PNG Investment Conference Sydney Dec 7
“The PNG LNG Project: Business Development Update”
Peter Graham Speech
Honorable Ministers, Distinguished Guests, Ladies and Gentlemen; Good Afternoon It is a pleasure to be here today to talk about the progress we are making on Business Development associated with the PNG LNG Project and the importance of this Project and associated business to the economic future of PNG.
The recent PNG budget predicts real GDP growth to be over 8% in 2011, reflecting the impacts of the PNG LNG Project ramp up. Clearly the budget is framed against a backdrop of strong domestic economic growth as a result of the project. An independent economic assessment by Acil Tasman in 2008 concluded that PNG’s
GDP could as much as double following the start-up of the PNG LNG Project. The Project will generate many direct benefits but also contribute indirectly to growth by stimulating associated businesses and demonstrating to the world that PNG can be an attractive investment destination.
As investors weigh up a decision to invest, aside from assessing the economic incentives, they also typically consider the business risks - and ask “are the
First and foremost, can I operate safely and securely in this environment? Investors need this in order to attract and retain high quality people and their families, and to execute efficiently without interruption.
Secondly, investors might ask – “Can I operate efficiently and with integrity in meeting
my customer’s expectations?” Reputation is priceless for a business, and investors
will want to be satisfied that they can meet their customers and shareholders expectations and do so in a manner consistent with their company’s standards of
Today I'll discuss how, through the PNG LNG Project, we are helping support our local suppliers to develop sound business fundamentals which contribute to the sustained economic and social wellbeing of the communities in which we operate in PNG - Businesses that include local citizens as employees and shareholders thereby contributing to the creation of a safe and secure work environment; businesses that operate efficiently and in a manner that enhances the reputation of PNG. But before doing so, let me give you a quick update on Project status. [CLICK]
As Decie Autin explained yesterday, our construction activities are currently focused on improving and upgrading infrastructure, including road and bridge works, telecommunications, and constructing camps to house the construction workforce and completing site preparation work ahead of facilities construction.
Detailed engineering, execution planning and procurement activities for the facilities, pipelines and drilling are also progressing.
Linepipe for the onshore gas line from the Gulf of Papua to the Southern Highlands is arriving at the expanded shore base at Kopi and clearing of the pipeline right-of-way has commenced. Trenching and pipe laying will commence in the first quarter of 2011. Earthworks at Komo Airfield and the site of the future Hides Gas Conditioning Plant have commenced.
At the LNG Plant site, an 800-person pioneer camp is complete and site preparation for the LNG Plant is well underway.
By early 2011, all of the major EPC contractors will have mobilized to the field. [CLICK]
ExxonMobil has over a century of success in helping countries around the world to develop their resources. Esso Highlands Limited, the project operator, is a subsidiary of Exxon Mobil Corporation, the world’s largest publicly traded international oil and gas
Exxon Mobil has long been recognized as a leader in the oil and gas industry. The secret to the company’s success is, in fact, no secret at all. It involves maintaining the same steadfast commitment to the business principles – those sound fundamentals –
that have proven successful over our 125 year history.
This business approach includes effective long-term risk management, disciplined capital investment, enduring business controls, and an unwavering commitment to safe and reliable operations.
We believe that this commitment to high ethical standards and business integrity and the importance of making a positive change in our communities is critical to our competitive advantage and it's a standard we expect from our business partners. We have long recognized that making the most of energy resources is about more than oil and gas production – it’s also about developing people and capacity, and
creating and delivering long-term benefits to local communities.
Through the PNG LNG project we are now very much a part of the PNG community and we are working hard to ensure we remain a valued member of the communities within which we operate.
Our commitment to National Content involves creating local jobs; educating and training national employees, contractors and suppliers; transferring knowledge and skills; buying local goods and services; and making strategic community investments. Our National Content Plan is important to our long-term success.
Developing a skilled workforce and reliable supply chain of local goods and services improves the local business environment, reduces costly delays and leads to local economic growth and improved standards of living in our communities. That said, let me tell you what Esso Highlands Limited is doing in PNG to achieve these national content objectives. [CLICK]
In project areas much of our service requirements is met by Landowner Companies –
called Lancos. These companies, common throughout the resource industries in PNG, are typically owned by landowners within the vicinity of the work site being serviced. They provide local employment in areas such as labor, camp management, security and ground transportation and when successful pay dividends to their shareholders. Lancos also often assume a social responsibility within their local communities, contributing during times of need.
Esso Highlands Limited’s objective in local business development is to provide opportunities for Project Area landowners by supporting the development of capable, nationally competitive service companies that remain operational long after Project construction is completed.
In the oil industry in PNG, lancos have typically developed as smaller geo-centric companies. Business has generated from the local oil operations and in some areas to support Government funded infrastructure projects. Often the business is almost exclusively in support of the oil operation and hence opportunities for growth have
been limited, and as with small business around the world, there are some great successes but there have also been a number of oil-based lanco failures The PNG LNG Project brought some challenges not previously faced on the oil project. The footprint of the Project is large, spanning hundreds of kilometers onshore and including multiple work sites. It involves multiple EPC contractors and sub-contractors across these work sites through the construction phase. The prospect of requiring these major contractors to deal with potentially large numbers of competing lancos (many as start-up companies) was daunting, particularly given our requirements that the Lancos must meet the same business standards that we expect from suppliers the world over.
Given the size and complexity of the Project, and our need to support the establishment of early construction work, our approach to developing landowner businesses has been to focus initially on the formation of what we call Umbrella Landowner Companies – larger companies providing core services at the major
project nodes – Hides/Komo/Angore/Juha and at the LNG Plant site. We have
reserved a number of business lines for the two Project Umbrella Lancos – labor hire,
camp catering, camp maintenance and site security. Outside these business lines, opportunities are open to competition from other lancos and suppliers generally. To give you a sense of scale, these lancos will be servicing approximately 12,000 people involved in project construction. This presents a tremendous opportunity not just for those lancos directly supporting construction, but other local businesses in the area.
Ultimately we expect landowner businesses to develop at three levels – the clan or
block based-companies, license or village-based companies, and the overarching umbrella landowner companies.
Since the PNG LNG Project overlaps the existing oil project footprint, the Project has reviewed and recognized many of the existing oil-based landowner companies rather than attempt to restructure them into an umbrella organization. [CLICK]
Getting the Umbrella Lancos Started
By forging sound umbrella Lanco organizations and framework agreements, we are positioned to demonstrate how the complex cultural tapestry that exists in PNG can deliver large-scale, efficient business services – and demonstrate the sound business
fundamentals that investors and customers demand.
These start-ups have been challenging, particularly in resolving issues around identity & ownership.
With our two start-up umbrella landowner companies, we have been providing urgently needed support in establishing these businesses – support in developing a
company constitution, registering the company, developing a sustainable business plan, recruiting a management team, establishing core policies, procedures and processes such as payroll, invoicing, accounts payable; and assisting with basic infrastructure.
Based on experience in the oil & mining industries in PNG, we expect to be able to expedite capacity building for these new enterprises by forming alliances with established service companies.
For example, in October Laba Holdings, the umbrella company formed from the four Lancos representing the villages near the LNG Plant, announced a joint venture with The Alliance Group, a new entity formed by established camp-management and catering-services companies, NCS and GCC. The new joint-venture, Laba Alliance
Group, will service the catering and camp requirements for the construction phase of the LNG plant. That’s 17 million meals that will be served up over the period of construction.
Similar agreements have been, or are in process of being established with HGDC in the Highlands.
I am proud to say that both Laba Holdings and HGDC are now trading successfully in their respective areas. You will hear more about this from the two chairmen in the speeches to follow. In addition to, Laba’s has 300+ employees, HGDC has over 1000
employees, and both are growing rapidly. It is early days and the bow wave of construction activity has yet to arrive, but these companies are both making good progress in meeting the expectations of their stakeholders and the contractual requirements of their respective EPC contractors. The path forward will be challenging, both from a business perspective and also to ensure cohesion among the shareholder companies, but early signs are encouraging.
Our belief is that these umbrella companies - with appropriate shareholding and representation of the smaller lancos - offer the best chance of building sustainable enterprises; companies that can continue to trade once the construction activities are complete and work associated with the project is concentrated around the two plants.
In addition to the two Project umbrella lancos LABA and HGDC, the Project is also working with TransWonderland a transportation and logistics company that has its origins in several oil based lancos. We were pleased to see Trans Wonderland and Agility recently announce a Joint Venture Agreement, to provide the Project’s logistics
and transportation requirements along the Highlands Highway from Lae.
Trucking resources and operations will be provided through the joint venture in cooperation with Lanco trucking companies contributing prime movers, trailers, drivers, and mechanics. [CLICK]
Getting the License- Based and Block-Based Lancos Started
With the umbrella companies now trading, our work is expanding to support the license-based and clan or block-based lancos. Smaller scale business opportunities are numerous; the challenge is to focus these companies on making realistic business choices for long term success, and supporting them in meeting the requirements of Project contractors and our business standards.
Esso Highlands is providing support through independent business advisors and through company local business development advisors. This support is in the form of operational reviews of existing landowner companies with feedback on how to close gaps, and training in business fundamentals.
The Government has committed to providing seed capital to support the establishment of these businesses. Some of this money is expected to be invested in developing small businesses and some will hopefully be invested in the umbrella landowner companies via share acquisition. [CLICK]
Other Supplier Development
In April 2010, we opened a supplier resource center, the “Enterprise Center” in
temporary premises at the well known Papua New Guinea Institute of Bankers and Business Management in Port Moresby. It’s expected to move into a permanent facility on the same site soon.
The Enterprise Center is an independent organization set up to support local businesses, including Lancos, to develop business opportunities and promote sustainability by facilitating communication between project stakeholders, including contractors, subcontractors and domestic PNG businesses.
It is also building capacity of some Papua New Guinean businesses to meet the Project’s business standards.
Since opening, the Enterprise Center has welcomed more than 1,750 visits from businesses and entrepreneurs who have sought information about the Project. The Enterprise Center held a series of workshops where Project contractors were able to present their company, scope of work and procurement principles and processes to Papua New Guinean suppliers.
We now have an online local supplier database for our contractors and subcontractors that lists more than 700 domestic companies. It provides company profiles, business assessment summaries where available, domestic business-to-business opportunities and lists Enterprise Center events.
Already the PNG LNG Project has invested about one billion kina in Papua New Guinean service contracts and the Project is employing about 3,700 Papua New Guineans, that's about 80 percent of our current workforce right now. [CLICK]
The PNG LNG Project needs a large construction workforce, as well as a highly trained workforce to operate and manage the facilities once built. Businesses need skilled people and we are adding to the pool of qualified Papua New Guineans.
On Nov 30 we officially opened our new trade training facility at the Port Moresby Technical College. This represents a significant investment in PNG's future. This centre will provide training to construction workers for the LNG Plant site, and along with a smaller facility we are building at Juni in the Highlands for the Hides Gas Conditioning Plant, will together train about 1,000 people per year, both men & women. While these centers were being built, we started training the construction workforce at a temporary venue in Port Moresby. Already nearly 200 trainees, including 40 women, have graduated with internationally recognized certificates. The training conforms to the Australian Qualifications Framework, so their qualifications will be recognized throughout PNG and overseas.
The training is being delivered by a team of 14 Papua New Guinean trainers, who were themselves recently trained in Queensland.
The training facilities at PomTech and Juni have been developed with the expectation that they will be handed over to the Dept of Education after Project completion to continue operating for the long term benefit of PNG.
In addition to training our construction workforce, we are also actively recruiting and training Papua New Guineans to become part of Esso Highlands’ long-term workforce
At the end of the day, contributing to the development of vocational skills in PNG, whether used on the Project or ultimately in other ventures, will promote stability within the communities in which we operate, and promote our long-term success and the success of other ventures in PNG. [CLICK]