JIMMY MALADINA'S US$81 BET

 

by PAUL L. KEBAIJA

The centrepiece of last week's Papua LNG bills is a price-linked benefit-sharing mechanism built around a neutral benchmark of US$81 a barrel. Below it, the State gives the project fiscal incentives that the Petroleum Minister describes as limited. Above it, the project pays the State a premium. Each side is capped at US$1.95 billion. Headline corporate income tax and production levy rates stay where they are.

On paper it looks like a fair hedge. The State shares the developers' pain when prices fall and their windfall when prices rise. Look closer and the symmetry fades.

The benchmark was set in a year of high prices. Brent traded in the high US$80s in August, comfortably above the line. But Papua LNG will not ship gas for years after a December FID. What matters is the price in the 2030s, not the price on the day Parliament voted. Brent has spent long stretches of recent years below US$81. If prices settle back there when the gas flows, the State pays. If they stay high, it collects. Nobody in Waigani has said which it expects, or published the price forecasts Treasury used to judge the deal.

The caps are equal in size but not in value. An incentive paid in a project's early years, when developers are servicing construction debt, is worth far more to them than a premium paid a decade later is worth to the State. A dollar in 2031 is not a dollar in 2045. Unless the agreement weighs both sides in present-value terms, two equal caps can hide an unequal bargain.

The form of the incentive matters as much as its size. Maladina has not said whether it reduces tax, defers it or arrives as a payment. Each lands differently on the budget. A tax reduction never appears as spending, so it escapes the scrutiny Parliament gives to appropriations. A State already struggling with arrears is promising up to US$1.95 billion of support to a consortium that includes some of the world's largest energy companies, without showing how it will be booked.

There are technical questions the House should have asked and still can. Is the benchmark fixed in nominal dollars or indexed to inflation? A fixed US$81 shrinks in real terms over 20 years, which makes the premium likelier; an indexed one does the opposite. Which price is it measured against: Brent, a Japanese crude index, or the project's own realised LNG price? Are the caps annual or for the life of the project? And how does the incentive interact with the four-year deduction of Papua LNG costs against PNG LNG income?

Each answer could tilt the deal by hundreds of millions of dollars. Some may favour the State. That is the point: nobody outside the negotiating room can tell. Ministers ask the public to accept that the mechanism protects PNG's long-term interests. A mechanism this sensitive to price should come with Treasury's scenarios, low, base and high, and what the State pays or receives under each.

Price-linked sharing is not a bad idea in itself. Producer governments use variants of it to keep marginal projects alive in downturns and to claw back windfalls in booms. Done well, it can be the fairest part of a fiscal regime. Done in secret, it is impossible to distinguish from a subsidy.

Until the scenarios are published, the US$81 benchmark is not a hedge. It is a bet placed on the public's behalf, with the odds kept from the people who will pay if it goes wrong.