable law-and-order problem are serious constraints on further development of the sector. The introduction of "compensatory development packages" for affected customary landholding groups and the implementation of systems for the distribution of project benefits (such as has been recently developed in the context of the Porgera mining venture) should be carefully monitored, studied and -28- compared with a view to better understahding ho' td involve society in economic and social development and so create an improved climate for investment. 4.9 Petroleum. PNG's concern for the regulation of tanker traffic and for dealing with potential oil spills is valid. However, PNG's limited capacity to regulate these activities remains a problem. Cooperative arrangements being developed with Australian authorities in this respect are a step in the right direction, and under this arrangement, useful recommendations have been made on the structure and capabilities of DME, DEC, and DOT for this work. Spillages in the course of tanker-to-shore transfers, and as a result of storage tank or pipeline ruptures, are an ever present threat. The fact that there has been relatively little problem in this respect can be credited to the oil companies themselves rather than to government vigilance. This fortunate situation may not last. 4.10 Offshore prospects for gas and oil in the Gulf of Papua need to be handled with care and skill if the country is to reap their short-term development benefits while maintaining the Gulf's capacity to sustain a long-term fishery. Speciar PNG treatf obligations with neighbouring Australia place particular emphasis on protection of the marine environment in and adjacent to the waters of Torres Strait. The fact that an exploratory well at the "Pascau prospect blew out in 1983 is cause for concern in itself. That concern is exacerbated by the knowledge that surface manifestations of this gas concentrate blowout continued for several months and reappeared as recently as April, 1990. PNG capacity to control offshore exploration in line with its international obligations vis-a-vis the Torres Strait treaty, the Law of the Sea Convention, and the South Pacific Regional Environment Program Convention needs strengthening. PNG intention to establish a special marine area management regime for Torres Strait and adjacent waters is a very sensible move in the circumstances. The Kutubu marine pipeline and terminal be should be included in the area to be subject to that management regime. 4.11 Electricity. Hydropower is a significant feature of the energy sector of PNC. There have been relatively few environmental problems. Social issues have been important, as evidenced by the Yonki scheme. The Yonki scheme also illustrates an important environmental point - the importance of hydro catchment protection to reduce reservoir sedimentation and sediment wear on equipment such as turbines. Elcom's program of reforestation and establishment of perennial crops such as coffee in this grassland catchment is a good example of a practical approach to hydro catchment management which also serves other interests. Most hydro catchments are, however, forested. Here, too, it is important that they be managed with a view to maintaining water quantity and quality. In such circumstances forest cover can be protected through legal arrangements such as are provided by Wildlife Management Areas. 4.12 Biomass Energy. Fuelwood is extensively used by both rural and urban households. This is mostly obtained by collecting wood from secondary forest, particularly old food garden areas. Some areas are now experiencing shortages. To ensure continuity of supply fuelwood supplies in future will need to planned on the basis of plantations. There are sound socioeconomic reasons for doing this. Environmental consequences of not doing this could be depletion of biodiversity in pockets of remaining natural vegetation and the increased soil -29- erosion and landslips on. steep land. from which vegetation is removed. Problems of this kind are already developing - on the slopes of Mt.Giluwe, for instance. Other sectors, such as agriculture and fisheries can also be adversely affected. The fact that biomass can be developed as a renewable resource, replacing itself, makes it a particularly attractive energy source. Yet, in the absence of careful control of biomass extraction quite serious environmental problems of soil degradation and sedimentation of waterbodies can result. Industrial scale biomass energy development schemes should be undertaken in close consultation with agriculture 2u, forestry and environment agencies, and fully assessed in environmental terms. 4.13 Other Issues. Urban vehicle traffic levels are building up, while vehicle maintenance standards remain low, resulting in inefficient combustion of fuels which results in higher levels of atmospheric pollutants than would otherwise be the case. There does not appear to be any move to shift to unleaded petrol. Bearing in mind the damaging effects of lead poisoning on children in particular it is important that attention be given to this matter and to another source of energy sector lead poisoning - the uncontrolled disposal of batteries. 4.14 PNG took an early initiative in respect of the possible implications of climate change by establishing a national committee on the subject. The scope of the committee's activities could usefully be extended to the energy sector. Though understanding of change in climatic processes is as yet very limited, it can be useful for energy sector planning to at least be aware of the possibilities. These include a possible expansion of agriculture on to higher and steeper land in the Highlands as temperature increase raises the "frost barrier" to higher elevations. Hydro catchments could then experience greater soil movement. Anticipated sealevel rise would have consequences for the operation of coastal infrastructure such as pipelines and seaside power plants. Changes in rainfall pattern could mean that future flow in some streams tapped for hydro may be reduced. 4.15 Measures for addressing environmental matters in energy sector development include: (i) Preparation of a national oil spill contingency plan backed by legislation, trained personnel and pollution control equipment; (ii) Strengthening the capacity of DME energy sector staff to contribute to national development objectives by providing them with training which would better fit them to understand the environmental and social dimensions of their work; (iii) Action on the possible public health hazards associated with the energy sector; currently concerning lead, and disposal of alkaline batteries; 27/ Guidance is provided by PEDP Reports REG 84-10: Guidelines for Large Scale Fuelwood Plantations in the Pacific Islands and REG 89-2: Guidelines for Environmental Assessment of Energy Projects in Small Island Countries. -30- (iv) Use of opportunities available through the South Pacific Regional Environment Programme for advice, training end other assistance regarding environmental aspects of the energy sector; (v) Clearer and firmer provision for consideration of customary land and sea tenure and rights, and for opportunities for landholders to participate in assessments and monitoring; (vi) Analysis of experience in the development of "benefit packages" for those groups and individuals who have customary rights in the area of a project; (vii) More far-reaching analysis of the implications of ewirgy pricing on natural resource use and the environment. (viii)Provision for management of hydropower catchments with a view to maintain water quantity and quality and protect biodiversity. Pricing Issues 4.16 Petroleum Product Prices. The prices for bulk sales of all petroleum products are negotiated directly between the consumers and the suppliers. The Government sets maximum prices only for retail sales of gasoline, gas oil, kerosene and aviation gasoline (Av Gas). The cost structure of these four products as in January 1988 and June 1990 (before the recent Middle East crisis) is given in Annex 4.1. Between January 1988 and June 1990, the FOB costs of gasoline, gas oil, kerosene and aviation gasoline have changed by about 5?, 10?, -3Z and 12Z respectively. For the same period the retail prices of these products have increased by 52?, 26Z, 14Z and 39?. These proportionately larger increases in the retail prices are mainly due to escalation of import duties, distribution costs, and wholesale and retail margins. 4.17 The retail prices are calculated for the main ports of Port Moresby, Lae, Madang, Rabaul and Kieta. Freight differentials are added to these prices for determining the maximum retail prices at other distribution centers. Sales taxes imposed by the provincial governments, on a per liter or a percentage basis, are also added to these prices. 4.18 The landed costs are reviewed monthly. The distribution costs and the margins are reviewed annually and the freight differentials are reviewed on a rotating monthly basis with each province being reviewed at least twice a year. The concept of "benchmark firm" is applied in determining the landed costs whereby the office of the Price Controller reviews the landed costs of all the three companies but reserves the right to adopt for pricing purposes the costs of the least cost (benchmark) firm. aM A trigger mechanism is also employed, whereby changes in the landed costs of 0.4 toea/liter or more, established in the monthly review, are passed through into prices and the changes less than 0.4 toea/liter are held in suspense on an accumulated basis. The prices for the 28/ Government uses the lower of the invoice or posted prices of the benchmark firm in arriving at the US$ FOB prices. -31- Government purchases are set in the same way except that a negotiated rebate (currently 0.7 toea/liter) is incorporated. 4.19 The approximate share of major components in the costs of gasoline, gas oil, kerosene and aviation gasoline (Av Gas) are shown in Table 4.1. Table 4.1: Petroleum Products Price Structure Gasoline Gas Oil Kerosene Av Gas …------------- ------z…_-------- ---------- FOB 27 40 36 51 Import Duty 9 14 3 6 Distribution Cost 17 22 39 30 Wholesalers Margin 10 16 14 11 Retailers Margin 7 8 8 2 Source: Office of the Price Controller. 4.20 Due to the limited size of the domestic market, there is little likelihood of substantial reduction in FOB costs through increased competition. Reduction in distribution costs and margins may, however, be possible through the enhancement of the efficiency of operations. Road and sea transport and storage account for about 55Z of the distribution costs ~While service stations, dispensing equipment, agency and direct selling expenses account for a further 25%, and financing and overheads account for the balance 20Z. Since the storage availability at the main ports does not impose a constraint on supply arrangements to the domestic market, the companies should be able to organize the distribution operations on the basis of supply cost minimization, i.e. minimization of transportation and handling costs, stock holdings and accounts receivables. Any improvement in the levels of stock and accounts receivables will impact on the investment base and should lead to reduction in the margins as well. 4.21 Electricity Tariffs. Since May 1983, ELCOM has adopted an uniform national tariff for all consumers. The current schedule is summarized in Table 4.2. Table 4.2: ELCOM's Tariff Schedule as of 31 January 1991 Category Energy Charge Demand Charge Minimum Charge toea/kWh Kina/kVA Kina/month Domestic- First 100 kWh 11.4 nil 4.0 Balance 16.3 General Supply 16.3 nil 4.5 Industrial 8.7 10.9 2,180.0 Source: ELCOM -32- 4.22 In the past, ELCOM's financial performance has been satisfactory. However, in the last two years (1989 and 1990) ELCOM has faced serious financial burdens. These are essentially attributable to external factors such as closure of BCL, which eliminated an important profit center, the ensuing decline in the country's economy, which depressed the sales, unexpected cost over-runs in the Yonki dam project, devaluation of the Kina which increased ELCOM's debt-service requirements, and increases in fuel costs. There was also no increase in ELCOM's tariffs since September 1989. Key indicators of ELCOM's past financial performance are summarized in Table 4.3. Table 4.3: Key Indicators of ELCOM's Past Financial Performance Year 1985 1986 1987 1988 1989 Sales GWh 453 480 512 542 551 Av. Rev./kWh 13.7 13.0 13.7 13.7 14.6 (toea) ROR - Z a/ 10.4 11.0 11.0 9.4 10.3 DSR - times b/ 2.1 3.0 1.5 1.8 2.5 SFR - 2 c/ 74.0 34.0 30.0 54.1 62.1 Source: ELCOM a/ 10 2 covenanted b/ 1.5 times covenanted. -/ 30 Z covenanted 4.23 The latest financial projection made by ELCOM indicates that it would be able to meet the principal financial covenants of the international lending institutions from 1993 if the tariffs are increased by about 8.5Z in 1991, 7.5Z in 1992, and 6.5Z in 1993. Annex 4.2 below summarizes the resulting principal financial indicators for the forecast period -1990 through 1999. ELCOM would need modest tariff increases in 1991 and 1992 in order to enable it to meet the principal financial covenants. The ELCOM system remains a high-cost one, with average revenue in the mid-1990s of more than US¢ 20/kWh. 4.24 The 1991 power development program of ELCOM (Annex 5.1) does not envisage any major additions to generating capacity during the 1990s. This program provides for a total investment of about K 330 million during the period 1990 - 1999 in current prices (including miscellaneous and administrative capital works). To sustain this level of investments and maintain its financial integrity and also meet the loan covenants ELCOM would have to increase its tariff levels by about 8.5? in 1991 and maintain it in real terms during the rest of 1990s. ELCOM has already submitted a proposal for tariff increase for 1991. This proposal seeks an increase of 8.5? i-n the tariff. However, the Government, it is understood, is considering a lower level of tariff increase and compensate ELCOM through duty concessions and conversion of some of its loans to equity to soften the impact on the consumers in view of the current depressed state of the economy. -33- 4.25 Marginal Cost of Power SuPPly: Similar to ELCOM's high average financial cost, the incremental cost of supplying power is affected by the relatively small scale of development, and the decentralized nature of the system. However, the marginal capacity cost of generation is currently modest, due to the current excess capacity until the end of the decade, and to the relatively low-cost additions to capacity at Yonki (toe of dam) and Port Moresby: capacity cost at generation level (at a hypothetical load factor of 60%) amounts to about t2/kWh, and the cost of diesel at the margin adds another t6WkMh. After distribution losses, the marginal cost for a high load-factor consumer could reach about t8- 9/kWh, before conaidering transmission and distribution investment. Incremental supply cost at this level is not always competitive with own generation by potential large consumers such as mining operations. In the case of the Porgcara mine power supply, the ELCOM cost including a 300 km transmission loop from Mt. Hagen proved to be higher than the mine's own generation using Hides natural gas, the preferred solution. On the other hand, the proposed CRA mining operation at Hidden Valley (perhaps to be supplied together with the proposed Kereminge mine and the town of Wau) may incur a marginal cost of ELCOM supply of close to tll/kWh, after necessary transmission investments from the Ramu grid are taken into account. The initial ELCOM offer price of a substantial up-front payment plus t9/kWh could conceivably be lower than the mines' cost of own generation. ELCOM's usual dilemma is the fact that system financial costs can be reduced only with difficulty below large consumers' own cost, thus depriving the utility of large loads that could reduce the supply cost to small consumers. Institutional and Strategy Issues 4.26 Management of Petroleum Exploration and Development. The Petroleum Branch, organized in the DME under the World Bank-financed Petroleum Exploration Technical Assistance Project, has performed a pivotal role in the promotion of exploration through sound geological data base and expert advice. Since 1985, a total of about US$700 million has been invested by the international oil industry in the petroleum exploration of Papua New Guinea, covering about 235,000 km2 through 40 petroleum prospecting licenses and has resulted in 11 oil and gas discoveries. Apart from negotiating and monitoring this large program, the Petroleum Branch has been rendering technical advice to the Government on the granting of exploration and development licenses. This unit is now facing severe shortage of manpower and may lose much of its credibility in the international oil industry. Unless prompt action is taken to fill the existing and forthcoming vacancies, the functions of resource assessment, archive management, drilling and reservoir engineering will be left unattended, leading to insufficient monitoring of the license holders' exploration activities. A similar lack of monitoring capability in 1983 may have contributed to the Pasca blowout and the subsequent loss of about 12 MHBBL of condensate. An additional position of pipeline and facilities engineer is required to monitor the construction and operation of Hides and Kutubu projects. The attrition of staff is largely due to poor renumneration (less than one-third of that offered by the industry). Substantial improvements in the terms of national staff will have to be made if the Government's policy of training national staff in petroleum technology and localizing the key positions in'DME is to be successful. 4.27 On the policy side, DME needs to develop a cost analysis capability and a data base to analyze development proposals and to monitor the pre-development -34- expenditures which the Government would have to bear if it decides to take equity positions in the proposed ventures. The management of petroleum exploration and development is split between divisions of DME. The functions of policy formulation and coordination are placed in Minerals and Petroleum Policy Division, while the functions of petroleum exploration and development license administration, resource assessment, archives management, drilling monitoring and reservoir engineering are grouped into the Petroleum Branch and placed in the Geological Survey Division. For more efficient coordination and interaction all petroleum functions should be consolidated in a single Petroleum Division reporting to DME. 4.28 Refinery Development. In 1988, DME's preliminary evaluations indicated that, while a small refinery sized to suit the demand of the Highlands region (about 2,500 BBLPD) would be a profitable add-on to a petroleum export project, a stand-alone (25,000 BBLPD) refinery would not be profitable and would cost the Government about US$50 million in annual subsidies. Recent oil industry calculations have also shown that only a small Highlands refinery would be attractive to investors. DME's studies indicate that a coastal refinery of about 12,500 BBLPD may be only marginally viable. The mini-refinery for the Highlands could have been included in the Kutubu project, but the opportunity has passed. DME should pursue its current intentions of commissioning a study on the location, size and product mix of a mini-refinery (possibly an expansion of the Kutubu project's topping plant). The study should also incorporate an evaluation of the use of condensate from the Hides project, now under review by BP. Recent estimates of condensate volume at Hides are much higher than originally envisaged, and could contribute 300-400 bbl/day to the Highlands supply of petroleum products. 4.29 LNG export. Indications exist that market niches in East Asia may be available for LNG export from PNG. The buyers' need to diversify sources and PNG's independence of any strategic shipping lane could be favorable factors for market development. For PNG, the choice would be between the promotion of a small LNG export project based on the reserves in the Gulf of Papua (about 4-5 TCF), or a larger project based on the combined resources (about 9-10 TCF) of the Gulf of Papua and the Papuan fold belt (Hides, Iagifu/Hedinia gas caps, SE Hedinia, etc.). DME should proceed with its intended approach involving (i) an audit of gas resources, to be followed by (ii) a feasibility study, and (iii) presentation of the results to all interested parties in a gas seminar. International oil companies active in PNG have already shown some interest, although the scale of investment would be very large (about $2 billion), and would involve complex contractual arrangements. 4.30 Petroleum Safety Standards. So far, insufficient attention has been devoted to this aspect of oil storage and transportation. Mostly, Australian standards are followed by the oil marketing companies, who in the absence of comprehensive legislation, have had to take the burden of self-regulation as far as their own installations are concerned. Downstream of these installations, the application and monitoring of safety precautions are left to the sub-dealers, retailers and transporters who may or may not be fully conversant with the requirements. A unit within DME should be established to compile the safety standards for handling, storage, and transportation of petroleum products (on the basis of world standards) which should be promulgated by the Government. The -35- responsibility for monitoring the application of these standards should be vested with the provincial governments with PME performing the coordinating role. 4.31 Power Supply System Effiriency. The future strategies for ELCOM have to be viewed in the context of its relatively small consumer base and the lumpiness of large investments for generation and transmission system expansion projects necessary to mzeet the projected load growth. Economies of scale are difficult to achieve as the geographical fragmentation of ELCOM's systems, rugged terrain, and their small sizes do not permit integration of its systems through viable interconnections with the exception of Ramu and Port Moresby systems. PNG has significant energy resource potential. Hydropower potential is conservatively estimated at over 14 - 21 GW of which less than 2Z has so far been exploited. PNG has large reserves of natural gas and oil, both off-shore and on-shore. In addition, there are also coal reserves and geothermal potential besides considerable biomass potential. However, detailed studies have yet to be carried out to determine the extent of these resources and the technical feasibility and economic viability of exploiting them in the power sub-sector. In those cases where some studies have been carried out, it is noted that the high cost of their development renders most of them uneconomical for meeting the relatively small increases in the load projected for ELCOM's systems in the foreseeable future. 4.32 In the light of the above factors ELCOM has prudently decided to consolidate its operations and defer major investment decisions till a clearer picture emerges with regard to the viability of other options including gas-based generation options. During this period of consolidation, ELCOM should: (i) improve the operational efficiency of its existing diesel plants with a view to reducing its fuel expenses; (ii) extend the life of the existing plants, particularly diesel units, through rehabilitation with a view to minimizing capital investments; (iii) automate the operation of the isolated small generating facilities (particularly the diesel units) and remotely control their operators with a view to reducing/eliminating manned facilities and reducing the generation costs; (iv) undertake appropriate system improvement measures to minimize the technical energy losses in transmission and distribution; (v) extend the application of prepaid card operated meters to more areas with a view to reducing the consumer-related costs: (vi) investigate the technical and economic viability of gas-based generation for meeting the future power needs, particularly in -36- Port Moresby system; au (vii) for the Gazelle Peninsula system, investigate the viability of the geothermal power potential for meeting the future power needs; and (viii)carry out the final feasibility and detailed engineering studies for the Ramu-Port Moresby interconnection and Ramu 2 hydropower project. 4.33 Land Acquisition for Power Projects. Land acquisition and right-of-way problems, have of late, assumed serious proportions in PNG and have adversely affected implementation of vital power generation and transmission projects. In particular, the transmission projects have been seriously affected because of the larger number of land owners involved. Unless this problem is effectively tackled, ELCOM may have to undertake more costly load-center-based generation programs which minimize the land requirements. 4.34 Rural Electrification. In PNG rural population live in small and isolated pockets, far from ELCOM's systems. Given the rugged terrain separating the rural settlements and the lack of proper transportation and communication infrastructure, electrification of these settlements has to be necessarily based on local/decentralized systems. The problem is made more difficult by high costs, lack of local skilled labor and low load/revenue potential. The future strategy for rural electrification in PNG should therefore take into account the above factors and the fact that the scarce resources available to the Government also have other claims such as health, education and employment generation. 4.35 Given the very low revenue potential of RE projects, it is of utmost importance that all options which have the potential for reducing the costs should be explored. In this context, remote control and operation of the small diesel and hydropower generation units, low-cost domestic wiring kit developed by ELCOM and prepaid credit cards for electricity consumers introduced recently by ELCOM deserve serious consideration. 4.36 Power Sector Organization. The Department of Minerals and Energy (DME) is responsible for all policy and planning matters relating to the power subsector. In the RE sector, DME has also recently taken over the responsibility for the "C" centers in additior to its existing responsibilities of planning and implementing rural power projects. DME is also proposing to directly assume the responsibility for operation and maintenance of the power supply facilities in the "C" centers. However, it lacks the required staff and the necessary expertise and experience to effectively handle its assigned tasks. Recognizing this need, DME is creating a separate Electricity Division. This proposed 29/ The EdF study has indicated that development of Ramu 2 hydropower project and interconnection of Ramu and Port Moresby systems as the least-cost solution. However, in PNG constructing a 400 km transmission line is not only expensive but also extremely difficult in view of the problems associated with land acquisition and right-of-way. Any solution should aim at minimizing these problems. -37- Electricity Division, when operational, should, at least in the beginning, to be functionally effective, concentrate on limited functional areas rather than dissipate its limited resources by attempting to cover each and every issue relating to the power subsector. The first priority of the division should be all matters pertaining to rural energy development including rural electrification and "C' centers. It is also recommended that the Government should seriously explore the possibility of entrusting the task of operation and maintenance of the "C" centers to private contractors in view of the serious staffing problems faced in the Government due to lack of adequate skilled technical personnel. As regards matters relating to ELCOM, the proposed Electricity Division should act as the technical secretariat for the Minister of Minerals and Energy and prepare technical briefs for him on policy issues. A more positive role for the division vis-a-vis ELCOM, a technically competent organization, could perhaps be considered at a later date when the division has acquired adequate expertise and experience. 4.37 ELCOM Organization and Staffing. ELCOM's organization is structured along functional lines (see Annex 4.3 for the current Organization Chart). It consists of five main departments - Secretary's Office, Administration, Commercial, Operations, Development, and Corporate Strategy & Planning. The Corporate Secretary is in charge of units for safety, internal audit, public relations and Board admi7nistration. The area managers in each of the 26 urban centers are also responsible for maintenance of "C" centers in their areas. ELCOM's organization structure is considered to be appropriate for its assigned responsibilities. Currently, ELCOM does not have in-house capability for design and construction of major generation and transmission projects and relies on external consultants and contractors. Considering the size of ELCOM's current and future operations, ELCOM need not develop these capabilities and should continue, as is being done now, to develop its organizational capabilities in the distribution areas. 4.38 During the 1980s ELCOM made significant efforts to improve its organizational structure, staff technical skills and information and management systems. These efforts have resulted in the gradual reduction of its workforce - from 2,744 in 1980 to 2,005 in 1990, a reduction of 27Z. This has been achieved despite significant expansion of its power supply facilities and the resulting increases in its operations. Given the geographical fragmentation of its systems, higher-than normal levels of staffing in ELCOM is to be anticipated. However, the mission recommends that ELCOM should continue its efforts at rationalizing its organizational structure and improve the technical skills of nationals with a view to reducing its dependence on expatriate staff. There is also some scope for reduction in ELCOM's workforce, particularly in the isolated systems, by adopting remote controlled generation and prepaid card operated meters. The first will reduce the requirements for skilled operation staff, and the second, minimize the staff requirements for meter reading and revenue collection. -38- V. INVESTMENT AND TECHNICAL ASSISTANCE PRIORITIES Public Investment Prop,ram 5.1 For the next few years, the ELCOM investment expenditures in constant 1991 prices will amount to about K 20-30 million per year, with a likely range of K 15-30 million annually in the late 1990s. The DME program for institution building, geological and petroleum assistance, and rural energy supply will add another K 2-4 million per year (Annex 5.1). The financing of this investment program (average new financing of K 17-37 million per year) will be achieved mainly through International Agency and Commercial Loans, supplemented by supplier credits. For ELCOM, the early years of the period represent primarily the completion of ongoing projects, while the late 1990s contain the construction of the Yonki toe-of-dam hydro facilities and additions to the Port Moresby diesel generation. If major new loads can be added to the ELCOM system earlier than anticipated (e.g., the Hidden Valley mine), the interconnection of the Ramu and Port Moresby grids could be advanced ahead of 2005, with investment expenditures in the late 1990s. 5.2 The DME investrent and technical assistance program for the 1990s includes the following components: (i) Minerals and Energy Support Project: originally a geology- oriented TA task, this assistance is sought mainly for the training of PNG officers. Total cost about K5 million over 5 years. (ii) DME Training and Staff Development: general training of PNG nationals in the country and overseas. The 1990 budgetary allocation was K 40,000 and a similar allocation is requested for 1991, rising somewhat in the following years. EEC funds are being obtained for petroleum staff training. (iii) Petroleum Development Support: started with New Zealand assistance, this TA encompasses funding for a refinery study, a gas utilization study, a pipeline issues study, and general training. The available funds (K 250,000 allocated for 1991) are insufficient to cover the necessary cost. (iv) Rural Energy Development: this program covers the installation of small isolated solar systems for schools, health centers, water pumping, etc. Other alternative renewable energy sources may also be considered. Funded by New Zealand and the EEC, this program requires about K 70-80,000 per year. If more resources become available, an assessment of the demand should be conducted. -39- (v) Minihydro Program: covers the completion of the construction of the Telefomin and Woitape minihydro facilities, and the investigation of 7 other projects. The program is funded by about K 11 million from the EEC and Germany, for an annual requirement of about K 1.5 million. Grant funds are required for this program, as cost recovery is unlikely from the rural consumers. Power 5.3 In view of the severe financial constraints, ELCOM is currently in the process of consolidating its operations and reviewing alternate strategies aimed at cost reduction. Also, as stated earlier, no major additions to ELCOM's generation and transmission systems are envisaged during the 1990s. As such, in the medium-term, only studies requiring technical assistance are considered in this section. In this context, the Asian Development Bank has already provided financial assistance for final feasibility and design studies for the Ramu - Port Moresby Interconnection project and Ramu 2 hydropower project. The ADB is also processing technical assistance for a gas-based power generation study. In addition, ELCOM should seek and obtain technical assistance for other studies as summarized in the ensuing paragraphs. 5.4 Diesel Plant Optimization Study. ELCOM has 97 diesel units in operation in 22 power stations spread across PNG with a total installed capacity of 68 MW. Of these, 16 power stations supply isolated distribution networks and 6 supplement the existing hydropower systems. The capacities of these power stations range from 400 kW to 45 MW. The peak demands vary from 85 kW to 25 MW. Two-thirds of these units are over 10 years old. Isolated power stations are manned 24 hours a day. There is considerable scope for optimizing their operation with a view to reducing ELCOM's costs. The proposed study will review the operation of ELCOM's existing diesel generation facilities and recommend appropriate and cost-effective measures to (a) improve their operational efficiency and reduce fuel consumption, (b) extend their life with a view to reducing the replacement costs, and (c) increase their automation with a view to reducing the need for operators. The total cost of the study is estimated at about $500,000. Indicative terms of reference for the study are given in Annex 4.4. 5.5 Distribution System Optimization Study. The main objective of the proposed distribution study is to rationalize the planning, design, construction, operation and maintenance of ELCOM's distribution systems. The proposed study will review ELCOM's current design and construction standards and operation and maintenance practices and recommend appropriate modifications, including increased automation with a view to minimizing the energy losses and improve supply reliability in a cost-effective manner. In the process of the conduct of the study ELCOM's in-house expertise in the relevant areas will also be enhanced and make it self-supporting in the future. The total cost of the study is estimated at about $500,000. Indicative terms of reference for the study are given in Annex 4.5. -40- Petroleum 5.6 DHE Regulatory Capability Support. In addition to the strengthening of DHE petroleum staff provided in the PIP so far, further technical assistance to DME in its discharge of the functions related to petroleum exploration and development is essential. Such assistance would support: (i) natural gas resources audit; (ii) pipeline facilities inspection and monitoring; (iii) review capability for feasibility studies; (iv) expertise in cost analysis, reservoir engineering, drilling, and pipeline construction; (v) LNG and other gas use promotion, such as presentation of study results to interested parties in a gas seminar. The total cost of the TA would amount to about US$3-4 million, and could be provided as a Petroleum Development Technical Assistance Loan by international lending institutions, perhaps supplemented by grant funds. New and Renewable Sources of Energy 5.7 Fuelwood for Household Energyt There is little reliable and accurate information on the supply and consumption of fuelwood in PNG. There are no PNG government institutions that are directly responsible for assuring the continued affordable supply of fuelwood while preventing negative impacts on the environment. The Forestry Department is only now beginning to assess the forest resource base. However, very little of this effort is directed at determining the sources of fuelwood supply and regeneration. The Department of Minerals and Energy's staff have little quantitative information on fuelwood consumption. There have been a couple of recent surveys on 'household energy consumption patterns" but these were not comprehensive or quantitative. To date only some qualitative data exist on the largest energy consuming sub-sector of PNG's economy. It is, therefore, recommended that technical assistance be provided to PNG to: (a) Conduct a comprehensive fuelwood resource assessment especially in the vicinity of the major urban centers and the densely populated highland provinces; (b) Conduct a detailed survey of urban and rural household energy consumption Patterns with the emphasis of determining more accurately the levels of consumption of fuelwood and other sources of energy as well as the economic and social parameters that govern household energy decisions; -41- (c) Create, within the Department of Minerals and Energy, the capacity to develop and formulate a "household and fuelvood energy strategy which accounts for PNG's growing urban population's Increasing demand on fuelwood and decreasing forestry resource base. 5.8 Household Energy Conservation: Electricity accounts for the next largest cpmponent of household energy consumption in PNG. With the exception of solar hot water heating, there has been very little else promoted for electricity conservation in the household sector. The possibility for technical assistance to define opportunities for household energy conservation, especially in lighting, refrigeration and air conditioning should be considered along with the introduction of domestic building and appliance efficiency standards that are cost effective and would help minimize the rate of increase in household energy consumption in PNG. 5.9 Rural Electrification and Alternative Energy Development (REAED): The Department of Minerals and Energy's new Electricity Division (ED) will require substantial technical mnd financial assistance in order to implement its rural electrification mandate. The new ED has 'three broad areas of functional responsibility: (a) promotion of new rural electrification initiatives and improvement in the operations and management of existing RE facilities; (b) energy planning and rural, household, and renewable energy activities; (c) providing the government's inputs to ELCOM's power sector planning related activities. To effectively carry out the responsibilities in each of these areas, the DME has approached the European Community, Germany, and other donor agencies for financial and technical assistance to cary out the various components of its program. The ED will have the responsibility of administering an average projects related budget of Kina 5.4 million in addition to its own annual operating budget estimated at K 1.0 to 1.5 million. The projects related budget is to be derived primarily from the EC and German grant aid funding (amounting to K 11 million over a five year period) and from the two Public Investment Program (PIP) Projects of Mini Hydro Development. Additional working funds for the ED are expected from the Rural Energy Development Program which has an EC grant component of K 1.8 million, the FSED/PEDP/EC sponsored Regional Solar PV Project totalling K 0.3 million and the annual recurrent budget of the Minor Power Houses (C-Centers) amounting to K 2.7 million. 5.10 Given the current levels of funding for the rural electrification and alternative energy development program in PNG, it would appear that the most immediate need is for capable, trained and experienced manpower to help administer, deliver and sustain the program of the new ED. At present, there appears to be very little emphasis on the training and capacity building aspects of the RE and alternative energy development program. Therefore, it is recommended that any additional financial assistance provided in the area of RE and alternative energy development be targeted at the mdanpower development and training rather than implementation of additional hardware and the addition of new isolated RE centers. ANNEX 1. 1 -42- PAPUA NEW GUINEA Growth and Comoosition of GDP. 1984-2000 (At 1988 price) Growth Rates (X pDn.) Shares In CDP Estimate Estimate Prolected Estimat ProjectcA 1984-88 1989-91 1992-94 1995-97 1998-2001 1991 2001 Agriculture p/ 2.1 0.7 8.2 8.8 8.0 27.8 27.4 Mining 10.1 4.8 15.2 -4.1 -8.8 19.2 18.2 Manufacturing 1.2 -2.0 4.1 4.0 4.6 10.1 11.0 Construction -8.2 9.7 4.6 6.0 6.0 6.S 7.8 Utilities 2.8 1.2 6.1 5.9 6.0 1.7 2.2 Other Services 1.7 -0.8 4.8 4.1 4.6 84.8 88.8 GDP 2.8 1.2 6.8 2.1 2.0 100.0 100.0 Memo Items Nonmining GDP 1.8 0.6 4.1 8.8 4.0 80.8 86.8 Employment In Formal Sector 1.1 -1.0 8.2 2.6 8.2 ... ... Consumer Inflation 4.2 6.1 5.2 4.6 3.8 ... ... I/ Including forestry and fisheries. Source: Date provided by PNC authorities and staff estimates. -43- ANN=o 1, 2 PAPUA NFW OITMFA Page 1 of 2 VALUE OF EXPORTS mY TYPE OF PRODUCT, 1988-91 */ (USS million at current prices, f.o.b.) 1988 1984 1985 1986 1987 1988 1989 1990 1991 Est. Mineral 447.4 865.6 548.4 577.8 787.2 994.0 70W.0 788.5 1001.6 Copper 198.0 151.6 209.1 160.6 810.4 515.6 408.0 886.6 820.1 aOld 240.9 2065.0 84.7 410.8 485.7 467.4 870.8 402.1 656.1 Silver 13.4 8.9 4.7 6.9 11.1 11.0 18.7 15.8 26.4 Non-Minerol 864.1 628.4 409.7 428.6 480.8 415.0 487.5 802.6 266.1 Agricultural 276.9 426.8 880.2 841.7 296.1 294.4 815.6 198.8 189.2 Cocoa 49.7 75.0 62.4 58.1 61.9 53.1 62.8 81.8 84.2 Coffee 118.5 128.8 117.6 214.7 148.8 131.0 164.1 92.7 84.8 Toa 12.5 19.2 11.6 7.7 6.2 7.8 7.1 7.0 8.8 Copra 28.5 64.9 38.4 10.8 16.7 22.4 18.4 9.1 5.6 Copra Oil 28.6 44.1 28.7 10.7 16.9 20.1 17.9 12.1 12.2 Palm Oil 28.5 84.7 61.6 29.1 26.8 88.0 44.8 84.2 40.8 Rubber 2.6 2.8 8.9 8.1 8.4 6.1 8.9 1.8 2.0 Othor b/ 18.1 21.6 16.1 8.0 17.8 17.7 9.6 10.6 1.8 Forest Products 68.8 91.4 87.8 76.9 122.1 112.5 112.4 96.2 76.9 Logs 52.6 78.2 58.4 70.0 118.4 104.4 101.2 88.4 70.5 Other c/ 18.8 18.2 8.9 6.9 8.7 8.1 11.2 8.8 6.4 Fish Products 10.9 11.2 12.2 8.1 12.1 8.7 9.6 8.6 Tune 0.8 0.8 6.1 -- -- -- -- Other d/ 10.6 10.6 7.1 8.1 12.1 8.7 9.5 MAJOR EXPORTS 801.6 898.9 958.1 1094.6 1217.8 1409.6 1227.6 1086.1 1267.7 Other Exports / 40.9 25.6 18.5 48.7 41.1 62.7 95.2 78.8 98.7 TOTAL EXPORTS 842.4 919.6 971.6 1095.8 1268.7 1472.2 1322.7 1162.9 1861.4 _____ ----- ----- ------ ------ ------ ------ ------ ------ Source: Data provided by PNO authorities and staff estimates. */ Based on customs data. b/ Includes a very sall amount of manufactured goods. c/ Includes timber, plywood A woodchip. d/ Include prawns, barramundi A crayfish. ANNEX 1.2 Page 2 of 2 -44- VALUE OF IMPORTS BY SITC CLASSIFICATION, 1983-O (US$ Million at current prico, f.o.b.) 1988 1984 1985 1986 1987 1988 1989 199W */ Food A Live Animals 162.4 178.8 152.9 168.1 158.6 209.8 228.1 168.0 Beverages A Tobacco 9.8 12.6 9.6 8.8 18.1 17.9 17.6 12.1 Crude Materials, Inedible* 5.6 6.6 7.0 7.3 8.5 9.9 9.1 6.7 Mineral Fuels, Lubricants, A Related Materials 200.6 174.6 158.0 99.6 128.1 118.8 74.4 49.1 Animals & Vogetable Oils A Fate 8.0 4.4 8.4 8.8 4.6 3.6 4.6 8.9 Chemicals 72.7 69.4 65.2 64.2 98.6 97.4 91.6 65.6 Manufactured Goods 154.0 164.8 188.6 168.0 199.7 287.3 298.0 170.2 Machinery A Transport Equipment 260.9 268.1 260.8 817.9 864.8 490.0 618.6 887.1 Miscellaneous Manufactured Articles 69.1 86.1 74.2 76.5 96.8 114.8 128.8 74.6 Other Miscellaneous 41.1 18.4 6.9 9.6 14.2 14.8 16.1 11.6 TOTAL 986.1 944.8 868.6 981.8 1094.7 1868.1 1472.8 884.0 a/ January to September. Source: Date provided by PNG authorities. Annex 2.1 Page 1 of 7 -45.- PAPUA NEW GUINEA Energy Balance 1990 iNERCY BALANCE eSTIDATm3. 1990 ('000 TOE) Agrlc. Totel Tota I Puelwood Reridue. Ethanol B;iasa 1b,dro Petroleum Elsctric. Solar Energy Oro.. Supply Production 540.66 149.61 3.19 693.26 126.22 28.00 847.48 Imports 627.0 627.0 Total Supply 54O.86 149.51 3.19 698.26 126.22 627.0 28.00 1,474.0 Conversion Poser Coneration -126.22 -60.0 186.0 0.0 Conver ion i_- 88.0 8S.0 Trans/Dit. Lose.. 17.0 1. Not Supplies 540.56 149.51 8.19 698.26 0.00 567.0 181.0 28.00 1,419.0 Sectorsl Conwumption Hou shoId 492.88 24.62 16.95 11. 90 55.6 22.00 606.0 oserci 4.92 ne. . 92 8.00 58.O 6 6.00 78.0 Industrial/Mining 1.17 14.02 15.19 249.0 16.1 0.00 280.0 Transport 8.19 8.19 278.50 0.00 281.69 Agricultural 42.14 110.80 15.02 12.38 0.00 165.0 ther. 0.7 0.7 Total Consumption 540.56 149.51 8.19 698.26 0.00 867.0 131.0 28.00 1,419.0 Source: Mission estimates. Assumptions: 1. Household Energy Consumption: Fuelwood: Total population is estimated at 3.907 million of which 85Z is rural based and 15Z is urban based. IL Fuelvood consumption is estimated at:.2/ 16MJ/cap/day - rural based; and 6/MJ/cap/day - urban based. Therefore, fuelvood consumption is estimated at: rural - 461.77 mtoe; and urban = 30.56 mtoe. Total household fuelvood consumption is estimated at 492.33 mtoe in 1990. Agricultural Residues: There is no reliable data on agricultural residjue consumption by households for energy. However, the mission observed the use of 1/ Based on data provided in the Los Alamos report. 2/ No recent reliable estimates of per capita fuelwood consumption exists in PNG. For the purposes of this study, per capita fuelvood consumptiorn data is based on a 1980 study by Newcombe, et.al., Energy for Development, the energy policy papers of the Lae Project, 1980. k% Annex 2.1 -46- Page 2 of 7 some agricultural residues for cooking, especially in the rural areas. Coconut husks and shells are commonly used to supplement cooking fuels by rural householders in the regions where this residue is available. The mission, therefore, assumes that consumption of agricultural residues in the household sector is approximately 5Z of household fuelwood consumption. 2. Commercial Energy Consumptions Fuelvood: At present no data exists for commercial fuelwood consumption in PNG. The mission estimates commercial fuelwood consumption in schools, hospitals, restaurants, etc., to be approximately 1Z of household fuelwood consumption or approximately 4.92 mtoe. 3. Industrial Energy Consumption: Fuelvood: Fuelwood is consumed in the agro-industrial sector and this is reported under "Agricultural Fuelwood Consumption." Agricultural Residues: Sugarcane bagasse is consumed by the sugar industry for process heat. The estimated consumption in 1990 is based on total consumption of all bagasse produced which is equal to 14.02 mtoe. The estimate of sugarcane bagasse is presented below. Wood Industry Residues. Logging and wood residues are produced in the process of log harvesting and wood processing. Total usable residues are estimated as only those produced at the saw and ply-mills. Total mill residues in 1990 are estimated at 35,070 tonnes. The mission estimates that only 1O of these residues are used by the mills for energy or the equivalent of 3,507 tonnes. The energy value of the wood residues are assumed to be 14GJ/tonne resulting in the equivalent of 1.17 mtoe in wood residue energy consumption. 4. Agro-Industrial Energy Consumption: Copra - Assumes the 1990 production at 150,000 tonnes of which 65Z is produced by hot air driers and 35Z by traditional smoke driers. The biomass fuel consumption by hot air driers is estimated at 1.25 tonnes per tonne of dried copra. The biomass fuel consumption of the traditional smoke drier is estimated at 2.5 tonnes per tonne of dried copra. Thus the weighted average specific fuel consumption is estimated at 1.69 tonnes of biomass per tonne of dried copra or the. equivalent of 23.65 GJ/tonne of dried copra. Of the total biomass fuel used for copra drying, the mission estimates that 70 percent is drawn from waste husks and shells and 30 percent is from fuelwood. fJ In addition, it is estimated that approximately 2.0 GJ of diesel per tonne of dried copra is required to drive 3/ Biomass energy consumption for copra drying is based on data provided by the PNG Department of Minerals and Energy in its "Rural Development Series Handbook No. 21 - Copra." Annex 2.1 Page 3 of 7 -47- fans, blowers and generators. Cocoa - Cocoa is dried in PNG by four basic methods: Samoan driers; flat bed diesel-fired driers; diesel-fired rotary driers; and solid fuel direct-fired driers. The total (fuel and power) specific energy consumption varies from between 4.3 GJ/tonne of dried cocoa from the diesel fired rotary driers to as high as 21.7 GJ/tonne of dried cocoa from the traditional Samoar. type drier.4/ No data on the distribution of processing techniques presently exists in PNG. Attempts by the mission to obtain a representative sampling of the cocoa industry were not successful as questionnaires distributed by DME were not returned in time for the analysis. Preliminary information obtained by the mission indicates that solid fuel direct-fired driers have been rapidly adopted by the industry. For the purposes of this analysis it is assumed that the following distribution and specific energy consumptions are present in the cocoa processing industry in PNG: Drying Method Specific Fuel Consumption Percent of Total (GJ/tonne of dried cocoa) (%) Biomass Diesel Samoan 21.70 0 20 Biomass Direct-fired 8.60 0.60 60 Diesel-fired 0 8.40 20 Weighted Average 9.50 2.04 100 There is presently no information on the split of fuelwood and coconut husks and shells used for drying cocoa in PNG. The mission estimates that approximately 40 percent of the biomass fuel used in cocoa drying is fuelwood while the remaining 60 percent is coconut shells and husks. Thus the total biomass fuel consumption used by the cocoa industry is estimated to be 11.21 mtoe in 1990. The diesel consumption is estimated at 2.41 mtoe. Coffee - Washed coffee beans contain 51? water, by weight (mcwb). This needs to be reduced to 11% mcwb for export quality. Three basic types of driers are used in PNG: diesel-fired; husk and wood-fired indirect driers; and wood- fired direct driers. The specific energy consumption needed for each type of drier is listed below:!, 4/ Data from PNG Department of Minerals and Energy "Rural Development Series Handbook No. 19 - Cocoa". 5/ Information takeni from PNG Department of Minerals and Energy "Rural Development Series Handbook No. 20 - Coffee". 0 Annex 2.1 Page 4 of 7 -48- Drying Method Specific Fuel Consumption Percent of Total (GJ/tonne of dried coffee) (Z) Biomass Diesel Diesel-fired 0 9.3 10 Husk-fired Indirect 15.5 1.0 60 Wood-fired Direct 10.0 2.0 30 Weighted Average 12.3 2.7 100 There is presently little information on the split in the type of drying systems used in-PNG. For the purposes of this analysis, the mission estimates that 102 of the total coffee in PNG is dried with diesel-fired driers, 60 percent with husk and wood-fired indirect driers and 30 percent with wood-fiLed direct driers. Average diesel consumption is estimated at 2.7 GJ/tonne of dried coffee. Diesel is used both for drying as well as to generate electricity to run blowers, fans and motors. Thus the total biomass fuel used in coffee production is estimated at 22.6 mtoe and the diesel consumption is estimated at 5.0 mtoe. Rubber - Rubber production in PNG in 1990 is estimated at 6,500 tonnes. The mission was unable to visit and gather any data from any rubber plantations in PNG. Thus, estimates energy consumption for rubber production are based on data taken for rubber production in Indonesia.N The specific fuelwood consumption for the production of Ribbed Smoked Sheet (RSS) amounts to about 1 tonne of air dried wood per tonne of RSS. Thus, the 1990 fuelvood consumption for rubber production in PNG is estimated at 2.17 mtoe. Palm Oil - Palm oil production in PNG has increased dramatically since it was first introduced in 1967. Palm oil is currently the third most important agricultural export in PNG resulting in over 657,000 tonnes of oil palm produced and 132,500 tonnes of palm oil exports in 1989. The mission was unable to review the palm oil industry in PNG and obtain any data on energy consumption and residue use. Thus, estimates of energy consumption are based on data from the palm oil industries in Indonesia and the Ivory Coast.7/ Energy is consumed in 6/ Information on energy used in rubber production is taken from the World Bank/ESMAP report 'Indonesia: Biomass Gasifier Pre-Investment Study", April, 1990. 7/ Data on energy consumption and agricultural residue production is based on the World Bank/ESMAP report "Improved Biomass Utilization Pilot Projects Using Agro-Industrial Residues for the Energy Sector", No. 069a/87, April 1987. Annex 2.1 Page 5 of 7 the palm oil production process in the form of electricity for machinery and lighting and in the form of process heat for the oil production and clarifying process. The energy demand of a mill depends on the its actual production level. At maximum capacity, electric power consumption amounts to 720 Kw/tonne of fresh fruit bunches (TFB) and 0.5 tonne of steam/TFB. Palm oil factories generate four types of residues: empty bunches; fibers; shells; and debris. The energy value of these residues is presented below: Residue Type Quantity MCWB LHV (wb) Energy Content (wb) t/TFB (C) (GJ/tonne) (GJ/TFB) Empty Bunches 0.26 60 5.0 1.3 Fibers 0.22 40 11.0 2.4 Palmnut Shells 0.06 15 14.8 0.9 Debris 0.025 15 14.8 0.4 At present, empty bunches are not generally utilized for energy at most mills but are either discarded or burnt in open piles. The primary reason is their initially high moisture content make the empty bunches unacceptable as a fuel for direct-combustion boilers. Alternately, the fibers and palmnut shells are usually utilized for boiler fuel. The net result is an estimated typical specific energy consumption at most mills of: Biomass Fuels - 1.83 GJITFB; and Diesel/Fuel Oil = 0.10 GJ/TFB.. Tea - Tea production in PNG in 1990 is estimated at 9,200 tonnes. In the processing of tea the major energy components are the fuel used for drying and withering and the electricity used for withering. Energy used elsewhere in the process is minor in comparison. Data provided by Gilmour !L indicates the following specific energy consumption per tonne of Made Tea (tMT): Energy Source Energy Consumption Avg. Energy Consumption (GJ/tMT) (GJ/tMT) Electricity9/ 4.8 to 7.2 6.0 Process Heat 10 to 35 22.5 8/ I.A. Gilmour, Tea, Technical Report 1987/2, PNG Department of Minerals and Energy. 9/ Electricity consumption is estimated by Gilmour at 0.4 to 0.6 MWh/tMT. Assuming a 30? conversion efficiency from fuel to electricity yields an equivalent energy consumption of 4.80 to 7.20 GJ/tMT. Annex 2.1 -50- Page 6 of 7 The process heat requirements vary significantly depending on the source of the heating system. Process heat provided by diesel based burners require in the range of 10 to 12 GJ/tMT while that from a manually stoked wood combustion indirect drying system, such as the traditional Sirocco burners, require upwards of 35 GJ/tMT. The tea industry in PNG has recently begun to move away from the less efficient manually stoked wood systems opting for more efficient wood-fueled direct fluidized-bed driers. Thus the mission estimates the average specific energy consumption for process heat in the tea industry to be approximately 22.5 GJ/tMT. The resulting fuelwood consumption by the tea industry is estimated at 4.93 mtoe in 1990. Electricity consumption is estimated to be 1.32 mtoe. Sugar - The sugar industry in PNG is a net exporter of energy. PNG has one sugar mill, located in Ramu valley. Sugar production in 1990 was estimated at 28,270 tonnes. Asstming an average tonne cane/tonne sugar of 8.5 lo/ results in total cane production of 258,485 tonnes in 1990. The resulting bagasse is estimated to be 25Z of the weight of the cane or equal to 64,621 tonnes. Average bagasse contains 50Z mcwb and has an energy value of 9.8 GJ/tonne. Thus the resulting energy value of the bagasse is approximately 14.02 mtoe. The bagasse produced at the sugar mill is utilized for energy, albeit very inefficiently at present. In addition the sugar mill produces, from waste molasses, approximately 4 million liters of ethanol per year for use a blend with motor fuels. The energy value of the ethanol is estimated at 3.19 mtoe 5. Hydropower. ELCOM's total hydropower generation in 1990 was estimated at 515.4 GWh or equivalent to 86.5? of its total generation for the year. Assuming a conversion efficiency of 352 to obtain an oil equivalent results in energy production of approximately 126.22 mtoe. 6. Electricity Consumption: The distribution of electricity in 1990 is based on ELCOM's energy sales data for 1989 and is given as: Sector Percent of Total (Z) Households 23.4 General 63.8 Industrial 12.3 Others 0.5 ELCOM informed the mission that the "general" category included commercial customers as well as households incorporated in "high-rise" condominiums. The mission estimates that total household consumption within the "general" category 10/ Source: World Bank Energy Department Paper No. 13 - "Identifying the Basic Conditions for Economic Generation of Public Electricity from Surplus Bagasse in Sugar Millsn, October 1983. 11/ Assumes 1,300 liters of ethanol per tonne and 1.038 toe/tonne of ethanol. Annex 2.1 Page 7 of 7 to be 30X of the total and commercial customers to be 702 of the total. The resulting distribution is thus: Sector Percent of Total (Z) Households 42.5 Commercial 44.7 Industrial 12.3 Others 0.5 Annex 2.2 Page 1 of 2 -52- PAPUA NEW GUINEA Energy ConsumDtion Patterns 1990-2000 ('000 toe) Household Energy Consumption Fuel/Year 1990 1995 2000 -------------------------------------------------------------------__------ Fuelvood (a) 492 570 661 Ag. Residues (a) 25 29 34 LPG 1 2 2 Kerosene 11 17 22 Electricity 56 88 108 Solar (a) 22 26 30 Total 606 732 857 __________ (a) Assumes a 3? annual growth in consumption. Source: Mission estimates. Commercial Sector Energy Consumption Fuel/Year 1990 1995 2000 Fuelvood (a) 5 6 7 Ag. Residues LPG 3 3 4 Electricity 59 93 114 Solar (a) 6 7 8 Total 73 109 133 (a) Assumes a 3? annual growth in consumption. Source: Mission estimates. Annex 2.2 Page 2 of 2 -53- Industrial and Mining Sector Energy Consumption -----------------------------------------------------------__-------------- Fuel/Year 1990 1995 2000 -------------------------------------------------------------------__------ Fuelvood (a) 1 2 3 Ag. Residues 14 19 23 Petroleum Products 49 687 (b) 801 (b) Electricity 16 25 31 Total 280 733 858 __________ (a) Assumes a 10 percent annual growth in the use of wood industry residues. (b) including BCL. Transport Sector Energy Consumption ---------------------------------------------------_---__---_--__---------- Fuel/Year 1990 1995 2000 -------------------------------------------------------------------__------ Av. Gas 9 13 18 Jet Fuel 17 91 115 ADO (a) 171 268 332 Gasoline 82 117 154 Ethanol 3 3 3 Total 282 492 622 __________ (a) Assumes about 30Z (or equal to 1990 ratio) of total ADO is consumed by the transport sector. Agricultural Sector Energy Consumption - 1990 to 2000 ---------------------------------------------------------------------__---- Fuel/Year 1990 1995 2000 -------------------------------------------------------------------__------ Fuelvood 42 45 49 Ag. Residues 111 118 130 ADO 12 13 14 Electricity 5 5 6 Total 170 181 199 Annex 2.3 -54- PAPUA NEW GUINEA Petroleum Product Imports 1984 1985 1986 1987 1988 1989 1990 ------------------------(megaliters)---------------------- Av. Gas 12.95 9.44 6.28 11.24 11.70 14.00 1/ 14.50 Gasoline 109.40 100.16 80.40 129.40 105.60 77.65 108.17 Jet Fuel 22.73 27.40 25.30 51.08 19.95 27.60 85.50 Kerosene 15.30 20.24 11.30 20.10 12.87 15.83 26.00 Gas Oil 187.65 237.36 242.54 316.40 389.40 287.93 402.33 Fuel Oil 402.45 384.99 359.24 394.62 343.94 148.29 27.50 LPG NA NA NA NA 3/ 6.90 7.001/ 7.00 1/ Others 2/ 45.38 32.85 27.00 41.88 47.32 40.00 46.00 Total 759.80 812.44 752.06 964.72 937.68 618.30 717.20 1/ Mission estimates. 2/ Light and medium petroleum oils and white spirit. 3/ Not available. Source: National Statistical Office and Petroleum Product Marketing Companies. Z. -55- Annex 2.4 PAPUA NEW GUINEA DETAILS OF "C" CENTERS AS OF 31 DECEMBER 1990 PROVINCE NO. OF NO. GENERATORS INS. CAPACITY CENTERS kVA Western 6 10 336 Gulf 4 8 160 Central 8 16 952 Milne bay 6 10 320 Oro 2 4 236 Southern Highlands 8 14 620 Enga 4 8 428 Western Highlands 2 4 70 Madang 6 12 160 Morobe 3 6 210 Eastern Solomons 5 10 420 Sandaun 8 16 370 East New Britain 3 6 226 West New Britain 5 10 280 New Ireland 3 6 670 North Solomons 6 12 420 Total 79 152 5,878 Source: Department of Minerals and Energy -56- Annex 2.5 PAPUA NEW GUINEA ELCOM'S LOAD DEVELOPMENT Year Energy Sales - GWh Growth Generation Peak Dom. Gen. Ind. Others Total Rate Z GWh MW 1981 121 254 44 2 421 463 87.4 1982 116 237 41 2 396 -6.0 446 84.8 1983 121 235 36 2 393 -0.6 454 85.7 1984 120 248 47 2 417 5.9 482 94.3 1985 124 275 51 2 452 8.4 518 98.0 1986 135 289 52 2 480 6.2 541 103.4 1987 123 328 58 3 512 6.7 580 112.0 1988 131 345 64 3 542 5.9 610 112.8 1989 129 352 68 3 551 1.7 622 114.0 1990 l/ 529 -4.0 596 110.4 Average Annual Load Growth during 1981 - 1989: 3.4Z 1/ The reduction in load growth in l989 and 1990 is due to the closure of BCL and depressed state of economy. Source: ELCOM Annex 2.6 -57. Page 1 of 2 PAPUA NEW GUINEA ELCOM'S LOAD FORECAST Year Energy Sales - GWh Growth Gen. Peak Dom. Gen. Ind. St.Lt Total Rate Z GWh MW 1990 na na na na 529 596 110.4 1991 105 385 70 3 563 6.4 642 122.8 1992 107 406 73 3 590 4.7 672 128.5 1993 130 440 79 3 652 10.5 742 142.9 1994 142 469 84 4 698 7.1 793 153.2 1995 144 492 87 4 727 4.2 826 159.6 1996 147 515 91 4 757 4.1 860 166.2 1997 149 540 95 4 788 4.1 896 173.1 1998 152 565 99 5 821 4.1 933 180.3 1999 155 592 104 5 855 4.2 972 187.8 2000 157 620 106 5 891 4.2 1,012 195.6 Av. Annual Rate of Load Growth - 5.35Z. Note: The above load forecast is based on the results of the system planning studies recently carried out with the assistance of EdF and adjusted for the impact of BCL closure and increased loads anticipated in Port Moresby area due the proposed development of high-rise buildings in the down town areas. The forecast excludes potential mining loads which in the near- term include the Hidden Valley Gold Mine near Wau (peak load of 15 MW and annual energy consumption of 82 GWh), and the cement plant near Lae with a demand of 3 MW. The forecast also assumes resumption of ELCOM power supply in Buka, Kieta and Arawa in Bougainville) by 1993. Source: ELCOM Annex 2.6 -58- Page 2 of 2 PAPUA NEW GUINEA DETAILS OF ELCOM'S ENERGY SALES FORECAST Port Moresby Ramu Gazelle Others Total Year GWh Z Inc. GWh X Inc. GWh Z Inc. GWh Z Inc. GWh Z Inc. 1990 256 199 34 40 529 6.4 1991 270 5.5 212 6.5 39 14.7 42 5.0 563 4.7 1992 284 5.2 220 3.8 41 5.1 45 7.1 590 10.5 1993 299 5.3 228 3.6 43 4.9 82 1 82.2 652 7.1 1994 315 6.4 237 3.9 46 7.9 97 18.2 698 4.2 1995 330 4.8 246 3.8 48 4.3 103 6.2 727 4.1 1996 347 5.2 256 4.1 50 4.2 104 1.0 757 4.1 1997 364 4.9 266 3.9 52 4.0 106 1.9 788 4.1 1998 382 4.9 277 4.1 54 3.8 108 1.9 821 4.1 1999 400 4.7 288 4.0 56 3.7 111 2.8 855 4.2 2000 420 5.0 300 4.2 58 3.6 113 1.8 891 4.2 Av. annual Inc. 4.9 4.1 6.8 4.7 5.35 1/ Resumption of electricity supply in Bougainville area assumed. -59- Annex 3.1 PAPUA NEW GUINEA Supply of Petroleum Products Port Region Covered Major Consumers Port Moresby Papua Elcom, Brewery, Ok Tedi copper mine, airlines. Lae Highlands, East Coast Porgera gold mine, Chevron at Kutubu, Milne Bay plantations, Missima gold mine, airlines, Hidden Valley project Madang North New Guinea Logging industry, plantations and small airlines. Kieta North Solomons Bougainville Copper mine. Rabaul New Britain Logging industry. Sourcet Department of Minerals and Energy. -60- Annex 3.2 PAPUA NEW GUINEA Hydrocarbon Discoveries in Papua New Guinea No. of Wells Discovery Year Type Possible Reserves in Field Province Kuru 1956 Gas 0.1 TCF 3 Gulf Barikewa 1958 Gas 1.6 TCF 2 Gulf Puri 1958 Oil - 1 Gulf Iehi 1960 Gas 0.4 TCF 1 Gulf Bwata 1960 Gas, condensate 25 BCF 1 Gulf Uramu 1968 Gas, condensate 0.1 TCF 2 Gulf Pasca (1) 1968 Gas, condensate 0.14 TCF 4 MHBBL 3 Gulf Juha 1984 Gas, condensate 0.9 TCF, 32 MHBBL 3 Western Iagifu 1986 Oil 0.8 TCF, 160 MMBBL 11 S. Highlands SE Hedinia 1987 Gas, oil 0.15 TCF, 3 MHBBL 3 S. Highlands Hides 1987 Gas, condensate 2.9 TCF, 77 MMBBL 2 S. Highlands Hedinia (2) 1988 Gas, oil included with Iagifu 12 S. Highlands Pandora A(3) 1988 Gas 1.6 TCF 1 Gulf Agogo 1989 Gas, oil 0.38 TCF 7 S. Highlands Usano (4) 1989 Gas, oil included with Iagifu 2 S. Highland Angore 1990 Gas, condensate 2.8 TCF, 69 MMBBLS 1 S. Highland Elevala 1990 Gas, condensate 0.4 TCF, 20 MMBBLS 1 Western Tarim 1990 Gas Under review 1 Western P'nyang 1990 Gas 2 TCF under review 1 Western Source: Department of Minerals and Energy Annex 33 -61- PAPUA NEW GUINEA KUTUDU PETROLEUM DEVEWPNENT PROJECT GOVEiUNNET CASH FLWW (US$ Million) INCOME STATE YEAR ROYALTY TAX NOMINEE TOTAL 1992 2 2 1993 6 51 57 1994 6 187 16 209 1995 5 198 131 334 1996 3 178 88 269 1997 2 114 48 164 1998 1 50 24 75 1999 9 10 19 2000 4 4 2001 0 2002 0 2003 0 2004 6 6 2005 5 5 2006 5 5 2007 4 4 2008 2 2 2009 1 1 2010 1 1 TOTAL 25 811 321 1157 Sourceg Department of 1inerals and Energy -62- Annex 3.4 Page 1 of 2 PAPUA NEW GUINEA DETAILS OF ELCOM'S INSTALLED GENERATING CAPACITY Power System/ Hydro Diesel Gas Turbine Total Station ----------------- MW ----------------------- Port Moresby Rouna 62.5 - - 62.5 Moitaka - 24.8 13.0 37.8 Subtotal 62.5 24.8 13.0 100.3 Ramu System Ramu 75.0 - - 75.0 Paunda 12.0 - 12.0 Mendi 0.2 0.6 - 0.8 Lae - 7.8 6.0 13.8 Madang - 9.4 - 9.0 Subtotal 87.2 17.8 6.0 111.0 Gazelle System Warangoi 10.0 - - 10.0 Kerawat - 3.2 - 3.2 Rabaul - 2.2 - 2.2 Subtotal 10.0 5.4 - 15.4 Other Centers 2.3 19.8 - 22.1 TOTAL 162.0 67.8 19.0 248.8 Source: ELCOM Annex 3.4 -63- Page 2 of 2 PAPUA NEW GUINEA Details of "Other Systems" - Installed Capacity Stn Diesel Hydro ---------------kw_______________ Aitape 330 Alotau 1,900 Bialla * 628 1,500 Buka 490 Daru 720 Finschhafen 340 Kavieng 2,770 Kerma 680 Kimbe 1,480 800 Lombrum 2,720 Maprik 390 Popondetta 1,400 Samarai 360 Vanimo 960 Wewak 4,680 Total 19,848 2,300 Source: DME -64- Annex 3.5 PAPUA NEW GUINEA List of Existing Hydropower Stations in PNG No. Name of Plant Province River Capacity Year Port Moresby System 1. Rouna 1 Central Laloki 5.5 MW 1957 2. Rouna 2 Central Laloki 18.0 MW 1964 12.0 MW 1967 3. Rouna 3 Central Laloki 12.0 MW 1975 La 4. Rouna 4 Central Laloki 13.5 MW 1986 5. Sirinumu Central Laloki 1.5 MW 1973 Ramu System 1. Ramu 1 E. Highlands Ramu 45.0 MW 1975 30.0 MW 1989 /b 2. Pauanda S. Highlands Pauanda 12.0 MW 1983 3. Mendi S. Highlands Epi 0.2 MW 1966 Rabaul System 1. Warangoi E. New Britain Warangoi 10.0 MW 1983 Isolated Stations 1. Sohun New Ireland -- 160 kW 1980 2. Simbai Madang -- 20 kW 3. Kimbe W. New Britain Ru Creek 800 kW 1982 4. Tari S. Highlands Huria 300 kW 1988 5. Tspini Central Alabule 30 kW la The Rouna 3 equipment is installed in the same powerhouse with the Rouna 1 equipment. b 2 x 15 MW generating equipment was added in the Ramu 1 powerhouse under the Yonki dam project. Sources ELCOM, DME Annex 3.6 Page 1 of 3 -65- PAPUA NEW GUINEA Small Hydropower Development Small hydropower development by Elcom is planned for replacement of diesel power plants in isolated systems. The unit construction cost per kW of small hydropower projects is naturally higher than that of large scale ones, and it is Elcom's policy to construct small hydropower stations only when their financial feasibility is confirmed. Bids were invited for the Divune project (3 MW) near Popondetta, but the quoted prices were considerably higher than the estimated prices, which made the project unattractive to Elcom. The final decision has been suspended for the time being. Elcom is now planning to commence in 1991 a feasibility study of the hydropower development of the Maum-Danop project for Wewak, the largest isolated consumption center in the country at present supplied entirely by diesel power. Studies and river gaugings are in progress also for other potential sites of Alotau (Gumiini), Fischhafen (Butaweng), Kerema (Murua), Lombrum/Lorengau (Lauls), Vanimo (Daundo) and Kimbe (Ru Creek 2). Cost minimization will again be essential for justification of proposed schemes. Mini Hydropower Development for Rural Electrification Under the Diesel Power Replacement Program (DPRP) which was promulgated in 1985 and recently re-named the Mini Hydro Development Program (MHDP), ten projects for important rural centers were selected as priority projects. Of these, the Tari project (300 kW) in Southern Highlands Province was constructed and commissioned in 1988. After completion, the power plant was handed over to Elcom for operation at no cost to Elcom; Elcom agrees to take over a completed power plant on the basis that the power plant could be operated with a fair return. The Woitape project (61 kW) in Central Province and Telefomin project (100 kW) in West Sepik Province are now under construction with target completion in 1991. Construction of the remaining seven projects is envisaged in the near future. A detailed study of the Talasa project (250 kW) in West New Britain Province has already been completed, and review of original plans, d6tailed design and review of construction costs for the other projects will be commenced soon. Eighty percent of the construction cost of the Tari project was funded from an EEC grant and the Woitape and Telefomin projects were constructed using PNG government funds. For the next 7 projects, an EEC fund of 9 million Kina is allocated under the Lomi 4 plan. For mini-hydro development, cost overruns which occurred for many mini-hydro projects, also for the Tari project is the Government's greatest concern. Compared with the diesel generation, the mini hydro has various technical advantages in (1) more reliable power supply with less chance of interruption, Annex 3.6 -66- Page 2 of 3 (2) freedom from oil supply difficulties, and (3) 24 hour supply becomes available. However, the present rural electrification system (both diesel and hydro based) is operated with heavy subsidies from the Government, both central and local. The financial feasibility of mini hydro projects currently is established by comparing the generation cost with that of diesel generation: in 1990, both.Qptions were yielding a cost of about toea 50-60/kWH, and with very small cost recovery. The marginal unit construction cost of the mini-hydro project falls in the range of 5,000 to 10,000 Kina per kw installed. The reduction of construction cost is a crucial issue for mini-hydro development. Measures to curtail construction expenditure have to be pursued for design, equipment and materials, construction methods, etc. The engineering costs also represent a considerable of the cost of small projects, and requiring simplified procedures for project execution to reduce expenditure. Financing of such projects through grants or soft loans will be essential. Once constructed, mini hydro plant can be operated with minimum of expenditure, requiring only that for operation and maintenance. Improved coorZination between mini-hydro development and other energy supply investments in isolated rural areas will be necessary in the future. The case of Woitape, where two new diesel sets were installed shortly before completion of a small hydro project illustrates the weakness. The transfer of the Minor Power Houses function from DEP to DME should bring an improvement in isolated hydro planning. It is understood that micro-hydro turbines of up to a few kW capacity have been manufactured by a technical institute in Port Moresby. Even Nepal, one of the least-developed countries, has its own water turbine factory to manufacture simple cross-flow turbines, which was established under a technical cooperation program of UNDP. Many home-made turbines are in use coupled with imported generators by belts. A similar program would also be introduced to PNG. Duties of Bureau of Water Resources The Bureau of Water Resources is the organization in DME which is responsible for the collection of hydrological data of rivers, and evaluation of potential hydroelectric sites. Studies for hydro potential evaluation in the country are being executed by this bureau. At present, 86 stations in total are in the list of river gauging stations under operation by BWR for BWR's own needs, and according to requests of Elcom and other institutions. The river gauging operations in PNG are conducted solely by BWR and necessary expenditures are being paid by clients. The greatest concern for river gauging in PNG is the difficulty of access to gauging sites. Due to lack of road connections, most of the gauging sites are accessible only by helicopter, hire charge of which is a big burden to BWR having limited funds only. When not enough funds are available, measuring operations have to be interrupted. It is understood that only data for rich organizations which can pay enough money are well arranged. The hydrological observations under the hydropower potential studies are also undertaken by BWR. Of the planned 30 gauging stations, 26 stations in total have been installed except in the Gulf area. However 2 stations in New Britain island are not working now due to the lack of necessary funds. -67- Annex 3.6 Page 3 of 3 The hydrological observations are mostly carried out by automatic gauging of pressure type recording gauges, and discharge measurements at a regular interval. Therefore, a site visit at 3 month intervals for data collection, checking and necessary measurement is essential. The collected data are processed using a computer in the BWR head office for preparation of the data base and technical analysis. A review of BWR's operation will be required to make the available records as far as possible complete with the limited availability of operation funds taking into account priorities of importance. -68- Annex 3.7 Page 1 of 3 PAPUA NEW GUINEA Electricity Costs vs. Diesel Price so ~~~~~~~CEconomic) 70- so - l lll l l l 0.2 oa0.O.O.0. O.0. 1 1. 1. t. t415 50 40 30 - 20 0.2 0.3 0.4 0.5 0.6 0.7 0.6 0.9 1 4. 1.2 1.3 1.4 1.5 Diesel Prico CIKI1) ISystem t Wood S 2Wt * Wood @ Wt A Wood K411/t Comparison of a 200 kWe Diesel System with a Biomass Direct Combustion System. Annex 3.7 Page 2 of 3 -69- Lighting Costs vs. Kerosene Price PNG 0.27- 0.26- 0.25 0.24- 0.23 - 0.22- %J 0.2- 0.19 ? 0.47 EP 0.18 0.1i5- 0.14- b. 0.12 -0.12- 0.11 0.09- 0. 08 0.06 - 0.25 0.33 0.42 0. 50 0. 0.67 0.75 0. 83 0.92 1.00 1.09 rorenero Prico (KI) Kareolen Lwnp + PV - Curront PP - Potential Comparison of the Cost of Lighting with Kerosene and PV Lanterns Annex 3.7 -70- Page 3 of 3 Cost of Electricity vs. Diesel Price 2.5 IcW Rral Elctricity In PNG I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F 0.3 K 0.7 0.17 0.25 0.33 0.42 0.50 0. 58 0.67 0.75 0.83 0.92 1.00 01"@o1 Price CK/ 1) O 00. S6t -F Sol Pv Syem Cost of Electriclty from a 2.5 kWe Diesel System versus a Solar PV System -71- Annex 4.1 PAPUA NEW GUINEA Petroleum Products Price Structure Cost Component Gasoline Gas Oil Kerosene Av. Gas jan88 Jun90 Jan88 Jun90 Jan88 Jun90 Jan88 June90 -_-_____-----__----------(tuea/liter)------------------------ FOB 11.8956 12.5186 11.1799 12.3662 13.2332 12.8357 27.3191 30.4765 Ocean Freight 0.8979 1.2145 1.0185 1.3775 0.9577 1.2954 0.8684 1.1752 Insurance 0.0099 0.0076 0.0094 0.0076 0.0109 0.0078 0.0217 0.0174 CIF 12.8034 13.7407 12.2078 13.7513 14.2018 14.1389 28.2097 31.6691 Import Duty 5.3530 17.0000 2.2360 4.0000 0.9925 1.0000 2.7319 4.0000 Landing Charge 0.2000 0.2000 0.2000 0.2000 0.2000 0.2000 0.2000 0.2000 Landed Cost 18.3654 30.9407 14.6438 17.9513 15.3943 15.3389 31.1416 35.8691 Additive 0.0110 0.0110 0.0000 0.0000 0.0110 0.0110 0.0000 0.0000 Demurrage 0.0750 0.0750 0.0750 0.0750 0.0750 0.0750 0.0750 0.0750 Ocean Loss 0.0960 0.1031 0.0916 0.1031 0.1065 0.1060 0.2116 0.2375 Inland Loss 0.0918 0.1547 0.0732 0.0898 0.0770 0.0767 0.1557 0.1793 A/L Cost 11 18.6302 31.2845 14.8836 18.2192 15.6638 15.6076 31.5839 36.3509 DICost 21 6.5230 8.0300 5.3560 6.5940 11.6140 14.2980 14.8480 18.28A10 V/Margin 3/ 2.7110 4.7840 2.7110 4.7840 2.7110 4.7840 4.2510 6.1240 V/Price 41 27.8642 44.0985 22.9506 29.5972 29.9888 34.6896 50.6829 60.9659 Retail Margin 3.5000 3.5000 a/2.8000 2.8000 a/2.9000 2.9000a/1.2000 1.2000 Retail Price 31.3642 47.5985 25.7506 32.3972 32.8888 37.5896 51.8829 62.1659 a/ Increased to 5.9000 toea/liter, 6.0000 toea/liter and 5.8000 toea/liter .'or gasoline, gas oil and kerosene respectively, since November 1990. 1/ Adjusted Landed Cost. _/ Distribution Cost. 3/ Wholesale Margin. 4/ Wholesale Price. Source: Office of the Price Controller. -72- Arnex 4.2 PAPUA NEW GUINEA Table 6: ELCOM's Finndal Proloton year 1960 1991 1092 1993 1994 1905 1996 1997 1996 1099 Sae. - GWh 529 663 590 652 696 7 757 766 821 855 Tariff - WoekWh 15.4 1.7 17.9 19.1 20.2 21.2 21.6 22.0 22.0 22.0 Tariff l. - % 8.5 7.5 6.5 5.5 5.0 2.0 2.0 Raft Sue - K M 267.8 347.5 422.2 425.0 442.4 71.7 486.2 489.4 496.8 524.3 ROR - pro-fax - % 10.6 9.8 9.4 11.9 13.0 13.8 13.9 14.5 17.4 16.3 ROR-Post tax % 9.6 9.0 8.6 10.3 11.0 11.5 11.5 11.8 13.8 12.8 DSR . brno 3 1.3 1.4 1.4 1.3 1.5 1.4 1.7 1.5 1.6 2.1 SFR-% / 8.0 28.0 41.0 26.0 44.0 45.0 66.0 48.0 44.0 107.0 63.37 61.39 60.40 59.41 56.44 53.47 47:53 43:57 41:59 40:60 Opwearng Rato - %68.4 84.7 83.7 61.8 60.5 56.8 59.7 59.9 52.6 54. Aocts. RBo.- monts 12 12 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 AoMo. Pay. months 2.5 1.8 1.9 2.0 2.0 2.0 2.0 2.1 2.0 2.1 1 10 per cwe ROR (Raft of Retun) coventd /1.5 1mn DSR (Debt Serino Ratio) covenanted / 30 per con SFR (Self F hncing Ratio) covenantd Source: ELCOM PAPUA NEW GUINEA: ISSUE8 AND OPTIONS IN ENERGY SECTOR .I~~~~~~~~~~~~~~~i~~~~ VX lEt 1F1 l ' Jv1 ., J. I w l~~~~~~~~~~~~ Annex 4.4 -74- PAPUA NEW GUINEA INDICATIVE TERMS OF REFERENCE FOR DIESEL PLANT OPTIMIZATION STUDY The scope of the study will include but not limited to: (1) determination of optimum sizes, speeds, types and number of generators for ELCOM's various power stations; (2) determination of optimum design for the auxiliary systems; (3) determination of optimum scope for automation; (4) determination of optimum operation practices; (5) determination of optimum maintenance practices; (6) optimization of spares procurement and inventory control; (7) determination of optimum criteria for plant retirement; (8) determination of optimum scope for extension of life of the existing plants; (9) development of a time bound program for achieving the above from the existing status; and (10) train selected ELCOM staff in the relevant areas so that it can sustain the diesel plant optimization program in-house in future. -75- Annex 4.5 PAPUA NEW GUINEA INDICATIVE TERMS OF REFERENCE FOR DISTRIBUTION OPTIMIZATION STUDY The scope of the study will include but not limited to the following: (1) review of ELCOM's design and construction standards for distribution system elements; (2) review of ELCOM's planning criteria for distribution systems; (3) review of ELCOM's operation and maintenance procedures for distribution systems; (4) review of ELCOM's metering and billing practices; (5) review of ELCOM's inventory control and management; (6) optimization of planning criteria for distribution systems; (7) development of software for computerizing distribution system planning; (8) recommendations for cost-effective design and construction standards; (9) recommendations for cost-effective operation and maintenance procedures for distribution systems; (10) recommendations for cost-effective metering and billing practices; (11) recommendations for cost-effective inventory control and management; and (12) recommendations for a time-bound program for implementing the recommendations of the study. -76- Annex 6.1 PAPUA NEW GUINEA ENERGY SECTOR PUBLIC INVESTMENT PROGRAM 1991-1999 K MILLION 1901 PRICES 1001 1002 1903 1994 1006 1906 1997 1998 1999 ELCO'4 Generation: Yonki Dom 6.5 0.2 0.5 a 8.3 7.5 Ramu 2A Hydro Design 0.3 0.8 1 1 0.8 Divuns and Bialla Small Hydro 0.2 5.1 6.9 Hydro Investigations 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Port Moresby Diesol 0.4 8.3 Gaozlle Diesel 0.6 0.2 4.3 0.4 Othor Small Diesol 0.1 0.3 0.8 Total Coneration 7.6 6.7 11.4 0.8 0.4 1.9 4.7 8.8 16.7 Transmission: 1/ Port Moresby Grid 1.6 1.9 1.9 0.2 0.2 1 1 Ramu Grid 2.2 0.7 4.1 6.4 2.2 Gazolle Grid 0.3 0.3 Studies and Communication 0.6 0.7 0.6 2.6 0.1 Total Tronsmission 4.7 8.8 6.6 8.2 2.3 0.2 1 1 Distribution: Urban 1.7 1.8 1.9 2 2.2 2.3 2.5 2.7 2.9 Rural 3.1 2.2 2.2 2.1 1.9 1.9 1.8 1.8 1.7 Total Distribution 4.8 4 4.1 4.1 4.1 4.2 4.3 4.5 4.6 Administration and Miscellaneous 7 7.3 7.6 7.6 0.2 8.5 8.9 9.3 9.6 Total ELCOM 24 20.6 29.6 20.9 15 14.8 18.9 23.8 30.9 DUE Geological Analysis Support 0.7 1.6 1.6 0.6 0.6 DUE Training and Staff Development 0.1 0.1 0.1 0.1 0.1 Potroleum Development Support 0.8 0.8 0.8 0.8 0.8 Rural Energy Development 0.1 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Minihydro Development 0.7 1.5 1.5 1.6 1.6 1.6 1.6 1.6 1.5 Total DME 2.4 4.3 4.3 8.3 4.2 1.8 1.8 1.8 1.8 Total Energy Sector 26.4 24.9 33.9 24.2 19.2 16.6 20.7 26.4 32.7 PIP Document: 2/ ELCOM 26.8 41.6 4.5 4 3.4 DUE 5 7.8 7.0 7 6.1 Total 31.3 49.8 12.8 11 9.5 Difforence to Optimum 4.9 24.4 -21.6 -13.2 -9.7 1/ Excluding possible connection of Hiddon Valley Mine or Port Meresby/Ramu Interconnection. 2/ Including K14.2 million for Hidden Valley. 17.' /1 S ow '>-2o,~Jas~ g 152' ISA' IRA' IBRD 229 PAPUA NEW GUINEA ENERGY ASSESSMENT I ~~~~~~~~I PETROLEUM RESOURCES MANUS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~DISCOVERI" S T t L ~~~~~ ~ ~~ ~~~~MANUS GASss : EST 'V * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~GAS AND OIL t 78 _ | EAST SEPIK |- I ' * GAS CONDENSATE * --- t ri-=;k I .~'-* NEW IRELAND Ni -; .< ;=~ --. v s SEDIMENTARY BASINS NEW 0~~~~~~~~~~~~~~~~~~~ MAJOR PETROLEUM STORAGE m Bismarck SoI DISCOVERIES UNDER DEVELOPMENT 1' ' * / s A05!UPPINES /L PETSOLEUM LICENSE BOUNDARIESuILNE BAY|O L O A 4. ~ ~ ~ 4 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ g AIFI C °1 4< Aoo~ Z 0¾ p kT.Mn'- INTRNATIONAL BOUNDARIES 6' 18 PA°UAR~E 10 *s H \ < e EAST KIOETR ,&-'K.. EAS-b T . CWSI I ~~H1 N ~~~MBU7' TERN I~~ NEW BRITAIN INWNEERN F H-\ G' OC/ON 5.< -~~~~~ ~ ~ ~ ~ ~~~~ N -&AAST FROST P~~~~~~~~OROSE%, d ~ " ('C!C J / AUSTAUA AUSTRALIA ' ~'K~"'~ LNE BAY I 1 I~ ~ PAII _CA CETA r 88 180P 158 200> 250- 3RD hA 19 I'AUA CSrlcSmonILOETeR 6' '~~~~o ISLANDS * . * ~~~~~~~~ ~ ~ ~~ oHm. E"o,~~~~ISLAN oD SeO,oIo ooo A~~~~~~~~~~~~~~~AN AUSTRALIA C~~~AUSTRALIA MILNE BAY~~~~~~~~~~~~~~~~~~~~MA 9 144- 194- I ill. l~~~~~~~~~~~~~~~~~~~12o wI £Y PAPUA NEW GUINEA ENERGY ASSESSMENT2 POWER SYSTEM AND 0 ~~~~~~~~~GEOTHERMAL POTENTIAL 1 ~~~~~~~MANOS UMOR F~WEST I- MS. I L- Uhl, ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U MAJOR DIESEL POWER STATIONS IA e. EAST SEPIK H YDRO POWER STATIONS SEPIKoNE IRLN N3YDRO POWER STATIONS - -1---,I SIupbI.N 0 ~~~~~~~~~~~~EWPRIVATELY OWNED WoP" wok *EX0 P 00 GAS TURBINE GENERAIION prr mc .0nn~~~~~~~~~~~~~~~~~~~~~~~~~~~~~l A ~~~~~~~~~COMMSSION CENTER NORMALLY - ----SUPLIPPED FROM GRID) '>~~~~-- ~ ~ ~ ~ *Monnnn Pent - - ~~~~~~~~~~~~~~~~~Il32 kV TRANSMISSION LINES,, 6112kTRNSISSONINS I / - 1 I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~22 kV TRANSMISSIONLUNES I MADANG // Nono~~~~~~~~~~~~~~~~~~~~~~~~~~e 0R~~~~~~~~noI ROOSDTRANSMISSION LINK _ L I I ~~~~~~~~~~~~~~~~~o,k~~~M DNG / (oJ0 RAMU-POET MORESBY) *i5o'ka, *G,- ~~~~~~~~~~~~~~~~I0 GEOTHERM.AL AREAS Z MO Md.ES"N\TORSO Bannon* ,-- 10. Nr PETROLEUM IMPORT PORTS Z i RIVERS - I 9OkT.d ) Longil - - *o.TkEl-'GBok.PRO'4NaE BOUNDARIES -30 T-TdMin a -ESTERN.-' - --- INTERNATIONAL BOUNDARIES oKi.ngo !!~4s9dI WEST NEW BRITAIN 0OI * --- ~~~~~HIGHLNSP0 IIM)ES001PtdRen- +~~~~ L LA~~~~~~~~~~JDS ~~~~~~~ --~~~~~~ ~~~ ~NEW BRITAINL.- WESTERN I I ~~~~~~~~~~~~~~~~~~~~~~~~~BOUGAIN VILLE.~- t-- -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ L I--- ------ Z.S LM Na GULF / *GP0~V I - \__ 9Banaina P0~RIXd0It NORTHERN IjISLANDS 1? AUSTRALIA 60M.4111Di- Kopano ~~~~MILNE BAY 0 Pe, ~~~PACiFIC o'i PlaIn PAPUA I.OLOMETER S 10 SO 0 5 0 NEOR4SSEA ~~~~~~ 'II /SEME4ROEB SOLOMON Rou"(!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C,ooh, t nrio0 ,dolI N,4,o ;ondnnXn VAN'ILATUJ 251 _________________________________ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~io,112 1.4 Il AESIBMIA CAI0DONIA'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ VoKwk~~~~~~~~~~~~Ia MAT 1991~~~~~~~~~~~~~A 19 The map on the cover of this report has been prepared by the World Bank's staff exclusively for the convenience of readers. The boundaries shown on the map do not imply, on the part of The World Bank Group, any judgement on the legal status of any territory or any endorsement or acceptance of such boundaries. Industry and Energy Operations Division Country Department III East Asia and Pacitic Region World Bank Washington, D.C., U.S.A.