Papua New Guinea’s Marape Government – a new approach to foreign investment?

Nov 5, 2020

The Marape government’s approach to foreign investment – and to governance generally – marks a significant, and welcome, shift away from the sometimes dubious deal-making that marked his predecessor’s approach.

In May 2019 James Marape succeeded Peter O’Neill as prime minister of Papua New Guinea. O’Neill had been under pressure for some time, over allegations of corruption and of his handling of issues associated with major resource projects and foreign borrowing.

In April 2019 Marape had a falling out with O’Neill over the signing of a $US13 billion agreement for the expansion of LNG operations with foreign venture partners Exxon-Mobil, Total and Oil Search, and subsequently resigned, precipitating a split in the coalition government which forced O’Neill  to resign.

On taking over government, Prime Minister Marape announced there would be a ‘change of direction’; ‘This leadership,’ he said, ‘is about … taking back our economy’, which he described as ‘bleeding and struggling’. He foreshadowed a review of ‘several major resource projects’ but assured investors that his government would not break legally binding agreements. He described his government as ‘pro-investment and pro-business’ but looking to shift focus from mining and petroleum to agriculture. The government did not intend to chase away investors, he said, but would ‘look to maximizing gain from what God has given this country’; ‘I truly want this country to be the richest black Christian nation on planet earth’.

Amendments to the Mining Act 1992 and the Oil and Gas Act 1998 were passed in June 2020. In October Marape again stated, ‘We welcome all investors to our country’. He also elaborated on his government’s policy directives, which included: that the state receive 60-65 per cent of the revenue from projects; that the state secure early revenue returns; that provincial governments and landowners receive a minimum of 2 per cent in royalty and development levy entitlements; that the state secure 5-10 per cent of gas, oil and minerals for domestic market obligations, and that venture partners share the cost of social obligations proportionate to their equity.

Amendments were also proposed to the Investment Promotion Authority Act, to provide a new list of businesses reserved for Papua New Guineans. (The Investment Promotion Authority primarily affects small and medium-sized enterprises, and reforms were under review before the change of government.)

Marape also announced his intention ‘to diversify Papua New Guinea’s [foreign] relationships’, though Australia ‘would remain a key partner’.

In the first half of 2020 direct foreign investment was well down on 2019 figures, in part probably reflecting the impact of the COVID pandemic. China was the largest investor, ahead of Australia and Malaysia.

Investments under review

One of Marape’s first moves was to initiate a review of the LNG agreement which precipitated his split with O’Neill in April 2019. The review was headed by petroleum minister Kerenga Kua, one of several MPs who had been appointed to cabinet from the ranks of the opposition, and an outspoken critic of the April agreement.

Papua New Guinea’s first LNG project, the ExxonMobil-led PNG LNG project (in which Oil Search held a 29 per cent interest), was negotiated in 2008 and its first shipments of LNG were made six years later. But the benefits to the government and landowners fell short of expectations, due largely to lower than forecast LNG prices, difficulties in identifying legitimate landowner claims, and what was seen by many as an agreement which favoured the petroleum companies (a 2017 report by the World Bank referred to the 2008 agreement as ‘a complex web of exceptions and allowances that effectively meant that little revenue is received by government and landowners’).

The controversial agreement of April 2019 arose out of negotiations over an expansion of LNG production, involving ExxonMobil, French company Total, and Oil Search, set to double LNG production by 2024-2025. There were two elements of the expansion: the Papua LNG project, with Total supplying gas from its Elk and Antelope fields in Gulf Province, and the P’nyang project, in which ExxonMobil was to supply gas from its P’nyang field in Western Province; both were to feed into ExxonMobil’s PNG LNG processing plant at Caution Bay outside Port Moresby, thereby saving $US2-3 billion on infrastructure costs.

The review was completed in September and an agreement was signed with Total. The government had honoured the earlier agreement, Marape said, while successfully pressing for some additional benefits, particularly in relation to local participation in the construction phase and domestic market obligation. Negotiations with ExxonMobil over the P’nyang project began in November, but the State Negotiating Team (SNT) was unable to conclude an agreement with ExxonMobil and in January Prime Minister Marape issued a media release in which he said, ‘… because of Exxon Mobil’s unwillingness to agree to reasonable terms in line with other international gas projects…. We have stopped negotiations at this stage’.

Papua New Guinea had sought better terms from the P’nyang agreement than ExxonMobil had been granted under the PNG LNG Gas Agreement, in terms of fiscal arrangements, domestic market obligation and local participation; ExxonMobil, on the other hand, argued that the resource size, cost of development and ‘challenges of operating in Papua New Guinea’ were very different from those of other countries, and the managing director of joint venture party Oil Search, Peter Botten, said that the terms proposed by the SNT rendered the project non-investable and unbankable. Kua, who headed the SNT, accused ExxonMobil of ‘absolute bad faith’ in refusing to concede ground on its initial negotiating position and regional leaders in Western Province were reported to have withdrawn their support for an agreement.

Botten warned that the breakdown of negotiations might lead to companies turning to prospective projects elsewhere and disadvantage Papua New Guinea as new LNG producers entered the market, but he suggested that the companies had room to improve their terms and that talks could be revived. In September, Prime Minister Marape said he had been in contact with ExxonMobil and was confident that the project would go ahead.

In announcing the end of negotiations over the P’nyang gas field in January, Marape said his government would focus on other projects so that life in Papua New Guinea was not solely dependent on P’nyang and other LNG projects. He specifically mentioned the Porgera and Wafi-Golpu mines. However, both these projects have also experienced difficulties in relations between the state and mine operators.

Gold and silver mining at Porgera in the Enga Province was initially developed by Placer Dome, which was taken over in 2006 by Canadian company Barrick Gold. Subsequently Porgera was operated as a joint venture through Barrick (Niugini) Ltd. (BNL), in which the Barrick Gold Corporation and the Chinese Zijin Mining Group hold equal equity, with a 5 per cent equity in the Porgera Joint Venture held by the Papua New Guinea government, the Enga provincial government and the Enga Landowners’ Association.

Porgera has been one of the world’s top ten producing gold mines and a major contributor to Papua New Guinea’s exports and revenue, but it has had a somewhat chequered history, marred by industrial accidents, disputes with landowner groups, human rights abuses by its security personnel, civil disturbances resulting in the deployment of police mobile squads, and environmental concerns over its tailings disposal. In August 2019 PJV’s special mining lease expired.

Negotiations over an extension of the lease were initially delayed by an ongoing court case, initiated by the Justice Foundation for Porgera Ltd. who opposed renewal of the lease until BNL had addressed landowner grievances. In April 2020, on the recommendation of its Mining Advisory Council, the government rejected the application for renewal of BNL’s lease, citing environmental and social concerns.

BNL described the move as ‘tantamount to nationalisation without due process’ and appealed the decision, and also sought World Bank intermediation. But it offered local landowners an additional 15 per cent stake in the project. In July the National Court rejected BNL’s request for a review of the government’s decision; BNL has challenged this ruling and the appeal is currently before the Supreme Court (which in September rejected an application to stay the non-renewal of the lease). Meanwhile, in September the government granted a special mining lease covering the Porgera mine to state enterprise Kumul Minerals Holdings Ltd. (KMHL), a move which brought another challenge from BNL.

With the Porgera mine closed, the workforce mostly retrenched, and mine infrastructure and assets still owned by BNL, KMHL and the government said they were keen to re-open the mine and would welcome BNL as an equity participant and operator under a new lease – even though the chairman of the Porgera State Negotiating Team, acting chief secretary Isaac Lupari, accused BNL of ‘years of environmental neglect and sustained human rights abuses’, and unfulfilled commitment to resettle displaced villagers. Then, in a surprise move, in October, Prime Minister Marape, together with Enga Governor Sir Peter Ipatas (who had been pressing the government to re-open the mine), met with BNL’s chief executive to discuss resumption of mining. In a joint statement, the two parties said that, under new arrangements, Papua New Guinea would take a major equity in the project and BNL would remain as the mine operator, with a fair sharing of economic benefits.

The other prospective project mentioned by Marape in January 2020 was Wafi-Golpu, a joint venture in Morobe Province between Australian Newcrest Mining Ltd. and South African-based Harmony Gold Mining Company Ltd. to mine for gold and silver. A MOU was signed by the O’Neill government and Wafi-Golpu Joint Venture (WGJV) in December 2018, establishing a framework to progress the project ‘as quickly as practicable’ with a view to the granting of a special mining lease in mid 2019.

The Morobe provincial government, however, rejected the proposal and initiated a court action to stop the project, and in January Marape announced that the MOU had been signed ‘outside of the normal protocols of Government’ and would be ‘eliminated’. With a court injunction preventing further work on the project and WGJV waiting on the outcome of amendments to the Mining Act, Newcrest was reported to have scaled back activity at the site. Talks were set to resume in February but were further stalled by delays in passing the amended mining act and by ongoing negotiations between the national and Morobe provincial governments over the distribution of benefits and other issues.

However, in May the national and provincial governments agreed to resume negotiations with Newcrest and Harmony and it was expected that a special mining lease would be granted in September. A continuing sticking point in negotiations concerns the proposed tailings disposal through deep sea tailings placement with a pipeline outfall several kilometres from the port city of Lae. This has been strongly opposed by the Morobe provincial government and landowners. At a forum in Port Moresby on 21 October Prime Minister Marape told stakeholders he urgently wanted an agreement reached for construction to begin and said he was ‘prepared to make tough decisions at the highest level should the negotiations fail to move forward soon’.

Another major mining prospect, not mentioned by Marape in January, has also made slow progress in the face of local opposition. The Frieda River gold and copper project in West Sepik Province, owned by Australian-incorporated PanAust Ltd., a subsidiary of Chinese state-owned Guandong Rising Assets Management co. Ltd., is said to have the potential to become Papua New Guinea’s largest mine but has raised widespread concerns about the possible impact of tailings disposal on the Sepik River (of which the Frieda River is a tributary). In May 2020 a Supreme Sukundimi Declaration was signed by 28 downstream Sepik villages, calling for a total ban on the mine, and the East Sepik provincial legislature voted not to approve the project. Influential East Sepik Governor Alan Bird has said East Sepik will lodge a legal challenge if the project is approved in its present form.

Meanwhile, another mine with a troubled history, Chinese-owned Ramu Nickel in Madang Province, was temporarily shut down by Papua New Guinea’s Mineral Resources Authority in August 2019 after (another) spill of toxic slurry into Basamuk Bay. The incident prompted renewed calls from villagers along the Rai Coast for the permanent closure of the mine, which were supported by Madang Governor Peter Yama.

In October, Environment and Conservation Minister Wera Mori announced that second phase studies of the impact on the environment and communities of the Ramu mine would be conducted by the Conservation and Environment Protection Authority, along with similar studies of Porgera, Ok Tedi, and the abandoned Sinivit gold mine in East New Britain.

Amongst positive news, in September 2020 the SNT concluded agreement with Australian company Twinza Oil Ltd for the development of the Pasca A offshore petroleum project in Gulf Province, in which the government is negotiating for 22.5 per cent equity. The project promises to deliver early economic benefits, including downstream processing capability, domestic market obligation and local participation. Various other developments are also under consideration, including Australian Andrew Forrest’s proposal to revive the idea of a Purari hydroelectric project in Gulf Province.

There has been widespread popular support for Marape’s attempts to gain better returns for government and landowners from major resource projects, especially in view of Papua New Guinea’s currently deteriorating economic and budgetary situation. But the challenges facing the government are considerable.

Most of the big mining and petroleum projects are in fairly remote areas with high development costs and potential for environmental degradation, particularly with respect to mine tailings disposal, and in dealing with project operators the government has been facing off against some of the world’s biggest mining and petroleum companies, whose main concern is maximize returns to their shareholders during the life of the project. At the same time, successive national governments have had to respond to the demands of traditional landowners whose environments are impacted by resource projects, and of provincial governments, for what they see as equitable returns through compensation, royalties, and community development. From Bougainville, through Ok Tedi and the failed Nautilus Solwara deep-sea mining venture, to negotiations with ExxonMobil over P’nyang, the task has not been easy and the outcome has sometimes been made worse by poor governance.

Not surprisingly, Marape, like other leaders before him, has expressed a wish to shift focus from mining and petroleum to agriculture. But agriculture does not offer the high returns (if over a limited lifetime) of minerals projects, and the country’s record with respect to forestry and the Special Agricultural Leases system suggest that the difficulties of dealing with foreign investors are not confined to the minerals sector.

Nevertheless, the Marape government’s approach to foreign investment – and to governance generally – marks a significant, and welcome, shift away from the sometimes dubious deal-making that marked that of his predecessor.

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