Weekly Commentaries

This is Sunday Chronicle's weekly commentaries on various issues of interest affecting the country. All individual commentators are done by elite Papua New Guineans from diverse educational backgrounds.

Monday, July 22, 2013

Boards’ roles in regulation of minerals and oil and gas

Mining and petroleum businesses are regulated activities. Key laws are the Mining Act 1992 and Oil and Gas Act 1998.

There are different licences for different activities in the two industries. Mining Act 1992 has 6 licences whilst Oil and Gas Act 1998 has 5 licences.

In mining they are;

·         Exploration licence;
·         Mining Lease;
·         Special Mining Lease;
·         Alluvial Mining Lease;
·         Lease for Mining Purposes; and
·         Mining Easements.

Role of the Mining Advisory Board or the Council is very critical for advice to the Minister for Mining and in the case of Special Mining Lease report to assist the National Executive Council and the Head of State.

Who comprises the Mining Advisory Board or Council and how it conducts its business is very important for probity and fairness taking account of all affected interests such as applicant’s technical, financial and environmental capacities. Landowners’ right to land surface ownership, occupation or use. Government’s overriding desire to turn its mineral ownership into value for money.

In oil and gas industry the licences are;

·         Petroleum prospecting licence;
·         Petroleum retention licence;
·         Petroleum development licence;
·         Pipeline licence; and
·         Petroleum processing facility licence.

Like for mining, the role of Petroleum Advisory Board is very important. It advises the Minister for Petroleum and Energy to, grant licences, enter into agreements and it provides reports to the National Executive Council for development licence purposes.

In 1997 a study was undertaken by The Centre for International Economics that was initiated by BP Exploration Operating Company Limited, Esso Highlands Pty Ltd and Oil Search Limited which had collaborated to develop a Liquefied Natural Gas (LNG) in PNG. That study used a base case of 1 train LNG facility with Wewak as the point of processing and export to Asian markets. Investments at Hides and elsewhere would have cost K3.3 billion over 4 years from 2001 – 2004.
Income to PNG would have increased by as much as 14% at the price at the time of study. Jobs to PNG was estimated at 4 450 jobs directly with 2 450 jobs for PNG citizens at construction. There are many other gains which were identified by the study appropriately titled; Gaining from Gas; the economic contribution of the Papua New Guinea LNG project.

Today PNG LNG project has 2 trains. BP has left PNG. Oil Search is the biggest petroleum company in PNG in terms of assets in PNG. But it is Esso that is the leader. Under its leadership the 2 train LNG project cost has gone up to USD 19 billion.  Large part of this cost would have been project financed. Assuming a 4:1 debt-t-to-equity ratio the debt would be USD 15.2 billion whilst equity contribution of the proponents would be USD 3.8 billion. LNG has created more debt for PNG.

Against such a massive debt how could we call LNG “a national interest project”? Looking at our leaders boasting about benefits from LNG and handing down a K3 billion deficit budget for 2013 before the first LNG export is a mortgage on PNG’s national sovereignty. We have harvested a garden when the garden was just being made.

We regret to say the Petroleum Advisory Board that comprises key agencies of government let PNG to be a debtor nation-to-be with LNG. Saying this is not easy for any public servant. Arrogance of leadership at the time did not allow any advice contrary to popular wisdom that LNG would miraculously heal all the financial and social ills of PNG.

Petroleum Advisory Board may not have had political support. The least it could have done was to give proper technical advice to the Minister for Petroleum and Energy. Probity and fairness demanded that the Petroleum advisory Board should have done proper due diligence on the LNG project proposal led by Exxon Mobil. Exxon Mobil is the parent of Esso Highlands. What intercompany loans and what management fees were built in as cost of PNG LNG? In terms of Gas Income Tax which entity would be taxable entity?

Apart from these technical issues the Petroleum Advisory Board has not advised the government through the Minister for Petroleum and Energy why Exxon Mobil as lead promoter of the PNG LNG project did not want to undertake social mapping and land investigation as required under the Oil and Gas Act 1998? We know that two agreements were entered into. Agreement before licensing provided a path outside of the Oil and Gas Act 1998. How could not the Petroleum Advisory Board not provided advice against this plot? What was the “national interest” that overrode legal requirements?

God bless leaders and lawyers who are probing LNG deal.  

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