Papua New Guinea’s oil and gas boom – blessing or curse?

Papua New Guinea announced last week that it is deploying its military to quell violence in Hela Province, home to the country’s largest oil and gas project.  Tribal conflict in the area has turned deadly this month, raising concerns about human rights and public safety as well as the potential impact on the operations of the PNG LNG (liquefied natural gas) project, operated by ExxonMobil.

The company is not directly implicated in the conflict. However, Prime Minister Peter O’Neill told Australia’s ABC news service the government would ask ExxonMobil and Australia’s Oil Search, a partner in the PNG LNG project, to provide logistical support to boost the security operation. The plant has also been a recent target of anger in the highlands. In August, local landowners blockaded roads leading to a natural gas facility in Central Province, demanding delayed royalty payments. This month, with tension mounting in the area, landowners reportedly threatened violence against the plant if a promised equity deal falls through.

Papua New Guinea is a country in transition. Perhaps best known for lost tribes and uncharted land, today PNG is hurtling into the 21st century – a shift that is clearly causing more than a few growing pains. While its past remains an integral part of its present, many of the country’s leaders are hopeful its abundant natural resources will provide the funds necessary for PNG to become a modern and prosperous state. The conflict currently raging in the highlands demonstrates the pitfalls of this process.

For decades, the mining of gold, copper and other minerals has been the mainstay of PNG’s extractive economy. More recently, oil and gas have become some of country’s most important exports.

In September, both the American oil giant Exxon Mobil and  Oil Search bought 40 percent shares in two separate offshore explorations permits in the Gulf of Papua. Peter Botten, managing director of Oil Search, said the maritime area, almost 150 kilometers (93 miles) off the capital Port Moresby, has “significant gas potential.” The purchase followed a bidding war between Exxon Mobil and Oil Search for shares in InterOil, a Singapore-Papua New Guinea company that offers investors a way into the Elk-Antelope gas field, believed to be one of the largest untapped gas deposits in Asia. The bidding war, which included France’s Total part-funding Oil Search’s bid, was credited by analysts as a sign of companies’ faith in improving international oil and gas prices and Papua New Guinea’s importance for the industry.

The potential profits from oil and gas extraction are enormous, but extracting it poses risks to the environment. “Like other forms of resource [extraction] in Papua New Guinea, oil and gas extraction is promoted as a model of development,” said Natalie Lowrey, Communications Coordinator for the Deep  Sea Mining Campaign. “But, as has been seen with large scale mining, logging and palm oil, there is the ongoing concern that it provides very little financial benefit for ordinary people as well as environmental destruction.”

According to conservation biologist Richard Steiner, the risks could be “very high,” particularly for offshore extraction. “Oil is a very toxic substance, and if or when it is spilled, it can cause long-term, even permanent ecological harm, as with the 1989 Exxon Valdez spill in Alaska,” he told Mongabay.  A number of spills have already occurred in waters of Papua New Guinea. In August 1993, Oil Search, a major player in oil and gas in PNG, caused a spill, although it initially denied such an event took place; it was only the work of local media that forced the company to admit to the spill three months later. Then, in 2012, Oil Search once again announced that a spill had taken place, though described it to the press as only a “minor incident” of a “small number of oil droplets.”

Even if nothing goes wrong, developing PNG’s petroleum industry will inevitably have a huge environmental impact. “Exploration and extraction of oil and gas will bring mass amounts of infrastructure, like pipelines and shipping, potentially resulting in land clearing,” Lowrey says. Take, for example, ExxonMobil’s PNG LNG Project, which began production in 2014.  The project sources gas from seven fields across the country, most onshore. Gas is transferred by a 407-kilometer-long (253 miles) subsea pipeline and a 292 kilometer (181 mile) onshore pipeline to two production facilities, where the gas is liquefied before being loaded onto ocean-going tankers that are then shipped across the region. As part of this project, the following had to be built: nine new wells in one onshore field; a new airstrip for the delivery of heavy duty machinery; more than 700 kilometers (435 miles) of pipeline; and the expansion of the docks for transport. And this was only a fraction of the infrastructure needed for the project.

Others are more concerned about the potential social impacts of such projects. “There is comparatively minimal environmental impacts, mainly due to the innovative construction of underground pipelines by Chevron in the early 1990s. Compared to mining, the footprint is small,” Emma Gilberthorpe, a Senior Lecturer at the University of East Anglia’s School of International Development, told Mongabay. “However, the social impacts are enormous, mainly initiated by the influence of cash royalties and conflicts over ownership.”

In a 2007, essay titled Fasu Solidarity: A Case Study of Kin Networks, Land Tenure, and Oil Extraction in Kutubu, Papua New Guinea Gilberthorpe explored the impacts of the country’s first commercial oil field development, located in the southern highlands. The use of cash royalties and “the imposition of centralized judicial constructs of corporate landholding groups” radically altered the traditional, social interactions between kin groups and communities. “Males are becoming isolated from pre-oil exchange networks, and females are becoming isolated within villages,” she wrote. More recently, the protests in Central Province show the potential for social unrest when expectations about cash royalties go unmet.

The extraction the country’s abundant resources, especially oil and gas, was supposed to transform the country and its economy. But it hasn’t, writes Charles Yala, Director of the National Research Institute, a local think tank: “The petro-oil-gas dollars [are] disappearing into thin air, leaving behind an impoverished nation,” he wrote in Business Advantage PNG. Despite the wealth the industry has created, Yala says the economic situation remains dire: getting to and from the country remains difficult and costly; accommodation can be more expensive than in most Southeast Asian capitals; internet access is poor; electricity supply is scant; and the government does not do enough to allow smaller businesses to prosper.

Even people in government admit that oil and gas revenue won’t solve all of the country’s problems. In June 2015, Finance Minister James Marape announced that the importance of Liquefied natural gas (LNG) to the economy was a “myth.” He added: “We are clouding our vision thinking that LNG is a waterfall of money. It is how we maximize use of all the resources in this country that will unlock our development potential.”

In October, an analysis by Development Policy Center, a  think tank ran out of the Australian National University, estimated that while PNG’s mineral exports in the first quarter of 2015 were worth $1.6 billion,  government revenue for this sector amounted to just $8 million, or roughly 0.5 percent of the total value. Some of this, the article noted, was likely due to a lag in between exports being made and taxes on them being paid, as well as changes in how the state receives its share of the sector’s profits.  Nevertheless, it concluded that “what the numbers illustrate most clearly are the effects of price volatility in the sector, and the subsequent, highly uneven returns to the government.” This volatility make it “extremely difficult for governments to manage these flows effectively, and makes strategic development planning difficult,” the report noted.

“In this regard, and others, Papua New Guinea certainly exhibits many of the classic markers of the ‘curse’,” the paper noted – referring to the theory that countries possessing an abundance of natural resources tend to have less democracy, less economic growth and worse overall development than countries without such resources. While not universal, the paradox of the “resource curse” has been found in countries across the world, particularly those without a history of good governance.

In an effort to sustainably manage the money derived from oil and gas, the prospect of creating a sovereign wealth fund has been on the table since 2011. It finally came into law in July 2015, was scheduled to come into operation this year – reports now point to a 2017 launch date. Many oil-rich countries have developed such ways of re-investing oil and gas profits for long-term profit, with Norway leading the way with a fund worth almost $890 billion, making every Norwegian a millionaire, in theory. (Norway has also helped other countries develop their own funds, including Papua New Guinea’s neighbor, Timor-Leste.)

Papua New Guinea’s fund will be split into three sections, according to an interview with the High Commissioner of Papua New Guinea to Australia, Charles Lepani. The Future Generation Fund is intended to put aside money for the decades to come; the Infrastructure Fund to revitalize what is needed today; and the Budget Stabilization Fund to support the country’s growing budget.

Again, there is a concern that its sovereign wealth fund might itself become another curse. In Timor-Leste, analysts have spoken of the government’s overuse of the fund to boost the state budget, which could lead to it being empty within a decade. Experts have warned that politicians in Papua New Guinea must provide accountability and expertise when managing the fund, so money for future generations is not wasted. The biggest task for future governments will be tackle corruption in the face of a slosh of new petrodollars. Transparency International’s latest index on corruption perception, in 2015, put Papua New Guinea 139th out of 168 countries. Without effectively tackling this endemic practice, the money available for necessary social projects and infrastructure development could slip away from the state’s coffers.

Another concern is that politicians look to the oil and gas industry, as the sovereign wealth fund, as a silver-bullet, and fails to plan for a future of less dependency on natural resources. When asked if the oil and gas sector could sustain the economy of Papua New Guinea, Gilberthorpe responded that it couldn’t on its own. “And not sustainably. Without a diversified economy Papua New Guinea is putting itself in the firing line of the resource curse,” she said. “The country needs to develop beyond natural resource extraction to more sustainable forms of economic development if it is to have a sustained economic growth.”