Ok Tedi natonalisation, biggest ever legal challenge?

PNG govt to defend aggressive move

Rowan Callick | Islands Business

The Papua New Guinea government on September 18 nationalised through parliament the vast Ok Tedi copper-gold mine by 62 votes to none—a move which is expected to trigger the country’s biggest ever legal challenge.

This is likely to see the government defend its aggressive move in both Port Moresby and also in Singapore, where PNG Sustainable Development Program (SDP), the trust that owned 63 percent of the mine is legally registered. This structure was arranged to ensure that most benefits of the mine—which is the biggest single contributor to the PNG government revenues, A$543 million or about 16 percent of the total government income—flow to people in the Western province, where it is located. It was devised with Australian mining giant BHP-Billiton when it pulled out of Ok Tedi more than a decade ago, following environmental disasters.

At stake is not only the mine worth A$876 million, but also the A$1.5 billion in a long-term fund established by SDP to be used for the people of the province when the mine closes.

Prime Minister Peter O’Neill, proposing the takeover, said that SDP shareholders would be compensated—but the amounts have not been determined. This will be decided by the prime minister, according to the legislation, acting on Cabinet’s advice.

The act, which cancels SDP’s shares in Ok Tedi Mining Ltd and issues new shares to the government, giving it 100 percent control, also removes the immunity for BHP against action for compensation, which was granted at the same time as the trust was established.

In an explanatory memorandum attached to the legislation, the government says: “Any person who has any choice in action or right to pursue or enforce legal proceedings against or in relation to BHP in connection with the operation of the Ok Tedi mine will now have their full rights restored.”

The remaining connection of BHP with Ok Tedi is that it has retained veto power over changes to the constitution of SDP— chiefly in order to ensure that the long-term fund, which comprises a form of compensation for the environmental impact of the mine, remains fully available to benefit those affected.

The chairman of both Ok Tedi and SDP, former prime minister and former central bank governor Sir Mekere Morauta, said: “Where we can fight, we will fight. Why are we expropriating assets from our own people? Ok Tedi is a nationally-owned mining company.”

One of the issues that triggered the government takeover, was that it claimed it was not consulted earlier in the process by which Morauta became chairman of both entities.

The O’Neill government has received widespread support from the public and from politicians since making its unprecedented move. But leaders of the mine-affected area of Western province, almost all of whom signed the Community Mine Continuation Agreement to approve an extension of Ok Tedi’s operation beyond the end of this year in return for a flow of dividends and other benefits via SDP, have attacked the mine nationalisation.

The association of such communities wrote to O’Neill saying that they had agreed to the mine’s continuing operation in order to gain development benefits via SDP, but “we have not consented to the takeover of SDP shares in Ok Tedi by the government”. Morauta said these villagers “have been tricked by a ruthless prime minister focused on his own ambitions.”

Stephen Howes, director of the Development Policy Centre at the Australian National University, who co-wrote an independent review of SDP in 2011, said the government’s move “raises serious questions about government-business relations and the security of property rights in PNG.”

Morauta said the government’s assumption of ownership would be “the trigger forced on the company to start drawing down” the A$41.5 billion long-term fund, to which two thirds of the dividends from the mine has gone. The SDP chief executive David Sode said the trust in its first decade spent about A$450 million on 662 projects, focused on education and health from the other third of the dividend income in Western province and elsewhere in PNG.

O’Neill said however: “It is time to put the ownership of the mine and its future beyond doubt. The behind-the-scenes influence of BHP and its representatives and appointees has gone on for too long.”

The move underlines a trend towards economic nationalism in PNG. Mining Minister Byron Chan has told parliament “the government is looking at taking over” the A$5.6 billion Frieda River copper/gold project, 81.82 percent owned by Swiss-based GlencoreXstrata. And Commerce Minister Richard Maru earlier this month blocked the partial takeover of New Britain Palm Oil Limited (NBPOL) by Malaysian company Kulim Berhad—which wanted to increase its stake from 48.97 percent to 68.97 percent—saying that 90 percent of the economy is controlled by foreigners: “The government’s aspiration is to reduce that to 50 percent by 2030.” He said that not only was Kulim barred from increasing its stake in NBPOL, perhaps PNG’s most successful agricultural venture, but it would have to reduce its present stake by selling shares to provincial governments where the company operates. He said the government would restrict full foreign investment or participation in some sectors of the economy, including in agriculture and fisheries. Maru said: “We have to create two million jobs immediately, otherwise we’re going to continue to have social problems. And as a responsible government, we’re going to take some very drastic steps, including legislative changes to create more opportunities for own citizens to enjoy the wealth of our nation.”

The battle for control of Ok Tedi and SDP with its massive funds began almost a year ago when O’Neill told parliament that leading Australian economist Ross Garnaut—who was chairman of both entities and had chaired SDP since its establishment—was “no longer welcome” in the country.

O’Neill said after introducing the nationalisation bill to parliament that SDP “has collected money and parked it in the bank and hasn’t been investing it in helping every day issues.” Morauta said that “the risk of turning Ok Tedi Mining Ltd into a state-owned enterprise far outweighs the benefits. “It would destroy the mine and threaten the flow of dividends”—with “reliable sources estimating that at least billions of kina have gone missing from government coffers in the last few years.”

A multi-billion dollar scheme to bring hydro power from PNG’s Purari River to Queensland in Australia, via a joint venture between Origin Energy and SDP, would appear to be one of the casualties rippling out from this massive row enveloping PNG’s political and economic worlds.

It remains unclear how the government will pay for the takeover. The share of the mine owned by SDP alone is valued at the equivalent of 55 percent of this year’s originally budgeted deficit. Morauta said the parliamentary legislation “would undermine investor confidence at a time when a number of very large investments are on the horizon”.

PNG Treasurer, Don Polye revealed in parliament during the same week as the nationalisation of Ok Tedi, that the budgeted fiscal deficit for 2013 of 7.2 percent of gross domestic product—following a succession of balanced or near-balanced budgets—is expected to deteriorate to 7.7 percent. He attributed this in part to falling commodity prices, in part to large corrupt payments for “ghost workers”—staff who have died or moved or collect more than one salary—on government payrolls.

The Faustian Contract between BHP and PNG

Why does the PM say he wants BHP out of Ok Tedi?

Nancy Sullivan | Nineteen Years and Counting 

 Is BHP still in control of PNGSDP? It seems to be. Follow out logic here. For those of us familiar with running the paper trails and company searches for RH subsidiaries, this is a pretty transparent chain of command, and it leads right to BHP Billiton’s Board room.

Remember the BHP settlement in 2001, following those long Ok Tedi cases against the company?  BHP gave USD $500 million worth of shares in the mine to the PNG Government, when Sir Mekere Morauta was Prime Minister. That was all the shares it had in Ok Tedi, and it was their compensation for the gross and unprecedented level of damage the had caused the Western Province people. That was their bail-out, and the means by which they would step away from the mine.

Or so we thought. The idea at the time was that the PNG Sustainable Development Program, would own and control all of the PNG Government’s shares in Ok Tedi for the purpose of implementing development in the deeply scarred Western Province, and the country at large.

Papua New Guinea was unclaimed by any European powers in 1876 when a speck of gold was found at  the highest point of D’Albertis’ exploration  on the Ok Tedi River. By 1884, at the express recommendation of Australian miners, Britain had established a protectorate over Papua.

One hundred years later, in 1984, the Australian mining company BHP had secured the mining lease for Ok Tedi mine.

Twenty years later it acknowledged responsibility for the single largest environmental disaster in the global history of mining. In compensation, they promised establish a trust for the impacted communities, and to leave this trust in the hands of Papua New Guinea. Ten years since, we find it has not.

So why did Peter O’Neill say on Radio Australia that BHP Billiton needs to give back control of PNGSDP to PNG?

How does the PNG Government NOT control PNGSDP and OK Tedi? BHP’s continued control is the largest con in PNG history.

After killing one of the world’s most important rivers and subjecting hundreds of thousands of Western Province peoples to continuing environmental impacts, the company pledged to give back its shares in a form of penance. But with the cynicism of an older, colonial age, they never did this, and instead kept control of those ‘development’ funds for its own ends.

They never left Ok Tedi. The biggest con in PNG history has been effected by BHP.

In 2001, BHP Billiton did gift all its shares to the PNG Government.  It also “suggested” to the PNG Government through then-PM, Sir Mekere Morauta, that the PNG Sustainable Development Program Ltd be set up, so that it:

• As a corporate entity, could hold and control all the
• shares in OK Tedi
• Would receive 75% of the dividends from OK Tedi
• Would be registered in Singapore and the dividends invested in Singapore, allowing the  PNGSDP would bring back the interest for development programs for Western Province and PNG.
• And PNG would thereby right the wrongs left by BHP Billiton.

So BHP and its lawyers went about setting up the structures and drafting the relevant agreements.  BHP then told the PNG Government that to start up the fund in Singapore – so that interest is readily available and PNGSDP can sustain itself from the beginning–  there would be no need for any start-up capital from PNG itself.  BHP LOANED PNGSDP USD$120 Million for the fund in Singapore.

And when someone gives a loan – they give terms to secure that loan. The terms BHP gave were that UNTIL the loan was 100% paid back, BHP would nominate 4 of the 7 directors on the PNGSDP Board.  BHP would retain a majority on the PNGSDP Board.

Since its inception 12 years ago, PNGSDP has been controlled by BHP through its Board, with Ross Garnaut at the helm. And as PNGSDP is in control of the OK Tedi shares – the OK Tedi Board is made up of 4 Australians and 1 Papua New Guinean, BHP also controls OK Tedi.

BHP has never left PNG.

There is now USD$1 Billion in the fund in Singapore BUT still the loan hasn’t been paid back – and won’t be for many years yet DESPITE the fact PNGSDP could repay the loan tomorrow in full and not even blink.

Why doesn’t PNGSDP pay it back ? Because the BHP controlled Board wants BHP to remain in control for as long as OK Tedi operates, and as long as the other mines near Ok Tedi operate.  Highlands Pacific, for example, has new gold and copper mine 25km away from OK Tedi: at Frieda River.

Ross Garnaut has been appointed to the Board of Highlands Pacific?  Why? Because PNGSDP has bought a huge chunk of shares in Highlands Pacific which entitles them to a Board seat.

Consider the obvious advantages to Frieda if Highlands Pacific could strike a deal with OTML to send all its tailings down the Fly River rather than the Frieda and Sepik Rivers? They could sell them to OTML whereby acquiring the legal indemnity OTML now enjoys from the 2001 agreement: the freedom from any possible litigation by OTML CMCA signatories.

So…instead of paying BHP back the loan and allowing 100% control back to PNG and its people – PNGSDP under Ross Garnaut has bought Highlands Pacific shares.

The Faustian contract PNG was forced to sign back in 2001, by continuing the mine destruction for the economic well-being of the country, is not just a tragedy. It is an expanding tragedy.

What does investing in Highlands Pacific have to do with providing sustainable development programs for the Western Province and the rest of PNG? That US 1$ Billion still sits in Singapore, and Western Province has recently been declared to have the worst human development indices in PNG. It’s ‘compensation’ for loss of a birthright and a stable, healthy future has been expanded investment in more mines.

IN 2010 PNGSDP brought $40 million of the Singapore fund back to PNG to fulfil its program mandate. But they spent $10 million on their own administration, and a further $1.5 million on Board fees. Where do these monies wind up? Back in Australia, with BHP Billiton-appointed Board Members, their colleagues and families.

Instead of working toward real development goals for Western province people by building schools, hospitals, roads, water supplies, better sanitation and small business opportunities, PNGSDP has now committed USD$400 Million from the fund to a project in Daru.

They are building a deep sea port and copper smelter in Daru.

According to affidavit material filed by PNGSDP recently, US $40 million has ALREADY been spent on the FEASIBILITY STUDY for this project. A feasibility study costing US$40 million. How many aid posts, college degrees, roads, small business loans could have resulted from $40 million dollars? How many PNG consultants would have liked to have conducted the study? We can only imagine.

The rest of the money will be spent on $178 Million worth of DREDGING for the port – as it needs to be much deeper to permit access to large ships for transporting the copper from the smelter.

But why build a copper smelter in Daru? Is this a sound investment for the PNG people? If you had an investment advisor managing your multi-million dollar investment portfolio—would this be the best possible investment?

Copper smelters are both financially and environmentally expensive. As a Daru villager, and one of the most negatively impacted groups by OTML’s devastation of the Fly River, would you choose to build a copper smelter? Daru is desperately in need if basic infrastructure, basic sanitation and water supply; it needs locally owned fisheries projects, schools, and most of all state of the art health care for children and adults still presenting illnesses from the polluted river.

But BHP knows the cost of copper smelters all too well. They own the Olympic Dam Copper Smelter in Roxby Downs, South Australia. It has been so expensive and environmentally destructive that business reports say BHP needs to build another one, elsewhere. The Olympic Dam mine uses 35 million litres of Great Artesian Basin water each day, making it the largest industrial user of underground water in the southern hemisphere. Contaminated water is passed through a series of sealed ponds where it evaporates. Reports tell us, however, that this is having a major negative effect on rare and endangered flora and fauna of nearby mound springs, which are drying out as a result of the water draw-down rate. The mound springs are the only permanent source of water in the arid interior of South Australia and a delicate yet intricate ecological balance has been established. They are a refuge for rare and endemic species including plants, fish, hydrobiids, isopods, amphipods and ostracods, many of which are now threatened by mining operations.

But more importantly, poor market returns for the refined copper, uranium oxide and gold and silver co-products of Olympic Dam have now forced BHP to shut it down.  In August of last year it was reported that BHP had to sack up to 140 staff from its Olympic Dam expansion team. BHP Chief Executive Marius Kloppers said this was due to the slowdown in China and the fall in mineral prices. The decision was announced on the same day the company announced a full-year net profit of $14.7 billion, a 34.8 per cent drop on last year.

To justify expenditures for the Dam expansion of around $30 billion, Olympic Dam can’t be just left to the whims of the market. The giant Anglo Group has already shied away from investment in the Mine because of fears that uranium would remain in the copper concentrates, and the acid leaching of these would be too hard to manage if the concentrate were transported.

Others say that BHP needs to erect another smelter, as the Olympic Dam is too expensive. BHP must devise a solution. If Olympic Dam is deferred then it is likely BHP has not found a solution somewhere. Like Daru.

For whom is the Copper Smelter and Deep Sea Port being constructed in Daru? BHP Billiton.

Now that Ok Tedi plans to continue mining for another 7 years, and now that it has invested in the new Highlands Pacific mine at Frieda; now that Ross Garnaut has left the Chair of PNGSDP for the Chair of Highlands Pacific; now that BHP has installed Sir Mekere Morauta in Garnaut’s place, as a golden retirement package in exchange for Morauta’s support in passing the Bill that allowed BHP to ‘step back’ from PNG—- the control BHP has over these monies is even more entrenched.  At this point, there has been only one Papua New Guinean on the PNGSDP Board, Rex Paki. His power if nullified by the On the Board of PNGSDP, there is one Papua New Guinean, Rex Paki, who cannot do anything in the face of BHP’s 4 appointed Directors, including Morauta now.

“Naturally, with such an accumulation of wealth in a poor country, it’s very tempting for political figures to think of better ways of using it right now rather than putting it into long-term development,” Professor Garnaut said recently. We assume ‘political figures’ refers to the democratically elected representatives of PNG. We assume he is saying no government of PNG (a “poor country”) will ever know how to invest these funds in its own behalf.

During grievance time in Parliament 2 November 2012, PM Peter O’Neill read the above quote aloud to great alarm from the MPs present. Some called out for Garnaut to be deported.

We have to ask again: What has PNGSDP done in 12 years?  Has the river been cleaned? Have Western Province people been ‘developed’? Garnaut tells us now, with no irony whatsoever, “I think Ok Tedi is the main single reason why PNG has in the last five years had some fiscal freedom.”

This is either the most cynical of statements or the most oblique admission of Garnaut’s own fiscal freedom in the last five years.  Perpetuating the myth that all Papua New Guineans are corrupt and all Australians are ethical, sneering at critics by asserting disastrous professional experience over genuine concerns, BHP is hiding in clear sight. Shape shifting Board Members, installing expensive mechanisms and six-figure salaries, and lavishly publicizing the Program’s comparatively meagre investments in the people of Western Province.

BHP has constructed in PNGSDP the biggest pyramid scheme PNG has ever seen. Forget the small scams run by church and cult leaders around PNG; forget the dubious investment schemes thrown up every day in towns across PNG. We have a winner of the biggest scam in PNG history: the illusion created by BHP that PNG benefits directly from and will forever need PNGSDP.

O’Neill ‘stealing’ Ok Tedi mine

Rowan Callick | The Australian

PAPUA New Guinea’s Prime Minister Peter O’Neill has been accused of “stealing” an $876 million asset, the Ok Tedi copper-gold mine, by former prime minister and former central bank governor Mekere Morauta.

Former Ok Tedi Mining chairman Ross Garnaut with former PNG prime minister Mekere Morauta in Brisbane last year. Picture: Liam Kidston Source: TheAustralian

Sir Mekere said that Mr O’Neill had decided to expropriate the mine without paying compensation to the people of Western province, who are the chief owners and beneficiaries of the trust fund PNG Sustainable Development Program (PNGSDP), which owns 63 per cent of Ok Tedi.

Mr O’Neill has consistently complained, however, that through its veto power over changes to PNGSDP’s constitution, BHP Billiton retains a degree of ultimate control that is inappropriate.

The Ok Tedi ownership structure was established through an arrangement between BHP and the PNG government — then led by Sir Mekere — just over a decade ago when the former quit running the mine in the wake of environmental disasters there.

Mr O’Neill said yesterday: “It is time to put the ownership of the mine, and its future, beyond doubt. The behind-the-scenes influence of BHP, and its representatives and appointees, has gone on for too long.”

It is understood that legislation is being drafted accordingly, which may be presented to parliament during the current sitting.

Australians have invested almost $19 billion in PNG, overwhelmingly in the resources sector, and the outcome of the long-running row over control of Ok Tedi is being watched closely by the industry, which earns about 80 per cent of the country’s export revenues.

Mining Minister Byron Chan has told parliament “the government is looking at taking over” the $5.6bn Frieda River copper-gold project, 81.82 per cent owned by GlencoreXstrata.

And earlier this month Commerce Minister Richard Maru blocked the partial takeover of New Britain Palm Oil by a Malaysian company, saying that 90 per cent of the economy was controlled by foreigners.

The battle for control of Ok Tedi, and of PNGSDP with its massive funds, has escalated since almost a year ago when Mr O’Neill told parliament that leading Australian economist Ross Garnaut — who was chairman of both, and had chaired PNGSDP since its establishment — was “no longer welcome” in the country.

In 2011, the mine provided $543m or about 16 per cent of the government’s total income.

Mr O’Neill said that PNGSDP, whose corporate structure is domiciled in Singapore, “has collected money and parked it in the bank, and hasn’t been investing it in helping everyday issues”.

But PNGSDP’s chief executive David Sode said that the trust in its first decade spent about $450m on 662 projects, focused on education and health. And two-thirds of the income, from mine royalties, has accumulated $1.5bn in a long-term fund to be used for the Western province when the mine closes.

The association of communities affected by the mine has written to Mr O’Neill saying they have agreed to the mine’s continuing operation in order to gain development benefits via PNGSDP, but “we have not consented to the takeover of PNGSDP shares in Ok Tedi by the government”.

Sir Mekere said that “the risk of turning Ok Tedi Mining into a state-owned enterprise far outweigh the benefits”. He said “it would destroy the mine and threaten the flow of dividends”, with “reliable sources estimating that at least billions of kina have gone missing from government coffers in the last few years”.

The multi-billion-dollar scheme to bring hydro power from PNG’s Purari River to Queensland, via a joint venture between Origin Energy and PNGSDP, would appear to be one of the casualties rippling out from this massive row.

O’Neill scores a win in battle for Ok Tedi

Rowan Callick | The Australian

PAPUA New Guinea’s Prime Minister Peter O’Neill has won a crucial round in his battle for control of the country’s biggest mine and largest taxpayer, the copper-gold resource at Ok Tedi.

The 63 per cent shareholder is the PNG Sustainable Development Program, a trust set up on behalf of the people of Western Province by BHP-Billiton and the PNG government when the former quit running the mine a decade ago in the wake of environmental disaster.

At SDP’s annual meeting in Port Moresby on Tuesday, its chairman, former prime minister Mekere Morauta, announced that as a result of government pressure, “constructive dialogue to put in place a fair and transparent exit of SDP from Ok Tedi Mining Ltd is necessary”.

He noted “the government’s decision to remove (SDP) from any involvement” with Ok Tedi mine, which last year made a net profit of $447 million, slightly down on 2011.

This would mean SDP would cease to receive dividends from the mine, which is awaiting approval by the government to renew its lease in order to continue operating next year.

Changing the terms of the trust would require the approval of BHP Billiton.

Stephen Howes, director of the Development Policy Centre at the Australian National University, who co-wrote an independent review of SDP in 2011, said the government’s move “raises serious questions about government-business relations and the security of property rights in PNG”.

Sir Mekere said the government’s assumption of ownership would be “the trigger forced on the company to start drawing down the $1.4 billion” in a long-term fund established solely for the people of Western Province. A further $400m has been spent on projects there and elsewhere in PNG. He also said SDP “recognises that the national government may be unable or unwilling to pay a full price for its shareholding in Ok Tedi Mining Ltd”, estimated to be worth about $1.1bn.

After paying tribute to his predecessor as chairman, Australian economist Ross Garnaut, for playing “a pivotal foundation role”, Sir Mekere said SDP had been able “to oversee very successful mining operations at Ok Tedi, to deliver sustainable development . . . and to save and protect a very substantial portion of the dividends . . . for the benefit of current and future generations”.

Professor Howes said shifting the ownership of Ok Tedi “will reduce expenditure effectiveness” and described it as a “a sad day for PNG”.

Complex challenges for PM O’Neill in mining

Steering govt through rocky rival interests

Rowan Callick | Islands Business

Early in the term of Papua New Guinea’s new government—which has ensured, by a constitutional amendment, that it will be in power at least until this time in 2015 – it is facing some complex challenges, especially around the country’s biggest revenue earner, mining.

There’s a common view, even in PNG which has more than a century’s history of the industry, that mining is merely about digging rocks up and shipping them to eager buyers. But it is as difficult to build and maintain a mining industry as it is easy to lose one.

Independent PNG has been substantially built on its resources, the source of about 80 percent of its export earnings—chiefly, until liquefied natural gas (LNG) starts producing revenue in a couple of years, from minerals

The big persisting dangers for PNG include:

• Spending the money before it’s been earned and thus building debt;
• The usual “Dutch disease” challenge of preventing resources from crushing the rest of the economy by inflating prices, especially damaging agriculture which is by far PNG’s chief source of employment and of family incomes; and, of course
• The debilitating battles between rival groups, including elements in various levels of government and within landowner groups, over the spoils from mining.

The dominant source of such resource revenue—and by far the biggest taxpayer in the country—has in recent years been Ok Tedi Mining Ltd. In 2011, it provided the government with about $US550 million—about 16 percent of its total income. Recently, the government has banned leading Australian economist and public intellectual Ross Garnaut from entering PNG, even though he was the chairman of Ok Tedi, the country’s highest tax paying company. It sought, by ratchetting up tensions around the mine and its governance, to place direct pressure on BHP-Billiton, which a decade ago withdrew from the operation due to environmental embarrassments, and set up a trust to run the mine.

Relax rules
The government appears to want BHP to agree to change the constitutional arrangements that hold substantial dividends back until the mine closes—now worth about $US1.5 billion. It also wants BHP to relax the rules that constrain its access to funds available annually for local development. Garnaut has stood aside this year for former prime minister Sir Mekere Morauta, who now chairs not only Ok Tedi Mining Ltd but also PNG Sustainable Development Program Ltd, the chief shareholder in Ok Tedi, which manages the holding in trust for the people of the mine area of Western Province and of PNG more broadly. PNG Finance Minister, James Marape, has recently sought to redirect some of the funds provided annually for local development, which have recently been used to buy boats and aircraft for local use to a new lobby group.

Hundreds of millions of dollars are now coming into play in this dispute, as the government places pressure on Ok Tedi in one area after another—including the ultimate sanction of refusing to allow an extension of the mine after its current approvals end this year. It is almost unthinkable that the mine would then permanently close. The thriving mining township, Tabubil, is being redeveloped as a centre for training and tertiary education, and for health work and research. But this transformation is far from complete. In the meantime, Tabubil continues to provide jobs and incomes for large number of families, and local people benefit from spin-offs and infrastructure work. So despite the mine’s many problems, starting with the collapse of its tailings dam causing mine waste to be flushed down the river system, permanent closure is most unlikely.

The far more probable course, is that the government would invite in a new operator. But from where? Although copper is today’s most-sought mineral, there is not a long list of aspirants. A Chinese buyer is most likely, given the country’s eager appetite for access to the resources its industrial growth requires. But Ramu Nickel, which recently began production, is operated by Chinese government corporation MCC. And it enjoys a surprising ten-year tax holiday, agreed by the Somare government in the face of opposition from within the bureaucracy. This would thus mark the starting point in any negotiation with Beijing. It is hard to imagine any other Chinese state owned enterprise accepting less than a ten-year tax holiday—which then raises the question of how this would benefit PNG, especially given the usual practice of Chinese corporations importing much of their own labour for such projects.

Just 100 km from Ok Tedi lies another huge copper/gold resource, Frieda River. But unfortunately for PNG, this is mostly owned by Xstrata—which eventually produced just before Christmas, after some postponements, a feasibility study. But some outstanding work remains. Xstrata is destined for imminent merger with Glencore, which is a Swiss based resource trading giant. And Glencore will not want a bar of even such a vast, promising resource as Frieda. Its chief executive Ivan Glasenberg, who will head the merged entity, said recently:

“We are afraid of greenfields”—new mines, which are considered risky and sometimes have capital over-runs.”

Glasenberg is a trader not comfortable with waiting for five years for a return. The Xstrata-Glencore merger is awaiting approval from regulators in China—which could itself prove a beneficiary, with the promising greenfields Frieda project coming into play. Brisbane-based Highlands Pacific, a minor partner at Ramu and Frieda, and also an explorer with promising assets close to Ok Tedi, is looking on with hope mingled with anxiety.

Meanwhile, over in Bougainville, the prospect of reopening the vast copper mine there—which featured at the centre of the decade-long civil war from which the autonomous province is still steadily recovering—hangs over any consideration of economic rejuvenation. President John Momis is calling on his considerable experience to urge all sides to take this prospect slowly. Any rapid change in the position on reopening the mine—which is still mainly owned by Rio Tinto Ltd—would play in to the referendum on Bougainville’s future that is due in a couple of years. But Bougainville will seek to insist, whatever happens constitutionally, that any future mine revenue stays in the province and doesn’t come through Port Moresby.

Besides these tangles, PNG is fortunate in having landed the firm focus of Melbourne-based Newcrest, the world’s third largest gold miner. Half of Newcrest’s resources now lie in PNG and the company has the technical and strategic skills, the capital, and crucially, the combination of commitment and understanding of how PNG operates, to realise those assets steadily.

And Mines Minister Byron Chan wants to change the laws to give the lion’s share of mining revenues directly to the landowners—although rival landowner groups frequently challenge each other over “true” ownership, when the unique opportunity arises to realise their core asset, access to their land.

The bottom line for PNG is that its government has to understand that, despite all the zeroes on the kina figures anticipated from LNG alone, success in managing a massive resources sector is not guaranteed, and that those revenues can dwindle almost overnight, leaving it with no obvious replacement.

Prime Minister Peter O’Neill thus still has to steer his ship of government through dangerous seas full of rocky rival interest groups. His core challenge is to help create, preserve and invest the wealth released by resource exploitation, rather than simply dividing up the spoils.

Sparks fly in battle over Ok Tedi mine

Rowan Callick | The Australian

THE extraordinary battle for control of the vast copper-gold mine at Ok Tedi and of its revenues, including the $1.4 billion long-term fund reserved for future generations, has heated up in Papua New Guinea.

The conflict emerged in November, when Prime Minister Peter O’Neill told parliament:

“I want to put it on record that (the then chairman of Ok Tedi Mining, Ross Garnaut) will be no longer welcome in this country until BHP surrenders control of PNG Sustainable Development Program to the government and people of PNG.”

The mine — which provides almost 20 per cent of the government’s income, more than $500 million a year — is owned 63.4 per cent by PNGSDP, a trust established by BHP Billiton when it quit the mine a decade ago, 24.4 per cent by the PNG national government, and 12.2 per cent by the government of Western province, where the mine is located.

Mr O’Neill wants BHP to give up any residual say in matters relating to the revenues, via the constitution under which PNGSDP operates.

He and former prime minister Mekere Morauta, who presided over the legislation through which the mine’s new structure was created, and who has now succeeded Professor Garnaut as chairman of OTML and PNGSDP, have been trading arguments through paid advertisements in PNG’s newspapers.

Mr O’Neill — who also attacked The Sydney Morning Herald’s finance columnist Michael Pascoe for what he called “a truly bizarre justification for BHP’s past and current roles” — said “new management at BHP in the period prior to 2002 wanted to close the mine because of its appalling environmental and social damage history, and because that history was attracting the most adverse regional and international media attention”.

He said BHP insisted, and the Morauta government approved, that PNGSDP’s funding be managed via Singapore, “denying PNG significant taxation and other revenue”.

“That was a vote of no confidence in PNG and was a reflection of the colonial-era mentality that existed in BHP then, and clearly exists in BHP Billiton today,” Mr O’Neill said.

The PNG parliament, he says, gave BHP immunity from prosecution that almost certainly spared it and its partners costly legal proceeding and compensatory payouts that may have run into billions of kina.

“The campaign by vested interests and their barrackers to portray the government’s commitments as being dangerous, and worse, will not succeed,” Mr O’Neill said.

He has threatened that unless the ownership terms change, his government will not renew the mine’s leases and will force it to close, with the prospect of a new owner being brought in.

Sir Mekere has responded that when told by BHP in 2001 that it wanted to close the mine, his government carefully balanced “the environmental impact against the economic and social importance of the mine at that time”, when “PNG stood on the brink of financial collapse after several years of gross mismanagement of the nation’s public finances”.

“Closing the mine would have had truly disastrous consequences for the country and the people of Western province,” Sir Mekere said.

The creation of PNGSDP, he said, aimed to ensure that dividends from the mine would “be used wisely, independently, transparently and accountably”, and to provide income for the people of Western province.

This structure “has stood the test of time”, he said, and BHP now “has no involvement whatsoever in PNGSDP” or the mine.

PNG govt to take charge of OK Tedi funds

Eoin Blackwell | AAP

THE government of Papua New Guinea will restructure the management of the Ok Tedi copper mine to ensure its funds are managed in PNG and not in Singapore, Prime Minister Peter O’Neill says.

In a two-page article written by the PM in Port Moresby’s Post Courier newspaper on Tuesday, Mr O’Neill vowed to end what he termed “secret arrangements” between the mine’s former owner, BHP Billiton, and the PNG Sustainable Development Project.

The PNGSDP was created by BHP in 2002 to manage OK Tedi’s profits on behalf of the people of Western Province, following massive environmental damage caused by the mine.
OK Tedi’s mining lease expires at the end of 2013.

“When the lease expires, the national government will put in place management arrangements that end any secret arrangements, and ensure that the people of Papua New Guinea, including the local landowners, have a say in the mine’s future and its management,” Mr O’Neill said.

“We will ensure the PNGSDP is managed in Papua New Guinea, and its funds are held in Papua New Guinea, and used transparently for the good of the people of the Fly River Province, and the nation generally.”

The $US1.4 billion ($A1.35 billion) PNGSDP fund is currently held in Singapore, where the company is registered.

Mr O’Neill wrote the article in response to a Fairfax newspaper column last week which described the PNGSDP as “by far the biggest act of corporate philanthropy in Australian history”.

BHP had nothing to be proud of, Mr O’Neill said.

“Nor can BHP be proud of its majority ownership and managerial control prior to 2002 when it divested itself of its majority shareholding, and pretended – and I use the word advisedly – to end its control over the mine,” he said.

“The establishment of the PNGSDP was designed by BHP to keep control of the mine, and the direction of its profits, principally through the PNGSDP, over which it clearly exercised effective control.”

Mr O’Neill said past claims by BHP that it had no say in running OK Tedi and the PNGSDP were untrue and that the company held effective control over the mine “through a myriad structures”.

In 2010 the OK Tedi mine was the largest single contributor to PNG’s tax revenues, to the tune of $US543 million.

In November, former chairman and noted economist Ross Garnaut resigned from the PNGSDP and was replaced by former prime minister Mekere Morauta.

Professor Garnaut was also banned from PNG by Mr O’Neill after he implied publicly that the government would not use the fund’s money wisely.

BHP announced in September last year it planned to no longer appoint board members to the PNGSDP.

Future directors would be chosen by the board, which also includes PNG government nominees.

However, it is understood BHP must agree to any changes in the core terms of reference under which the trust operates.

PNG’s national government and the provincial government of Western Province jointly own a 36.6 per cent share of OK Tedi, while the PNGSDP currently holds a 63.4 per cent stake.

Both the PNGSDP and BHP have declined to comment.

OK Tedi will stay in PNG, says PM

Eoin Blackwell | AAP

THE government of Papua New Guinea is still considering extending the mining lease for OK Tedi Mining Ltd under a new management structure, Papua New Guinea Prime Minister Peter O’Neill says.

Mr O’Neill said last week’s media reports quoting him as saying the lease would not be extended when it expired at the end of 2013 were wrong.

“There is no divorce with OK Tedi. OK Tedi is in PNG and we will continue our engagement with them,” he told reporters in Port Moresby on Sunday.

“I said the partnership between the owners of OK Tedi – that is the PNG government and the PNGSDP (PNG Sustainable Development Project) – that partnership will not continue,” Mr O’Neill said.

The PNGSDP, which owns 63.4 per cent of OK Tedi, and is worth $1.4 billion, was set up by mining giant BHP when it withdrew from the project in 2002 after it reported the mine was responsible for causing major environmental damage.

“By 1st January 2014, if the mine life’s extended, OK Tedi mine will be managed under a new structure,” Mr O’Neill said.

He said the government would only consider extending the lease after consultation with the people and government of Western Province, where the mine is located in the Star Mountains.

PNG’s National and Western Province provincial governments jointly own a 36.6 per cent share in the mine.

Mr O’Neill has previously criticised the PNGSDP as being run by BHP via remote control.

“BHP divorced us long ago, we simply didn’t realise that,” he said on Sunday.

“It’s time for them to move on, that’s precisely what this government is doing.”

Late last year Mr O’Neill ordered economist and former PNGSDP chairman Ross Garnaut be banned from PNG after the latter implied the government would not spend the PNGSDP money wisely.

In November former prime minister Sir Mekere Morauta took on the chairmanship of PNGSDP.

Mr O’Neill has just returned from a three-day trip to Japan where he held talks with Prime minister Shinzo Abe and promoted PNG to investors.
Japan is a major importer of Liquefied Natural Gas and PNG’s behemoth, $16 billion, Exxon Mobil lead gas project is expected to go online in 2014.

On Sunday evening Mr O’Neill is expected to greet Thai Prime Minister Yingluck Shinawatra, who is making an official trip to Port Moresby.

More distorted views from The Australian (aka The Mining Industry)

Strange days, fur sure

Michael Pascoe | The Australian

…. While the Australian government was auditioning on Thursday for a minor job with Ashton’s Circus (they were turned down), real news was breaking to our north: Papua New Guinea’s Prime Minister reportedly announced his government would seize control of the $1.4 billion sustainable development fund set up by BHP in 2002 as a gift to the Papuan New Guinea people with a structure designed to try to pre-vent it being seized by the politicians of a country rated by Transparency International as one of the world’s most corrupt – ranked 150th out of 176.

This is the latest act in a saga of both tragedy and generosity. The Papua New Guinea Sustainable Development Program represents by far the biggest act of corporate philanthropy in Australian history. It was the compromise worked out by Paul Anderson when he was running BHP between the need to end the downriver pollution caused by Ok Tedi and the PNG government’s determination to keep the mine operating.

When Anderson personally reviewed the studies commissioned by his predecessors of the Ok Tedi mine’s impact, he found it morally impossible to continue to operate the mine. The initial plan was to effectively fill the hole in, a scheme that would allow mining to continue for a little longer without polluting the river, giving PNG time to adjust.

But with Ok Tedi being the government’s biggest source of revenue, Port Moresby would have none of it. The mine would continue to operate as long as it was profitable. Anderson nonetheless believed BHP could not ethically keep mining, so its majority stake was gifted to the people of PNG through the PNGSDP structure, a Singapore-based corporation with PNG government representation on its board, but not dominance.

New PNG Prime Minister Peter O’Neill last year began his push to take control of PNGSDP. Steadily rising tensions broke surface when PNGSDP chairman Professor Ross Garnaut was banned from entering PNG after he very gently stated the obvious about the country, that it was “tempting for political figures to think of better ways of using it right now rather than putting it into long-term development”.

Thursday’s development – O’Neill announcing that Ok Tedi’s lease would not be renewed upon its expiry next year, that the PNG government would own and operate the mine and that “we will restructure the PNGSDP with our own people managing it, not by strange people who live beyond and do not know our needs” – would be a sorry conclusion to a magnificent effort to ameliorate an environ-mental disaster.

There was hope that O’Neill becoming Prime Minister would help lift PNG and much of the new government’s rhetoric has been encouraging about removing some of the infrastructure bottlenecks holding this complex country back. Certainly a good government could indeed put the PNGSDP funds to good usage, but good government to the benefit of all the people have not been the rule in PNG. Despite fabulous natural resources, delivery of services in many areas has gone backwards.

Giving O’Neill the benefit of the doubt, the tragedy here might not be what his administration might do with the money, but whatever crew takes over from him. It’s a tough job standing between a politician and a bag of money the world over, including Australia.

When the PNGSDP was set up, it was envisaged that it would ultimately be controlled by the PNG government. The timing and attempted safeguards could not be ensured a decade ago. The structure has at least preserved a large proportion of Ok Tedi’s wealth for the people. In the end, it is indeed theirs to deal with.

To have the structure end in rancour and high dudgeon though, bodes ill. Australia’s nearest neighbour and major destination of Australian aid funds has a great many problems as well as potential.

And where’s the Australian government been as this unfolded? Somewhat busy working up a circus act. Standby for some sort of reassurance from Canberra about maintaining faux fur standards and that the future of education here is in good hands.

‘PNG eyes new Ok Tedi player’

The National

CONTROVERSIAL Australian journalist Rowan Callick, who has been accused by the anti-mining lobby of being pro-BHP Billiton and Ok Tedi Mining Ltd, yesterday suggested that the PNG government is trying to bring in a new operator for the Ok Tedi mine.

In an article in The Australian, titled ‘PNG learning not to count its chickens before they hatch’, Callick – whose interview with former OTML chairman Ross Garnaut led to Garnaut’s banning from PNG by government –  said this was evident in relations between the newly-elected Peter O’Neill government and OTML.

“Recently, we’ve seen the newly elected government ban Ross Garnaut from entering PNG, while he was the chairman of Ok Tedi, and effectively direct pressure on BHP Billiton, which had set up a trust to run the mine, to accede to the changing of the constitutional arrangements that hold substantial dividends back until the mine closes, and also constrain government access to the funds available now for local development,” he said.

“Finance Minister James Marape has this month sought to redirect some of those funds, which have recently been used to buy boats and aircraft for local use, to a new lobby group.

“Hundreds of millions of dollars are now coming into play in this dispute, as the government places pressure on Ok Tedi in one area after another, including the ultimate sanction of refusing to allow an extension of the mine after its approvals end this year.

“Then a new operator could be invited in. But from where?”

Callick said although copper was today’s most sought-after mineral, there was not a long list of aspirants.

“A Chinese buyer is probably most likely,” he said.

“But with Ramu Nickel, operated by Chinese government corporation MCC, enjoying a 10-year tax holiday, this will mark the starting point in any negotiation with Beijing.

“Just 100km from Ok Tedi lies another huge copper-gold resource – Frieda River.

“But unfortunately for PNG, this is mostly owned by Xstrata, which eventually completed just before Christmas, after some postponements, a feasibility study, but which is destined for imminent merger with Glencore.

“And Glencore will not want a bar of even such a vast, promising resource as Frieda.

“Its chief executive Ivan Glasenberg, who will head the merged entity, said last week: ‘We are afraid of greenfields,’ which are risky and have capital overruns, and have deals ‘which kill the NPV (net present value) on those projects’.

“Glasenberg is a trader not comfortable with waiting five years for a return.”