Comments

Thank you Paul for your post. I am unpersuaded by your elaboration of your modelling methods for the PNG economy. The model remains conjectural and comparing one set of conjectures with the conjectures of the Acil model is fraught, in my opinion, with the possibility of error. Your ‘Double or Nothing’ report mentions the PNG LNG Agreement, signed by the co-venturers on 22 May 2008 as secret. A copy of this agreement can be found on the web-site banktrack.org (with links to Jubilee Australia). The PNG LNG Agreement defined the financial terms under which the co-venturers agreed to enter the Project. This document was followed late in 2009 by the Final Investment Decision document (FID) which committed the licensee partcipants to meeting equity capital calls. Post the GFC the co-venturers met with some difficulties in raising the needed capital from private equity markets. This was largely overcome by ExxonMobil taking a lead role and involving various export credit agencies (ECAs) to both shepherd commercial banks into the deal and handle the vexing issue of country risk. See for example the contribution of JBIC and NEXI (both country risk and technical risk). The following are some specific comments of the ‘Double or Nothing’ report. Page 31 argues that “net well-head value” was a “generous financial concession” on the part of GoPNG. Not so. Net value is more or less an industry norm for gas projects. Examination of the Conocophillips process will show that it is driven by gas-derived energy as are other parts of the field operations, such as the Hides Gas Conditioning Plant. Raw gas is contaminated by impurities (including water) which must be removed before sale. Using gas as energy is both energy efficient and cost-effective. Any joule consumed by processing is a loss to the gas sales volumes that accrue to all UJV co-venturers. The costs of using gas for this purpose are subject to scrutiny and approval of the co-venturers. Page 32 refers to tax havens. There appear to be some serious misunderstandings here. The entity referred to here is a ‘stichting’ created under Netherlands law and probably domiciled in the Netherlands Antilles (Bermuda may be merely an intermediary). It is not a commercial entity or a trading company and has no members or share capital. It’s purpose may be narrowly defined as the pay-down or amortisation of LNG project debt. As such its existence may be part of pledging arrangements. Its broad purpose is to shield the project debtors from some of the consequences of project failure, either partial or complete. For that reason it is always located in a jurisdiction in which none of the parties hold any assets, operations or bank accounts. In order to maintain the necessary legal distance from the debtors (beyond the ‘guiding hand’) it is necessary that ExxonMobil and other debtor company directors have no knowledge of or contact with the stichting directors, whose function is merely that of ‘trustees’. Creation of SPVs is a component part of risk management for both creditors and debtors. Accounting for the discrepant rates of tax paid by ExxonMobil as against co-venturers may find its explanation in the role of ExxonMobil as LNG Project co-lender. PNG LNG Agreement “Exhibit K Capital Uplift Provisions” may be of relevance. Page 22 – 24 refers to the absence of budgeted figures for UBSA and the not-mentioned LBBSA. There is again a serious misunderstanding here. The MOAs LBBSA and UBSA are just that – MOAs. In these agreements GoPNG gives an undertaking to support landowner development project wish-lists by either using its “best endeavours” or making “good efforts” to bring the proposed projects before the EIC and/or the relevant stutory authorities (National Planning, Roads, etc, etc). The MOAs also include and tie-in both LLGs and Provincial Governments. The policy intention is to push project initiation, planning and budgeting onto local authorities whenever appropriate. This general policy has been in place for decades and has produced some very good results in some provinces and marginal results in others. The creation of the Hides Gas Development Corporation is partly an attempt to replicate the success of organisations such as the Gazelle Restoration Authority. The epic failure of the anthropologist driven social mapping and landowner identification studies scheme is the root cause as to why there are no budgetary entries pertaining to the project MOAs (except for business development grants to landowner companies). Both the other Jubilee Australia report and the “The Monthly Report” that you mention are in need of a re-think of their basic assumptions on this matter. Page 39 mentions the SWF and the “diversion” of LNG income to the SOE KPHL. To understand the background to this decision we have to go back to the 2008 PNG LNG Agreement and the disastrous inclusion into this agreement of the ExxonMobil/OSL “sweetheart deal” with the Australian-based contract anthropologists. The 2008 PNG LNG Agreement Clause 15 covers Social Mapping and Landowner Identification issues. Clause 15 (a) (ii) and (iii) require the State to agree that existing and future SMLI studies have met the requirements of the Oil and Gas Act. Further details as to what is to be determinative here are provided in Exhibit J. This latter provides, inter alia, that the persons engaged for the SMLI studies shall be “scholars” and that their principal task shall be to “generally report” under the headings of: “Social-Cultural Context – detail who the ethnic groups are in the Licence Area (e.g. Huli, Febi, etc)” “Social Organisation – to provide a description of the clan structure, migration history, ... principles of group formation (kinship and descent) ... (s)ample genealogies should be collected. “Mapping Results – Findings – To provide a preliminary distribution map showing the relative positions of major groupings such as clans in the area”. An uncharitable view would be that the resulting consultants SMLIS reports never advanced beyond what could be accomplished by desk-based studies using decades-old, anthropological fieldwork reports. Actual landowner identification was simply elided. PNG law and the possibility of court action were air-brushed out of existence. Arguably ExxonMobil and Oil Search were in breach of their obligation to comply with PNG law. GoPNG was in the embarassing and impossible position of appearing to deny the relevance and applicability of its own statutory law. It was this edifice that came crashing down in the P’nyang Case in 2016. The effect of this colossal blunder was to eliminate any possibility that PNG equity might be financed by concessional finance obtained from development banks (IBRD, ADB, etc). These organisations not only offer concessional rates but they also supply loans that are effectively without a country risk component. Instead the risk component of these loans is met by a PNG legislative provision which is sometimes sometimes over-looked – Loans and Assistance (International Agencies Act (1971), S4 (1) and (2). A form of negative pledge. In 2005 the PNG equity in the Gas to Australia project was estimated at USD$800 million. By 2007 the PNG equity in the new LNG project was estimated USD$1.8 billion (total project USD$10 billion). By start of LNG production PNG equity share had grown to an estimated USD$3 billion plus. Standardly risk is assessed on an actuarial basis, except for country risk, which is logarithmic while rates are linear. It is doubtful that a country can insure itself and its creditors against country risk except by pledging assets, which brings into play the negative pledge. Accordingly, GoPNG faced many difficulties in meeting its LNG Project equity capital calls. The diversion of SWF funds to KPHL is a consequence. Vailala

Katherine The report from the Secretariat of State for Youth and Labour is available but it is not on the web yet. Please contact me by email and I can send you the report.

I would like to more about this situation, can you please direct me to some additional research

Great article, Cameron; I am reminded of Epeli Hau'ofa's "Our Sea Of Islands". And, as one of my senior colleague always says, "we may be defined as poor, but we are rich in culture and natural resources". Tagio from the Solomons.

It is extraordinary that this report has not referenced the work of the g7+ group of conflict affected countries which developed the Dili Consenus as a broad consensus on how the specific development challenges faced by fragile and conflict-affected states should shape the post-2015 global development framework, as laid out in the New Deal for Engagement in Fragile States and the follow up Dili Consensus (www.regionalcommissions.org/dilli.pdf) The important message from this was that the conflict-affected countries called on new approaches which were country led and country owned, thus in charge of their own development destiny. Greater South-to-South cooperation would contribute to learning from lessons about what does and does not work in the pathway towards sustainable peace. Strong partnerships based on dialogue is important, but the report's failing to incorporate a recognition the g7+ strategy does not appear to be getting off the the right start.

Bill - completely agree. Only so much that can be said in a blog post. Clearly the role of citizens and the government - citizen accountability relationship is critical. Perhaps something to address in the next blog post. Thanks for reading! Ben

While the point about policy implementation failure is very important and well made, the solutions seem to involve a narrowly technocratic take on the problem. They do not go far enough. To suggest, as this blog seems to, that governments, especially those in 'fragile settings' will solve this problem by the means proposed, without reference to citizens, is not taking the intrinsically political processes entailed in satisfactorily implementing policy seriously.

Hi Adam. I think McGillivray was arguing with (or at least dismissing) the conclusions when he states "its (the JA report) findings must be taken with a pinch of salt." Fortunately, there does seem to be agreement that any new projects should be on better fiscal terms - the report has helped clarify why that is necessary. Since the report, Treasurer Abel has also indicated (on 8 June) "Low Tax Revenue from PNG LNG 'Being Addressed'". However, there is less agreement on the need to reverse the "resource curse" policies discussed in the report. There is a wealth of 'lessons from experience' from other countries, and PNG's own history, that could be better tapped into - PNG's current economic performance indicates mistakes are still being made.

I don't think McGillivray was arguing with your policy conclusions - and neither was Abel supporting your modelling. McGillivray's critique was of your methodology - which I agree with - and Abel's comments related to the need to negotiate things differently to create better policy outcomes - something that everyone, including the Prime Minister, agrees with. The latter are lessons you only learn from experience, and those lessons were learnt long before this report was released.

The Pacific as indigenous people's heritage is the core. It all begins with treating people with respect and dignity. If people are relegated to the status of subhumans, it's easier to inflict all sorts of indignities on them, including colonise them and steal from them. In the past the 'greater' powers treated the Pacific as chattels. In some respects, they still do it today.

I should have added the following lines to the end of the comment: 'Doing so also can create unrealistic expectations of local benefits that can also have destabilising implications. Going well beyond models and their limitations, the Jubilee Australia analysis also indicates the crucial importance of policy responses to any major project. PNG should learn the lessons that poor policy responses induced by major resource projects can undermine promised benefits. More broadly, the report raises important questions about PNG’s development path and its experiences with a repeat of the resource curse. Pretty valuable lessons from that “dead sheep”.'

Thank you Paul F for your comments. I must apologise for being rather too brief in my comment and I hope these additional comments prove helpful. The first Acil report (Gas to Australia) faced quite simple modelling tasks for a dry (specification) gas supply to a Townsville baseload and a potential expansion into a then immature Australian hubbing system. The second Acil report (LNG Project) faced much more complicated issues and found its answers from somewhere beyond the planet Mars. In mitigation it must be said that this second report was prepared at a time when ‘excessive optimism’ seemed normal, i.e. just before the GFC. As a report commissioned to meet a PNG legislative requirement it was, of course, a public document. It should also be noted that ExxonMobil have since the 1990s emphatically insisted that the returns from a gas project will be small, very small. As far as PNG is concerned the die was cast more than 20 years ago following the realization that PNG had little oil but abundant supplies of stranded gas. The ‘going for gas’ scenario was progressively developed over several decades as a scheme for the rational development of a PNG petroleum industry. The PNG government expended quite large sums of money in developing this scenario involving geotechnical surveys, legislative development and institutional strengthening and training schemes. Insofar as GoPNG and developer fiscal arrangements are concerned about 97% of the content of these terms can be found in the Oil and Gas Act and a number of other Acts, including, of course, the arrangements for taxation. This means that most of the negotiations of relevance for future resource development contracts arise in the context of the bankability studies. Apart from the staging of equity calls and GoPNG assurances that these will be met the most important item is likely to be the fiscal stability contract. For more insight into the LNG Project you need to fully comprehend the core substance of the unincorporated joint venture agreement. Under this scheme GoPNG as licence equity holder and co-venturer participates pro rata in the debt, risk, costs and income streams of the LNG Project as do other concession holder co-venturers and the operator ExxonMobil. As operator ExxonMobil must justify all operational costs to the co-venturers and, of course, acquit all sales income to the respective licence shares. It should also be emphasised that PNG has now accumulated many years of experience as a joint venture participant. Detailed scrutiny is made of all aspects of the LNG Project at the time of bankability studies. Independent studies are commissioned for this purpose. Lender party scrutiny is intense so as to eliminate ‘optimism bias’. Country risk analysis is also added at this point. Risk is assessed as a number, 0-6. Nigeria and Yemen rate 6, PNG 5, Indonesia 4, Quatar 3. This number plays into the financial calculations and any lender counter-party lay-offs. The ‘jewel in the crown’ of the LNG Project is that it will pay a cash benefit to many thousands of entitled landowner beneficiaries over many years. If these payments are made down to household level we can confidently expect an improvement in the welfare of women and children. Instead these very deserving people face the barriers erected by anthropological consultants in the form of ‘zone ILGs’, ‘umbrella sharing groups’, metaphors of Huli land tenure as a hotel and the benefit sharing process as the ‘cutting of the pig’. Fantasies all guaranteed to produce prebendarism. Unanticipated by the Acil report are the post 2011 development of the US shale gas play, the impact of this on Henry Hub prices and the rise of POP contracts, etc. These developments have in turn impacted on Asian gas prices and given rise to developments such as Asian price hubbing and a marked fall in LNG prices since 2014. There is a likelihood that there will be a long term trend of further downward pressure on LNG prices. Did the Acil report cause PNG’s current budget crisis? Or is it just another budget episode? Vailala For more information on how the PNG LNG Project sits within the global context see - Sophia Ruester “Financing LNG Projects and the Role of Long-Term Sales-and-Purchase Agreements”, Deutsches Institut für Wirtschaftsforschung, Berlin 2015.