Author: Colin Filer, ANU
After eight years as Papua New Guinea’s prime minister, Peter O’Neill was replaced by his former finance minister, James Marape, in May 2019. Marape declared that it was time to ‘take back’ Papua New Guinea and turn it into the ‘richest black Christian nation on the planet’. It certainly wasn’t getting much richer under O’Neill’s stewardship.
The main trigger for O’Neill’s removal was dissemination of the Ombudsman Commission’s report on the government’s decision to borrow AU$1.24 billion from the Union Bank of Switzerland (UBS) in 2014. In order to pay for its 20 per cent equity stake in the PNG LNG Project operated by ExxonMobil, the government hoped to retrieve the shares in Oil Search Ltd that it had previously mortgaged to the International Petroleum Investment Company of Abu Dhabi.
This was one of a sequence of bad decisions that Paul Flanagan and Luke Fletcher described as a classic case of the ‘presource curse’ — a version of the resource curse whereby a government wastes piles of money in anticipation of a massive stream of revenue from the trunk of an extractive industry elephant that only delivers a pile of dung to the rest of the national economy.
The second trigger for O’Neill’s removal was news that the government had recently signed agreements with a consortium led by French company Total to develop the Papua LNG Project that could double the volume of Papua New Guinea’s gas exports by 2024.
In June, Marape announced that a commission of inquiry would be set up to investigate the UBS loan. It had a mandate to discover whether foreign corporate actors — most notably Oil Search managing director Peter Botten — should take some of the blame for a decision that turned out to have cost the government more than AU$300 million when it sold its Oil Search shares in 2017. Hearings are scheduled to start before the end of September but could drag on for months. It will certainly drain more money from the public purse, given the latest proposal to engage Australian experts in commercial law to be part of the process.
Marape and his newly appointed petroleum minister, Kerenga Kua, have attempted to renegotiate the new project agreements signed in April. A ‘Mexican standoff’ was reported to have taken place when the state negotiating team met the project proponents in Singapore in August. But two weeks later, Total was reported to have made a few concessions to the government’s demands and the standoff was stood down. In case this should seem like a backdown, Marape and Kua also promised ‘drastic changes’ to the Oil and Gas Act whereby ‘production sharing agreements’ would ‘relieve the State of expensive loans and create early free cash flows’ from future projects.
O’Neill, his former treasurer Charles Abel and former opposition leader Patrick Pruaitch argue that the deal made in April was superior to the one made between the Somare government, ExxonMobil and its partners back in 2008. That is mainly because it allows the national government to collect a ‘production levy’ from the new project that will be worth 2 per cent of ‘wellhead value’ — just like the royalties and development levies shared by local landowners and lower levels of government.
That might sound like a more reliable source of revenue than the 30 per cent tax levied on company profits that has so far produced a very small stream of income from the PNG LNG Project and is not expected to produce a bigger one for another five years. But the whole point of the levy is to enable the government to make retrospective payments for its equity stake in the project during the production phase.
This removes the need to take out another commercial loan that it cannot afford. But it also means that the government is borrowing money from private partners in the joint venture that it still wants to join, and the production levies will not be available for any other form of public spending for a very long time.
Peter Botten keeps reminding everyone that the gas business is a train that needs to run on time if it is not to be derailed. In this case, the schedule requires that Minister Kua convene ‘development forums’, both for the Papua LNG Project and a proposed expansion of the PNG LNG Project, within the next 12 months so that a ‘final investment decision’ can be made before the end of next year.
The development forums held for the PNG LNG Project in 2009 resulted in a set of benefit-sharing agreements between the national government and local stakeholders that proved almost impossible to implement. One major issue was failure to agree on a method for the identification of the customary landowners. It won’t be any easier this time around, especially because the government is proposing to make ‘drastic changes’ to the Oil and Gas Act, and even to repeal the Organic Law on provincial and local-level governments, during the same time period.
Even if the train does run on time, it seems unlikely that changes to the legal and policy framework will have removed the many symptoms of the Dutch Disease afflicting Papua New Guinea’s first LNG project.
Colin Filer is Honorary Professor and member of the Resources, Environment and Development group at the Crawford School of Public Policy, The Australian National University.