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Prime Minister James Marape has urged Papua New Guineans to draw inspiration from South Korea’s extraordinary journey out of poverty following the devastation of the Korean War (1950-1953), highlighting their rise to global economic prominence as a testament to hard work and determination. “South Korea, a nation ravaged by war and with virtually no natural resources, rebuilt itself through sheer commitment to hard work and a strong work ethic. From a GDP per capita of just USD $63 in 1953, they now boast over USD $33,000 per capita as of 2023,” said Prime Minister Marape. “Their transformation is a powerful example of what a nation can achieve when its people and leaders focus on productivity and innovation rather than dependence on government handouts.” The Prime Minister contrasted South Korea’s rapid economic growth with Papua New Guinea’s trajectory. “In 1975, when Papua New Guinea gained independence, our GDP per capita was USD $521—significantly higher than South Korea’s $252 at the time. Yet today, South Korea’s GDP per capita has skyrocketed to over $33,000, while PNG’s stands at less than $3,000. This stark difference is a wake-up call for us to rethink our priorities and embrace the values of hard work and enterprise.” Prime Minister Marape drew attention to the similarities in land size, noting, “South Korea’s landmass, at 102,000 square kilometres, is only slightly larger than our Western Province at 98,000 square kilometers. Despite having limited arable land and only nine months of planting and harvest annually, their people turned poverty into prosperity through dedication, effective policies, and a focus on manufacturing and technology.” The Prime Minister called on Papua New Guineans to make better use of their land and resources, stressing the significance of land ownership as a foundation for self-reliance. “One of the greatest legacies of our independence in 1975 was ensuring that land remained in the hands of traditional landowners. From your land, you can become masters of your destiny. Let’s stop talking and start building businesses for our children,” he said. He commended young Papua New Guineans who are already demonstrating entrepreneurial spirit by creating businesses, exporting local products, and adding value to PNG’s resources without relying on government support. “These young entrepreneurs are proving what is possible with dedication and action. They are bringing foreign currency into PNG and showing us all the way forward,” he said. Addressing the ambitious goal of creating one million jobs under the Medium-Term Development Plan 4 (MTDP 4), Prime Minister Marape outlined a broader definition of employment. “A job is not just a 9-to-5 salaried position. It is any productive activity that earns income to support individuals and families. Achieving this goal requires empowering landowning families to engage in agriculture, forestry, fisheries, tourism, and SMEs.” The Prime Minister emphasised that the government will continue to refine policies to support productive Papua New Guineans. “We will revisit SME development, tax regimes, land accessibility, banking, and market opportunities to foster growth. But the responsibility also lies with our people to work hard and maximise these opportunities,” he said. Prime Minister Marape closed with a call for unity and action. “If South Korea could transform itself with no natural resources and the scars of war, we can do it too. What we need are more doers and fewer talkers. Let politicians talk, but let the rest of us work. Together, we can build a prosperous Papua New Guinea where every family is financially productive and self-reliant.” He added, “God has blessed us with land, brains, hands, and feet. Let us use them to work hard and create a brighter future. Prosperity will come when we embrace the ethic of hard work, just as South Korea did.”

K92 Mining Inc. hit record-breaking production results for the fourth quarter of 2024 at its Kainantu Gold Mine in Papua New Guinea, signaling strong momentum ahead of its highly anticipated Stage 3 Expansion. The company reported on January 8 a gold equivalent (AuEq) production of 53,401 ounces, marking a 37% increase from Q4 2023 and a 21% rise from the previous record set in Q3 2024. K92 produced 51,371 ounces of gold, 958,312 pounds of copper, and 41,992 ounces of silver in the quarter. Annual production for 2024 totaled 149,515 ounces AuEq—significantly surpassing the company’s guidance of 120,000 to 140,000 ounces—and representing a 27% increase over 2023. Annual gold production reached 139,123 ounces, with copper and silver output totaling 4,926,738 pounds and 142,063 ounces, respectively. Sales figures for Q4 included 48,350 ounces of gold, 946,704 pounds of copper, and 41,720 ounces of silver. For 2024, sales reached 140,659 ounces of gold, 5,043,134 pounds of copper, and 145,060 ounces of silver. The Kainantu process plant processed 96,614 tonnes of ore in Q4 2024, with a head grade of 18.0 g/t AuEq, including 17.3 g/t gold, 0.47% copper, and 15.2 g/t silver—the highest gold equivalent head grade since Q2 2020. This performance was driven by higher-grade stopes from the Judd and Kora deposits, along with notably positive gold and moderately positive copper grade reconciliations against the independent mineral resource model, the company statement said. The plant achieved record metallurgical recoveries, with gold recoveries averaging 96.4% and copper at 94.7%. December set new monthly records with gold recoveries of 97.1% and copper recoveries of 96.1%. Annual recoveries were also strong, with gold at 94.6% and copper at 94.1%, outperforming the company's Updated Integrated Development Plan (IDP) recovery targets of 92.6% for gold and 94.2% for copper. Underground mining operations delivered 97,016 tonnes of ore across 12 mining levels at Kora and Judd. Total material movement, including waste, was 306,430 tonnes—the second highest on record. Mine development advanced 2,571 metres in the quarter, up 17% from the previous quarter, setting the stage for increased development rates to meet the demands of the Stage 3 Expansion. PM Marape commends K92 Prime Minister Hon. James Marape commended K92 Mining Limited on January 10 for its achievement, describing the milestone as a significant boost to the country’s economy.  “The record-breaking results achieved by K92 Mining are encouraging for Papua New Guinea as we continue to see significant contributions from our resource sector to the nation’s economic growth,” Mr. Marape said. “K92 Mining’s continued success, particularly through its Stage Three Expansion, demonstrates the potential of our mining industry to create more jobs for our people, improve community infrastructure, and contribute to the country’s long-term development goals.” The Prime Minister highlighted the importance of responsible resource development and acknowledged K92 Mining’s efforts in advancing safety, environmental stewardship, and community engagement. “I commend K92 Mining for its responsible approach to mining. Their success is a prime example of how resource companies can deliver value to our country while also contributing to social and environmental priorities,” he said. The Prime Minister reiterated his government’s commitment to fostering partnerships with companies that focus on sustainable development and ensure that the benefits of resource projects are shared fairly with the people of Papua New Guinea. “We welcome partnerships with companies that work with the Government to maximise the value of our resources for the benefit of all Papua New Guineans. The resource sector plays a critical role in our economy, and we are focused on ensuring that it delivers long-term benefits to our people,” he said. “K92 Mining’s achievements provide a solid foundation for 2025 and beyond, and I encourage other resource companies to follow this example by continuing to invest in our country and our people.” Stage 3 Expansion Nearing Completion Construction of the Stage 3 Expansion at Kainantu is advancing rapidly, with approximately 70% of the required growth capital spent or committed as of December 31, 2024. The expansion is designed to elevate Kainantu to a Tier 1 mid-tier gold producer. Commissioning of the new process plant is slated to begin in late Q2 2025. Drone footage showcasing the progress of the process plant construction underscores the project's momentum. Other key infrastructure developments include: Completion of the interim ventilation upgrade, operational since early January 2025. Stage 2 interim clean water supply upgrade, scheduled for completion in late January 2025. Puma ventilation drive for life-of-mine ventilation upgrade, with two 2 MW fans becoming operational by Q2 2025. First ore pass/waste pass raise bore completion in early Q1 2025, fully operational by late Q2 2025. An increase in mine development rates, targeting 1,000 metres per month for Stage 3 and 1,200 metres per month for Stage 4. The progressive introduction of new mining equipment and the execution of productivity initiatives are set to enhance operational efficiency, the company said. K92 Mining's record production and high gold price environment have strengthened its financial standing to fund both the ongoing Stage 3 Expansion and its extensive exploration programs on high-priority targets. The company remains confident in its strategy to expand production capacity while advancing exploration efforts, as this dual approach aims to unlock further value at Kainantu.

In the rapidly changing field of fuel management, maintaining the integrity of your fuelling system is crucial. Leaks compromise fuel quality, pose significant environmental risks and lead to costly operational disruptions. Our acoustic leak detection method is a highly effective, revolutionary solution for maintaining and securing fuel infrastructures. Importance of controlling leaks Ensuring there are no leaks in your fuelling system is crucial for several reasons: Preventing fuel from being contaminated with water guarantees the delivery of high-quality fuel to consumers Avoiding pollution and potential shutdowns safeguards the environment and your business operations Maintaining the overall integrity and functionality of your fuelling system is essential for smooth operations and long-term sustainability Adhering to regulatory standards helps you to avoid legal repercussions and fines Demonstrating a commitment to safety and reliability protects your brand’s reputation Acoustic leak detection process The process begins with meticulous preparation to ensure accurate results. All tank-related activities, including fuel delivery and filling, are suspended. We ensure that all openings and gaps, including the filling line, vent, and suction lines, are securely closed to create a controlled testing environment. Once preparation is complete, a specially designed coupler, which holds two sensors, is used to facilitate vacuum application. One sensor is placed within the liquid in the tank, while another is positioned in the air space above the liquid. This dual-sensor setup allows for comprehensive monitoring. The background noise level inside the tank is measured and recorded to establish a reference value. A vacuum is then used to create a controlled environment, essential for accurate leak detection. The background noise level is measured again, allowing for precise comparison of the noise level before and after the vacuum was applied. Significant discrepancies between the reference background and post-vacuum noise levels may indicate potential leaks. All readings are meticulously documented, and an inspection report is generated and printed on-site for immediate review. Why choose SGS’s acoustic leak detection method? More than 90% of leaks stem from accessories, fittings and joints, rather than the tank itself, and 95% of these leaks can be easily repaired by qualified pipefitters. This highlights the importance of comprehensive system checks and the efficiency of the acoustic method in identifying even the most minor vulnerabilities. Widely recognized and approved, our acoustic method for leak detection is trustworthy and reliable, with many advantages: It can be used to detect even the most minor leaks, providing you with a thorough assessment of your fuelling system The tank and associated pipes can be evaluated without being disconnected, streamlining the process Tests can be conducted with the tank containing fuel at between 10% and 90% capacity, minimizing operational disruptions. Fast, dependable results, along with onsite report generation and replay capabilities ensure accurate, thorough and dependable results and facilitate quick decision-making The acoustic leak detection method is a game-changer in fuel system maintenance. Its precision in detecting even the tiniest leaks ensures your entire system's integrity, from the tank to the piping, and allows you to invest in the future of your fuelling infrastructure by prioritizing safety, efficiency and reliability.

Prime Minister Hon. James Marape has recently (11.12.24) announced his government’s decision to partially privatise PNG Power Ltd amidst Government’s further decision to open up other parts of the country to independent power suppliers. Prime Minister Marape told the PNG CORE Investment Week in Sydney that Cabinet has approved the decision in one of its final meetings this year the partial privatization of the State-owned enterprise to improve its operations and efficiency of power supply to Papua New Guinea. The partial privatization means the State will continue to maintain its interest in PNGPL with the investor taking over management of the enterprise and equity - assets worth over K4 billion in the company. This will be the second decision Cabinet has made on PNGPL, where an earlier decision was made to look at the company’s power generation, retail and distribution status. The Prime Minister urged investors to keep an eye out for Expressions of Interest soon to be advertised, pointing out the advantage in PNG Power’s “first right to supply power” monopoly in Papua New Guinea. “Power supply is a strategic asset and investment, and PNG Power has two important assets. It has asset that is K4 billion in total, and more importantly it has monopoly in first right of supplying power with its community service obli-gation that it still holds,” said the Prime Minister. Prime Minister Marape said reforms in the energy sector have begun with the government ministry responsible ready to issue licenses to investors willing to partner his government to take power supply to parts of PNG that are out of reach of PNGPL, as up to 70 percent of the country still remains without elec-tricity supply. The Prime Minister also highlighted Government’s long-term decision to move into clean, green energy in the next 20 years, while pointing out PNG’s numer-ous clean energy potential in hydro, thermal, wind and solar sources. He urged investors to seriously consider this space and to look further down the line to selling power over the borders to Indonesia and Australia. “We want to unlock power in our country by bringing cheaper reliable and cleaner power to our people at the earliest. We have more than enough sources of clean energy where hydro remains the biggest available source. “I encourage investors to think big and take up these opportunities that are available in our country,” said PM Marape.

Prime Minister James Marape recently commended the Chinese government for its commitment to strengthening bilateral trade ties by granting Papua New Guinea access to its vast agricultural market. This milestone, facilitated through the National Agriculture Quarantine and Inspection Authority (NAQIA), is set to unlock significant economic opportunities for PNG producers. The Prime Minister praised the progress made in recent years, particularly the successful collaboration between NAQIA and China to meet the required phytosanitary and agricultural standards. “Our government has worked very hard over the last five years to secure this historic agreement, and I extend my heartfelt thanks to the Chinese government for facilitating this process. Their recognition of PNG’s agricultural potential is a testament to the strength of our bilateral relationship,” said Prime Minister Marape. With a population of 1.4 billion people and a rapidly expanding middle class, China represents one of the largest and fastest-growing coffee markets in the world. Coffee consumption in China has been rising at a rate of approximately 15% annually, far outpacing global averages. While the market demand for coffee is substantial, PNG’s current production levels are insufficient to meet its potential export volumes. “China alone needs a substantial amount of coffee every month. The market is there, but unfortunately, we are not yet producing enough to supply this demand,” said the Prime Minister. “This untapped opportunity pains me because we could be earning significant foreign exchange revenue in U.S. dollars through exports to China. Our farmers and producers must seize this opportunity and scale up production to meet market demands.” Prime Minister Marape highlighted the government’s achievements in opening up new markets for PNG’s agricultural produce. “In addition to China, we’ve worked tirelessly to secure access to India, Japan, South Korea, Southeast Asia, the Philippines, and our traditional partners in Australia, New Zealand, Europe, and the U.S. Asia, being our closest neighbor, offers immense opportunities for growth, and China, as the largest market, stands at the forefront,” he said. The Prime Minister called on PNG citizens to take advantage of these expanded market opportunities by increasing agricultural production. “While the government continues to open doors for our exports, the responsibility now lies with us as a nation. Our people need to work harder on the land to grow and produce more. Coffee is just one example—our agricultural potential spans far wider. Let us step up and take ownership of these opportunities,” he urged. To further enhance PNG’s ability to capitalise on these markets, the government is considering the establishment of a National Export Agency. This agency would coordinate the export of PNG’s agricultural and food produce, ensuring that farmers and producers have direct access to international markets. “This initiative will support producers by reducing barriers to export and streamlining processes to get our goods to market quickly and efficiently,” said the Prime Minister. Prime Minister Marape emphasised that these advancements in trade are part of a broader effort to strengthen PNG’s relationships with its neighbors. “The healthy bilateral relationships we have fostered with China and other nations are not just political achievements—they are economic lifelines. These partnerships will ensure PNG has access to global markets, boosting our economy and creating opportunities for our people,” he said. Prime Minister Marape urged the nation to focus on productivity and export readiness. “I thank the Chinese government for opening its doors to our agricultural products, and I call on our people to rise to the challenge. Together, we can transform PNG into a leading exporter of coffee and other agricultural goods, creating wealth and opportunities for all.”

PNGX recently released the 2024 performance data for the Papua New Guinean market. 2024 represented a year of remarkable growth on the market. The financial services sector emerged as a strong performer, delivering robust returns for investors and setting a high benchmark for the market. Key highlights among PNG companies included: Kina Asset Management Limited (KAM): Share price rose from K0.90 to K1.60, achieving a 77.8% annual gain. With dividends of K0.20 per share, KAM shareholders enjoyed a total annual return of 100.0%. BSP Financial Group Limited (BSP): Share price climbed from K13.70 to K19.90, representing a 45.3% increase. With dividends of K1.51 per share, BSP shareholders saw a total annual return of 56.3%. NGIP Agmark Limited (NGP): Share price grew from K0.69 to K1.00, achieving a 44.9% increase. Including dividends of K0.07 per share, total annual returns reached 55.1%. Credit Corporation (PNG) Limited (CCP): Share price increased from K2.00 to K2.70, a 35.0% gain. When adding K0.25 per share in dividends, total annual returns reached 47.5%. Kina Securities Limited (KSL): Share price rose from K2.50 to K3.25, delivering a 30% gain. With dividends of K0.266 per share, shareholders experienced a 40.6% total return. Steamships Trading Company Limited (SST): Share price increased from K35.46 to K48.00, a 35.4% gain. Including K1.0 per share in dividends, total annual returns were 38.2%. City Pharmacy Limited (CPL) faced challenges following civil unrest in early 2024 resulting in a 12.7% decrease in share price. Increased trading activity significantly enhanced liquidity in the PNGX market. Total trades, share volumes, and transaction values demonstrated robust investor engagement compared to previous years. 2024 saw a 47% increase in the number of trades and a 37% increase in the value of shares traded. There was also a significant decrease in the average trade size which is an indicator of increased retail investor participation in the market. These indicators are a clear sign of a higher level of activity and liquidity which is positive for the PNG market. The major increases from 2023 were in the volume and value of KSL and NGP shares traded. KSL saw a 123% increase in volume and 181% increase in value of shares traded. Meanwhile, NGP saw a 535% increase in volume and a 581% increase in the value of shares traded.   The year ahead promises exciting developments for PNGX: PNGX will launch a new Investor Education Program to empower investors, the first of which will be in Port Moresby in February. Follow PNGX on its website, LinkedIn, and Facebook for updates or email PNGX at education@pngx.com.pg Upcoming listings, including Pacific Balanced Fund and National Banking Corporation, are anticipated, though timelines remain uncertain. The potential partial privatization of PNG Power would be a future opportunity for market expansion, though whether listing is proposed is unclear. The 2024 market performance underscores the resilience and growth potential of PNGX-listed companies. As always, investors are reminded to consult with stockbrokers to make informed decisions.

The Papua New Guinea Tourism Promotion Authority (TPA) reaffirmed its partnership with Carnival Australia (P&O Cruises) to strengthen Papua New Guinea’s (PNG) growing cruise sector on Monday 9 December in Sydney, Australia. TPA’s Chief Executive Officer (CEO), Eric Mossman Uvovo, met with Carnival Australia’s Vice President, Peter Little, to reaffirm the partnership between PNG and the region’s leading cruise liner, Carnival Australia. Carnival Australia, under its passenger cruise brand, P&O Cruises, have been sailing into PNG waters since 2014, a significant moment that marked the entry of large capacity passenger cruising into PNG. Since then, the cruise sector in PNG has grown exponentially. In 2019, prior to the onset of the global pandemic, PNG registered the highest number of cruise arrivals into PNG at 52,000 cruise passengers alone. Over the years, Carnival Australia has played a significant role by ensuring continued cruise itineraries for PNG as a cruise destination in the Pacific. Cruise tourism in PNG has contributed an estimated US$20 million to the PNG economy, a specific percentage of which goes directly to the local communities through landing fee’s, shore excursion activities, arts and crafts, local hire bus services and tour guiding. TPA’s CEO alluded to the importance of ensuring concentrated investments in cruise provinces to improve the overall cruise experience. “Our cruise hubs, Milne Bay and East New Britian, have incredible potential and require stronger coordination in the province to drive community educational programs and tourist safety initiatives,” said Uvovo. Uvovo also highlighted his concerns over recent law and order issues which have cast a cloud of doubt over the cruise sector in PNG. “I look forward to working with the leadership in the cruise provinces of PNG to establish community policing initiatives and youth ambassador programs to mitigate risks associated with cruise port call days. The communities in these cruise destinations must appreciate the windfall of tourist a cruise brings into a town when the passenger ship calls into their port, it should be a time to embrace our visitors and take ownership as proud ambassadors for your culture, community, province and country. I appeal to all stakeholders in our cruise provinces, a coordinated effort is critical as we continue to welcome cruise ships of all sizes into our coastal and riverway communities,” said Uvovo. Uvovo has reaffirmed TPA’s partnership with Carnival Australia and has committed to finding proactive solutions to issues currently faced in the Cruise sector for the benefit of all cruise stakeholders.

 Michael McWalter picks up his prior discussions of petroleum sector reform (Issue No. 3 2024) and describes in more detail exactly what a Production Sharing Contract, or what a PSC, is all about. In my commentary of PNG Business News, Issue 2, 2023 entitled: Petroleum Sector Reform for Papua New Guinea, I wrote about the need to apply better governance to the sector to achieve optimal outcomes for the State. In particular, I spoke of the need for the petroleum revenues arising from petroleum resource development to be deployed wisely for the benefit of the people of PNG on capital formation activities like: education, health, social welfare, infrastructure, etc. – all of which should promote the National economy to grow, and thus improve livelihoods.  This translation of the value of resources with appropriate management into sustainable development is often called the value chain, and each aspect of the chain needs most serious and competent management.   There is little point in mobilising one’s natural resources to make an income for the State, if that money is not put to good purpose, but rather wasted one way or another by folly or malady.  Those resources may only be produced once, and not again; they are finite and have value now at such time as that kind of resource is sought after in global markets. We must remember that there may come a day when oil and gas are no longer consumed with such avid demand as today. This might eventuate as more investments are poured into the development of renewables sources of energy and advancements are made with cleaner nuclear fission and sustainable thermonuclear fusion. Oil and gas might become a quixotic, antiquated and outmoded source of energy, and thus attract considerably less value.  So, if a government is going to foster investment in petroleum exploration and development, it needs to embrace such grave and important responsibility to ensure that the Nation’s petroleum business is conducted most professionally and with total accountability. Government must ensure that the resultant revenues from subsequent production are appropriate, reasonable and respected as being derived from the overall patrimony of the people of the Nation.  This requires investment by the State in professional excellence to manage, moderate, administrate and regulate the sector and its operations firmly and fairly.  The oft cited National Petroleum Authority (NPA), which was first defined in the Government’s 1976 White Paper on Petroleum Policy and Legislation by two of our greatest leaders, Sir Michael Somare and Sir Julius Chan, has been repeatedly conceived, only to be still born. Into that vacuum, Kumul Petroleum Holdings Ltd, PNG’s de facto National Oil Company (NOC) has steadily and bravely taken the lead and embraced National development in the oil and gas sector, and all that it entails. Meantime, the Department of Petroleum and Energy has valiantly tried to keep up with ever increasing core and essential petroleum sector functions, like licensing, operational approvals, and data collection, whilst otherwise becoming absorbed, and perhaps overwhelmed, in the peripheral though, absolutely essential tasks of dealing with project area landowners, their benefit claims and their many other concerns and worries. Plans for a NPA have been formulated in great detail several times over in the last few decades, only to be forsaken, lost, sidestepped, and derailed time and time again. The whole notion of the NPA was to bring together a cadre of PNG excellence to lead the petroleum sector as the guardian of PNG’s petroleum resources. The members of that cadre were to have been well-paid for their experience and important responsibility, and as an Authority of the Government, the NPA might have been able to retain and attract some of PNG’s finest graduates in such exciting and challenging work.   I also discussed the vital need for the commerciality of petroleum developments without which investment by the industry in field development would be withheld.  I discussed how the 2020 amendments to the Oil and Gas Act imposed a test on a proposed petroleum development project that the applicant’s proposals should reflect a minimum expected return to the State over the life of any recovery of petroleum. However, that minimum expected return to the State is not specified in law and is only examined and determined by the Petroleum Advisory Board (PAB), and then considered by the Minister at the time of application for a development licence.  This leaves investors with great uncertainty and unnecessary risk throughout the period of exploration, appraisal, development planning and the application phase of petroleum resource development.  There is thus now no absolute certainty of development if a discovery of commercial extent is made. Either the PAB or the Minister may set a threshold minimum expected return to the State during the consideration of an application for development. This is at a very late stage in the cycle of petroleum resource development investment and comes just before the investing companies have to elect to develop their discovered petroleum accumulation, or not. If a field development is marginally economic, the setting of such a minimum expected return to the State might in some circumstances make corporate consideration of development uncommercial, and as a consequence the field might be left undeveloped. In any normal distribution of petroleum accumulations, there are a few large fields, a fair number of medium size fields and many smaller fields. It would not be wise to disadvantage the development of smaller and often smaller marginally economic fields, which tend to be developed after the larger fields have been found and produced, and which can readily sustain a domestic petroleum industry populated by smaller, and likely, local companies with smaller investments.  Oddly, as I said in 2023, the potential introduction of Production Sharing Contracts (PSCs) would obviate such a risky situation because the terms of development are normally locked into a PSC when originally negotiated and agreed between the State and the investing companies as contractors to the State at the outset. Being a contract, any capricious demand by the State for unexpected returns on petroleum development pursuant to a PSC would end up with the contract being the substance of legal proceedings.  I now want to pick up on my themes of a year ago and discuss optimal and necessary arrangements for petroleum development in the light of some creeping petroleum policy change in recent years, and a keen desire by the Government to change the PNG petroleum regime and to adopt the use of PSCs. I particularly wish to demystify PSCs. Figure 2: Much has been written on PSCs. Celebrated analyst, Daniel Johnston, is prominent with his simplified mapping of fiscal and commercial regimes. King & Spalding, an American multinational corporate law firm, has also written a most comprehensive book on the topic, ex libris McWalter.   WHAT ARE PRODUCTION SHARING CONTRACTS?   The notion of a Government sharing the production of oil and gas arising from the development of a successful petroleum exploration campaign by companies as part of a commercial venture was first developed and employed in Bolivia in the 1950s. A Production Sharing Contract (PSC) is an arrangement between a host Government and an international oil and gas company (IOC) for the division and allocation of the oil and gas produced between those two parties under a contract which provides for the exploration for and the development and production of petroleum resources. The allocation of a share of the production to the IOC serves to recompense the IOC for its investment and to provide a reasonable reward for its success. The Government, as owner of the resources, also provides a mechanism called a cost recovery allowance to the contractor for its work, but keeps the rest of the petroleum produced. The PSC was introduced in Indonesia in 1966, and PSCs of this kind or variants of the same are used extensively to agree the arrangements for oil and gas exploration, development, and production with oil and gas companies. PSCs of one kind or another are used in over 40 countries, throughout the world.   The PSC is not the only manner by which a government may grant oil and gas exploration, development and production rights to commercial investors and gain a share in the value of successful petroleum production.  Prior to the development of the PSC, exploration and production of oil and gas was typically governed by way of a licence or a concession agreement, and such regimes still remain in effect in many different places around the world. In many developing nations, the PSC is now the most common means by which a government allows corporate investment in the oil and gas industry. It provides a company or consortium of companies the right to explore and produce oil and gas.  In many jurisdictions, there are political or nationalistic reasons for the adoption of PSCs as they perceptibly provide the Government with greater and more direct control over its resources and the ability to exert National sovereignty over the industry more readily.   After gaining independence in 1945, Indonesian’s concessions regime came under attack by certain nationalist groups leading to the nationalisation of Royal Dutch Shell’s assets. Indonesian Law 44/60 abolished the old concessionary system and specified that: “Oil and gas mining shall only be carried out by the State and implemented by State enterprises,” and further that, “the Minister may appoint other parties as contractors of the State enterprises.” Alas, a decline in foreign investment in Indonesia’s oil and gas sector inevitably ensued. To mitigate this decline, the government eventually negotiated and agreed in 1962 with the Pan American Indonesia Oil Corporation, a subsidiary of Standard Oil of Indiana (later to become Amoco), a new contract based on legislation that was much more favourable to the Government.  The other large foreign petroleum investors, Caltex (a venture of Chevron and Texaco), Shell, and Stanvac (a venture of Socony [Standard Oil of New York] and Vacuum Oil and Standard Oil of New Jersey, later to become Exxon) followed by signing Contracts of Work in September 1963. These early PSCs were widely considered to be less controversial than the previous concessions system, as they enabled the government to maintain formal ownership of the resources until sold, while permitting the IOCs to exploit them for and on behalf of the Government. These contracts provided for the recovery of the costs of the contractor up to an agreed percentage of overall production plus an agreed, but often scaled, share of the produced oil and gas as a reward for its investment. Although often cited as the example of the use of PSCs, in 2017, in a somewhat odd twist, the Indonesian Government established a new form of PSC called the Gross Split PSC. This completely abolished cost recovery systems pioneered in the classic PSCs of the 1960s. Instead, this new arrangement simply relies on an agreed split of the actual production between the Government and the IOCs, typically 43% to the contractor for oil and 48% to the contractor for gas production, with the balance of production going to the Government. Due to a loss of faith in Pertamina (Indonesia’s national oil company) in the late 1990s (an audit had shown that Pertamina had allegedly lost about US$6.1 billion from inefficiency and corruption in 1997 and 1998) the Indonesian Government took steps to rein in control of the industry at the Ministry level, but they had no financial ability to manage the proceeds of the sale of oil and gas which were remitted to the revenue account of the National government.  Without any retained funds, this then entailed the Ministry having to seek parliamentary appropriations to pay the cost recovery allowances to the IOCs, but then the Indonesian Parliament questioned these payments. This brings home the need to think through the implications of changes in regime and the management of any given regime, especially if one is contemplating changing from a licence or concessionary regime to a contractor-based one. What is a PSC? In a PSC, a government makes a contract with an IOC to provide the necessary and requisite financial, technical, management, environmental, social, planning and logistical skills in order to explore for, and hopefully, if successful in finding oil and gas accumulations, to produce the oil and gas. The host State (that throughout most of the world, normally owns the subterranean resources) will usually be represented by the Government or a Government Petroleum Ministry, Department, Authority or quite often some other type of agency of the State, such as its National Oil Company (NOC), which will take delivery of the State’s share of production and generally manage the commercial aspects of the PSC. The IOC is typically granted an exclusive time-limited right to explore for petroleum accumulations, appraise any discovery, plan and execute development and produce oil and gas within a defined area, generally known as the contract area. Under the PSC arrangement, the IOC bears the entire risk of the project, both technical and financial. If a commercial discovery is declared, the IOC becomes entitled to a portion of any subsequent petroleum produced as an effective payment for its efforts, in addition to recouping all its costs from the production. Conversely, if no discoveries are made, the IOC receives nothing. The Government retains ownership of all the oil and gas produced, save for what oil and gas is allocated to the IOC as cost recovery petroleum, or is the subject of sharing between the IOC and the NOC as profit petroleum. This causes the Government to be involved in selling its share of the produced oil and gas.  In some jurisdictions, the IOC is allowed to keep the physical oil for itself, and the IOC makes just cash payments only to the NOC, based on the sale of the NOC’s petroleum entitlements; in others, physical oil and gas allocations are used to reward the IOC. The extent to which the NOC is involved with the exploration, development and production process varies from country to country with some NOCs seeking to take a significant lead in the business other than a just managing the PSC, whilst other NOCs take only a small participating interest in the commercial venture, so as to be within the operating consortium and to learn from it. There are commonly four key financial aspects to a PSC: royalty, cost recovery petroleum, and profit petroleum, though many other relevant matters are agreed in the PSC. Figure 3: Contents of a PSC: A sample from Equatorial Guinea, after the Republic of Equatorial Guinea, 2006    Royalty Most often and foremost, the IOC is typically expected to pay a prescribed or agreed royalty as a percentage of the gross value of oil and gas production to the State as valued at the point of export from the contract area. The royalty is often, at the State’s option, taken as a physical share of production, or alternatively by way of a payment by the IOC equivalent to the sale price of the State’s royalty share of production. Sometimes, the percentage rate of royalty may be the subject of bids for a contract area by competing oil and gas companies when bidding for the same or similar areas.  Royalty is a payment made in kind or related to produced volumes and price without regard to the profitability of the business. Therefore, in times of low petroleum commodity prices it has the effect of digging deep into profitability.  However, for a host Government, royalty is an assured payment regardless of profitability, but proportionate to the value of the produced oil and gas. Cost Recovery Petroleum Following payment of any royalty, the IOC is normally entitled to a pre-determined maximum percentage of gross production from which it may recover all its genuine costs, with any costs not recovered being carried forward to the next accounting year. Such production is known as cost oil and cost gas, and again may be taken in cash or kind. Obviously, the IOC attempts to maximise cost recovery early in the cycle of production up to the agreed maximum percentage limit, so as to recoup its expenses soonest, and likewise the Government will scrutinise the costs submitted to it for recovery as to their genuine eligibility. That scrutiny involves approval of all procurements and sub-contracts of the IOC, and represents an enormous accounting burden for the Government.   Profit Oil The oil and gas remaining after the payment of royalty to the Government and the cost recovery allowance to the IOC by the host Government is known as profit oil and profit gas, and it is generally divided between the IOC and the Government in accordance with the production sharing provisions agreed and defined in the PSC. Quite often the Government’s share of profit oil and profit gas increases as the production rates increase. Income tax Finally, the IOC is quite often required to pay income tax on its share of net benefits which should strictly amount only to profit oil, as cost oil and cost gas represent only a recoupment and recovery of costs. However, the application of income tax varies from jurisdiction to jurisdiction and in some cases the IOC’s notional income tax due is often paid by the NOC, or the State on behalf of the IOC, such that there is no financial impact on the IOC, there being just a journal entry between different parts of the Government. An income tax superposed on the PSC regime without appropriate tax deductions can rapidly make a fair PSC regime become a very hostile one.  In the calculation of the net take to the State under a PSC, one has to include the results of any Corporate Income Tax and all and any other taxes, levies or imposts that affect the outcome of the overall PSC.  In some PSCs, there is simply no tax, and the royalty, cost oil and gas, and production share are deemed to be final fiscal devices. Figure 4: It must be noted that the production or profit oil split is not the same as the overall net take to each party, after Daniel Johnston in International Petroleum Fiscal Regimes and Production Sharing Contracts      Government Involvement The objectives of the parties when negotiating a PSC and its terms will generally be diametrically opposed.  An IOC will strive to negotiate for itself as much independence and control as possible over operations, and it will want any State intervention in the running of the project to be kept to a minimum. Naturally, it will be keen to keep its costs low, by negotiating the highest cost recovery allowance and the largest production share it can, and it will seek the full recovery of all its costs. The Government will wish to have an overall say in the development of its resources in an orderly and systematic manner that creates synergies for future development. The Government will also wish to make as much money as possible, reduce cost recovery allowances, and have access to an IOC’s resources and relevant expertise, without spending much time and money. The Government may also have economic priorities for domestic petroleum supply to its economy to mitigate energy import requirements and obviate foreign exchange requirements. Throughout the contract from exploration to development to production, the Government will want to ensure that the IOC is undertaking a technically appropriate exploration work programme with appropriate levels of investment and that the exclusive right to access land or the offshore area is being used efficiently. In addition, the Government will typically be concerned to secure as many rights and benefits for the people and local businesses, including affected local communities, as possible.  This is generally accomplished by the optimisation of jobs and training for local workers through requirements to use local goods, services and contractor and subcontractor services as far is feasible and practical – this is what is typically called local content. Figure 5: The main elements of a PSC, after Hassan Harraz, Tanta University, Egypt, 20106   Why the PSC Model? The obvious advantage of the PSC model for a government is the minimal risk on its part throughout the value chain of the enterprise. It is thus able to reap the benefits of its natural resources without having to spend its own time and money even for development. This is not to say that the State does not pay. It inevitably pays for its share of all and any costs of exploration, development and production through the cost recovery process payable to the Contractor. In most cases, the Government will not have the technology needed to explore for and produce oil and gas, and so contracting the help of an IOC that has the appropriate skills, capacities and technology is usually necessary in order for the Government to exploit its natural resources optimally, especially in the offshore areas. The same is, however, also true for licence and concessionary arrangements where even if the host Government has an equity option to take up a participating interest in a petroleum development project it will still pay for at least its pro rata percentage share of sunk and past exploration, appraisal and development planning costs up to the point of the establishment of facilities for development and the commencement of the recovery of the petroleum. As and when exploration proves to be successful, the Government can secure long-term supplies and/or exports of oil and gas in a PSC regime, which it can trade as it sees fit. The long-term nature of a PSC enables the Government to predict future levels of oil and gas for domestic use, export and to make provisions in the national budget accordingly. Alternatively, the PSC model can be most lucrative for the State, if it takes the option of taking its share of production as a cash payment, rather than in kind. It is also very common for PSCs to contain provisions that as the production rate increases, the proportion of the production attributable to the Government may also increase, meaning that a significant and increasing proportion of the value of profit oil is paid to the host Government and its representative entity defined in the PSC. In all cases, at the initial stage of petroleum resource development, the IOC bears substantially all the financial risk. If, and only if, exploration proves successful and the discovered oil and/or gas accumulations are developed and produced, the IOC may be able to recover its costs through cost oil and/or cost gas and an agreed share in the profits of the remaining quantity of oil and gas. As to whether the PSC model is more favourable to the State than to IOCs in contrast to the licence or concessionary system, ultimately depends on the rates used for the various fiscal and commercial parameters in each system. In a concessionary regime, costs are only recovered slowly as depreciation allowances against assessable income. The speed of the recovery of costs depends entirely on the terms set by law and those allowed to be negotiated in the framework of a PSC. It may or may not be possible for an IOC to negotiate the terms of a PSC with more, or less financially and commercially attractive terms for petroleum development than a licence or concession arrangement might otherwise have offered under a prior regime. It is all about the terms of the selected regime, whichever is applied. Figure 6: Some terms of the petroleum regime may still be contained in legislation whilst others will be negotiable depending on the particular regime, after Daniel Johnston in International Petroleum Fiscal Regime and Production Sharing Contracts.     One possible negative aspect of the PSC model is that it is an agreed and contractual arrangement, and not the product of binding and enforceable legislation. Thus, any breach of the PSC by either party will constitute a breach of contract for which civil relief may be obtained.  Pursuant to the PSC model, the State always remains the owner of the resources, with the contract establishing the applicable compensation arrangements and level of NOC or Government involvement in the asset. The negotiation of a PSC is up front before any investment is made in exploration by the IOC, so the terms are locked in.  PSCs tend to afford IOCs less freedom to run an asset, with Contractors being subject to restrictions and required approvals in addition to those contained in the applicable legislation and regulation. Commonly Used Alternatives to the PSC There are several substantial alternatives to the PSC model. The differences in these alternatives are mainly in relation to the level of control granted to the IOC, the level of involvement of the NOC, and the compensatory arrangements for the investment made. Licences Generally, under a licence arrangement, there is normally little scope for an IOC to negotiate specific fiscal or commercial terms in relation to its exploration and production rights. Licensing regimes and their terms and conditions are typically standardised and embedded in legislation, such that the terms of each licence are near identical. This regime is most common in developed countries, e.g. UK, Norway, the Netherlands, and Australia. The terms of licences may change from time to time as the Government seeks to restrain or encourage sector investment.  The IOC is typically granted complete control over the contract area and complete ownership over any oil and gas that it successfully produces. Unlike PSCs, where ownership of the resources always remains with the State, in licence regimes ownership generally passes to the IOC at the wellhead, with the IOC’s profits from the sale of the oil and gas produced being the subject to general tax legislation, or specific petroleum taxation legislation. Like in PSCs, if the IOC fails to find commercially producible oil and gas within the limited terms and periods of their licence, they go home empty handed.  In some jurisdictions, the Government has an entitlement to join in at the development stage when the risks of finding oil or gas have been mitigated and it may either chose to pay its proportionate share of costs of exploration and development and participate alongside the IOCs, or be carried in some form or another. This can be a very profitable feature for the Government, but it essentially takes a slice of the venture away from the IOC venture at the proportionate sunk costs only, without any regard or compensation for the commercial value of any oil and gas discovered by the IOC. Concessions A concession arrangement is generally subject to a greater level of negotiation than a licence. The IOC is typically granted proprietary rights over the contract area and complete ownership over any oil and gas that it successfully produces, subject to the payment of a royalty and income tax, each of which may vary in rate depending on the level of production as negotiated and agreed. There may be specific taxes like the Additional Profits Tax (APT) which progressively applies further amounts of tax, the greater the rate of return of the production project. In some jurisdictions, licences have become more concession-like as the terms and conditions of the licences have increasingly become the subject of Agreements with the Government defining those agreed terms which are supplementary to or adjust the current and applicable legislation as sought by and agreed by both the Government and/or the IOCs. Service Contracts Under a service contract, the IOC provides its technical services to the State to explore and develop oil and gas resources, and therefore in so many ways, it is similar to a PSC. However, remuneration to the IOC is usually by way of a service fee or payments based on the value of oil produced in US$ per barrel for oil and other hydrocarbon liquids, or per million British Thermal Units (BTU) of energy for natural gas. The term of a service contract is often very short, leaving an IOC with considerable risk and no guarantee of a long production period Services contracts are common in Iran, Iraq and Kuwait and have also been used from time to time in Indonesia and the Philippines. The Overall Picture By and large, about half the world’s petroleum prospective Nations use licence/concessional systems and about half use PSC arrangements, though many of each of these are strictly hybrids involving features of one regime and the other. No particular petroleum regime is superior to any other and much depends on the degree to which the host Nation wishes to promote or reduce exploration investment according to the terms applied. Sometimes, the IOC will tolerate a slightly tougher regime, if they know that it will be stable and well-implemented in a professional and organised manner. Good subsurface prospectivity and a consequent high chance of finding accumulations of oil and gas can often be spoilt by self-imposed surface risks. Factors that may induce surface risk are Governments that: successively make petroleum regime changes, politically drive or make unqualified determination of fiscal and commercial terms without regard to the ultimate take to each party in the case of success, and the poor governance of the sector in general leading to untimely and late decision making. Indeed, a good regime whether it be a PSC-type or a licence/concessional one, will depend on the enforcement of its terms and conditions and the values agreed for those terms and conditions that determine economic outcomes.  The great difference between PSCs and other arrangements is that PSCs keep control over the produced oil and gas and its sale and disposal with the State, whereas licences and concessions leave such matters and the fate of the industry more to the will and imperatives of the corporates.  The intrinsic control of a contractor by the NOC under a PSC means the Government has to be better equipped, more efficient and more knowledgeable to operate such a regime than under a licence or concessionary regime. The State or its representative (usually its NOC) needs to make the PSC work in its favour as it is the manager of the entire enterprise and needs to lead the way. Any failure to step up to such challenges will result in a poorly planned development of the industry with delays, unrealised synergies leading to lost production, and overall loss of value from the resources. No matter what regime is applied to the development of petroleum resources, there is no doubt that resolute and appropriate petroleum policy formulation and firm and fair administration of the sector will pay dividends for any host Government willing to invest in such. The definition of a petroleum regime is not a new game; it has been done many times across the world by many Governments and there is very sound collective advice on the subject which is relatively inexpensive to access compared to the enormity of the task and the value of managing a Nation’s petroleum resources optimally. Figure 7: The IMF has some excellent specialists in its Fiscal Affairs Department who advise Governments on resource regimes and it has often commissioned books and studies on such matters as in the excellent handbook on Administering Fiscal Regimes for Resource Industries by Jack Calder, formerly of the Oil Taxation Office of the UK, ex libris McWalter.    

Bougainville Copper Limited (BCL) is pleased to announce the appointment of Mr Johnny Patterson Auna as Chief Executive Officer (CEO). Mr Auna, who hails from Laguai Village, Buin in South Bougainville, joined BCL in March 2024 as Chief Financial Officer and Company Secretary. He has also been serving in the role of Acting CEO since July 2024, following the unfortunate resignation of the late David Osikore, due to health reasons. Mr Auna’s appointment follows a proud family legacy with his late father Joseph Lawrence Auna, serving as BCL’s first Papua New Guinean and Bougainvillean general manager, heading up its Personnel Services Division in 1989. Johnny Auna is a highly regarded executive with more than 30 years’ experience in finance and accounting, strategic planning, senior management, and corporate operations in both the private and public sectors in PNG and Australia. He has also served on several boards as both a director and chairman and is a certified practising accountant who holds several qualifications, including a Bachelor of Business in Accountancy from Deakin University in Australia.  Mr Auna said he was “honoured and privileged” to be given the opportunity to work for and lead the new BCL management team as CEO and thanked the board for its confidence in him.  “I consider this to be a once in a lifetime opportunity given the significance of where things sit with BCL as a Bougainvillean company and the ABG’s plans and negotiations for Independence with the National Government,” he said. “The redevelopment of the Panguna mine is a key impact project that Bougainville needs to ramp up its economy and act as a catalyst for further economic development for Bougainville, its people, and all stakeholders.” Prior to joining BCL, Mr Auna served as Secretary of the Department of Treasury and Finance with the Autonomous Bougainville Government (ABG). During his diverse career to date, he has also served as a managing director, general manager, CEO, accountant, business consultant and commodity trader. Mr Auna takes on the CEO role at a pivotal time for BCL as the company moves to a more active operational phase. In February 2024, the company was granted a five-year extension of its EL01 exploration licence in the Panguna mine project area. “The granting of EL01 by the ABG and signing of a Land Access and Compensation Agreement with landowners in 2024 lays the groundwork for the redevelopment of the Panguna mine to commence,” Mr Auna said. As a brownfield project, work will be completed this year on landowner identification studies and social mapping as well as modelling and pre-feasibility studies using existing intellectual property resource data. Lines of communication are also being opened with potential project development partners and operational structures and funding arrangements will also be explored. “I look forward to working with all BCL stakeholders as the new CEO to ensure that Panguna’s redevelopment is implemented in an environmental, social and commercially responsible and viable manner,” Mr Auna said.   BCL Chairman, Sir Melchior Togolo said Mr Auna’s local knowledge and connections across government and the broader community will be invaluable to project advancement. He will also continue to act as Chief Financial Officer and Company Secretary until a new appointment for these positions is made.

The Papua New Guinea Chamber of Resources and Energy (PNG CORE) is proud to announce its Highly Commended Recognition in the Best Use of Technology (500+ category) at the 2024 EventsAir Innovation Awards. This year’s awards saw a record number of high-quality submissions, making the judging process highly competitive. Despite the strong field, PNG CORE stood out for its exceptional use of the EventsAir platform, which has greatly enhanced event management and engagement across its operations. “We are grateful to receive this recognition,” said Mrs. Pansy Taueni-Sialis, Chief Operating Officer of PNG CORE. “This award highlights our commitment to leveraging technology to connect stakeholders and in streamlining our operations. The events Air platform has been integral in delivering more efficient, engaging, and impactful events that drive growth and innovation in Papua New Guinea’s mining, oil and gas sectors.” “The platform has played an enabling role in organizing and managing successful conferences, workshops, and seminars, enhancing communication, data management, and real-time engagement for more dynamic events.” “We thank the Innovation Awards organizers, our dedicated team led by Manager Events Sheryl Peter, and partners who continue to drive our digital transformation,” Taueni-Sialis added. “This recognition encourages us to keep adopting new technologies to strengthen the resources and energy sectors and contribute to the sustainable development of Papua New Guinea.” “PNG CORE remains committed to advancing the industry and promoting innovation and collaboration in the nation’s resources and energy sectors.”