Tackling Papua New Guinea’s resources sector blues

In the first of this three-part series about PNG’s resource sector, FRANK SENGE KOLMA writes about the shifting goal posts

Prime Minister James Marape gave notice when he resigned from the government of Peter O’Neill that he would review resources development agreements considered unfair and not beneficial to PNG.
On May 30, 2019, when Marape took government, he hatched his plot in advertisements taken out by Petroleum and Energy Minister Kerenga Kua that promised a complete regime change in the way business is conducted in the extractive sector.
A bill for an Organic Law to that effect shortly went before Parliament.
Called the Organic law on Papua New Guinea’s Ownership and Development of Hydrocarbons and Minerals and the Commerialisation of State Businesses 2020, it will replace a similarly worded Organic Law of 2016.
This law, now on Parliament’s notice paper, proposes changes which might take control of hydrocarbon and mineral assets away from the State and vest it in the hands of private companies such as the Kumul Mineral Holdings Ltd and Kumul Petroleum Holdings Ltd.
These, while allowing the companies to operate without much political interference, might also place important mineral and hydrocarbon ownership beyond the State. Were the ownership structure of the companies to change with control passing on to other interests, there too would pass these strategic national assets.
This is a very early and cursory reading of the proposed law but parliamentary debate is crucial and detailed explanatory notes from the Government is required in the reading of this Bill for greater clarity as to its intent and purpose.
As can be expected, the industry, long used to operating under the current legislative, policy and regulatory regime is bristling with barely suppressed indignation.
Consultation, the industry claims through its powerful lobby arm the Chamber of Mining and Petroleum, has been insufficient in the first instance. In the second, the industry will be affected to the core which might affect all participants, including the State, provincial governments and near-project-site-communities.
Nationalists and others who have long felt that the country has given away its vital non-renewable resources for a pittance are out in force too behind Marape supporting his exhortations to bear “short-term pain for long term gain”.
Opposition Leader Belden Namah declares with equal vehemence that the Government move was sudden and terribly timed with the result that there was “short term pain” and “more pain will surely follow”.
However, it plays out level heads are required right now because pain, whether dispensed now or at some time in the future, is pain. Looking to history and the actions of others under the same or similar circumstances are good guides for affirmative and correct action.
In this discourse, we hope to put the divergent viewpoints in perspective so that all sides to this argument can appreciate the point of view of the other; that discussion and not contention, ought muster compromise and positive forward motion. We begin with the PM who rose to power with his battle cry to “take back PNG” and to, by 2030, build PNG into the “richest, black, Christian nation” on the planet where “no child is left behind”.
A manifesto was released shortly after to coincide with Independence Day, calling for greater returns to the State’s extractive resources projects targeting Porgera gold mine and Ramu Nickel Cobalt mine which had reviews in their respective governing agreements that year. He called for emphasis on downstream processing of raw materials and for greater tax and equity take in resources projects.
He called for all projects to bring revenues onshore and manage accounts through the Bank of PNG.
Strong words. Fighting words. But words of similar vein have been heard many times before. They ruffle no feather, usually. But Marape went farther. He announced that he would renegotiate some terms, and did so as it turned out, of the last agreement his predecessor had signed into operation: the Papua LNG project.
That produced immediate effect.
Total, the French energy giant heading Papua LNG as lead venture partner, scaled back its PNG office and halted its preparations to advance to front end engineering and design (Feed) stage. One major venture partner, Oil Search Ltd, announced to its shareholders that it suffered a K8.5 billion dunking of its values as a result of the uncertainties generated by the government’s move.
That is a massive loss by any standards and one wonders how that will factor on the balance sheet of the company and its perhaps greater impact on investor nerves.
It is a loss most multinationals are loath to take which is why sovereign risk and political stability rank high on the checklist of companies which seek to invest in countries like PNG.
Oil Search’s recent announcement to sell down its exploration equipment and scale down its activities in that area might imply a deeper hurt and the recent moves for a merger with Santos might have its genesis there. One of PNG’s best performing, multiple global award winning chief executive officer of Oil Search’s, Peter Botten, left his post one year before his time and it was highly likely he might have been yet another victim of the political regime change.
Ironically, Botten was a champion for Marape’s Hela, heading the provincial health authority and assisting communities through the Oil Search Foundation he had set up.
Adding to the uncertainties was Marape’s insistence, at the same time, that proven gas reserves at P’nyang become a separate LNG plant and not be supplied to Papua LNG for a third train as proposed. Talks towards that proposal broke down repeatedly and lead negotiator Kua used a curious turn of phrase to announce to Parliament once that the country ought “celebrate the failure” of the talks before Marape raised a rare point of order to correct his own minister.
After a year of delay, the Government and Total announced the remobilisation of the project with the reconfirmation of the Papua LNG Gas Agreement of 2019, with the signing of the Fiscal Stability Agreement and the award of the License extension in February 2021. The objective now is to launch Feed in early 2022 and to prepare for final investment decision in 2023. Despite this positive development and assurances it is back on track, the ripple effects of the delay on financing, on project timelines and even available markets and expertise will have been enormous and unknown at this point, but they will make their play by and by.
The Government has announced that P’nyang talks are back on track but how they emerge into project agreement and when remains yet at “conjecture” stage. Marape, then, jangled even the most hardened of investors’ nerves when his Government refused to renew Barrick Niugini Ltd’s (BNL) application to continue gold mining at Porgera after its special mining lease expired.
Whatever the reasons expressed locally, in the wider world, it was reported as a government takeover of the mine, an expropriation.
Expropriation, along with nationalisation, are putrid words to investors anywhere and only the worst of autocratic regimes apply them, mostly to their own demise. Mine operator BNL took the issue to the National Court in PNG on April 28, 2019, claiming procedural unfairness among other things. At the same time, BNL took the matter to the World Bank’s International Centre for Settlement of Investment Disputes.
Following this, Marape found support in unexpected quarters. Catherine Coumens of MiningWatch Canada reportedly said: “It is outrageous that Barrick is seeking international arbitration through its subsidiaries before the PNG court has even ruled on the case. This smacks of an attempt to put undue pressure on PNG court procedures. It is stunning that Barrick, whose lease has expired, somehow thinks it has a right to continued access to the gold under the feet of the people of Porgera, who have suffered so much because of this mine.”
A court ordered negotiation between the parties failed and the National Court threw out the entire case for abuse of process claiming BNL has gone to many bodies outside the PNG court jurisdiction. Barrick appealed the decision and sister company, Barrick Australia, took the matter up under the Bilateral Investment Treaty between the two countries claiming a violation of the treaty.
Barrick Niugini is owned jointly by Canada’s Barrick Gold and Chinese state-owned Zijin (47.5 per cent each) with the remaining 5 per cent with Mineral Resources Enga. The local shareholding is split equally by the Enga government and Porgera landowners. This is an important local element in the national controversy because the longest serving governor of the province is Sir Peter Ipatas.
He has built Enga into a quite remarkable province, educating the majority of its school aged children on a policy of free education since 1997 and ensuring future children are equally secured with a Enga Children’s Fund (now Ipatas Foundation), both mostly built on proceeds from the mine. Perhaps far more than most others, Sir Peter knows the value of the contribution from Porgera and what a bigger take in the business can mean. He stoutly supports Marape’s actions and Mineral Resources Enga is represented in court on the State’s defence bench claiming lack of consultation by Barrick.
On Aug 25, 2020, the Government announced that Special Mining Lease 11 had been granted over 2135 hectares of land, the site of the Porgera mine, for a period of 20 years to the Government-owned Kumul Mineral Holdings Ltd. The PM promised a speedy re-opening of the mine, going so far to suggest using certain provisions of the previous SML to compulsorily acquire Barrick assets onsite, if it would not sell them on commercial terms. Barrick went back to court.
Then, last April, exactly two years after the closure, BNL and the State signed a binding framework agreement (FA) to reopen the Porgera mine under reorganised ownership structure with much improved benefits for the State.
Under the agreement, PNG will own 51 per cent and Barrick will own 49 per cent with options for PNG to buy the mine outright in 10 years at market value. Barrick will pick up the bill to reopen the mine and the landowner’s and provincial government shares with options to also fund Kumul Mineral’s 36 per cent (that is the State’s take) which will be repaid through future profits.
As all these are expressed as percentages it is difficult really to put down exact sums of money and these will depend on mine value and other variables. Clause 4 of the FA is interesting and the framework agreement’s usefulness hinges on it. This clause makes it explicit that BNL will not be responsible for any tax liability from old Porgera and that if the State through the Internal Revenue Commission were to bring it up or try to impose any such tax liability, the agreement would be terminated.
The tax liability for Old Porgera is put variously at about K1.2 billion and the cost of reopening the mine at between K800 million to K1 billion. This looks like the State is being propositioned to finance the reopening with the tax liability owed by Old Porgera.
The offer for 100 per cent acquisition of the mine in 10 years at market value might sound good but will there be sufficient reserves in the ground to make it profitable. The mine will have been running 46 years by then. By 2006, the mine was already scaling down operations and only mining stockpiled low grade ore made attractive by good gold prices.
How it remains open presently with very high prospects for the long-term will mean revised gold reserves estimates confirmed by exploration and drilling, which information is not public knowledge at present.
Porgera, which produces 400,000 ounces of gold annually, has been shut for over a year now with the loss of 3,600 jobs and all local contracts, loss of revenue to the state in taxes and dividends, loss of royalty and all of these with the gold price at well over K6,000 per ounce for all of the time the mine has been shut. Environment damage and the welfare of near mine communities and those downstream from the mine are legacy issues going back to 1984.
Porgera remains shut. No new project has got off the ground. Exploration is paralysed.
The first attempt to strike a fair and equitable deal for PNG has ended up costing far more than anticipated. A quite costly lesson which full impact on the country remains unknown yet.
The legislative moves before Parliament may produce the fair and level playing field anticipated by Marape and company if it is fine tuned to that effect. The legislative and regulatory regime change approach, in hindsight, ought to have been the preferred and only option.
Next: The price we pay

Frank Senge Kolma is a journalist, commentator and newspaper editor.