Tag Archives: Papua LNG

Papua New Guinea treasurer calls for more benefits from LNG, mining projects

Sonali Paul | Reuters | June 26, 2019

Papua New Guinea’s new treasurer on Wednesday put Total SA, Exxon Mobil Corp , Newcrest Mining and their partners on notice that the country wants to extract more benefits from their gas and mining projects.

Treasurer Sam Basil said the country also needs better forecasts from Exxon and Total on the expected income flow from a $13 billion plan to double the country’s liquefied natural gas (LNG) exports. Basil was appointed earlier this month by Prime Minister James Marape, who led a revolt against former prime minister Peter O’Neill in May.

France’s Total is leading the Papua LNG project, which will develop the Elk-Antelope gas fields to feed two new LNG production units to be sited at the PNG LNG plant, run by Exxon.

At the same time, Exxon and its partners plan to add a third new unit at PNG LNG, which will partly be fed by another new field, P’nyang.

Total recently reached an agreement with the government setting terms for its Papua LNG project, while Exxon is in the process of negotiating a separate agreement with the government for P’nyang.

Treasurer Basil said the projects should all be treated as one, rather than “under the cloak of separate joint ventures”.

“I am putting each of the project partners in all of these projects on notice that the concerns of our people must be addressed through dialogue and negotiations with the state and that we expect all parties to contribute to a fair and equitable outcome,” he said.

Exxon’s original $19 billion PNG LNG project is the biggest foreign investment in the country and crucial to the economy, but the plant has been a disappointing contributor since it started exporting LNG in 2014.

Last year’s earthquake which forced a shutdown of PNG LNG dented the government’s take from the project more than Exxon had expected it would. The 2019 budget had assumed that oil and gas sector revenue would fall by 9.4 pct from 2018, but it actually fell by 16.4 percent, Basil said.

He plans to ask the Treasury and Exxon to come up with new detailed forecasts of future cash flows from the project to the national and provincial governments and local landowners.

He also said the government would put on hold talks with the owners of the Wafi Golpu gold project, Newcrest and South Africa’s Harmony Gold, until the state negotiating team has talked to the Morobe provincial government about its aspirations for the project.

“Our future prosperity depends on delivering these projects and delivering them well. But we must now find a way to ensure that these major resource project agreements capture enough value to the state and to our people,” he said.

Exxon and Total were not immediately available to comment. Newcrest had no immediate comment.

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Govt To Review FIFO: Minister

Gorethy Kenneth | Post Courier | June 25, 2019

The government will review the fly in-fly out (FIFO) workforce arrangements for foreign workers. This may now put an end to K91 million spent annually on this exercise. Minister for Immigration and Border Security Petrus Thomas announced this yesterday.

Mr Thomas said the Immigration and Citizen Authority (ICA) is now looking at issuing long-term working residence visas by next year which is in line with its organisational reform and improvement of service delivery under its Five-year Corporate Development Plan (2018-22).

The Minister referred to the study carried out by National Research Institute in 1997 on the effects of fly in-fly out on the Porgera mining project which revealed that the PNG economy was losing between K36 million and K91 million annually on direct national income.

He said the Bougainville Copper Mine had successfully maintained a small satellite mining town with classic facilities that were built to accommodate workers for the Bougainville Copper Mine.

“There was sufficient cash flow injected directly into the local communities with high returns gained from the capital investments, he said.

Mr Thomas said these changes to the frequent abuse of the 60-day multiple entry visa by foreigners had prompted him to suspend it last year.

“The multiple entry visa category had been reviewed and will be introduced again once cabinet approves the new conditions, fees and guidelines,” he said.

Similarly, Mr Thomas was of the view that the fly in-fly out practice has also been abused by many foreign em-ployers and contractors after receiving criticisms lately from MPs and concerned landowners of resource project areas.

“The fly in-fly out practice may have worked in some short-lived projects, but the impact of FIFO and contribution to host communities, their social welfare and economy has never been truly assessed in long-term projects,” he said.

Mr Thomas said part of the issue lies in the distant lack of national data. “Various agencies supposed to be integrated to streamline these processes had not succeeded,” he said.

“There was no viable data or studies carried out in the past to justify foreign workers’ fly in-fly outs continuous practice.

“It appears that PNG has been under the notion that the FIFO system works in every particular way and no one bothered to review it.”

Mr Thomas said while the government is embarking on developing few new resource projects like Wafi-Golpu and the Papua LNG Project, it should also be mindful of such fly in-fly out arrangements that could potentially suck opportunities during this thriving economic situation.

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New Petroleum Minister says no more coffee shop deals

Kerenga Kua says there will be no more coffee shop deals – like the one between Peter Botten and Peter O’Neill where they agreed the disastrous and unlawful State investment in Oil Search shares (funded through the notorious UBS loan) over coffee at the Grand Papua hotel.

PNG LNG Review Must Focus On People, Says Kua

Elias Nanau | Post Courier | June 18, 2019

A sigh of relief for the aggrieved landowners and key stakeholders of the recently signed Papua LNG (liqued natural gas) – the gas project agreement will be “reviewed”.

This was the ultimate assurance from the Petroleum Minister Kerenga Kua during the handover-takeover ceremony between him and outgoing minister Dr Fabian Pok in Port Moresby yesterday.

He said the review should be done to satisfy the government and people that “it was signed in compliance with all applicable laws” and protocols and key institutions like the Bank of PNG and Treasury had been involved equitably and statutorily.

He drew applause from the conference room.

“We owe it to our people,” he said. “Leadership and government must combine and deliver back to our people.”

Mr Kua gave the assurance in front of a packed conference room of landowners, oil and gas company executives and department staff at Hideaway Hotel.

Mr Kua said although there were market forces, they would not run away and the government and people must approach it judiciously.

He said the petroleum industry was one of the biggest revenue earners but asked: “Is the level of revenue we generate enough?”

Mr Kua reminded the department staff that while there would be work to review projects and legislation.

“There is that urgent need to source money to fund the visions of the government as outlined by Prime Minister James Marape,” he said.

He noted the bold statements of making PNG the richest black nation and to take back PNG.

“The challenge or way forward has been defined, now we need money. It must start somewhere, you cannot wait,” he said.

Mr Kua said his key performance indicators would be defined by the two guiding statements made by the Prime Minister.

“It is incumbent of the leaders of today to make such vision statements,” he said.

He reminded people they may think its “insurmountable and unachievable” but 70 years ago when Kondom Agaundo from Chimbu told expatriates the next generation would learn and communicate fluently in English, it happened and today the country has a load of “intellectual workhorse”.

He appealed to petroleum staff : “We must restore the strength and prominence of the department. “It must be at the forefront of the economic departments.”

Mr Kua told everyone he did not want to have meetings with investors or anyone that is work related outside of the department and staff.

“Let’s meet at the office rather than at the coffee shop,” he said.

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Papua LNG Gas Agreement To Be Reviewed

New Petroleum Minister Kerenga Kua

Post Courier | June 17, 2019

A sigh of relief for the aggrieved landowners and key stakeholders of the recently signed Papua LNG, the gas project agreement will be “reviewed”.

This was the ultimate assurance from the Petroleum Minister Kerenga Kua pronounced during the handover take over ceremony between him and outgoing minister Dr Fabian Pok today in Port Moresby.

He said the review should be done to satisfy the government and people that “it was signed in compliance with all applicable laws” and protocols and key institutions like the Bank of Papua New Guinea and Treasury, to name a few have been involved equitably and statutorily.

Former Petroleum Minister Dr Fabian Pok meanwhile has issued caution that by 2024 the supply of gas world-wide will increase and demand will be less.

“If we think we have enough that the world can wait than we have a serious problem,” he said.

He added that the Papua LNG agreement will see the country reap more than what the PNG LNG in the highlands had to offer.

Dr Pok admitted there had been a lot of criticisms and critiques about the Papua LNG agreement but he was convinced that it was for the better of the country and his team had put in substantial effort to ensure it was beneficial to the state and key stake holders like the Gulf Provincial government and landowners.

“There is nothing sinister about it,” he said.

“When you sit on the chair, you are bound by what happens around the world,” Pok said referring to international gas markets supply and demand which influence business.

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OUR RESOURCES – THEIR PROFITS

ACT NOW!

It is time for Papua New Guinea to stop relying on destructive large-scale extractive industries and build an indigenous economy based around our land and our people.

Projects like the ExxonMobil LNG, logging and mining don’t benefit our people or our economy as the revenues and profits are kept overseas.

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PNG PM Marape urges investors in Mining and Petroleum to consider Resource owners Interests

Papua New Guinea Today | June 13, 2019 

Papua New Guinea Prime Minister  James Marape  has urged investors in the mining and petroleum sectors to consider the interest and benefit of the resource owners and the country.‍

Prime Minister Marape said this when responding to the Managing Director of Oil Search Peter Botten, who said the new Government led by Prime Minister Marape should be investor friendly.

“I know Oil Search Managing Director, Peter Botten came out a while ago in the media asking me to be investor friendly.‍

“Peter Botten knows that I am investor friendly. But I am more concerned for the interests and benefits and speaking for the 8 million shareholders of this country.

“That is what this generation of leaders wants in our country. That is the catch cry of these leaders and our country and what our people want,” said Prime Minister Marape.‍

He said that his Government welcomes new investors and encourages those already in the country to continue investing in the economy.‍

“I am not in the business of harming our investors in the country. Other investors in the country and our partner investors, ExxonMobil, Oil Search, Total, Santos, Nippon Oil, they have been with us for a long time.‍

“We are in the business of now consolidating on these investments here, as well as attracting new investors into the country.‍

“But, as I speak I want to first pick the lowest hanging fruits to improve our economy, improve on areas of domestic market obligations, areas of local content, and in improvements in greater equity participation in the resource sector by our landowners.‍

“We are tired of being rent collectors. Sometimes down the line, whether that is in 2022 or 2025 with the best advice from the Petroleum Department and with the new Ministers we will be making regime shift and change in the resource laws and most importantly it will be friendly to the investors.

“But more so importantly friendlier to the interests of the 8 million people of our country and the benefits they truly deserve.‍

“And that is by making sure that our economy gets the residual benefit from those resources.

“And I make no apologies to anyone. I make no apologies. If you don’t like the way I am speaking, pack up and leave.

“I am more about adding value to the economy and for my people to benefit,” said Prime Minister Marape.

Prime Minister Marape on May 30th during his maiden speech after his election as the 8th Prime Minister of PNG told Parliament he does not want any international conglomerates in the resource sector to dictate to his Government what to do and or change the laws to suit their interests.‍

He said he would tweak and turn the resource laws for the benefit of the resource owners and the country. Prime Minister Marape said his intention is not to chase away investors, but wants maximum benefit and meaningfully participation by landowners and the Government in the resource development.

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PNG’S RESOURCE CURSE: DOUBLE OR NOTHING REVISITED

Paul Flanagan | PNG Economics | 12 June 2019

Executive Summary

Do the controversial conclusions of the “Double or Nothing: The Broken Economic Promises of the PNG LNG project” report still hold? The broad answer is “Yes” – indeed the conclusions are re-enforced by recent economic data. Fortunately, PNG’s new Marape/Steven government is seeking better terms for future projects. It is too early to tell if it will make even more important but politically difficult policy changes to reverse the “resource curse” approaches of the O’Neill government.

  • Recent PNG National Statistics Office figures have confirmed that PNG Treasury was over-estimating the health of the PNG economy in 2016. The new figures increase the gap between PNG LNG promises and actual outcomes relative to “business as usual” prior to the PNG LNG project (see “statistical details” section below for detail).
  • At a more detailed sectoral level, there is a mixed story with sectors such as health not doing as badly as thought (now ‘only’ minus 27%) but manufacturing doing worse (now minus 32%). The average outcome remains that PNG’s industries were just over one-fifth worse off in 2016 than if they had simply continued the “business as usual” growth prior to the PNG LNG project.
  • Overall, the PNG LNG project massively over-promised and then failed to deliver. This is not because of the fall in oil prices – indeed LNG export returns are higher than predicted.
  • Resource projects on good terms should be good for development – but this requires good policies. The PNG LNG project induced poor policies under the O’Neill government. These poor policies have overwhelmed the potential PNG LNG benefits.
  • The O’Neill government made little progress on the four recommendations from the report designed to address the broken promises of the PNG LNG project (see below). This probably contributed to its fall.
  • There are encouraging signs that the new Marape/Steven government is seeking better returns from its resources. Hopefully, it will also pursue better policies in other policy areas such as competition policy and devaluing the exchange rate to deal with the resource curse. But these will be politically difficult.

Details

The release of national accounts information by the NSO in April shows lower GDP and non-resource GDP (a proxy for household incomes) in 2016 relative to the PNG Treasury forecasts used in the earlier analysis. This has the effect of increasing the gaps between the PNG LNG modelling predictions, and actual outcomes. Specifically, the PNG LNG modelling had projected an increase in GDP of 97% two years after production had commenced. The actual outcome relative to the pre-PNG LNG “business as usual” case was a 6% increase – down from 10% in the initial report. For household disposable income, the prediction was an 84% improvement. The outcome is a decline of 9%, larger than the decline of 6% estimated in the earlier report. Using updated Bank of PNG figures on employment, the prediction was an increase of 42%. The outcome is now estimated as a fall of 26%, slightly smaller than the 27% decline in the earlier report. There is no new data on exports, imports and government expenditure.

The following graph updates that on page 6 of the Executive Summary of the initial “Double or Nothing” report. It contrasts PNG LNG predictions with actuals all relative to the pre-PNG LNG undergrowing growth path (or ‘business as usual’ growth case which was running at 5% growth per annum).

Of course, many people have benefited from the PNG LNG project such as local transport, catering and security firms, the support for local health and education facilities, the work of project partners in responding to the 2015 drought and 2018 earthquake, some tax and dividend revenues, and some landowner benefit payments (although see a related Jubilee Australia report “On Shaky Ground” (see here) which discusses some adverse local impacts and broken promises at the local level). However, taking a helicopter view of the entire economy, household incomes, government expenditures, employment and import levels were worse by 2016 than if the pre-PNG LNG underlying ‘business as usual’ growth trends had continued.

The reasons for failing to deliver had nothing to do with the fall in oil prices in late 2014 – see here (although a continuation of historically high oil prices would have helped). Indeed, as shown by the first columns in the above graph, the PNG LNG project is actually earning more in export incomes than initially projected. The reasons for failure are linked to the O’Neill government’s policy shortcomings in not addressing the well-known “resource curse” risks of a major resource project:

  • a 50% build-up in spending before revenues flowed that has led to the largest on-going budget deficits in PNG’s history;
  • crippling foreign exchange shortages due to poor exchange rate policies;
  • a failure to put enough policy effort into other critical sectors of the economy;
  • unwise state investments such as the Oil Search purchase funded by the UBS loan; and
  • growing corruption.

As documented in Chapter 5 of the earlier report, the O’Neill government continued to ignore local and international warnings that PNG LNG required appropriate policies to manage the possible adverse impacts on other parts of the economy once the construction phase was completed. PNG slid into classic resource curse policies. Indeed, those making such warnings were often attacked – a classic case being when Isaac Lupari accused me of being unprofessional and working for former Treasurer Don Polye when all I did was to correctly claim that the fall in oil prices in late 2014 would affect 2015 budget revenues. His claims that PNG would largely be sheltered from such falls was false as was his claim that I was still working for Don Polye (although I admired Don Polye including for his stand on the UBS loan and I did work for Polye as a public servant when he was Treasurer). If such warnings had been listened to, the O’Neill government could have made a more rapid fiscal response which would have lessened PNG’s current debt burden.

The “Double or Nothing” report was condemned as “utter nonsense” by former Prime Minister O’Neill (even though he subsequently admitted to the press that he hadn’t read it). Oil Search CEO Peter Botten promised to subject the report to “rigorous analysis” by an independent accounting firm to “demonstrate that there are some serious flaws in the Jubilee report”. This was not done, or at least the findings have not been released over the last year. Fortunately, former Treasurer Charles Abel did acknowledge that project returns were indeed below par. More recently, the Papua LNG project partners have been more cautious in selling the latest project and we do not have the black magic PNG-GEM model making more overly-optimistic promises. However, the PNG public still does not have access to the economic modelling behind such key claims that the Papua LNG fiscal agreement “divides the net free cash flow 50/50 between PNG and Total led developers”. More transparency is required.

It is encouraging that the new government appears to be taking a more balanced approach towards the resource sector and its potential contribution for inclusive development. Prime Minister Marape’s discusses PNG’s resources as going beyond minerals and gas to agriculture, forestry, fisheries and human resources. Given his strong legal background, including as a former Attorney General, appointing Kerenga Kua as the new Petroleum Minister should help address local concerns about current and prospective LNG agreements.

There is also positive language on gauging views on what needs to be done to create a healthy economy even if it means he doesn’t make many friends (see here). The strong stance on corruption is welcome. However, some policy corrections to move away from the resource curse will be extremely challenging politically. For example, PNG has an over-valued exchange rate which acts as a subsidy on all imports and a tax on all exports. It reduces incomes for rural households yet lowers the cost of living especially in urban areas (the latter because more consumption is imported). However, urban elites appear to have a stronger voice in PNG than the much more numerous rural poor. PNG has also moved away from competition and trade policies that would balance the resource sector and allow PNG to benefit from its strategic location in the Indo-Pacific region. Policies such as high tariffs to protect local manufacturing are understandable but economic history shows the costs for the many outweigh the benefits for the few. These are two examples of the vexed political economy challenges facing the new government. Addressing such policies are critical to addressing PNG’s resource curse. They are at least of equal importance as getting a better direct benefit return from resource projects. Time will tell if the new government will tackle such difficult political economy challenges, challenges that must be addressed to make PNG a much richer black Christian nation.

My next article will explore the different economic impacts of the construction phase and the production phase of large resource projects. The dramatically different economic impacts across these two phases could help explain why former Prime Minister O’Neill wanted to push through the Papua LNG project against the advice of his local team.

Recommendations Re-visited

The “Double or Nothing” report included four recommendations for the PNG government.  One year on, how have they gone? Following are the four recommendations, with some comments on progress shown in italics.

1. PNG should return to more inclusive development policies while better managing the resource curse. There is a need to address the overvalued exchange rate, ensure the new medium-term fiscal plans are implemented in a  transparent fashion, and re-design the SWF to ensure all resource revenues flow to the budget.

As noted above, there are some positive messages that the new government may consider action in such policy areas. Over the previous year, there had been no improvement in managing the exchange rate (the sovereign bond did not address the underlying issues), the medium-term fiscal plans faced major inconsistencies between the 2019 Budget Strategy and the actual 2019 Budget, and there was little progress on the SWF (which needs to be redesigned anyway).

2. PNG should establish a clear policy framework for all future resource projects (and extensions) that ensures PNG gets a better and earlier share of the resource pie than current agreements. No new resource projects should be approved until this framework is completed and publicly released.

This was not adequately done prior to the Papua LNG agreement. While the new deal has improved some elements of the PNG LNG deal, there clearly was a lack of internal agreement as to whether enough extra had been gained.

3. Projects should not be approved without the production and release of transparent, verifiable, contestable and independent economic modelling by the government; this modelling should include a completely new independent model that includes net costs to the budget.

Fortunately, there was little PNG-GEM spruiking of the new Papua LNG project. However, it did appear to be making claims of future revenues as well as benefit sharing that were not verified by transparent figures or modelling.

4. PNG should urgently clarify some of the confusing figures in the most recent EITI reports that royalties and development levies paid by ExxonMobil are not being received, and explanations provided as to why the level of what should be identical payments are so different.

EITI continues to do a good job in PNG given data limits. However, key information such as the Kumul Petroleum Holdings annual accounts have not been released. Recent data indicates that PNG Treasury had been claiming as “dividend revenues” funds that were actually just “advances” financed by loans from BSP.

Overall, progress against the four recommendations had been poor. That said, it is quite possible that the original report helped confirm and strengthen views in PNG that future projects needed considerably better deals. As stated a year ago “As the government considers this report, there are potential benefits for PNG in terms of encouraging public discussion about PNG’s future options and even supporting PNG’s negotiating hand with the LNG companies. Hopefully, with the benefit of hindsight, “fake news” comments will fade and true benefits will be understood.” Given developments over the last month, possibly the O’Neill government didn’t deal adequately with the broken promises of the PNG LNG. The new government appears committed to not repeating that mistake in terms of benefit sharing. Time will tell if it will also address the crucial underlying “resource curse” policy issues.

Statistical background

The PNG National Statistics Office released updated national account figures for the PNG economy on April 10 2019. This release included detailed figures for 2015 and 2016. The new numbers would be more robust that the earlier PNG Treasury estimates, although they are likely to still be too high. The release also provided consistent figures for 2006, but these did not include new growth rate figures for 2006. If it had, this would have allowed a re-estimation of underlying growth rates which had been based on the three years growth rates for 2007 to 2009. Given that 2008 was actually a year of recession according to the NSO (with growth falling by 0.3%) the inclusion of 2006 information is likely to have lifted the estimate of “business as usual” real GDP growth to slightly above 1.7% per annum in per capita terms, or 4.8% without taking population factors into account. More detailed justification around the “business as usual” growth rates are provided here. The next article will also provide some sensitivity analysis around “business as usual” growth rates.

Using the same methodology as outlined in appendix 2 of the earlier report, three actual 2016 values are updated (shown in green in the following table). These lead to three updated figures for the difference between what the 2016 value would have expected to be if “business as usual” pre-PNG LNG situation continued and the actual 2016 value.

The updated story at the sectoral level also produces slightly worse outcomes. The following table sets out the expected sectoral impacts from the PNG LNG modelling in the second column. The third column covers the gap between the underlying sectoral ‘business as usual’ growth path and the available PNG Treasury figures for 2016. The fourth column uses the recently released 2016 NSO data (except for agriculture exports which continues to use BPNG data). Some sectors have not done as badly as set out in the initial report. For example, the health sector has “only” declined by 27% when the original estimate was a decline of 33%. Other sectors have done worse. For example, the manufacturing sector has declined by 32% rather than the initial estimate of a decline of 23%. The overwhelming story remains – all sectors in the PNG economy outside of the petroleum and LNG sector have gone backwards relative to their underlying ‘business as usual’ growth performance prior to the PNG LNG project. The average decline is now 23%. This is an extraordinary missed opportunity with poor policies pushing PNG away from the “business as usual” pre-PNG LNG case. It is also a remarkable contrast to the foreshadowed gains averaging 36% from PNG LNG partners.

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