assessments

Sep 6, 2019 | 09:00 GMT

9 mins read

In Papua New Guinea, Reality Will Dim Any Nationalist Dreams

Papua New Guinea's Prime Minister James Marape (left) shakes hands with Australia's Prime Minister Scott Morrison as their wives look on in Canberra during July.
(MICK TSIKAS/AFP/Getty Images)
Highlights
  • Papua New Guinea's small size and dependence on oil and gas extraction will limit Prime Minister James Marape's ability to win more beneficial deals without alienating foreign investment. 
  • To mitigate the country's massive debt, Marape has also waded into great power competitions by appearing to openly court China for additional financial aid. 
  • But in doing so, he'll have to tread carefully to avoid running afoul of Australia, which remains the country's largest trade and investment partner. 
  • Meanwhile, Marape's political longevity is also in question given the country's deep internal fractures and no-confidence mechanisms that will come into play in late 2020.

Papua New Guinea's new prime minister, James Marape, is touting a more nationalist push on resources for his energy- and mineral-rich country and hinting at a rebalance in great power relations, vexing both foreign companies and regional heavyweight Australia. Since taking office in late May, Marape has launched a formal review into a multibillion dollar liquefied natural gas (LNG) project, threatened to seek Chinese help in refinancing the country's $7.9 billion debt and mulled an overhaul of the country's natural resource laws to increase Papua New Guinea's share of revenue. But despite his ambitious intentions, the eager new leader will find it difficult to take any of these efforts too far, because there's only so much the small resource- and aid-dependent Pacific country can push the envelope without jeopardizing its political stability and primary income streams. 

The Big Picture

As the great power competition heats up between the United States and China, U.S. allies such as Australia are trying to find a balance and preserve their own domains against Beijing's encroachment. For Canberra, the broader Pacific islands — and Papua New Guinea in particular — are vital to maintaining the country's national security.

Marape Goes to Battle

After serving as the country's finance minister for seven years, Marape came into power in the midst of a political crisis that ousted the eight-year government of Prime Minister Peter O'Neill. In April, he resigned from his post in protest of a $13 billion deal that O'Neill's administration had signed with Total SA of Paris for the Papua LNG project. Marape condemned the agreement for failing to secure enough revenue for Papua New Guinea, citing the dismal government payout from the existing parts of Exxon's separate PNG LNG project as evidence. The Exxon project brought in only $145 million in government revenue in 2016 — a far cry from the annual projection of $613 million initially promised per year through 2021 — by allowing the U.S.-based energy giant to subtract operating, capital and debt costs when calculating its government payouts.

Just a month after taking office in May, Marape began a full review of Total's Papua LNG deal, with an eye on improving the terms. (The review also put on hold an as-yet incomplete agreement for Exxon's PNG LNG expansion project, which is connected to Total's Papua LNG deal.) But shortly after, he was quick to reassure that his administration was still pro-investment and that adjustments need not be drastic. And on Sept. 2, the government announced it would move forward with the Total deal after the company agreed to make the pipeline accessible to third parties and to open up the possibility of a government stake in the future, and after it granted state-owned Kumul Petroleum Holdings the option to take on ownership of some LNG tankers. 

Putting Papua New Guinea First

For foreign companies already locked into investments in Papua New Guinea's substantial oil, natural gas, gold, copper and nickel reserves, Marape's new nationalist push risks troubling their long-term plans. The way Total was able to save its project by agreeing to some concessions could temporarily alleviate some of these concerns. But perhaps most importantly, the settling of the deal after such extreme political rhetoric serves as a testament to the limitations Marape's government will surely face when it comes to implementing its wider "Papua New Guinea-first" platform. 

Papua New Guinea's Goods Exports

Marape's ambitious vision for the country includes reducing its reliance on primary resource extraction by building onshore processing and increasing agricultural exports to nearby Asian markets. He's also stated that he wants to overhaul the country's resource-related legislation by 2025 to ensure that it earns at least half of the foreign revenues on all resource projects via taxes and royalties. But in doing so, he faces a steep uphill climb, because energy and resource exports made up over 77 percent of exports in 2017 (Agriculture, by contrast, accounted for only 15 percent).

When it comes to oil and gas in particular, LNG accounted for 34 percent ($3.86 billion) of exports in 2018, making it a critical revenue stream for his government to sustain and thus protect. Accounting for just 3 percent of global LNG exports, Papua New Guinea is also dwarfed by much larger exporters in the region (namely, Australia, Indonesia and Malaysia), as well as a growing field of other potential nearby exporters such as East Timor. This means that despite his attempts to pressure foreign majors, Marape will have to tread lightly — knowing that foreign energy firms can take their lucrative projects elsewhere, should his government's meddling become too burdensome to their bottom lines.

Leveraging Great Power Games

Marape's other big priority will be managing the country's $7.8 billion debt burden, which now amounts to nearly one-third of its gross domestic product (GDP). The massive debt was largely racked up under Marape's predecessor in recent years. The 2015 drop in oil prices hit the country hard, worsened by an ill-fated $810.5 million loan used to buy a stake in the Australian oil and gas company Oil Search. And as a result, the 2018 government budget was in a $478 million (2 percent) deficit.  

To help dig the country out of its debt, Marape has sought additional help from its two vying suitors, China and Australia. On Aug. 7, Marape's government announced it had approached China in the hopes of having Beijing fully refinance Papua New Guinea's debt burden. This raised a furor from neighboring Australia, who fears such a move could lead to a loan default and the Chinese repossession of a major New Guinean port, mine or infrastructure project. Several weeks later, Marape's government called for greater financial assistance from Australia. Specifically, he said he wanted 25 percent to 50 percent of total Australian aid to the country in the form of direct budget support. After Canberra declined the request, Papua New Guinea tacitly threatened to seek help from China instead. And, just as intended, this prompted Australia to mobilize a high-level delegation to the country to reportedly discuss terms for a significant loan. 

Papua New Guinea's Goods Exports by Country in 2018

But while such efforts to play China and Australia off each other might help shake a more money loose from Canberra, there's probably only so much more cash the regional giant can funnel to Papua New Guinea. In addition to a recent partnership to develop a joint naval base on Manus Island, Australia is already the country's largest trade and investment partner, with $6.7 billion in bilateral trade and $17 billion in investment in 2018. Between 2019 and 2020, Australia provided about $400 million in aid. 

Australia's assistance, however, is often slotted for programs specifically focused on making Papua New Guinea more financially independent and politically stable. China's assistance, by contrast, often comes in the form of loans with far fewer strings attached. Beijing's state-owned China Development Bank, for example, is slated to deliver a $300 million loan to help with Papua New Guinea's budget deficit at the end of the year. 

That said, China has so far accounted for only about 17 percent of Papua New Guinea's total foreign aid in 2019, paling in comparison to Australia's 40 percent. But Papua New Guinea is also a keystone of Australian efforts to secure its periphery from China's growing presence, especially as Beijing's rivalry with one of its strongest allies, the United States, heats up. And for this reason, Canberra will want to keep Beijing from growing its financial influence further. 

But at the same time, Australia is also facing mounting political pressure at home to curb government spending and wean the country's Pacific neighbors off aid. Thus, it won't be able to completely counter Chinese largesse. Instead, it will move to prevent China from making major inroads — dangling the sweetener of its non-loan aid and ability to help Papua New Guinea complete the restructuring needed to continue receiving International Monetary Fund assistance.

A Looming Existential Threat

Meanwhile, back at home, Papua New Guinea's innately fragile and fragmented political context will make rebalancing the country's resource-dependent economy a particularly challenging feat for Marape's government. The country is deeply fractured, geographically and ethnically. Disruptive pushes from fragmented regional power bases have led to a dispersed, decentralized government that grants a strong hand to provinces. The successful pushes of the resource-rich states of Enga, New Ireland and New Britain for a road map to greater autonomy could prompt other regions to follow suit. Meanwhile, the region of Bougainville is planning a nonbinding independence referendum in November, which risks whipping up secessionist fervor elsewhere in the country. 

Papua New Guinea's new prime minister can only go so far without jeopardizing the country's fragile political stability and vital foreign revenue streams. 

However, greater revenue-sharing on LNG projects across the country might help quiet some of these calls for regional autonomy. But if Marape is unable to deliver on his political promises and placate key stakeholders, there's a chance his term — scheduled to end in 2022 — could very well be cut short. Since gaining its independence in 1975, the country has seen a slew of feeble governments defined not by party or ideology, but by personal politicking and lawmakers defecting to other parties for their own self-interests. As a result, only a handful of these administrations have completed a full term. And indeed, Marape's rise to power embodies this trend as well. When an 18-month constitutional grace period expires, he'll be vulnerable to a vote of no-confidence beginning in October 2020 — the very same tool used to force O'Neill's resignation in May. 

To ensure he doesn't suffer the same fate as his predecessor, Marape he will need to deliver a high-profile victory on resource deals that both saves face for the government and doesn't jeopardize vital projects. Meanwhile, on debt and aid, he will need to extract at least some concessions from Australia to illustrate his ability to diplomatically secure the country's interests. But in doing so, foreign players will be aware that he can only push so far due to his cash-strapped country's reliance on the revenue flows from both foreign LNG firms and Canberra. As such, while both Australia and foreign major oil companies will respond to Papua New Guinea's calls for adjustments, they will not make the kind of sweeping overhauls to their relationship with the government that Marape has called for.

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play