Tackling PNG’s resources sector blues

In this final part of a three-part series on Papua New Guinea’s resource sector under threat, FRANK SENGE KOLMA writes about the wider field

Porgera gold mine is not the only mine where Papua New Guinea has raised a voice of concern over unequal distribution of benefits and environmental damage.
Bougainville Copper, Ok Tedi Copper and Gold mine, Misima Gold, Tolokuma Gold, Hidden Valley and Ramu Nikel cobalt mines have had or continue to have pestering concerns over the environment and the matter of uneven or equitable benefits to state and onsite and near mine communities.
Concerns on Bougainville led to a bloody uprising starting in 1987, the consequences of which are still being felt today.
These complaints find resonance in most parts of the world where resources development is to be found.
The International Bar Association reports that one of the “most difficult areas in concession contracts in resource-rich developing countries is achieving an equitable balance between the interests of investors, host states and, increasingly, mine and near mine communities”.
In 2007, the Democratic Republic of Congo successfully claimed “international best practice” to set aside a resource contract and claim benefits retrospectively.
The next year, Zambia demanded by legislation a greater share of resources rents through windfall profits tax and renegotiated royalty rates.
The Namibian government has said it will declare copper, coal, gold, uranium and zinc as “strategic minerals” and subject to “additional national protection” and all concessions to be held by a state owned mining company.
Zimbabwe published in March 2008 that country’s indigenisation and economic empowerment act and regulations spell out, in part, that all foreign owned companies offer 51 per cent of their shares to citizens.
As we can see Prime Minister James Marape is not alone in wanting a better deal.
He has a personal grudge to boot.
If you have lived, as he has for decades, in pitch darkness after the diesel generator at Tari shuts down at 10pm while power lines trespass his land to supply 24 hours power to Porgera mine in neighbouring Enga carrying electricity generated at his Hides PDL 01 gas plant then he can be excused some begrudges.
Of course, he has now shut down that mine so perhaps shut down too is the power supply.
Grudges we will have forever in this business.
It has not ever been a fair world in the extractive sector or indeed in any other business and the debate for and against can rage with compelling arguments each side for a long time.
It is not to political rhetoric we ought turn but to that deeper burning issue of whether or not this country is indeed getting a fair return on the harvest of its mineral and hydrocarbon resources that we ought engage our energies.
And that, to my mind, is the sole preserve of the Government if only they can wield the power they have responsibly and fairly.
Foreign investors are mostly wrongly blamed, and often retrospectively or in hindsight, for playing in a field applying the rules in force in that country.
If we make the rules and certain players actually follow the rules and we discover belatedly that our own rules place us at a disadvantage, then it is preposterous to, like a child who lost the race, cry: “I was robbed.”
The important thing is to be the good referee, consult the players, let them know our angst, and then with their full knowledge and some contribution, set about redrawing the rules.
Those who have contracts under old rules can continue until the legally stipulated review falls due to renegotiate a new regimen.
New venturers will have to abide by the new rules. That is a fair deal and any party who cries “foul” can take their leave.

Long history of grudges
Unfair and unequal distribution of benefits, as earlier stated, is a complaint not of recent birth and resonates around the world wherever mineral and hydrocarbon resources have been found.
In the case of hydrocarbons, the complaint has its roots in the 1950s when governments woke up to the fact that multinational companies were making a killing from the harvest of hydrocarbon resources within their territories.
Previous to that governments merely gave the nod to companies to explore huge tracts of their territory and if oil or gas were discovered in commercial quantities it fell to the company to develop, market the resource and keep the profits, paying governments their taxes.
In the 50s and 60s, a global movement was taking root where many of the colonising nations were scrambling out of their colonised states and handing the burden of government back to the indigenes.
These new states, cut off from the umbilical cord they had become dependent on, scrambled to find the means to become economically independent.
Mineral and hydrocarbon resources which were increasingly in demand for energy needs by a fast industrialising world became lucrative opportunities for these newly independent nations.
It would be wrong to say this was the state of play in developing countries alone.
Older nations such as England, Italy, Netherlands, Norway, Russia, and the United States also had oil and gas discoveries within their territories on land and at sea and their governments were equally anxious to get their hands on some fast cash and especially access to some of the oil and gas produced for their own energy needs.
And so governments here and there began encroaching on an area previously held to be the sole preserve of energy companies.
And oil as an item of global geo-political interest made its play and intensified with time, taking centre stage in our era.
The increased interest governments showed with regard to ownership and control of natural resources led to the 1962 UN resolution on the permanent sovereignty over natural resources.
This resolution provided for the creation of alternative legal arrangements for petroleum development, allowing for host states to retain ownership of the resources in situ within their national boundaries while allowing oil companies to conduct petroleum operation in the country.
Old concession conditions were revised and ownership of discovered petroleum now reverted to the State with provisions made to share petroleum at the well head.
There was a catch. The oil and gas business has a very long period of exploration for the precious resources and once discovered there is even more intensified efforts to prove up commercial reserves.
This involves quite substantial outlay of exploration and development capital before any money in return is even sniffed at.
While such is the nature of this business for energy companies, governments can ill-afford to put down that kind of money in long term risky ventures. It would be forbidden in law in many countries in any case.
An arrangement had to be arrived at that suited both governments and resource companies, the latter which carried the inordinate burden of footing the entire bill for exploration and, most often, the cost of development.
And so different schemes or regimes were introduced and put into operation.
Melvin Yalapan, in an excellent paper on the “Legal nature of the Papua New Guinea petroleum arrangement” introduces for us the main regimes in use around the world in petroleum exploration and production.
Yalapan names them as concessions, joint ventures, production sharing and services contracts.
Concessions were the original form where governments handed over to the company carte blanche exploration and ownership rights within the concession area.
Joint venture arrangements were first entered into by Italy and involved state through its national oil company and the exploring petroleum company forming a venture company with equal rights on the board and management.
Production sharing, which was first experimented by Indonesia in 1967 and which is still in force there, involved the state taking over almost exclusive ownership of the resource after compensating the company its exploration and production expenses and issuing it a development license.
The fourth scheme in operation are service contracts.
Under services contractual arrangement, the foreign oil company is engaged by the national oil company to conduct petroleum exploration for a fee or a share of production.
The oil company also provides the host country and its national oil company with technical services and information relating to the development of the petroleum resources.
Upon discovery of petroleum in the area, the national oil company engages the foreign oil company as its agent to produce the oil, and if it agrees, also to market the oil produced on behalf of the national oil company.
The national oil company is the sole titular holder of the area under the agreement.
All petroleum deposit and oil and/or gas produced are the property of the national oil company at the wellhead.
The foreign company is not a concession holder or partner, but merely a hired agent.
The state of play in PNG, the ever reliable Yalapan informs us, is a legislative and policy regime that “fixes in advance, conditions under which rights to explore for and produce petroleum are granted”.
“The legal regime is set out primarily in the legislation and complemented by petroleum agreements that are entered into in respect of each exploration licence.”
Whereas in other regimes development agreements vary from project to project, in PNG all developments appear to be uniform in many respects as stipulated by the law and policy and agreements follow a similar path.
The government’s rights to participate as an equity partner is also spelled out in law down to the exact percentage point (22.5 per cent in petroleum) and it can choose and pick whether or not it wishes to participate.
The State can take up to a maximum 30 per cent equity interest in mining developments.
How it is that the State which has 100 per cent ownership in resources should relinquish in law all of its holding voluntarily and come in as a minority shareholder at commercial rates is beyond this writer’s comprehension?
This issue is finally addressed in the new proposed Organic on Papua New Guinea’s ownership and Development of Hydrocarbons and Minerals and the Commercialisation of State Businesses 2020.
The proposed law was gazetted and circulated and was on the Notice Paper of Parliament but was quietly withdrawn by the minister.
However, this or other laws take their course, there will always be this huge burden upon the State to raise money for its equity or as usually happens it forgoes future revenue to the tune of the amount of its equity participation which is normally carried by the operator.
The State, thereby, pays well into the future – the length of many annual budgets before it can start to realise any dividends.
The added paradox in PNG under present arrangements is the State’s most difficult position as regulator and shareholder.
This is made poignantly clear when disputes arise about environment damages, for instance.
The Ramu Nickel mine spillage of recent fame is a case in point.
To take a very strong environmental position exposes the State to substantial losses in its investment or further cost increases in hefty compensation.
To take the company position means the State turns a blind eye to breaches of its own environmental protection laws and to actual and lasting damage to the environment.
Yalapan contends that the PNG regime in practice tends to lean more and more towards a concession type arrangement and only in places does it resemble other types.
This means even if fixed in law, the goalposts are ever shifting.
Quite often, the State has given tax holidays to some projects on the lame excuse that it is a first of its kind project.
Tax concessions should be given to companies which are at best marginal or about to enter a business many have been loath to go into previously meaning market conditions might be fraught with difficulties.
Minerals and petroleum are always in demand so out the window goes that consideration as valid for granting of tax exemptions. Oil and gas business are not marginal at all.
From exploration and construction outlay to commercial development amounts in hundreds of millions of Kina are budgeted.
So flimsy too is this argument for tax concessions.
It is a small field to be sure but the players are global giants with resource envelops many times the budget of developing countries.
PNG is one case in point against its business partners like Exxonmobil and Total.
No company has been loathe, thus far, to do business in PNG.
Chevron packed up in the oil production business early in the piece but was replaced by an even bigger giant in Exxonmobil.
PNG is NOT an unattractive place to do business.
The question is: Is PNG enjoying the full benefits as it should, of investments conducted on its shores?
That we shall discuss in the final part of this conversation.

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