Airing on sovereign risks again
After major advances over the last six years, there has been a likely reversal recently in overseas perceptions of political and sovereign risk in PNG.
One of the events that would lead to this perception has been the ongoing tussle over mineral exploration rights at the Kodu copper-gold project and the threat it may pose to the historic Kokoda Track.
When the government awarded the exploration lease several years ago, Frontier Resources would have legitimately believed it would have the opportunity to develop any mineral discovery in the area.
A situation has now developed where Frontier has spent more than K8 million of its scarce shareholder funds to delineate the significant Kodu discovery only to find that its exploration rights may be forfeited so the government could stop potential development.
Leaving aside the rights and wrongs, this can be viewed as a classic example of political or sovereign risk though, certainly, not of the same scale of what Venezuela did to ExxonMobil by effectively expropriating its oil assets.
Although Australian prime minister Kevin Rudd has not taken a similar hardline stance as his predecessor, it appears that Frontier’s fate could well be decided at the Australia-PNG Ministerial Forum in Madang on April 22-23.
Because of the complex issues involved, it could be argued that damage in terms of political risk perceptions may be minimal even if the exploration licence was withdrawn.
Possibly even more damaging to PNG’s political risk credentials have been recent reports supposedly emanating from the Department of Petroleum and Energy that a US$1 billion fee be enforced if companies do not proceed with proposed LNG projects.
It has urged the Minister of Petroleum in this eventuality to consider forfeiting gas resources, seriously raising the question of sovereign risk.
The US$1 billion penalty fee, which is likely to have been abandoned during negotiations on a gas agreement, is irrational.
Although most people would accept that the recent surge in oil prices ensures that the two major LNG projects under active consideration are potentially highly lucrative ventures, as far as the project sponsors are concerned, their economic and commercial viability have yet to be fully proven.
This will only happen once the two consortia – one led by ExxonMobil, Oil Search, Santos and the PNG Government and the other involving InterOil-led Liquid Niugini Gas – complete their front end engineering and design studies or FEED.
This will provide these companies with the assurance the gas reserves and the requisite infrastructure can be built and operated economically over the planned 30-year life.
According to the news reports, one reason for the suggested US$1 billion penalty fee is the lost opportunity that resulted from cancellation of the previous plan to pipe natural gas from Southern Highlands to Queensland.
The department reportedly is claiming that the government lost an estimated A$126 million because the gas pipeline was cancelled. In reality, billions would have been lost.
Despite trying to sell gas at prices reportedly lower than supplies available in Australia, the PNG gas pipeline promoters were unable to find sufficient buyers. Scrapping the pipeline has made it possible for the consortium to consider an LNG plant.
Already an authoritative study shows PNG’s first LNG project would double the size of our economy even without taking into consideration other potential spin-offs such as gas-fired power stations or the prospect of building petrochemical and/or fertiliser plants.
There is certainly no upside to the US$1 billion penalty fee idea. It appears like another cargo cult concept that raises questions about political risk.
A third area that raises concerns about PNG’s political risk comes not from within the government but from one of the country’s highest profile resource developers, Lihir Gold.
Despite the good fortune it reaps from one of the world’s biggest gold deposits and the greatly improved PNG economic environment, Lihir Gold has been telling the world that PNG is a high risk operating environment.
There is certainly some truth in this claim even though other companies, including the world’s biggest gold miner, Barrick Gold, now consider PNG to be one of the most attractive places in the world for discovery and development of new mineral deposits.
Barrick is digging deep into its pocket to back up this view, having earlier this year agreed to spend US$8 million on grassroots exploration activity in the huge area it now controls in Morobe province.
It has also agreed to fork out some US$400 million for additional equity in its Porgera mine, purchase of the Kainantu gold operations and through a more recent partnership with Allied Gold.
Lihir Gold, by contrast, last year carried out a merger with Ballarat Gold in Victoria, Australia, and more recently with Equigold, whose main prospect is a gold mine soon to commence production in Sierra Leone in Africa.
It told its large global investor base and industry analysts both these deals would reduce its risk profile but in both cases, initial shareholder reaction to the mergers was negative.
Australian journalists and commentators have for long been negative about PNG, as we get reminded time and again. Despite this, a noted mining columnist with the Perth-based Aspermont Group, Stephen Bell, has recently questioned this perception particularly with regard to Equigold’s Sierra Leone operations.
In a column on March 26 carried on Miningnews. net and on PNGindustrynews.net, he said Lihir’s usage of the word “risk” was not what he had expected, in light of Equigold’s growth plans in West Africa. Noting that Lihir had made four mentions in its presentation of a “reduced risk profile”, the writer suggested it was conforming to the old adage ‘don’t put all your eggs in one basket’.
“The market didn’t much like that (Ballarat) deal, nor has it warmed to Lihir’s latest foray. On Thursday, Lihir’s share price closed down 11%, whereas Equigold was up 8%,” he noted at the time.
Discussing the sovereign risk issue, Bell said you would not have realised that Lihir Gold’s planned involvement in the Ivory Coast also involved “sovereign risk” from its presentation to stockbrokers and analysts.
Bell said: “The Ivory Coast has a record of unrest, capped off by a failed coup in 2002. Elections are due in June, the same month Bonikro is meant to pour its first gold.”
Bottom Line views Lihir’s frequent assertions about its perceived high risk in PNG in a different light, somewhat akin to biting the hand that feeds you.
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