Tackling PNG’s resources sector blues

In this part four in a series of articles on Papua New Guinea’s resource sector, FRANK SENGE KOLMA writes about what the future portends

A group calling itself the Monticello Company, put up quite a strong fight for separate ownership of the pipeline during the Kutubu Oil development phase in the late 1980s.
It lost that battle but the economic sense of its arguments are now playing out with other smaller oil fields and the PNG LNG project coming into production which are basically using the same oil pipeline infrastructure.
Had Monticello won its fight, perhaps with the weight of its government behind it, there would be in existence today a substantial local company specialised in the pipeline business and the PNG LNG pipeline business which took a huge chunk of the construction expenditure and flung it back overseas might have landed in local hands or a sizable piece of it anyway.
In the oil and gas projects that have come online since, PNG has ceded pipeline ownership and shipping and marketing rights to the developer – each a multi-billion Kina business in its own right.
This is the price this country pays for inexperience, for lacking the gumption to play hard ball, for the weak legal and fiscal regimes it has in place and for lacking the large amounts of capital required for such undertakings.
Major companies operating in the hydrocarbon business do not just make their money from the product. Related services are also money spinners.
The value added product at the other end fetches more for the end customer than the product in its raw form does for PNG, even if that customer is itself resource poor.
While the main concern of hydrocarbon companies might be exploring, finding and producing oil or gas, there are a number of big money spinners in this industry that do not even seem to enter the equation in PNG.
Piping the product from the wellhead to the export terminal and transporting the product to the customer are lucrative billion Kina businesses in themselves.
Finding a customer and marketing the product at a fair price is equally big business.
Market analysis, order and accounting services, and other so-called back office services help lighten the load considerably for companies and they are most willing to pay big money for these services.
And then there is the downstream processing business that PNG has given away for nothing in the oil and gas and mining sectors.
Value-adding through refining of our minerals and hydrocarbon products are concessions PNG has made that mocks us in the eyes of the international community.
PNG has allowed itself to be robbed in broad day light with its eyes fully open. Of course it can be said that this happens with almost all primary export products across almost all sectors.
Downstream processing of oil and gas produces a long line of products including gasoline (petrol) diesel fuel, kerosine, asphalt base, fuel oils, heating oil, liquefied petroleum gas and petroleum naphtha.
Asphalt, for instance, is used for roofs, coatings, floor timings, sound proofing and other building construction elements.
It has many uses in industry and PNG imports these by container loads for its industrial inputs.
To think that we own the primary product in the first place, export it in its raw form and then become net importers of petrol, diesel, kerosine and all the other by-products of oil referred to here is positively scandalous.
The downside of all this again is capital to invest in all the various offshoot businesses to a resource project.
How to cut a deal when one does not have the cash has been a matter that has plagued this and other nations.
But the first asset and the best negotiating power in the State’s hand is the resource.
That resource should belong 100 per cent upon discovery to the State, or ought to be, not the discovering party.
As I have mentioned elsewhere, how it has turned out that the owner of the resource has to pay for its share of equity at market price for something it owns 100 per cent in the first place is beyond me.
And this is cast in cement at law in agreements, it appears.
Petroleum Minister Kerenga Kua also pointed out this inequality at a virtual seminar recently.
Kua reiterated that government has long operated the extractive sector under the current system of concessional licensing where 100 per cent of ownership of the country’s natural resources are transferred to developers and after handing over the resource, the developer grants government a 30 per cent option in mining and 22.5 per cent for the petroleum space.
He elaborated that the current regime forces government to seek funding to buy into multimillion projects for its own resources that it has given away “free of charge” to developers.
Kua prefers moving away from the concessional based system to a benefit sharing one where state ownership is maintained from exploration and production to export which sees benefits being shared between both parties at the end of the process.
Ultimately the final process of distribution will be determined by both parties through contracts and not by the state, nor the developer, but in agreement.
This then frees up the state to borrow within its debt to GDP limits for vital goods and services to the country that is not taken up by project debts.
Good suggestion but only he (Kua) alone can walk this talk since he alone has the powers to change the law and the fiscal regime in place.
It seems rather strange that the Organic Law proposing some of these changes was quietly withdrawn from the Notice Paper of Parliament on a letter from him.
If this country is pathetically poor four decades and six years after Independence, it is clear to this writer that it is because this country’s approach to business and commerce has been pathetic.
It seems quite clear from liberal reading of the situation that the PNG government, rather than multinational companies involved in the industry, would appear to be at fault here.
The companies do seem the maligned party at first sight and quite often bear the brunt of blind nationalism.
But it is entirely up to the government to set the legislation and the policy parameters.
It should, therefore, have the upper hand at the negotiation table as to what it wishes for its citizens in the agreement.
The company comes to the table with its exploration expenses and its development proposal as its chief, and not insubstantial at that, negotiation instruments.
All other terms ought to be dictated by the State team, if such a team is conversant with all issues pertaining to the project and the wider socio-economic needs of the country. There ought to be no retrospective regrets giving rise to attempts to renegotiate signed and sealed deals.
In that direction lies the tombstone of country reputations as good places to do business.
It is stark clear that the State of PNG needs to put its house in order where its extractive resources sector laws and policies are concerned.
It is somewhat troubling that Prime Minister James Marape, was a senior economic minister (Finance) in the government that approved the Papua LNG project which he sought to and did review the terms of when he became prime minister in 2019.
Laws and agreements are perpetually binding instruments compelling all parties, regardless of individuals who bring them into effect until such time as their statutory time limit is expired or a lawful change in law or policy is effected or circumstances referred to as an act of god invokes a force-majeure clause. The time has arrived for a serious relook at the resources sector regime in operation in the country.
Our abundant natural resources in timber, in fisheries, in minerals and hydrocarbon deposits have been harvested day and night, 24-7-365, since before independence with the singular and bewildering effect that PNG remains severely underdeveloped.
Where on earth have all the billions gone?
At last count, Australia had spent K28 billion in aid to this fair nation so where has all that gone too?
Bulolo Wau gold, it is said, helped develop Brisbane and Sydney.
One wonders at what other cities or mega-corporations PNG timber, fisheries, oil and gas have or are building because there is nowhere in this country any sign in evidence of the proceeds of the harvest having been returned here.
This is criminal negligence and let us not peep out the door to see who is at fault.
The fault lies within, quite securely indoors, with ourselves.
Marape asked citizens to “take back PNG”. The next line is clearly a question: “From whom shall we take back PNG?”
The answer supplies itself: “From PNG itself, who else?”
We need to revisit the resources laws and policies in operation.
There is a serious need to address the environmental and socio-economic impacts of resources development.
There is a serious need for development of downstream value adding industries across all resource sectors.
Local content and business development as well as knowledge and skills transfer need serious consideration and ought to be fixed in law and in fiscal policies.
Do we need to fix everything in unwieldy legislation?
Ought not legislation be generic and let policy and individual agreements sort out the nitty gritty?
Ownership of the resources is perhaps the most serious question that is being posed now.
Many, like elder statesman Sir Julius Chan, Boka Kondra and Ben Micah, contend today that resource ownership ought to be placed in the hands of landowners.
The questions that comes right back is: Who are the rightful landowners of any resources?
What should the state’s role be in this?

Next article: Resource ownership – the State versus the people.

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