Papua New Guinea Draws Energy Interest

SYDNEY - Foreign governments are boosting efforts to win influence in Papua New Guinea, with Australia deepening economic and defense ties with the impoverished South Pacific nation Friday as it prepares to become one of the world's newest significant energy producers.

The visit by Julia Gillard represented the first by an Australian prime minister to Papua New Guinea's capital, Port Moresby, in four years. It followed trips this year by Thailand's leader, Yingluck Shinawatra, and a U.K. government minister.

China, too, has made little secret of its desire to gain diplomatic weight in Papua New Guinea. Beijing offered almost $3 billion in loans for infrastructure projects in the country last year and has a long-term deal to buy its first natural-gas exports.

"We're seeing a lot more economic competition between Chinese and Australian and other businesses in Papua New Guinea," said Jenny Hayward-Jones of the Lowy Institute for International Policy, a Sydney-based think tank. "The Thai prime minister doesn't visit just for the hell of it."

Papua New Guinea, known for its jungles and tribal society, has large deposits of natural gas, copper and gold, and lucrative fishing rights that long have appealed to foreign investors.

Exxon Mobil Corp. has placed the biggest bet on the country's resources sector, leading development of a $19 billion liquefied-natural-gas project due to begin exporting to Asia, including China, next year.

Papua New Guinea has been a large recipient of foreign aid, including from Australia. Little infrastructure exists outside Port Moresby, while the country's hilly, densely forested terrain makes getting around difficult.

The country, with several thousand separate communities, has a history of tribal conflict. Lawlessness has been exacerbated by an influx of guns into urban areas. In 2011, Port Moresby was rated one of the worst cities in the world by the Economist Intelligence Unit, measured on criteria such as stability and infrastructure.

Papua New Guinea Prime Minister Peter O'Neill and Ms. Gillard penned a joint declaration Friday to boost trade and economic links. Later this year, they plan to sign a more formal economic-cooperation treaty. The nations also vowed to cooperate more on regional defense issues.

"Australia wants to work with Papua New Guinea as economic partners, as development partners, and as partners in the region," Ms. Gillard said in a speech.

Australian officials also have been advising Papua New Guinea on establishing a new sovereign-wealth fund to lock away proceeds from its anticipated energy riches.

Still, the trip got off to a rocky start, as Mr. O'Neill criticized Australia's visa policy as too onerous.

"Our people find existing visa arrangements very frustrating," he said. "Some regard them as insulting." Ms. Gillard said steps were being taken to address the issue.

Papua New Guinea, home to 6.4 million people and covering an area slightly larger than California, has been prone to political instability. A power struggle between Mr. O'Neill and predecessor Michael Somare, who led the country for many years following independence in 1975, lasted several months before it was settled in an August general election.

Since winning the election, Mr. O'Neill has signaled he wants more foreign investment in tuna processing, mining and gas.

Australia, separated from Papua New Guinea by about 94 miles of water at its northern tip, is the country's biggest investor, the Lowy Institute says. The U.S. and Malaysia invest a significant amount, while China is progressively increasing its role.

"There's no conflict whatsoever" between Papua New Guinea's strengthening of its relationship with China and ties with traditional allies like Australia, said William Duma, minister for petroleum and energy, in an interview. "Aren't we all looking to export to China?"

Beijing has offered loans totaling 6 billion kina ($2.9 billion) to Papua New Guinea for infrastructure, following similar moves by China in other Pacific Rim countries like Tonga. Mr. O'Neill said late last year the government planned to draw down as much as $200 million of those loans this year.

Unlike many resource-rich nations, Papua New Guinea is lightly explored, increasing its appeal to overseas investors. France's Total SA and Japan's Mitsubishi Corp. each bet on natural-gas projects there last year. U.K.-based consultancy Wood Mackenzie estimates Papua New Guinea has 26 trillion cubic feet of natural gas--about equal to U.S. annual consumption.

The country also has large minerals deposits that have lured companies like Glencore Xstrata PLC and Australia's Newcrest Mining Ltd.

Mining those deposits can be hard, however. Deals often need to be struck with tribal leaders and can unwind if there is popular opposition to mining companies' plans. The Panguna copper mine on the island of Bougainville shut in 1989 amid an armed insurrection that led to attacks on its workers.

"It ranks high on the list of difficult places to do business," said Ronald May, an Asia-Pacific specialist at Australian National University.

Copyright (c) 2012 Dow Jones & Company, Inc.


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