An entry in The Crocodile Prize
PNG Chamber of Mines & Petroleum
Award for Essays & Journalism
THE Papua New Guinea government’s 10.01 % share acquisition in Oil Search with A$1.2 billion UBS loan is a vital investment for the people of PNG.
For ages we have been complaining about multinational companies reaping our natural resources and giving us scraps … so rich yet so poor has been our cry for donkey’s years.
The gas and oil business is booming. Apart from Exxon Mobil's LNG Project, in which the PNG government holds a 17% stake, InterOil's Elk and Antelope gas fields - described as the country's largest gas deposits - are about to be developed. And there could be more gas and oil elsewhere.
So how can we get equity for our citizens and maximise our gains?
The best option is increased participation by the people either directly or indirectly through the elected government and prime minister Peter O'Neill has just done that.
I cannot think of another better or more innovative way for participation by the people, particularly the poor rural masses.
The majority of our people are poor and do not have the capital to directly invest in the gas and oil business. As a result, they have been mere bystanders, gaining very little benefit in the form of royalties although admittedly there has been employment, contracts and taxes.
Through this latest investment, Papua New Guineans, who in their lifetime would have never acquired direct shareholding in the lucrative oil and gas sector, now own a 10.01% stake in Oil Search through their elected government.
This means that, apart from royalties and taxes, PNG will also benefit from Oil Search's profits, in the form of dividends, for the next 50 plus years.
Debt financing is a normal investment practice, however the concern people express is wjether the government has mortgaged its future earnings from its 17% stake in the PNG Project.
It is highly likely that Peter O'Neill did mortgage the future earnings because in any such large commercial loan there has to be collateral and in this case UBS would require it.
Nonetheless, profitability and the ability to repay are determining factors in this kind of investment. People who question this matter are indirectly questioining the integrity of Exxon and Oil Search, the two companies the state has an interest in.
With the expected revenue of K75 bullion over the next 30 years, the loan debt of K8 billion is manageable.
The fear of the loan having a negative impact on the broader economy is unnecessary as it will be amortised over a number of years thus spreading the debt burden and easing any strain on the economy.
It is nonsense to suggest such a large loan will be amortised in just two or three years.
Making comparisons with unprofitable state owned enterprises to give credence to one’s negative argument on the investment is a flawed tactic.
All the SOEs are controlled and influenced by the government while this investment is totally different in nature and beyond state influence, hence the prospect of success looks good. Otherwsie, again, we might be questioning the integrity and strength of Exxon and Oil Search.
Moreover, partnering with the largest oil and gas company in the country and a publicly listed (POMX and ASX) firm, the purchase is a worthwhile and strategically selective investment.
Oil Search is a PNG-registered entity founded in 1929 and operating five oil fields (Kutubu, Moran, Gobe, Mananda and Iagifu-Hedina) and one gas field (Hides), all in the highlands.
The company has a 29% interest in the soon-on-line $US 15.7 billion PNG LNG Project and, with the recent acquisition of 22.8% stake in PNG’s largest undeveloped gas fields, Elk and Antelope gas fields in the Gulf Province, the company is set to quadruple its profit in 2014 and onwards.
The people of PNG through their elected government are strategically positioned to benefit immensely from its growth.
I would be against the government if it decided to invest likewise in sectors of the economy other than gas and oil. This is a strategically sound and good investment.
My concern is the manner in which the prime minister sacked William Duma and Don Polye as Petroleum Minister and Treasurer respectively and appointed himself acting Treasurer to pave the way for expediting the loan agreement and purchasing shares.
However, I think the timing factor had a lot to do with these decisions.