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Is the PNG LNG project really that good?

Staff Reporter | 8:43 PM | |
CLEARLY it’s a consider    able achievement for the PNG LNG partners, led by ExxonMobil, to have established this project ahead of time and reached this milestone in terms of production and exports, largely to the Japanese and East Asian markets. The construction phase of PNG LNG provided a major and valuable economic stimulus to the country early this decade, including many jobs for skilled professional and technical staff, but that stage is relatively short-lived and the subsequent direct economic impact  to date is limited, except in so far as:

A relatively small but highly skilled Papua New Guinea workforce is retained by the project,
the project does provide a valuable backstop and level of longer-term confidence in the prospects of the economy, so long as there’s prudent fiscal and monetary management and prior borrowing against future earnings restrained; and,
It enhances the prospects of future investment in LNG development, both with new projects, such as Papua gas from Gulf, supplementary projects, using current facilities, notably P’nyang in Western, assuming continued orderly and undisrupted production from PNGLNG in the meantime.
That there’s been no revenue to the State from the proceeds of the sales, to date, is not the project’s fault, per se, although clearly partly determined by the project development agreement and tax arrangements, but substantially by the requirement to repay financiers initially, and the slower lead in time, given the substantially lower oil and gas price since late 2014.
However, while different investment conditions could have been determined, which might have provided an earlier revenue stream to the State from the proceed of sales, that might have jeopardised the project capitalisation and prospects of agreement to proceed with project development in the first instance, particularly being the country’s first LNG project.
It might also have increased the overall project debt servicing costs by extending the repayment duration. The project has an expected 30-year lifespan, so, in the fullness of time it will provide valuable and longer-term revenue, although, as stated, this should not be exaggerated, particularly in this era of lower energy prices, based upon more extensive global supply options, including from renewables.
It will also provide the basis for guiding the government in the investment and fiscal conditions for future LNG resource utilisation, which may entail lower investment costs and better and earlier returns to the State. But it remains critical that the State does not exaggerate expected revenue, as has tended to occur in the past, from this or other extractive industries, and does not heavily pre-commit, particularly entailing diversion of budget expenditure on projects which are overpriced or with limited economic and social return.
The current and recent budget figures demonstrate the critical need to diversify the economy and for the government not to impose unrealistic expectations of returns from the extractive industries.
The other sectors, notably agriculture and some associated value-adding, services, but potentially tourism (if many prior conditions are satisfied), which provide not only the formal and informal sector employment and household incomes, but also a much greater level of steady revenue.
The diminutive revenue figures from company taxes from the extractive industries in recent years, notably 2016 (which was a relative strong year for gold prices and included improved oil and gas prices), provide a clear message, with around K3 billion of revenue coming from personal taxation, around K2 billion from company taxes from other industries, (but both of these have been declining with the overall economic downturn), well over K1 billion from GST, and somewhat less from other duties, but a paltry K80 million from the extractives.
Yes, this figure does rise and fall, although revenue in relation to production has tended to decline as successive generations of projects have rolled out, but having the Sovereign Wealth Fund in place to smooth future variation in sector revenue is critical (and overdue), and ensuring greater effort on safeguarding and encouraging the investment and development of the other economic activities will be critical to absorb the growing workforce and provide a more reliable and growing revenue stream, as needed by government to fund the core functions  of the State.
These core functions entail basic infrastructure, health, education, law and order and other utilities and services, plus regulatory functions (environmental standards, competitions etc), but do not including  speculative commercial ventures, which are a diversion, at least until basic services and core social indicators have reached a far more satisfactory and internally comparable level.
The future prospects for LNG and the extractive industries also depends upon efficient administration of the State’s responsibilities with respect to these industries, with respect to transparent revenue administration and licensing, but also prompt payment of royalties and other obligations to the landowners, under benefit sharing agreements and to the sub-national administrations to perform their duties.
The Government’s commitment to the EITI (extractive Industry Transparency International) process has been valuable, but has exposed the weaknesses in much of the State’s capacity in performing its core functions with respect to resource management and oversight.
The information obtained from this process requires adequate and collaborative effort to rectify identified weaknesses, particularly with the Department of Petroleum and Energy, including in record management.
It is also critical that landowners and the wider public are familiar with the details of resource contracting, financing and revenue streams, despite the complexity, and therefore in a stronger position to require accountability both by the State and all resource companies.