The political aftershocks of PNG’s earthquake need careful handling

| April 8, 2018

The 7.5-magnitude earthquake in Papua New Guinea (PNG) on 26 February 2018 killed over 100 people and left 270,000 in need of immediate humanitarian assistance.

There have been dozens of physical aftershocks. But the most damaging aftershock may be the earthquake’s undermining of the ‘social licence’ of the affected areas’ PNG LNG project, which is responsible for 40 per cent of PNG’s exports.

The immediate disaster relief effort is proceeding slowly but surely. The Highlands Highway, a lifeline through PNG’s Highlands Region, has been cleared, although many important side roads remain blocked. In the affected areas, health centres were badly damaged but 73 per cent have re-opened. Early damage estimates are at US$200 million (600 million kina).

International cash contributions totalled some US$45 million by mid-March, and there has been further in-kind assistance such as military transport support from Australia. A state of emergency in the area has been declared, and a new Restoration Authority has been created to guide reconstruction over the next four years.

The physical aftershocks have been significant: quakes measuring up to 6.7 in magnitude have killed more people and have kept them fearful of returning to sleep in their damaged homes or to tend their gardens. The latter is especially important — subsistence agriculture dominates the area, supplemented by coffee or other cash crops and by the promise of royalties from resource projects.

The public’s growing concern is whether the earthquake demonstrates the ancestral spirits’ disapproval of the LNG project. Most areas affected by the earthquake are very remote and have little contact with the modern world. Traditional belief systems remain very strong and ancestors are ever present.

Local landowners were meant to receive most of the 4 per cent of royalties and development levies based on the wellhead value of resource production in these areas. But a pre-condition for these payments was that the actual landowners be identified.

This has not happened in the project area, and no payments have been made even though the project has been exporting gas since May 2014. Legal experts have serious doubts whether there can be any agreement on exactly who are the legitimate landowners.

Without such an agreement and with no payments to local landowners, there were already growing concerns about the project’s ‘social licence’ to operate. The Hide gas plant was closed by landowner leaders in late 2016 and special police squads were mobilised to protect the site.

The 2018 earthquake occurred among an already volatile mix of weapons, tribal conflicts, growing disenchantment with the project due to a lack of cash benefits, and traditional belief system concerns about the project. There is now local concern that the LNG project itself was the reason for the earthquake.

Although geological experts are clear that the earthquake resulted from natural movements, social media and local discussions are generally blaming ancestors or the drilling from the LNG project.

The extent of this disquiet, although ‘irrational’, has resulted in senior political leaders such as PNG’s Minister for Finance and its Vice-Minister for Petroleum and Energy calling for an inquiry into the reasons for the earthquake to confirm if it was natural.

PNG’s opposition leader has also called for all outstanding royalties to be paid before the project re-opens.

Following a request from Prime Minister O’Neill, Geoscience Australia has agreed to investigate the causes.

The immediate economic impacts from the earthquake are the estimated US$200 million damages bill, the closure of the LNG project for an estimated eight weeks and the effect on government revenues.

These economic impacts are bearable. The government has promised to spend US$150 million in repairs, but this is likely to be spent over several years and is only a very small proportion of the state budget. Losing eight weeks of production at the LNG project is balanced out by the increase in oil prices in early 2018, so PNG’s overall export values in 2018 are still likely to exceed those in 2016 and 2017.

Revenue flows from the project are only 1 per cent of the government’s budget due to very generous depreciation and other tax concessions.

The real economic risks are if the earthquake marks a turning point in local support for the LNG project. This could be psychological, building on the continuing frustrations over the non-payment of royalties and development levies, and the willingness of the local Huli people to take direct action.

The worst case scenario is one that PNG has already experienced. The loss of social licence for the Bougainville copper mine in 1989 started a decade-long civil war that led to thousands of deaths, undermined development prospects on the island for a decade, damaged PNG’s economy more broadly and quite directly led to the removal from office of prime ministers Paias Wingti and Julius Chan.

Following the earthquake, the PNG government and LNG-project partners will have to work even harder to maintain a social licence for the project. The alternative would be catastrophic for Papua New Guinea.

When the Bougainville Copper mine closed in 1989, there were other major resource projects in the pipeline to ‘pick up the slack’. This time around, even with LNG and other major mining projects in the offing, there are no projects as advanced or as large as the early 1990s resource projects of Kutubu Petroleum and the Porgera Gold Mine.

History shows economic pressures lead to political pressures, and mishandling the ‘irrational’ elements of this earthquake would put Prime Minister Peter O’Neill’s coalition government under great strain.

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Paul Flanagan

Paul Flanagan is the Director of PNG Economics and an Associate at the Development Policy Centre at ANU. His thirty-five-year public service career was evenly shared between Treasury/Finance and AusAID.