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Opinion: How PNG can lessen the impact of falling energy prices

Progress in fostering economic and social development is threatened by the recent drop in global energy prices. Paul Barker provides practical ways to minimise the impact of the downturn.

2015 has been heralded as the year when 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 PNG LNG 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, have 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.

Market trends
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.

The stabilisation component of the planned Sovereign Wealth Fund should reduce the short-term budgetary impact of a volatile energy market, but this will only work as long as the fund is run transparently and in accordance with the Santiago Principles.

Production from the PNG LNG project 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.

Impact of lower prices
Estimates on the impact of lower prices differ. Government sources suggest minimal change and firm immunisation from short-term market conditions. Independent analysts have suggested a K1.4 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).

Action is being taken by Government, churches, business foundations, and development partners to address the lack of basic services. 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.

The PNG Government cannot squander funds on low priority activities and one-off events, and must 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 encourage young men and women to participate actively in the economy.
Paul Barker is Executive Director of the Institute of National Affairs, an independent policy think-tank based in Port Moresby. A full version of this article can be found on the Lowy Institute website.