All eyes on LNG

ANY delays to the start of the PNG liquefied natural gas (LNG) project will affect the 2010 National Budget, secretary for the Department of Treasury Simon Tosali has said.
And with the final investment decision (FID) scheduled for Dec 8 and construction set to start next year, if all goes well, PNG’s economic growth would be high at 8.5%, compared to 5.5% if otherwise.
Mr Tosali said previous estimates were that LNG could result in a 25-35% increase in GDP during the peak production phase and around 15-20% increase over the life of the project.
“In 2010 Budget, the biggest assumption is that LNG project will proceed as planned.
“That is the biggest assumption underlying and underpinning the 2010 Budget,” he said yesterday during the 2010 Budget Press Lock-up in Parliament.
Under Government commitments, K120 million was allocated as grants towards the umbrella Benefit Sharing Agreement (BSA)’s Infrastructure Development, another K60 million in Business Developments Grants, and additional K5 million for feasibility studies for infrastructure projects.
But while there is much anticipation on the LNG project, Mr Tosali warned that a project of such size that needed a lot of resources, brought out two main risks.
Inflation was a major concern as it had remained high since 2008 driven by international factors and strong domestic demand.
Last year saw inflation at 13.5% up to September and averaged 10.7% (2008) and this year’s average is estimated at 7.4%, and next year its expected at 9.5% reflecting strong domestic inflations pressures driver by high Government spending and strong domestic demands into the start of LNG project and other new mines.
Mr Tosali said inflation was expected to stay high as economy changed and adjusted to the LNG project but should stabilise to 4% in 2013 and 2014 based on the assumption of prudent fiscal and monetary policy.
The second concern was the large Current Account Deficit (CAD).
Mr Tosali said construction of the LNG project would be associated around imports of much needed materials for construction.
But if there would be high trade and current account deficits during the construction phase, the CAD would not be of concern.
“This is because the LNG project will not proceed unless all the equity and debt financing for the project is in place.
“This means that international financing of the current account deficit will be in place.
“The current account deficit will be driven by a substantial increase in national investment associated with the LNG project.
“The deficit will not be primarily driven by an increase in general consumption of goods and services rather spending will be directed towards productive investment in the LNG project,” he said, adding this should generate large returns in exports.
The National Budget included impact of the LNG project on PNG’s economy and fiscal outlook.
“With a stronger economy, we are expecting an increase in Government revenue which will enable the Government to further investment in the development of the country.”
He said this included new training colleges and education facilities aimed at raising capabilities of Papua New Guineans.