Papua New Guinea has a ‘fair and reasonable’ fiscal regime for resources when compared with its neighbours Australia and Indonesia, according to John Chambers, General Manager PNG for Santos. He outlines three approaches used around the world to deliver benefits from projects.

Santos PNG’s John Chambers Credit: BAI

Speaking at industry conference late last year, Chambers said it was important to get the balance right between the state, investors and—in the case of PNG—landowners.

‘PNG has a fair and reasonable regime compared with its neighbours.

‘It is sufficient to attract investment and provides income to a state company, to landowners and the state through taxation.

‘And it is the only regime to provide income to landowners directly.

‘If you give away a nation’s endowment cheaply, it is a bad result for that nation.

‘But, conversely, [having] no investment is a disaster, resulting in limited development opportunities to grow the economy and expand the workforce.

‘The fiscal structure is really what defines that balance.

‘The nature of the petroleum and mining industry is high risk.’

‘Capital is very mobile and, internationally, it will go to where it finds the best returns.’

High risk

Santos Chambers noted that projects can be developed using government money, but that can potentially pose problems.

‘Is that the most efficient use of the nation’s resources?

‘Not all projects are successful.

‘How will people react when a government makes a failed investment in a high risk project?

‘The nature of the petroleum and mining industry is high risk in terms of geological uncertainty, commodity price uncertainty and commercial uncertainty.

‘There are three types of fiscal regimes in use.’

‘Governments are really in the business of managing the economy, not running individual projects.

‘So, it is generally more efficient for governments to tax or profit-share, and use funds in areas that the private sector struggles to fund, such as health, education or infrastructure.’

Three approaches

Chambers said there are three types of fiscal regimes in use around the world applied to petroleum and gas projects.

The first is surface contracts, which are ‘the least common’ and generally occur in nations that have well-established reserves.

‘The investor pays a dollar per barrel for the product, which is petroleum.

‘PNG is not a nation of well-defined reserves; there is still a lot of exploration to be done.

‘Pushing the government take too hard will lead to a lack of investment.’

The second regime type is a royalty tax system.

‘PNG, like Australia, New Zealand, Thailand, Pakistan and much of the Americas, has an established royalty tax system.

‘This is a relatively simple system, where the investor puts up the investment and, on production, pays a royalty plus corporate tax on profits.

‘Another tax, APT (Additional Profit Tax) in PNG is levied on windfall profits because of higher than expected prices.’

The third system, which was popularised in the 1960s and is now used widely, is a production sharing contract.

‘The resource is defined as state-owned and the investor is really employed as a contractor.’

Chambers says the contracts typically have a cost recovery phase for the investors, which can cause tension.

Hypothetical scenarios

Chambers said all three systems can be configured to offer similar returns to the participants.

He ran through some hypothetical scenarios, which showed that investor interest, which is a function of the returns that are likely to be achieved, is highly dependent on the price of the commodity and the percentage of the ‘take’.

‘Pushing the government take too hard will lead to a lack of investment.’

Chambers said Australia has been ‘very successful’ in attracting investment in its upstream oil and gas sector due to stable policies and offering a good investor take.

But he noted this has delayed receipts to the government.

‘In Australia, there is a large number of projects in various stages of development and production.

‘So, it is not as difficult for the Australian economy as it is in PNG, where you are really relying on very large projects that are not yet in a tax paying position and government receipts don’t look good.

‘The notable thing about the PNG system, though, is that it gives a variety of splits.’