When it comes to Papua New Guinea’s resources sector, the government wants a better share of the rewards, but the industry is warning that the country is becoming a less attractive destination for investment.

Minister for Petroleum & Energy Kerenga Kua. Credit: PNG Chamber of Mines and Petroleum/Linkedin

The Minister for Petroleum and Energy, Kerengua Kua, has further elaborated on the Papua New Guinea government’s vision for the resources sector.

Speaking a recent industry event, Kua said recent changes to the Mining Act permit the state to reserve mining rights for new operations and to take over existing operations when they come up for an extension of the lease.

He said the government ‘is very cognisant of the need to establish a good, stable platform on which everybody can do business’, but added that the state is carrying out a series of legislative reforms in both mining and petroleum because it believes there are ‘certain aspects of the legislative framework that we are working under at the moment,’ that do not operate to the benefit of the country.

Kua said that the present system obligates government to borrow money to acquire their interests in commercial projects. The borrowing becomes part of budget financing.

With the PNG government’s debt-to-GDP ratio close to the maximum permitted level, he said the government does not have the capacity to borrow to participate as an equity partner.

Kua argued that one way to mitigate a perceived loss of resource ownership by the state is to move to a ‘production-sharing’ arrangement. He added that proposed legislation currently before Parliament is intended to enable the ‘mechanisms and vehicles’ needed to establish and operate a production sharing regime for both mining and petroleum projects.

‘PNG is not considered an attractive investment destination. We have to work to change that.’

According to a statement by the PNG Chamber of Mines and Petroleum, production sharing arrangements are unusual in mining.

‘This is due in part to a production sharing regime being significantly greater in complexity and cost to implement.’

Less attractive

Mining consultant John Gooding, formerly CEO of Highlands Pacific, told the event that Papua New Guinea’s attractiveness as a destination for mining investment has fallen.

He cited the Fraser Institute’s ranking of global investment attractiveness, which ranked Papua New Guinea rated above New South Wales, Tasmania, New Zealand and Victoria in 2018. In 2019, however, PNG was considered a worse destination than all of Australasia (although it did improve its overall ranking).

‘PNG is not considered an attractive investment destination. We have to work to change that. Foreign direct investment is essential for a nation that is capital constrained. The COVID-19 pandemic throws an additional obstacle for all governments and industry.’

Gooding said that it took over a decade of exploration and production before many of the major PNG mines started production. He noted that resource leases could expire just as the mine becomes productive, leaving the original operator having incurred majority of capital expenditure while receiving little reward.

Financing resources projects

The perspective of investors was outlined by Mark Couchman, the ANZ bank’s Director of Resources, Energy & Infrastructure. He said when banks look at financing a resources project, they will want to have the equity in a project paid ‘well before’ they commit capital.

Couchman said banks look for:

• A strong rationale for project
• A competent management with good track record
• A flexible financing structure
• A clear identification of risks and their mitigants
• Equitable allocation of risk.