Papua New Guinea: Biggest loser under current Business Model of Liquefied Natural Gas (LNG) Project

Papua New Guinea will mostly benefit from only one segment of the multibillion kina Liquefied Natural Gas (LNG) project while foreign investors will take away much of the profits. This is because of the current National Alliance-led (NA) Government of Prime Minister Sir Michael Somare rejected outright the professional and technical advice of PNG’s most senior public servants (Technical Team) in adopting the Business Plan of the multibillion kina PNG LNG Project.

Leading up to the Government eventually adopting a Business Model produced by the developers, certain members of the now well-known Kitchen Cabinet became Marketing Managers for developers and successfully sold the idea to the Government.

Under the Business Plan recommended by the Technical Team, PNG National Government, Provincial Governments, Local Level Governments, landowners and other PNG citizens were to have fully participated through share equity in all segments of the Project.

This means, if the current NA Government listened and considered the immense economic benefits, it would have accepted the recommendations of the Technical Team. Under that Business Model, various PNG entities and groups would have invested and benefit in all segments from UPSTREAM, PIPELINE, PROCESSING FACILITIES, SHIPPING and MARKETING.

Minister for Petrolum and Energy and MP for Hagen Open, Mr. William Duma given a highlands' welcome when he presented a check of K100,000 ($54,000) to the Jika Kupingal tribe in his electorate in Mount Hagen, Western Highlands Province

But, unfortunately this will not be so because this NA Government rejected the Technical Team recommendation which was far more favorable Business Plan. Under the Technical Team-recommended Business Model, PNG investors would have opportunities to invest and benefit from Upstream, Pipeline, Processing Facilities, Shipping and Marketing segments.

Sadly, these one-in-a-life time investment opportunities for PNG citizens have been denied by the current Government by adopting a totally different Business Model. The PNG LNG Project is to be developed at a cost of over K30 billion. It proposes to commercialise gas resources at Hides, Angore, and Juha and from oil fields at Agogo, Kutubu, Gobe and Moran fields of PNG’s Southern Highlands province.

Gas will be processed, conditioned then compressed at high pressure and sent through a buried pipeline to Gulf of Papua then via an underwater pipeline to the LNG Facility at State Portion 152 near Port Moresby. At the Facility, the gas would be turned into liquid by extreme cooling (approx -161 degrees Celsius) and pumped to LNG storage tanks from which it will be exported to international markets in China, Japan, Korea and other markets.

The Project is to be operated by Esso, an ExxonMobil Affiliate in co-venture with Oil Search Limited, Santos, AGL, Mineral Resource Development Company (MRDC) and Nippon Oil Exploration (ENEOS) of Japan. There is a growing perception various stakeholders that the originally well-intended ideals of this Project were hijacked by the Kitchen Cabinet.

The accepted Business Model under which the LNG Project is to be undertaken was facilitated by parties others than the Technical Team, comprised of Treasury, Internal Revenue Commission, Attorney General and the Department of Petroleum and Energy. The Ministerial Committee on the LNG Project appointed by the National Executive Council totally ignored and ultimately rejected the Business Model recommended by the Technical Team.

The Ministerial Committee was head by Deputy Prime Minister and Minister for Mining Sir Puka Temu with members; Public Enterprises Minister Arthur Somare, Finance and Treasury Minister Patrick Pruaitch, National Planning Minister Paul Tiensten, Public Service Minister Peter O’Neil, Labour and Employment Minister Mark Maipakai, Petroleum and Energy Minister William Duma, Attorney General Dr Allan Marat, Minister Assisting the Prime Minister Philemon Embel and Governor of Southern Highlands province Anderson Agiru.

Minister William Duma was not fully involved as the Minister responsible and was completely ignored. This is despite a signed letter by Prime Minister Sir Michael Somare on April 9 2008 to Mr Duma and copied to Sir Puka. The letter stated: "As you know, under the Determination of Titles and Responsibilities of Ministers published in the National Gazette on 13 September 2007 (No G145), you are responsible for all matters related to the Department of Petroleum and Energy and downstream processing and gas matters".

"Consistent with the above-mentioned Determination and with a view to progressing the current negotiations with the ExxonMobil led consortium in the proposed PNG LNG Project, I appoint you, with effect on 01 April 2008, as Chairman of the Ministerial Gas Committee. "As portfolio Minister responsible for oil and gas matters, I expect you to, with immediate effect assume responsibilities and take lead and ensure that PNG LNG Project progresses to conclusion of the GAS Agreement and the implementation of this important national project.

"I have informed Hon Dr Puka Temu, the Deputy Prime Minister and former Chairman of the Ministerial Gas Committee, of this change and appointment. A subsequent NEC submission will be made to ratify this change, " Sir Michael directed Mr Duma. However, that did not eventuate. It is now a common knowledge that the appointment of Sir Puka as Chairman of the Ministerial Committee did not go down well with Mr Duma, who felt he was being undermined, given that he was the Minister responsible for LNG, and the Leader of United Resources Party, which is a senior partner in the multi coalition Government.

Concerns and protests were made to the Prime Minister, which obviously felt on deaf ears. The key members of the ruling NA party knew that LNG Project was the biggest undertaking and therefore it was proper that NA took charge of the Project. The Ministerial Committee was to be responsible for policy directions whilst the senior government bureaucrats would be the Technical Team to lead the negotiation for the development of the LNG Project, and fiscal terms required for the project to proceed.

At the early stage, the Technical team was allowed to negotiate the fiscal and technical term, but along the process the Kitchen Cabinet took over and negotiated directly with the developers. The Technical Team was completely isolated and the Ministers supported by certain outside advisors took control of the negotiations. Mr Duma was marginalised and the structure was designed by the Kitchen Cabinet to control the negotiations.

It all started when the investors in the project realised that their interests were at risk; they would simply not get what they wanted in terms of technical and fiscal concessions. The negotiations with the Technical Team became so difficult no matter how much they tried.
The Technical Team was able to make them realise that what they were asking for was "too much" and PNG was not prepared to play second fiddle in this project, as it is with existing and ongoing oil and mineral projects in the country.

The LNG Project is far important to the future economic health and well being of PNG. It single-handedly underpins the future economic advancement of PNG. This was fully recognised by the Government and the Technical Team was task to deliver the project within the ambit of this objective.

The Technical Team was convinced that the Business Model for the LNG Project had to be structured in the way, so that PNG and landowners were drivers of the projects, rather than mere bystanders, if the above objective was to be realised. Case studies were carried out of Business Models of existing LNG projects around the World. The team examined PETRONAS Business Model of the LNG project and considered it to be the best. This is because it suited well the political and economic aspirations of PNG for PNG citizens to be owners for their own resources.

The PETRONAS Business Model is structured with the maximum participation of Government, landowners, and Provincial Governments, in all segment of the LNG Project. They retain the majority ownership of the complete chain. The PNG LNG Project Business Model is based on existing business, models for oil and mineral development in PNG.

Under this model, the State, Provincial Governments and landowners are to participate ONLY at the UPSTREAM, by exercising their 22.5% rights under the Oil and Gas legislation. Other than that they have no participation or interests in other segments of the Project.

Under the current Business Model, the State and the landowners are complete bystanders, with no tangible control and ownership in the Project. This Business Model defeats original Government policy ambition as well as political and economic aspirations of PNG. The ultimate benefactors of the PNG LNG Project are the developers. PNG as a country will receive peanuts for its resources. As a result, the LNG project will not underpin the economic advancement of PNG.

Almost 80% of direct revenue from the project will flow out of PNG. As a result less employment and income opportunities will be created for PNG citizens. The Project is the single largest investment undertaking in PNG and the expected internal rate of return (IRR) is between 16-18%. This is a commercially viable project and with such expected IRR, no developer and financier would be mad or crazy not to be involved.

The developers fully understand the commercial dynamics of the project and it is in their interests to attain maximum benefit. The Business Model they have developed does quarantine their financial interests. The NA Government’s decision to reject the Business Model recommended by the Technical Team was not in the best interest of the majority PNG citizens.

Serious questions will arise when more and more people, particularly landowners/resources owners are made aware of this. As it is, very little is known about this and when the whole country learns about it the government can expect demands for full explanation.

What is the rationale, if not economic and business for the Government to throw out a better Business plan that was recommended by the Technical Team, which is made up trained and professional personnel who saw greater benefits to the majority of PNG citizens in financial, economic and other benefits.

Why did the Ministerial Committee reject it outright? Why did the NEC completely disregard the PETRONAS concept when the benefits would have been much, much greater than what had been adopted. Whose interest was the Ministerial Committee representing? The Kitchen Cabinet knew very well that the PETRONAS option was the best for PNG and it over six million citizens.

It is gross negligence on the part of the Prime Minister, the NEC Members to deny the PNG citizens what they would have benefited and greater opportunities provided for in the PETRONAS concept of the LNG Project.

Cabinet members might well have been subject to political bullying from the Kitchen cabinet in the whole PNG LNG Project. Immediate consequences, the landowners, people in the resource areas, pipeline routes and processing facility in Southern Highlands, Gulf, Western and Central province as well as other PNG citizens are going to miss out greatly on opportunities. Hundreds of thousands of PNG citizens will miss out only because of the greed of few individuals and stupidity of others who have succumbed to political bullies.

While political bullying continues to be the order or the day in the NEC, the nation cannot be expected to be proud of its decision on the PNG LNG Project. As long as political bullying continues there is no consensus and no democracy at NEC level. True political democracy should mean elected leaders, in this case NEC Members to do their best they can to protect public discourse.

Has the NEC Chairman and "Founding Father" forgotten the Fourth Point in the National Goals and Directive Principles - To decide and protect the resources for the wellbeing of this and future generations?" If few individuals in Cabinet have hijacked the whole PNG LNG Project, they should be held responsible and made to account their actions/inactions. A high-level probe and appropriate action is warranted. Leaders have been vested with insurmountable powers to protect and promote the wishes and aspirations of their people and not their own greed and selfishness.

Apart from being political genius, those who volunteer to serve the people must possess high and appropriate moral values to participate meaningfully and honestly in the too important decisions that are vital for the good of PNG and well being of its citizens. Despite the current NA-Government’s fanfare and much hype of the multibillion kina PNG LNG Project, there are a number of underlying issues that needs to be addressed and remedial measures taken in the early stages of the project before it is too late.

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