A new organic law defining how Papua New Guinea manages resource projects may soon be tabled in Parliament. It appears the main aim will be to change ownership and control of future projects, but will it spook international investors?

New laws seek to change mine ownership in PNG, but will they be good for new investment?

The introduction of the Organic Law on Papua New Guinea’s Ownership and Development of Hydrocarbons and Minerals and the Commercialisation of State Businesses 2020 was flagged by Kerenga Kua, Papua New Guinea’s Minister for Petroleum and Energy, at a recent industry seminar.

‘We are going to do some structural adjustments and create the operating vehicles and agencies that will have to carry the responsibility, or share it out between them.

‘Changes of this gravity and significance require careful and extensive assessment to protect the interests of our nation and the future investment in our resource industry that enables it to thrive.’

‘The organic law that we now have sitting in Parliament only aims to achieve that outcome, which is to create the operating vehicles and the agencies. It’s not going into other details, such as the operational side of the mining and petroleum things. That will be in the next stage, when we introduce legislations later next year.’

Industry objections

In response, the PNG Chamber of Mines and Petroleum has voiced strong concerns about the proposed changes. In a statement, the Chamber said: ‘a new law is being tabled by the Government that could jeopardise the future of PNG’s essential resources industry, as well as its landowners, workers, communities, provincial and local level governments, and the economy.’

The Chamber argues that the proposed Organic Law will ‘put an end to an era of contribution and investment that has seen PNG grow as a nation and helped its people thrive.’

The statement argues that Production Sharing Agreements (PSAs) have been shown not to work in the mining industry ‘anywhere in the world’ and will put all future investment at risk.

The statement also says that the law will make it possible for the government to compulsorily acquire land from landowners ‘taking away certainty and livelihoods’. It also expresses concerns that the establishment of state-owned enterprises (SOEs) to manage the projects will remove direct oversight or regulation by government agencies.

‘Changes of this gravity and significance require careful and extensive assessment to protect the interests of our nation and the future investment in our resource industry that enables it to thrive.’

The Chamber has called for a postponement of the proposed changes and for ‘urgent consultation and dialogue’ with the industry and other stakeholders to take place.

New ownership model

Resources Minister Kerenga Kua. Credit: PNG Echo

Production-sharing would replace the current system in PNG, which is known as a royalty/tax concessionary (or RTC) regime.

While the existing financial terms of a project could be replicated in a production-sharing agreement, the key difference is anticipated to be the major role PNG’s state-owned entities would play in the future.

The proposed new regime would also change how ownership of any mining or petroleum resource is viewed.

Under PNG’s current oil and gas regime, ownership of oil or gas transfers from the State to the developer at the wellhead. In current mining projects, ownership is transferred to a developer when minerals are dislodged and released in their natural state.

Under a production-sharing regime, by contrast, PNG would retain ownership throughout exploration, development and up to when minerals are physically exported. Such a change would therefore take away the option of a developer selling the resource to another company.

Under the current regimes, control is in the hands of the developer throughout a resources project. Under a PSA regime, control would be theoretically retained by PNG’s state owned entities: Kumul Minerals Holdings (for mining projects) and Kumul Petroleum Holdings (for oil and gas projects).

Instead of the developer being in charge of the project, they will either be engaged as contractors or they would become joint venture partners.

‘Given the PNG government’s rising debt and lack of access to capital, this would appear to be an important difference.’

According to some legal analysis of the proposed new laws, instead of the State having to pay upfront costs on a project (mostly likely paid for with borrowed money), all project costs would be incurred by the developer and recovered as a portion of gross revenue. Given the PNG government’s rising debt and lack of access to capital, this would appear to be an important difference.

Delays

Any changes to PNG’s resource laws may take some time to flow through to actual projects, with Oil Search reportedly flagging a two-year delay in the AUD$20 billion (K51 billion) PNG LNG expansion (which would include the P’nyang gas project), citing the effect of the COVID-19 crisis.

Chief Executive of Oil Search, Keiran Wulff commented that the ‘world is a very different place today than it was six months ago,’ although he added that the company remained ‘very confident’ that the expansion would proceed ‘given its robust economics’.