People missing out on LNG benefits

THE recent incident involving disgruntled landowners blocking the entrance to the PNG LNG project in Hides, Hela Province, over the prolonged delay in promised financial benefits resulted in several responses from different government representatives.
However, the response given by the Secretary for Treasury which was aired on TV WAN news was quite interesting as well as surprising given the confusion about whether revenues from the sale of more than two hundred shipment of gas condensate from the PNG LNG project.
In responding to the aggrieved landowners’ actions, he may have inadvertently disclosed a fact that eluded questions by the public about the implications of the state’s borrowing to finance its equity portion in the PNG LNG project.
He stated that no revenue has entered the country as yet and this situation will continue for up to eight or 10 years until the loan is fully repaid.
What can be construed from his response is that the state has mortgaged its revenue from the PNG LNG project to service the loan it obtained to pay for its equity in the project and during the next eight or ten years no revenue will flow into the country.
He also said that in the meantime, PNG would benefit from other revenue sources such as tax from the PNG LNG project.
If no revenues have entered PNG, it may explain why the government is experiencing financial problems when it should by now be enjoying the revenues from the PNG LNG project to resolve these financial issues and boost the economy.
This could also effectively mean that no funds from the PNG LNG project will go into the Sovereign Wealth Fund for some time.
A clarification by the Treasury Secretary is essential to put into perspective what he actually said in order to prevent the public from misconstruing his assertions.
Nevertheless, the question that needs to be answered is: Can the state amend the Oil and Gas Act so that its stipulated equity portion of 22.5 per cent be acquired as free-carry using its sovereign ownership rights instead of acquiring it on commercial terms?
The same argument here can be extended to the Mining Act which requires the state to acquire its stipulated equity portion of 30 per cent on commercial terms. The PNG LNG project and past experiences have shown that the state has been obtaining loans to finance its equities in various projects.
Although such an approach may be seen as a worthwhile sacrifice for the future, it delays much needed revenue that is needed in the immediate term to fund key development projects.
The delay in revenue inflow into the country may continue as oil and gas prices are affected by the unpredictable fluctuations in the international commodity
market and therefore making it difficult for the government to plan its development endeavours with certainty.
It could mean that by the time the government starts to enjoy revenue inflows into the country after repaying its loan, a project’s life may have only a few remaining productive years and the state may not enjoy maximum returns at all.
It does not make sense to see PNG being forced to finance its stipulated equity portion when in the first place, it is the owner of these resources.
A way forward in this area would be to make it a mandatory requirement for the state to exercise its sovereign ownership rights to acquire the stipulated equity of 22.5 percent as free carry in the oil and gas sectors.
When issuing exploration and development licences, investors must not be given exclusive ownership rights.
It should be made clear in the policy regime that the state which include the national government, provincial government and landowners shall exercise their sovereign ownership rights to acquire their stipulated equities as free carry without having to pay on commercial terms.
This concept should be considered in the proposed review of the Mining Act as well.

Eugene Kambut
Port Moresby