Exxon Mobile’s LNG project will bring in over US$30 bn over its 20-year lifespan.
A yearlong political stalemate in Papua New Guinea (PNG) ended last month with the inauguration of the country’s newest Prime Minister, Mr. Peter O’Neill, following the June-July general election. O’Neill’s confirmation will surely provide greater political stability for the Oceania country. Mr. O’Neill’s newly formed government consists of approximately 75 members within 111-seat parliament, ensuring an abundance of support for his parliamentary agenda and PNG law protects newly formed governments from no-confidence votes for the first 18 months in office. This should provide Mr. O’Neill with enough cachet to pursue his main objectives, which he campaigned on, specifically fighting corruption, restructuring national planning, and reforming the country’s state-owned enterprises, all while husbanding sustained economic growth.
This article was originally published in the Leopard Asia Frontier Fund (LAFF) September Newsletter. The newsletter can be read in its entirety here.
A yearlong political stalemate in Papua New Guinea (PNG) ended last month with the inauguration of the country’s newest Prime Minister, Mr. Peter O’Neill, following the June-July general election. O’Neill’s confirmation will surely provide greater political stability for the Oceania country. Mr. O’Neill’s newly formed government consists of approximately 75 members within 111-seat parliament, ensuring an abundance of support for his parliamentary agenda and PNG law protects newly formed governments from no-confidence votes for the first 12 months in office. This should provide Mr. O’Neill with enough cachet to pursue his main objectives, which he campaigned on, specifically fighting corruption, restructuring national planning, and reforming the country’s state-owned enterprises, all while husbanding sustained economic growth.
Although Mr. O’Neill’s government will have its hands full, it is blessed with a robust economy. PNG has been able to experience strong economic growth over the last few years, as real GDP grew 11% in 2011, and is expected to expand by 7.7% in 2012. PNG’s growth is a direct reflection of the impact of high global commodity prices influencing its domestic economy and the influx of foreign investment dollars into large infrastructure projects in the extractive industries, such as Exxon Mobil’s Liquid Natural Gas (LNG) project. While Papua New Guinea’s economy is expected to level out to a more moderate average rate of 6.3% a year through 2016, growth will be directly tied to commodity prices and its ability to extract resources, which include gold, copper, silver, natural gas, timber, and oil. PNG’s agricultural sector also plays a major role in its economy; agriculture accounts for 32% of GDP and supports 75% of the population. Cash crops include coffee, palm oil, cocoa, copra, tea, rubber, and sugar and 40% of the country is covered with exploitable timber.
Regardless, the extractives industry is and will remain the cornerstone of Papua New Guinea’s economy for the near to mid-term. The most important project within this sector currently in development is the US$15.7 billion LNG project managed and operated by Exxon Mobile in the Western and Southern Highlands provinces. The project is forecasted to produce over 320 billion cu ft of LNG annually, providing the country with US$ 3.3bn and US$3.4 bn in export revenue in 2015 and 2016 and a total of US$30 bn over the project’s 20-year lifespan.
Mining of nickel and cobalt also hold a strong presence in PNG’s export sector. The US$1.5 billion Ramu Mine, operated by the China Metallurgical Group, is expected to be worth a total of US$2.3 bn in nickel exports over its four year lifespan (2013-2016), and approximately US$430 bn of cobalt production during the same period.
The importance of the successful implementation of these projects for the future of PNG cannot be understated. The influx of revenue and the jobs that these projects provide could be a game-changer for the country’s poorest citizens – 8,605 nationals were hired for the construction of the LNG project alone. Furthermore, a timely launch of a large-scale profit generating project such as Exxon Mobil’s LNG plant (expected 2015) will be a strong indicator to other international oil and mining companies standing on the sidelines that PNG is a lucrative destination to conduct business, which could have a lasting impact on its economy.
However, PNG’s economy is not immune to downside risks. Any economy heavily dependent on the export of natural resources is vulnerable to a downturn in global commodity prices. In addition, the influx of DFI for large infrastructural projects and revenue from sales of natural resources will place upward inflationary pressures on PNG’s local currency, the Kina. This makes PNG vulnerable to Dutch Disease, a scenario in which inflationary pressure from the sale of commodities negatively impact the competitiveness of a country’s export in other sectors; in PNG’sinstance, agriculture and logging.
However, if PNG is at risk to the ailments of Dutch Disease, it appears the government is taking requisite steps to ameliorate potential ailments. Perhaps no one policy could potential assuage the impact of rising inflation and stave off Dutch disease than the responsible implementation of PNG’s own Sovereign Wealth Fund (SWF). The SWF is mandated to primarily invest offshore, while allocating only 4% of the funds assets under management to domestic investments in a given year. If invested responsibly, such an SWF could stave off inflationary pressures domestically, ensure long-term growth for the government’s coffers, and help modernize the country by addressing social issues such as education, unemployment and the rural and agricultural economies.
Dutch disease or not, PNG is poised for titanic growth. Though the country is isolated on the western portion of the island of New Guinea (which it shares with Indonesia) participating in the country’s growth is easily achievable through investing in the country’s first and only stock exchange; the Port Moresby Securities Exchange (PoMSOX). The bourse was formally opened in June of 1999 as a means to provide a medium to raise domestic and foreign capital for companies operating in PNG. However, it has mostly been a means for large energy and mining companies to raise funds. Of the 19 companies listed on PoMSOX, over half (10) operate in the mining and extractive industries, and most have dual listings in either Sydney or London. The majority of the other nine companies operate in ancillary sectors such as finance, shipping, logistics and transport. In 2011, PoMSOX held a total domestic market capitalization of K85.7 billion (US$ 40.28 bn) – with over 90% of market cap allocated to Oil Search Ltd, PNG’s largest oil and gas producer – with an average daily trading value of K689,000 (US$ 324,000).
It is apparent Papua New Guinea is at a crossroad. The country’s large influx of FDI, coupled with massive deposits of natural resources portends enormous wealth for the country. Though how Mr. O’Neill’s government chooses to spend these newfound fortunes will have a profound impact on PNG’s development. Will PNG fall into the trap of the “Resource Curse” and become afflicted by the Dutch Disease as many other resource-rich countries? (See Nigeria) Or will Mr. O’Neill usher in a new epoch of anti-corruption, good governance, and most importantly investing in the country’s future, such as education, transportation and agriculture? It is presumed the answer is buried as deep as its oil deposits.
Correction: PNG law protects newly formed governments from no-confidence votes for the first 18 months in office, not the first 12 months in office, which was originally reported.
John Conway Boyd is an Investment Consultant at Leopard Capital
Photo Credit: Google Images
