PAPUA New Guinea’s energy users such as transport companies, manufacturers, the hospitality industry and households will benefit from the lower energy prices over the next months and possibly years, Institute of National Affairs executive director Paul Barker says.
But, he added that the oil/gas explorers and producers would face tougher times, and more marginal or less proven projects and fields may well be deferred for rosier times into the future. He made the comment yesterday in relation to the global drop in oil prices down to US$56 (K145) per barrel. Barker said that was the first time since 2007 there should be some stimulus to the sluggish global economy, which has been burdened by high energy costs. “LNG prices are directly connected to oil prices. “There have been efforts in recent years to have a separate LNG market, but partially substitutes, they’ll invariably remain connected to some extent. “LNG is almost entirely used for power generation and PNG’s production goes to the major East Asia market (China/Japan/South Korea/Taiwan). “As to PNG, there has been some talk by government, consumers (and the investors and financiers) to secure long term secure energy supplies (and ensure sound returns), so contracts (and financing contracts) were agreed. Since then the market had changed and it’s become very much more of a buyers’ market, with less interest in securing such long term exclusive supplies. “Under those contracts consumers (East Asian energy companies) may still be paying markedly above market prices for 80 per cent of the PNG’s product, providing some shield from market forces. However, most contracts, including those for LNG provide avenue for renegotiation and buyers will not readily pay well above market prices for long without renegotiation or even reneging on contracts, partly facing pressure from their own consumers to pass on reduced world prices,” Barker said. “Likewise the government needed to recognise that revenue would be affected from this major (LNG) sector, which has been the bright economic hope for PNG for the medium term, and it is better to reviewing revenue and expenditure forecasts and plans promptly, rather than leaving it till later. “Clearly, the focus should remain on the provision of core public goods and services, notably for law and order, basic infrastructure (maintenance and upgrades), sound education and health, and on encouraging broad-based economic development and employment in formal and informal sectors. “Some level of continued fiscal stimulus is justified to sustain economic activity and formal employment, but it should be at a prudent level, rather than overly borrowing against upon tighter future revenue, and major commercial investments and borrowing for such should be avoided while major capital investments and projects should only be based upon sound economic and financial justification, with some current and prospective projects/facilities justifying reconsideration, particularly those of a potentially more prestige and white elephant nature. “Clearly, much tighter application of procurement procedures is critical, to ensure public contracts are not over-priced, along with wider public participation in public tracking and accountability mechanisms,” he said.
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