Fair split: finding an oil and gas model that works in Papua New Guinea


Papua New Guinea is making changes to its approach to oil and gas projects, suggesting the country gets a worse share of revenues than other comparable producing nations. John Chambers, General Manager of PNG LNG venture partner Santos, has considered some of the options used internationally.

Independent oil and gas producer Santos. Credit: Santos

The Papua New Guinea government’s amendments to the Oil and Gas Act point to potential new relationships between the State and oil and gas companies, according to law firm Allens.

‘Minister Kua stated he would be introducing a new bill to move away from the current concession-based licensing system to a production-sharing arrangement, for both the mining and petroleum industries,’ an Allens note said.

What choices are available to the PNG government with future projects, especially if it starts sharing production and revenue?

Fair split

Speaking during a recent online conference, Chambers said many countries, including PNG, are grappling with how to get a fair split.

‘A very common system is a royalty tax, which is what Australia has, Papua New Guinea has, the United States and Canada – a lot of countries use it.’

‘Within the petroleum industry, there are three broad types of fiscal schemes that countries operate. They often have a mixture of these. There is no single type; they all have variations and tweaks to make them work in individual circumstances,’ Chambers said.

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‘A very common system is a royalty tax, which is what Australia has, Papua New Guinea has, the United States and Canada – a lot of countries use it. It is a very simple system where the contractor – the oil company – invests in exploration or production. The state takes a royalty and levies a tax on profits. That is pretty much how it works in PNG, with some tweaks with the state company [Kumul Petroleum] being involved.’

Chambers said production-sharing contracts are also used in many countries.

‘The contractor – the oil company – invests in development or production and the state shares in production after costs are paid,’ he said. ‘It is not a panacea. The investor has to get their money back and then the splits happen. Although you can tweak it to get earlier government take.’

The third type of fiscal model is a service contract which, Chambers noted, is mainly used in the OPEC countries where there are very large resources. The contractors are paid a dollar-per-barrel rate.

‘It is probably not applicable to PNG where you have a large amount of in-ground risk still,’ he suggested.

Fiscal regimes

Chambers said that in PNG investors get a 52 per cent share of revenues. In Australia the investors’ share is 61 per cent and in Indonesia, which has a production-sharing arrangement, the investors’ share is 51 per cent.

In PNG, there is up to 22.5 per cent state participation (shares in the venture), plus two per cent free landowner equity. There is a royalty and development levy of about four per cent (Chambers said that has been increased to six per cent for Papua LNG) and the 30 per cent income tax, plus a 30 per cent additional profits tax.

Australia only has a 30 per cent tax rate plus an additional profits tax (resource rent tax). Indonesia, where the ‘production sharing contracts (PSCs) were invented’ is now ‘morphing into a royalty tax system,’ according to Chambers.

Types of fiscal regimes.

‘They [Indonesia] have actually shifted to having a higher effective tax rate and royalties as well,’ he said. ‘So, although PSCs might be the flavour of the month in PNG, you don’t have to look far to see that Indonesia is actually shifting away from those.’

Mutual interest

Chambers believes that resource companies and the PNG government have significant areas of mutual interest. They both want to:

  • Increase reserves (for companies) and understand endowments (for the government)
  • Invest in local communities
  • Minimise environmental impacts
  • Work within a stable fiscal framework (for companies) and attract private sector investment and taxation revenue (for government)

With PNG LNG, two LNG tankers leave the LNG plant every week, so there is a huge amount of cash flow running through the country. But that money has to be used to pay off the investment: almost $US20 billion with PNG LNG, the financing costs.

Income tax

‘There has to be a split for landowners to cover royalties and there are ongoing operating costs.’
Chambers added that in resource-rich countries, like Australia and many African nations, there is a ‘multiplier effect’, whereby resource projects stimulate three times its size in additional economic activity.

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