Report of extractive industries out
The sixth report of the PNG Extractives Industries Transparency Initiative (PNGEITI) report for 2018 was released this week. This report covers the calendar year from Jan 1, 2018 to Dec 31, 2018. Below is a summary of the report, with the introduction by Treasury Minister and PNGEITI chairman Ian Ling-Stuckey.
THE implementation of the Extractives Industries Transparency Initiative (EITI) in PNG continues to gain momentum with the publication of the sixth consecutive PNG EITI Report covering 2018.
The timely publication of the annual report signifies PNG’s commitment in meeting its reporting obligation as a member country of the EITI Global Initiative.
This report is the first to be delivered under the James Marape-led Government and demonstrates the government’s continued support towards the promotion of revenue transparency and accountability in the extractive sector.
The compilation and publication of the EITI annual reports is an illustration of the sustained efforts and enhanced collaboration between members of the PNG EITI Multi-Stakeholder Group.
The reports seek to present to our populace a comprehensive description of the PNG extractives sector, its economic and social impacts and particularly, the management of the revenues generated within this sector.
It is a significant progression from the previous five annual reports since PNG became a member of this global body in 2013.
The report not only seeks to address, amongst other things, the remaining recommendations from PNG EITI’s first validation outcome, in the lead up to the second validation, but it also includes various aspects of reporting attributed to sub-national payments and beneficial ownership disclosure.
The 2018 report has been significantly improved to also address reporting gaps identified in previous year reports with the aim of ensuring comprehensiveness and timely reporting on the sector.
This will also be the final report produced in compliance with the requirements of the 2016 EITI Global Standard.
With the recent introduction of the 2019 EITI Standard, future PNG EITI reports will include additional information such as gender, systematic disclosures on State participation in extractive projects through state-owned enterprises (SOEs), commodity trading, project by project reporting, systematic disclosures on production, license allocations and contracts transparency.
With existing resource projects and new projects on the horizon, the extractive sector will continue to play a significant role in the PNG economy, hence it is vital that citizens are made aware of how resources generated revenues are being managed and used.
The PNG EITI reports contain valuable financial data and other contextual information that are useful for this sector.
The reports are also important in diagnosing areas of systematic weaknesses in the government system and practices, the fiscal and taxation laws governing the sector and initiating necessary reforms to address these weaknesses.
The country is undergoing a period of significant economic transition and this Government has taken positive steps to put in place mechanisms for faster economic recovery including; prioritising expenditures, less dependency on borrowings and reducing existing debt to a manageable level.
What is EITI?
The Extractive Industries Transparency Initiative (EITI) is a global organisation established in 2002 with a goal of increasing industry transparency and accountability. Countries participate by issuing annual reports reconciling payments from the extractive industries to receipts by governments, in accordance with the EITI standard.
It is PNG’s sixth EITI report, covering 2018. In accordance with the EITI Standard, the reporting process has been overseen by a multi-stakeholder group and has been compiled by an independent administrator Ernst & Young.
Important progress has been made since PNG’s first EITI report, providing greater transparency for Papua New Guineans over revenue streams from the country’s mining and oil and gas industry.
The 2016 EITI report was the first to undergo validation by the EITI Secretariat and was found to have achieved satisfactory progress.
Papua New Guinea is home to around eight million people, living predominantly outside urban areas, and speaking 800 different languages. The country is extremely diverse geographically, biologically, culturally and linguistically.
PNG has experienced 17 years of economic growth and is classed as “lower-middle income” by the World Bank. It has a wealth of natural resources, and revenue from these resources could contribute to reducing poverty and improving the lives of PNG citizens.
However, 37.5 per cent of PNG citizens continue to live below the national poverty line.
The country is classified as “low human development” – ranking 153 out of 188 countries. Corruption is a challenge for PNG.
In 2018, it was ranked 138th out of 180 countries in Transparency International’s Corruption Perception Index.
What are the extractive industries in PNG?
Until the current decade, PNG’s export commodities were gold, copper and oil. Before 2018, copper volumes decreased while PNG was able to add silver, liquefied natural gas, condensate, nickel and cobalt to its export commodities, diversifying and expanding its revenues from its endowment of natural resources.
In the 2019 National Budget, silver was the only export with volumes forecasted to increase over the forward estimates.
Who owns mineral resources in PNG?
Subsoil assets in PNG belong to the State. Developers of resource projects generally enter into an agreement with the State in addition to obtaining a resource development licence or mining tenement.
This typically involves a broad consultation process with all affected parties.
The State has the right, but not the obligation, to acquire up to 22.5 per cent of a participating interest in a designated gas or petroleum project, and up to 30 per cent of a mining project.
The State generally also grants free equity in resource projects to landowners from the area in which a project is located. Details of contracts and licences are confidential and not made public, but the EITI process has prompted efforts to understand whether some contracts, particularly in the mining sector, might be publicly disclosed in future.
How do the extractive industries contribute to the PNG economy?
PNG’s economy is characterised by two very large economic sectors: agriculture, forestry and fishing.
They engage most of the labour force (the majority informally).
The extractives sector (oil and gas extraction, mining and quarrying) accounts for the majority of export earnings.
These two sectors make up nearly 46 per cent of PNG’s nominal Gross Domestic Product. The extractives sector contributed significantly to nominal GDP growth in 2018 despite a decrease in total output from 2017.
High commodity prices and a weaker PGK currency helped extractives business generate more revenue from less total output.
The extractive industries also make up the majority of PNG’s exports, and the commencement of the PNG LNG project has been the primary driver of GDP growth in recent years.
The extractives sector contributes a smaller proportion of the stock measure of nominal GDP, government revenue and employment.
The extractive industries have both positive and negative social impacts in PNG.
The positive impacts of the extractive industries are the provision of employment and revenue to local communities, as well as funding for infrastructure such as roads, hospitals and schools.
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.
The mining industry in PNG
During 2018, eight mines were operating in PNG, distributed over a number of provinces. A further four mines were in advanced stages of pre-production.
Companies active in mining and exploration in PNG include large international companies, state-owned enterprises, and many junior companies, together with a significant contribution from up to 80,000 small-scale alluvial miners.
Mining in PNG is governed principally by the Mining Act 1992 (MA) and administered by the Mineral Resources Authority (MRA).
There are four principal channels by which communities benefit economically from mining projects, other than through employment and procurement: Royalties, infrastructure development grants, special support grants, and the public investment programme.
The benefits for a project are agreed in a development forum with relevant stakeholders, including the State, company, provincial government, local level government and landowners, and set out in a memorandum of agreement. These agreements are not currently publicly disclosed.
The oil and gas industry in PNG
In 2018, five principal oil fields were operating in PNG.
Commercial oil production began in PNG in 1992 and has been in slow but steady decline since the mid-1990s. The PNG LNG project exports liquefied natural gas (LNG), the first shipment of which was in 2014.
The project has design capacity of 6.9 million tonnes of LNG per annum, 14 and is expected to make a significant long-term contribution to the economy and government revenues. Another two gas projects are in advanced stages of development.
Oil and gas interests in PNG are predominantly in listed companies and state-owned enterprises.
A range of companies are actively engaged in exploration and production in PNG, with a number of new projects in planning and development stages.
Production figures for 2018 were inconsistently reported by companies, the Department of Petroleum and Energy (DPE) and Customs.
The oil and gas industry in PNG is governed principally by the Oil and Gas Act 1998 (OGA), and overseen by DPE. DPE is chronically under-resourced and lacking in capacity, and has been the subject of a number of recommendations in previous PNGEITI reports.
The DPE is working to address some of these recommendations, such as establishing an electronic registry and revenue system.
The State holds the right to acquire a participating interest in any mining or petroleum project in PNG at par value, or ‘sunk cost’. In return, the State can receive a share of the profits of the project, paid as dividends in accordance with its rights as a shareholder.
During 2018, PNG’s state-owned enterprises (SOEs) that held interests in the extractive industries included:
Kumul Petroleum Holdings Ltd (all hydrocarbon assets);
Kumul Minerals Holdings Ltd (all mining assets);
Ok Tedi Mining Ltd.
The report also covered two organisations that act as trustees: Mineral Resources Development Company Ltd (MRDC) and Ok Tedi Development Foundation.
MRDC acts as a trustee shareholder for beneficiary landowners and provincial governments.
It holds and manages shareholdings and pays royalties and equity to project landowners.
The OGA specifies MRDC’s role in holding and managing hydrocarbon assets for landholders, including investment of funds in future generation and community infrastructure trust funds.
All oil and gas projects therefore have associated trusts which are wholly owned subsidiaries of MRDC.
The MA allows for MRDC to hold the State’s interest, but does not mandate it; consequently, not all mining operations have an associated MRDC subsidiary.