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Can LNG continue to fuel Papua New Guinea's economic growth?

Can LNG continue to fuel Papua New Guinea's economic growth?

2015 has been heralded as the year when Papua New Guinea (PNG) will enjoy the highest GDP growth rate in the world, on the back of its first full year of liquefied natural gas production.

Confidence in the anticipated revenue from the ExxonMobil-led project has encouraged the O'Neill Government to commit itself to tackling a backlog of issues, such as decaying public infrastructure, upgrading education and health services (including free primary education and basic health access), reviving public goods at the district level, tackling corruption and restoring run-down law and order services.

These are widely accepted as critical priorities for fostering economic and social development.

Major budget increases have been directed to most of these priorities, but weak policy conception, planning and implementation capacity and even poorer accountability has handicapped achievement of the objectives. Progress is now further threatened by the recent drop in global energy prices.   

The plummeting price of oil and other hydrocarbons since late 2014 will have a heavy impact on the earnings of oil companies, and on oil and gas producing states worldwide. While PNG's modest oil production has diminished steadily over the past 20 years (to around 20 million barrels in 2014), lower LNG prices will have a much greater impact for the country, if sustained (many forecasters foresee an era of lower hydrocarbon prices). [fold]

PNG's initial LNG production was sold substantially on the spot market, but now the majority is traded in longer-term sales and purchase agreements. This provides more reliability in supply and sales for all parties, but it doesn't mean PNG is immune from market trends. Although in the future, the stabilisation component of the planned sovereign wealth fund should reduce the short-term budgetary impact of a volatile energy market, this will only work as long as the fund is run transparently and in accordance with the Santiago Principles (as opposed to the furtive accountability of many of PNG's state-owned enterprises). 

Production from PNG-LNG, the co-venture between ExxonMobil and PNG, is unlikely to be affected by the lower market prices, but income to its investors, including the state, will be substantially reduced if prices remain subdued, with the period and cost of loan repayments also extended. The development of major new fields in PNG (notably Elk/Antelope and P’nyang) is likely to proceed.

Although the commencement of LNG production was forecast to stimulate 15.5% GDP growth for 2014 and 2015 according to the PNG Treasury, Government revenue from the production is expected to not build up until 2017. With limited direct economic stimulus and employment creation from LNG production (as opposed to the construction phase, which is now over), the main benefits of LNG production come from the revenue to the Government and local investors, and how productively this revenue is then reinvested in the local economy.

With dwindling revenue from the minerals sector overall, LNG was expected to provide a growing contribution to Government revenue and help restrain the accumulating deficit. Early production and sales, when prices were higher, will have boosted Government revenue due for 2014. But this will be countered by significantly reduced dividend and tax revenue since late 2014. 

Estimates on the impact differ. Government sources suggest minimal change and firm immunisation from short-term market conditions. Independent analysts have suggested a K$1.4 billion reduction in revenue from lower oil and gas prices alone (10-% of total revenue), compounding the reduction of revenue from other sources due to the sluggish economy. Although shorter term LNG revenue forecasts were relatively modest during 2014-2016, lower LNG revenue against forecasts later into 2015 will have a significant impact on PNG's budget. 

Continued interim (counter-cyclical) fiscal stimulus measures are therefore justified, but it is important to recognise that LNG prices might remain subdued for the medium and even longer term. PNG thus needs to avoid accumulating debt through unsustainable deficits or major further borrowing, particularly for activities which are marginal to government functions, such as equity acquisition (except under the auspices of the sovereign wealth fund). the Government should also be ready to make adjustments to avoid spending on lower priority activities (including some capital works) that squeeze out priorities in education, health (including TB prevention and control), infrastructure maintenance, and law and order.

LNG development in PNG has been hyped in the media and stirred up political and public expectations. Much of PNG's population has seen little change over the past two decades, except for mobile phone access and tall buildings (and traffic jams) emerging in the national capital. Although some provinces and districts have performed much better than others, much of the population has limited access to basic services, markets and economic opportunities, with many roads and airstrips closing down even during the past decade. Some of the most resource-rich provinces have the worst services and social indicators, as exemplified by the very high rates of drug-resistant TB now recorded in Western Province (and HIV/AIDS in Enga). 

Action is being taken by Government, churches, business foundations, and development partners to address these challenges. For instance, there is a new rural airstrip agency and a major school of government planned. But action remains sporadic and ill-coordinated, with public sector capacity, performance and accountability the weakest link.

Another LNG construction project in the near future would briefly and usefully generate extra jobs and economic activity. But PNG needs to find practical ways for LNG production and exports to stimulate broader economic opportunities, such as through prudent investment of public funds into priority services.

Low oil and gas prices provide a sobering but potentially valuable reminder of the need to avoid the pitfalls of the 1990s. The PNG Government needs to avoid squandering funds on low priority activities and one-off events, establish and operationalise the long-delayed sovereign wealth fund, revitalise the anti-corruption and accountability effort, and focus policies on establishing favourable conditions for economically and environmentally sustainable activities, particularly in agriculture. It also needs to focus spending on the needs of all Papua New Guineans and not just selected parts of the community, especially by encouraging young men and women to participate actively in the economy.

Photo courtesy of Flickr user Jens Schott Knudsen.

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