Gas Fuels Papua New Guinea's Growth

PORT MORESBY - Cairns international air terminal had three check-in counters open on a typical day recently: one for Port Moresby, one for Moro, the gas and oil hub in Papua New Guinea's Southern Highlands, and one named Newcrest -- for the fly-in, fly-out workers heading towards its Lihir mine, also in PNG.

There's little doubt which industry is dominating PNG, even more than it is Australia, and even though PNG's non-mineral exports have also risen by an average 6 per cent a year over the last decade.

Nor is there any question that the PNG resources industry is a huge spender, through diverse business spin-offs, in north Queensland too, especially in Cairns and Townsville.

Australian shareholders have exhibited a strong appetite for PNG resource properties, investing about $19 billion in the country so far -- about the same as Australia has invested in China.

But the prices of PNG's major export commodities have been falling this year -- gold by 13 per cent, copper 9 per cent and oil 5 per cent, for example.

The $19bn liquefied natural gas project is in its final stages of construction by Exxon Mobil, with Oil Search, Santos and the PNG government as other major stakeholders. It will start producing next year.

But as Port Moresby-based Kina Funds Management says in its latest market outlook: "Other mega projects around mining appear likely to be shelved for some years."

Greg Anderson, the respected veteran executive director of the PNG Chamber of Mines and Petroleum, says that as a result, "there's a big divergence".

He says: "The resource industry, which has for some years been heading in the same highly positive direction, is now splitting into a two-speed phenomenon -- gas and oil, still growing rapidly, and mining, which has hit some hurdles."

Prime Minister Peter O'Neill tells The Australian: "Resource development is going quite well, particularly in petroleum and gas, and I believe current negotiations between Interoil and PNG LNG plus others will give a very strong possibility of a five-train LNG project." That's the same as Australia's North West Shelf this year and a huge boost for the country, with the main capital costs covered.

He welcomes back Kelly Taureka, who has been a senior manager with Chevron at head office and a range of countries, including China, Thailand and Indonesia, "with his global experience".

Taureka has taken a top job with Interoil, which controls access to large reserves of gas in the Gulf province and which is likely to provide the resource for one of those further PNG LNG trains.

O'Neill says: "It's good to see many of our experienced people in this sector returning to PNG. That enables us to build capacity within the industries."

In the mining sector, he says, his government's first priority was "to get the Ok Tedi (ownership) issue out of the way before we embrace other projects".

"Ok Tedi is tied to arrangements with BHP. To unravel that involves some complex issues that need to be dealt with, including ensuring continued operation of the mine and dealing with landowners and with the provincial government.

"We are in very positive discussions on all these issues. It is our opportunity to correct the mistakes of the past."

He says of the $5.6bn Frieda River copper-gold project, for which 81.82 per cent owner Glencore Xstrata has been looking for buyers: "We understand the owners do not wish to develop any greenfields projects.

"We also know that the government at the same time needs to intervene to ensure the project continues to be developed, so it can reach full production potential."

But the government will consider its involvement in Frieda River later, after the issues swirling around Ok Tedi -- where the government has intervened strongly to challenge the policies and ownership structure of the controlling trust, the Sustainable Development Program -- have been resolved.

O'Neill says: "There is no point in jumping ahead of ourselves."

Chiefly as a result of the cooling of mineral prices, "The explorers are shutting up shop," Anderson says. "Since about a year ago, the bourses -- including Canada's -- became risk-averse to junior explorers.

"Since then, they've been trying to live on their wits and many are on their last million dollars or so. Some are going to fold. And the number of tenements being held will contract.

"People often don't hand them back in when they run out of money to work them. They walk away at the end of their term."

Major companies such as Newcrest, which holds about half its total assets in PNG, have also been in some stress, cutting both staff and contract workforces, although production surpassed expectations in the last quarter, providing the besieged management with some relief.

O'Neill says: "When a company as big as Newcrest faces serious problems, we have to be concerned at the possible impact on our resource sector and our economy generally."

Barrick Gold's Porgera mine, now underground, is producing about 550,000 ounces of gold a year and is employing 1300 people directly and 3000 contractors. But it is pulling back from exploration.

The Canadian gold giant says it is re-evaluating the mine, along with half its global operations, after writing down its assets last Friday by $8.8bn and slashing its dividend by 75 per cent.

Newmont has pulled out altogether but Vale is still there.

Ramu Nickel, operated by Chinese giant MCC, began production this year, moving towards full output by the end of next year, and providing a timely boost for the government budget as LNG construction has wound down -- 90 per cent complete -- and other mine output has been disappointing, in both price and quantity.

Ramu has also impressed and surprised some observers, Anderson says, with the quality of its community programs.

Anderson points to three advanced prospects being put on hold this year: Frieda River, because Glencore has stressed since taking over Xstrata that it is not interested in greenfields developments, and has failed to find a buyer; Yandara, a copper-gold target near Ramu Nickel's mine, controlled by Perth-based Marengo; and Wafi, owned 50-50 by Newcrest, the operator, and Harmony, which planned to spend $10bn on development over the next 10 years.

Newcrest's Hidden Valley, 70km to the south, has improved its performance of late, with the long conveyor belt there now working again -- but the cash cost of production has at times reached $1900 an ounce.

Although PNG is replete with great resources, Anderson says "a lot of companies paid too much for their properties", causing pain as prices slide.

Lihir is an example, but Newcrest has invested heavily in improving the performance there and expanding the output, and the resource is massive.

Nautilus, a pioneering undersea mining project that intends to begin operating on the seabed near New Ireland, appears set to start operating now that the government has committed itself at last to contributing its share of capital. This is essentially a technology company, which Anderson believes "has a serious chance of changing the face of mining".

St Barbara last year acquired the assets of Allied -- both based in Western Australia -- and is operating its mine at Simberi in New Ireland, while Australia-listed Kula Gold is developing its prospect on Woodlark Island in Milne Bay.

Brisbane-based Highlands Gold has handy stakes in a number of ventures, including Frieda River, with a steady cashflow now coming from its 8.56 per cent of Ramu Nickel.

Anderson says: "Every time there's a major project, people say it won't be realised, and then it happens."

For instance, Oil Search and French company Total are drilling for oil and gas to the south of PNG, the first offshore action for many years, Anderson says. While the results of two wells haven't been stunning, it's been sufficiently encouraging to trigger a third later this year.

In the Western province, approaching the 750km land border with Indonesia, Canada's Talisman has big acreage for oil and gas exploration and is starting a second drilling campaign this year.

Australia's Horizon, also searching for oil and gas, has attracted Osaka Gas as a partner, while Talisman has brought in Mitsubishi. The steadily increasing prospects for the revival of the Bougainville copper mine, still owned by Rio Tinto, depend on all the disparate players on the island agreeing on the terms -- within the context of a countdown towards a referendum there about independence.

On the broader political front, the debate about shifting ownership of resources from the state to the landowners, initiated by Mining Minister Byron Chan -- son of former prime minister Julius Chan, who is still an MP -- has grown quiet for now, without apparent support from O'Neill.

But the chamber is concerned, Anderson says, to ensure that the comprehensive tax review now under way -- of which former Australian treasurer Peter Costello is a panel member -- does not shake up what has become a stable resources tax regime. [TheAustralian]
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