Papua New Guinea: Year in Review 2011

With the mining and agriculture sectors performing well and a major liquefied natural gas (LNG) export project nearing completion, Papua New Guinea (PNG) used 2011 to prepare for an expected resource-related boom over the coming years. Despite some political discord, the country took a number of progressive steps during the year, including the establishment of a sovereign wealth fund (SWF), which was seen as vital for the management of future revenues.

The World Bank predicted in November that PNG would register 10% GDP growth in 2011, citing high prices for the country’s principal exports – oil, copper and gold –and strong government spending financed by higher-than-expected revenues. Meanwhile, the treasury department projected a 10.2% growth rate for the non-mining sector for the year.

This confidence was reflected in the 2012 budget released in October, the country’s largest ever at PGK10.6bn ($5.19bn). The budget’s key objectives include the introduction of tuition-free education for all students from elementary through grade 10, enhancements to transport infrastructure through an additional 9.1% in funding, and an improved health system through an additional 8% expenditure above 2011 levels.

Plans to increase expenditure are banking on a forthcoming energy and minerals surge. ExxonMobil’s $15bn LNG project in the country is about 50% complete, with production scheduled to begin in 2014. With an estimated output of 6.6m tonnes per year, it is estimated that the LNG project could transform the country into a significant energy producer, more than doubling its GDP (which is currently less than $10bn) and almost tripling its export revenue.

The country’s treasury revealed in July that the project was having a major impact across the economy already, with 21% growth in the construction sector and 16% growth in the transport, storage and communication sector. Tax revenues in 2011 rose to PGK7.83bn ($3.84bn), up PGK498.1m ($244.32m) on the 2011 budget, according to the treasury.

Another project is in the works as well: Highlands Pacific, an Australian minority partner that holds an 8.56% stake in the Ramu nickel mine project, told Reuters in December that the $1.5bn project should be operating at almost maximum capacity by mid- to late-2013. The mine is expected to yield 31,150 tonnes of nickel and 3300 tonnes of cobalt a year for at least 20 years.

In May, South African gold miner Harmony revealed that the drilling results of its half-owned Wafi-Golpu project in PNG were “spectacular”, with the excavations extending the mineralisation beyond the porphyry copper-gold resource of 16m ounces of gold and 4.8m tonnes of copper.

Meanwhile, the InterOil Corporation said in November that it would make its final decision on a $6bn Gulf LNG project. The project, which InterOil is developing with Pacific LNG in a joint venture called Liquid Niguini Gas Limited, is initially expected to produce 5m tonnes per annum (tpa), increasing in stages to 7.6m tpa and 10m tpa. Through preliminary sales agreements the company has currently sold 2.3m tpa.

Concerning other related projects, in 2012 Horizon Papua will begin construction on a gas stripping project in the Stanley gas fields near the Ok Tedi mine, while Canada’s Talisman Energy and its partners, including Kina Petroleum, are coming closer to production at the Ketu and Elevala gas fields. According to BP, PNG contained 15.6trn cu feet of proven natural gas reserves as of the end of 2010.

Despite the promise of massive gas-related growth, the country is keen to avoid a “resource curse”, where an abundance of natural resources are poorly managed and end up lowering economic growth. To avoid this the government led the passing of a much-anticipated SWF bill in December.

According to the PNG Post-Courier, Anthony Yauieb, the deputy secretary for economic and financial policy of the Department of Treasury, said at the 2012 National Budget Press lock-up that the SWF will be fully integrated into the budget and fiscal framework in line with international best practice, adding that there will be governance, transparency, disclosure, accountability and asset management rules.

The SWF bill proposes that an Independent Infrastructure Authority oversee programmes that fall under the Department of Works, the National Roads Authority and the Border Development Authority.

“This will be for major infrastructure projects and maintenance – the Highlands Highway and the Buluinski Highway, for instance,” Yauieb said. “We will also see funding for major hospitals, as well as our higher education institutions.”

The coming gas boom is also affecting inflation, with the treasury estimating an annual rate of 9% in 2011, an upward revision on the 2011 budget forecast of 8.2%, whereas inflation in 2010 was estimated at 6%. However, the treasury also noted that the Central Bank had tightened monetary policy by increasing the Kina facility rate in July 2011 from 7.25% to 7.5%, adding that inflation for 2012 is expected to moderate to 7.2%.

With a surge in revenues and resources expected as PNG’s various energy and mining projects come on-line, the country’s government will likely be focusing on how best to allocate expenditures to ensure that all economic sectors feel the benefit. The SWF should assist in this effort, as should opening the doors further to private investment.