As the PNG LNG project enters its operational phase, Frank Kramer, Chairman of the National Petroleum Company of Papua New Guinea (which will hold and manage the government’s 16.8% stake) outlines his vision for managing the country’s hydrocarbon assets.

The NPCP’s Frank Kramer

PNG is in a unique position to secure the future of every Papua New Guinean by ensuring that we optimise the value of our natural resources long after its resources have been exhausted.

We cannot undervalue the significance of recent hydrocarbons developments in PNG:

• The first LNG cargo has just left our export terminal for Japan;
• We have two super majors in ExxonMobil & Total;
• We have other successful operators in-country including Santos, Oil Search and Talisman;
• We have a number of major hydrocarbon projects reaching the development phase.

In a global context, it is important to note that:

• Hydrocarbon products represent the largest single category of worldwide trade between countries;
• National (or government) Owned Companies (NOCs) control more than 85% of the world’s hydrocarbon reserves and and more than 75% of global hydrocarbon production.
• Some 65% of the world’s undiscovered reserves are estimated to be within jurisdictions where NOCs have preferential access.

No improvement after 40 years

Development strategies espoused by successive PNG governments since independence have had a consistent theme, focusing on economic and social development objectives.

However, while we can boast some progress, possibly even good progress, on the economic development front, our scorecard in the social development sector and government economic infrastructure leaves something to be desired.

‘… after nearly 40 years of independence we are ranked 156 out of 187 countries on the UN Human Development Index. Perhaps more tellingly, when compared to our Pacific Island neighbours, we rank last on this UN Human Development Index scale and of greater concern, we are not improving.’

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During the 27 years from 1975 to 2002, we changed our Government 11 times, leaving each government to govern on average for less than three years.

It doesn’t matter how much a government tries to focus on economic efficiency or enhanced social welfare, nobody can govern or manage an organisation with only 2.5 to three years at the helm and a good portion of that time with political survival as their overriding goal.

But, at the end of the day, after nearly 40 years of independence we are ranked 156 out of 187 countries on the UN Human Development Index.

Perhaps more tellingly, when compared to our Pacific Island neighbours, we rank last on this UN Human Development Index scale and of greater concern, we are not improving.

Roles of government and private sector

Classic economists will say that governments should govern, set the framework for economic development, pass laws and don’t try to run businesses.

I would be the first to champion the principles of a free market system.

But I have come to the view that in PNG’s case, there is an argument for why Government does have a defined role beyond that classic divide that free market economists call ‘the sacrosanct of private enterprise’.

Kumul can be a showcase

NPCP (or as it will soon be known, Kumul Petroleum) can set the standard and showcase that model of government ownership with global private sector culture, management and corporate governance.

At NPCP, we recognise that the government’s primary objectives are about the optimisation of economic prosperity and social welfare.

‘If we were to put a consolidated value on NPCP (Kumul Petroleum) today, this figure would be about K15 billion (US$ 5 billion) which is nearly double the collective value of all other SOEs in PNG.’

State-owned Enterprises in PNG do not have the best record in optimising economic prosperity and probably an even less flattering record in delivering social welfare.

A 2012 Asian Development Bank report is revealing. I quote:

‘That while PNG’s SOEs have produced net profits that are in the upper range of the SOE portfolios in the six Pacific countries benchmarked, they have done so at a substantial cost to the government in terms of ongoing fiscal transfers and other subsidies, and to the detriment of the poorer segments of the population due to the generally poor quality of the services provided and limited range of delivery.

Government support

Prime Minister Peter O’Neill officially opens the new NPCP office. Credit: EMTV

The current Government has acknowledged the seriousness of the ADB Report and has taken definitive steps to remedy the problems identified by this study.

The most obvious and most significant undertaking is the re-establishment of NPCP as PNG’s National Oil Company.

This is significant because if we were to put a consolidated value on NPCP (Kumul Petroleum) today, this figure would be about K15 billion (US$5 billion), which is nearly double the collective value of all other SOEs in PNG.

The confidence shown by the Government in appointing an independent professional Board has energised my Board.

Strategic direction

In turn, we have begun the process of setting the direction for the strategic development and growth of the company. NPCP or Kumul Petroleum has a clear commercial orientation, strong corporate governance and the highest level of accountability and transparency.

Not only do we plan to contribute significantly to PNG’s economic prosperity, but equally important to us is our goal for social value creation.

But that is where our similarities to an [privately owned] International Oil Company (IOC) end, and our significance to future generations of Papua New Guineans begins.

Economic and social contribution

Not only do we plan to contribute significantly to PNG’s economic prosperity, but equally important to us is our goal for social value creation.

This national purpose or subtle sense of social responsibility must not be confused with government subsidies or political benefits from state interference.

It is about national content as is commonly referred to in the industry today and much more, much more in the sense that national content should not just be a percentage of the dollar value of project capital expenditure or some such measure.

This national purpose or subtle sense of social responsibility must not be confused with government subsidies or political benefits from state interference.

It is about technology transfer and building an in-country skills repository, which will also benefit our IOC partners because knowledge across all aspects of the industry value chain will generate confidence in the NOC’s abilities to respond in a collaborative and timely manner to all aspects of IOC interaction with government agencies.

Future shareholding

The options for the future structure of the NOC are only limited by our strategic thinking and political will.

There may be opportunities in the future for Kumul Petroleum to consider partial liberalisation of the NOC so that PNG people and PNG institutions can participate more directly in the success of the NOC.

This is an edited extract of Frank Kramer’s speech to the Australia-Papua New Guinea Business Council Forum in Cairns this week. Kramer is also CEO of Kramer Ausenco.