Future developments could largely depend on regulatory and structural changes

As the energy industry takes on an increasingly important role within the economy, the government of Papua New Guinea has been moving in recent years to update its regulatory framework for the sector through the creation of new government entities and an overhaul of related laws. Under the current Oil and Gas Regulation of 2002, which updated the 1998 Oil and Gas Act, exploration and production activities are regulated by the Department of Petroleum and Energy (DPE).

Making Changes

The system is on track for a major shake-up in the near future as the government moves forward to create a Petroleum and Energy Authority (PEA) to oversee the sector in a similar manner as the Mineral Resources Authority, which was created in 2007 to administer the mining industry. The goal of this transformation is to create a robust regulator in the face of strong foreign investment, which would replace the DPE, according to statements made by William Duma, the former minister of petroleum and energy, at the PNG Mining and Petroleum Investment Conference in December 2013. He went on to outline the major features of the new authority, stating that it would be governed by a board of directors subject to new updated legislation. Petroleum operations would be overseen by a petroleum advisory council and would be split into separate oil and gas divisions, while energy ( electricity) would be guided by an energy advisory council.

The new PEA would also take on the responsibilities of policy research, formulation and development. A draft of enacting legislation for the new authority is planned to be submitted to Parliament by November 2014, followed by a period of transition and full implementation by mid-2015.

This new legislation could also include changes to the natural resources tax regime as well, a process that has been ongoing since the end of 2012. While Prime Minister Peter O’Neill has indicated “there will be no drastic or radical change to the laws that exist today,” he has also made statements to contradict that. In late 2012, O’Neill said the government wanted to achieve “fair and equitable distribution of benefits to all stakeholders”, which has prompted concern that the state could boost taxes and other financial measures skewed towards both the state and landowners.

State Representation

The government ownership structure of energy assets is currently convoluted with numerous state entities holding stakes in oil and gas projects. The Mineral Resources Development Company, for instance, holds a stake in the Kutubu oilfield, as well as the PNG liquefied natural gas (LNG) project, while the Independent Public Business Corporation subsidiary National Petroleum Company (formerly Kroton No 2) also holds a 16.6% share in PNG LNG.

Petromin PNG Holdings was created in 2007 to operate as a stand-alone state-owned entity with the mandate of maximising the value of its mineral wealth. As such, it held stakes in numerous energy projects, including a number of exploration licences and a minimal share in the PNG LNG project. After just six years, Petromin was scrapped in favour of the new Kumul Trust structure. Under this scheme, all state-held mineral resources fall under the trust’s three entities: Kumul Petroleum Holdings, Kumul Mining Holdings and Kumul Corporations Holdings. According to the government, Kumul Petroleum Holdings would absorb all government oil and gas assets. The exact structure had yet to be released publicly by mid-2014.

In addition to these companies, in March 2014 O’Neill announced that the government would purchase just under 150m shares in Oil Search (OSH) at A$8.20 per share. The oil and gas company has numerous interests in PNG, including a stake in PNG LNG and in petroleum retention licence 15, which holds the majority of natural gas expected to be tapped in the country’s next big LNG project. As of mid-2014 it remained unclear what entity would be responsible for these shares. The government previously used a separate block of OSH shares as collateral to obtain a loan from the Abu Dhabi-based International Petroleum Investment Company in order to fund its share of the PNG LNG project.