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Extracting more from Papua New Guinea’s resource sector

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Peter O'Neill, then Prime Minister of Papua New Guinea (PNG), speaks during the opening of the PNG Mining and Petroleum Investment conference in Sydney, Australia, 5 December 2016 (Photo: REUTERS/David Gray).

In Brief

Successive Papua New Guinean (PNG) governments have adopted different policy stances towards the resource sector, but its benefits to citizens remain limited. As former prime minister Peter O’Neill and the incumbent James Marape emerge as favourites for the upcoming July election, the incoming government must ensure that more gains from the resource sector are channelled into development.

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PNG’s resource sector grew from 11.8 per cent in 1980 to 23.5 per cent of GDP in 2020. Throughout the 1980s, the resource sector grew steadily with only a slight decline in 1989 due to the closure of the Panguna gold mine. It grew again throughout the 1990s with the opening of more gold mines, and the Kutubu oil field.

The 2000s saw some volatility but posted generally higher growth than the 1990s at an average of 21.1 per cent of GDP. When liquefied natural gas (LNG) production commenced in 2014, the resource share of the economy grew to a high of 27.9 per cent in 2018. The resource sector comprised 23.5 per cent of GDP in 2020.

Despite its growing significance, the resource sector’s main connection to PNG’s broader economy is through the government’s resource revenue which it uses to finance expenditure including capital expenditure or the development budget. This is largely because of the foreign-owned and capital-intensive nature of resource projects. When the government fails to meet its revenue targets, development budgets are slashed as it struggles to maintain expenditure.

Though resource GDP has grown, resource revenue as a share of resource GDP has fallen in the past 10 years. Growth in the non-resource sector has also languished as subsequent development budgets have been slashed. Annual growth in average non-resource GDP per capita has been 1.4 per cent since 2003, which is positive but lower than average annual GDP per capita growth of 1.9 per cent.

Non-resource GDP, which excludes output from both the mining and petroleum sectors, is the closest measure of income for the average Papua New Guinean because it accounts for over 80 per cent of Papua New Guineans (in both formal and informal employment). Gross National Income would be a better measure, but this data is unavailable. GDP per capita is another misleading measure of average living standards given the enclaved nature of the resource sector.

But lacklustre growth in the non-resource sector seems to have little bearing on resource agreements. Under Peter O’Neill’s administration (2011–2019), the 2019 negotiations for the Papua LNG Project with TotalEnergies had already improved on the terms of the 2014 PNG LNG Project with ExxonMobil. One particular improvement was a new production levy on top of royalties, earmarked for the national government at 2 per cent of wellhead value — the expected value from commercial sales less deductable costs. This was designed to protect against mineral price volatility and ensure quicker tax flows, compared to previous levies which applied to gross profits.

Papua’s LNG royalties will also be non-deductable against corporate income tax payments. But tax concessions similar to the one enjoyed by the PNG LNG Project — estimated to cost 500 million kina (US$142 million) in 2017 — remain in place.

Marape sought greater equity in resource projects under his ‘Take Back PNG’ banner. This resulted in significant delays in the reopening of Porgera gold mine. The government refused to renew Barrick Niugini Limited’s mining lease (which expired in 2019) unless the company (jointly owned by Barrick Gold and Zijn Mining) surrendered part of its 95 per cent equity in Porgera. Barrick Niugini Limited has since agreed to let PNG stakeholders hold half of the equity, while the government reserves the right to acquire the company’s remaining 47.5 per cent at fair market value after 10 years. Porgera is yet to reopen.

Another delay was the P’nyang LNG agreement with ExxonMobil and partners, which was finally signed in February 2022. Whether the deal is better than previous agreements remains to be seen, as the details are yet to be made public.

Under O’Neill, the largely foreign-owned resource sector grew from 14 to 28 per cent of GDP, while government resource revenues fell from 18 to 6 per cent of resource GDP. The drop has forced the government to tax the non-resource sector, as well as borrow commercially to fund expenditure over the past 10 years. Marape’s fight for greater equity in resource projects has only delayed new agreements from coming online, while non-resource sector prospects have not improved.

Regardless of who becomes the new prime minister, it is clear that new resource agreements need to be oriented towards increasing the government’s resource revenue beyond current arrangements.

Maholopa Laveil is a lecturer in economics at the School of Business and Public Policy, The University of Papua New Guinea.

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