Although the extractive sector continues to be responsible for the bulk of Papua New Guinea’s exports, the latest Papua New Guinea Extractive Industries Transparency Initiative report has found that revenues to government remain comparatively small. Here’s what you need to know.

Lihir Gold Mine is in Niolam Island, 900 kilometres north-east of Port Moresby. Credit: Newcrest

According to the latest report of the Papua New Guinea Extractive Industries Transparency Initiative (PNGEITI), the extractive sector continues to be responsible for the bulk of the country’s exports, but the revenues to the government remain comparatively small.

The EITI is the international standard for good governances of oil, gas and mineral resources. In its 2018 PNG report, which was published last month, it says that the extractive sector contributed ‘significantly’ to nominal GDP growth in 2018 despite a decrease in total output from 2017.

‘High commodity prices and a weaker PNG currency [kina] helped extractive business generate more revenue from less total output.’

Dominant in exports

The annual EITI report, the sixth conducted by consultancy EY in PNG, says that the extractive industries accounted for 89 per cent of PNG’s exports; and it predicts that resources exports will account for 94 per cent of the country’s total exports in 2019 – mainly LNG and gold.

‘The list of extractive industries’ revenues for 2018 reveal that the biggest resources project was ExxonMobil’s PNG LNG project, with a turnover of K678 million.’

In 2018, the extractive sector was responsible for 29 per cent of the country’s GDP; the report predicts that in 2019 it will account for 28 per cent of GDP. It also suggests that oil and gas, mining and quarrying contributed half of the nation’s growth in GDP last year.

Contribution

The extractive sector provides 9.4 per cent of corporate income tax revenue, according to the report, and notes that the International Monetary Fund (IMF) has concluded that PNG’s taxes on the extractive industry are low by international standards.

‘Some high-profile projects, such as Ramu Nickel, contribute little to resource sector revenues, largely due to accelerated depreciation and tax exemptions. Similarly, Lihir, one of the largest mines [in the world], has paid almost zero corporate income tax since 2013, after deduction of infrastructure tax credits. In 2018, Santos subsidiaries and Morobe Consolidated Goldfields paid no corporate income tax.’

Two thirds of the revenues to government are in the form of a ‘share of sales’: the share of revenues that state-owned enterprises (SOEs) receive in the projects. These revenues may not be passed on in full to the National Government, but they are nevertheless counted as government revenue. Corporate income tax accounts for one tenth of government revenues, followed by salary and wage taxes (nine per cent), dividends (eight per cent) and royalties (four per cent). Production and development levies are negligible.

The report says, however, that the trend of declining mining and petroleum revenues to government in the years to 2016 has been corrected, rising from 3.74 percent in 2016 to 10.1 percent in 2018. ‘The revenue increases are due to growth in both mineral and non-mineral receipts.’

Companies

The list of extractive industries’ revenues for 2018 reveal that the biggest resources project was ExxonMobil’s PNG LNG project, with a turnover of K678 million, according to the report. State-owned copper-gold mine Ok Tedi, was the nation’s biggest mine, with revenues of K529 million.

‘The sector provides employment and revenue to local communities, as well as funding for infrastructure such as roads, hospitals and schools.’

Other large turnovers in extractive industry projects were:

• Lihir (K237 million)
• Porgera (K207 million)
• Oil Search (K146 million)
• Hidden Valley Mine (K52 million)
• Simberi (K28 million)

Kumul Petroleum Holdings, which holds there State’s share of the PNG LNG project, recorded revenue of K579 million.

Impact

The PNGEITI report suggests that the extractive industries have ‘both positive and negative social impacts’ in the country.

The sector provides employment and revenue to local communities, as well as funding for infrastructure such as roads, hospitals and schools. But there report also warns that the extractive industries ‘can also be a source of tension between different societal groups and negatively impact the environment through land degradation, water quality and increased carbon emissions.’

Mandatory social expenditures by operators in 2018 to support health, education and community projects were K176 million, while discretionary expenditures were K373 million.

Transparency

Ok Tedi Mine.

The PNGEITI report says that ‘all the producing companies’ have accounts audited to international standards and notes that government entities and SOEs (other than Ok Tedi) are audited by the PNG Auditor General.

‘Most, however, do not yet have audit financial statements for the reporting period, and previous audit statements indicated significant shortcomings in the reliability of accounts,’ it states.

‘Improved data assurance has been the subject of previous recommendations, but improvements have not yet been seen.’