Large-Scale Mining Operations in Papua New Guinea

A large-scale mining operation is here defined, for the sake of argument, as one that produces mineral commodities with an average value of more than US$100 million a year for a period of at least ten years. Although the title of this article features the concept of a ‘large-scale mine’, we do not think of a ‘mine’ as a place where mineral resources are extracted from the ground, but rather as a group of excavation and processing activities that are integrated into a single whole by means of a network of corporate relationships between the producers. In Papua New Guinea (PNG), each large-scale mining operation occupies and constitutes a distinctive territorial enclave within the country’s borders, with one place of excavation, one processing plant and one route by which the product leaves the country.

In calculating the contribution of extractive industry to PNG’s exports, we have included a petroleum project that has been exporting oil on this scale since 1992, and this has recently been supplemented by a liquid natural gas project whose contribution to the value of PNG’s exports will be much greater. However, for the purpose of the present article, we have excluded oil and gas projects from our definition of a ‘mining operation’: because the mining and petroleum industries are subject to different forms of regulation in PNG.

PNG has hosted seven large-scale mining projects in the period since independence, five of which are still in operation.

  • The Panguna gold and copper mine operated from 1972 to 1989, when it was forcibly closed by civil unrest on the island of Bougainville.
  • The Misima gold mine (in Milne Bay Province) operated from 1986 to 2004.
  • The Ok Tedi gold and copper mine (in Western Province) began production in 1984.
  • The Porgera gold mine (in Enga Province) in 1992.
  • The Lihir gold mine (in New Ireland Province) in 1997.
  • The Hidden Valley gold mine (in Morobe Province) in 2009.
  • The Ramu nickel and cobalt mine (in Madang Province) in 2013.

The Ok Tedi, Porgera and Hidden Valley mines are all scheduled to close within the next decade. A large-scale seabed mining project has been approved for development but is not yet operational. Four other prospective large-scale mining projects (in Milne Bay, Morobe, Madang and West Sepik provinces) are currently undergoing feasibility studies, and the Autonomous Bougainville Government has plans to reopen the Panguna mine if it can mobilise popular support for this to happen.

The PNG Government reserves the right to purchase anything up to 30 per cent of the equity in any mining project for which it grants a development licence, but has generally ended up with a smaller stake or no stake at all. The balance of the shares in all large-scale mining projects has normally been held by foreign investors, including the companies that operate them, but the Ok Tedi project is now an exception to this rule because the former operator (BHP Billiton) decided that it was a liability rather than an asset. When the government has purchased a stake in a large-scale mining project, all or part of it has commonly been held in trust for the provincial government, local-level government or landowning community that hosts the project. These other entities are allowed to choose whether they wish the national government to exercise this option on their behalf.

The PNG Government currently holds a 5 per cent stake in the Porgera project, which is operated by the Canadian company Barrick Gold, and this stake is held in trust for the Enga Provincial Government and the local landowners. A comparable stake in the Lihir project, which is operated by the Australian company Newcrest, was acquired and then sold by the local landowners. The government did not exercise the option to purchase shares in either the Hidden Valley project, which is also operated by Newcrest, or in the Ramu project, which is operated by the China Metallurgical Group Corporation. BHP Billiton bequeathed its shares in the Ok Tedi project to a charitable trust known as the PNG Sustainable Development Program, but this entity was nationalised in 2013, so this project is now wholly owned by the government.

Development Agreements

The development of a large-scale mining project in PNG is framed by three different types of agreement that are normally negotiated in the following order. First, there is a compensation agreement between the holder of an exploration licence and the customary owners of the land covered by that licence. Since 97 per cent of the land in PNG is generally held to be customary land, there is no such thing as an exploration licence without customary landowners. Second, there is a development agreement (or mining development contract) between the national government and the project proponent based on feasibility studies that the proponent provides to the government. This type of agreement is linked to the production of an environmental impact statement that must also be approved by the national government. Third, there is a benefit-sharing agreement between the national government, the provincial and local-level government (or governments) hosting the project and the customary owners of the land required for development purposes, which is negotiated through an institution known as the development forum. The project proponent is also represented in the negotiation of this third type of agreement, but a development licence is not normally granted until it has been finalised. The first two types of agreement have been features of PNG’s mineral policy framework since independence in 1975; the third type was added in 1988 in response to political pressure from provincial governments and local community representatives.

In PNG, development agreements have normally required that national participation be specified in training and localisation plans and business development plans whose implementation is then reported to the national government at regular intervals. These plans are subject to the ‘preferred area policy’, which has come to inform the negotiation of benefit-sharing agreements. The origins of the preferred area policy can be traced back to a pair of decisions made by the newly independent national government in 1976. The first decision was to repatriate a sum equivalent to the whole of the royalty collected by the national government, in its capacity as the legal owner of subsurface mineral resources, to the province from which those resources were extracted. This decision was made in response to threats of secession from the province that hosted the Panguna mine, but it would have general application under the new system of provincial government that was put in place at the same time. The second decision was to oblige the future developer of the Ok Tedi mine to give preference in training, employment and business development to the people of the area most directly affected by the mining operation. This decision was not initially meant to have general application, nor did it apply to the Panguna mine. It was justified by the observation that the people living around the Ok Tedi mine were exceptionally poor and therefore deserved this form of affirmative action.

Considerations of poverty and equity have long since disappeared from PNG’s preferred area policy. The allocation of royalties and the allocation of entitlements to training, employment and business development opportunities are now included in the range of benefits that are subject to benefit-sharing agreements through the development forum. In effect, the preferred area policy creates concentric rings of entitlement to a range of benefit streams that are subject to such agreements, including entitlements to training, employment and business development opportunities. The innermost ring is occupied by the customary owners of the land covered by development licences, the next by ‘project area people’ (however these might be defined), the next by the people or government of the host province, and the outermost ring by the population or government of the nation as a whole. In the period since the development forum was invented in 1988, there has been a steady increase in the proportion of government revenues from each new resource project that is captured by organisations or individuals in the three inner circles of entitlement. Since 1993, the economic privilege bestowed on preferred areas has been compounded by a tax credit scheme for developers who supply social and economic infrastructure to local communities.

Local-Level Politics

There is no simple answer to the question of what actually constitutes the ‘local’ level at which large-scale mining operations become the subject of local-level politics. There is no necessary correspondence between the boundaries of a mine-affected area and those of a set of political or administrative units, even if each mine-affected area is conceived as a unique geographical space surrounding a large-scale mine. The question of what actually constitutes a mine-affected area is itself a political question, especially if people’s inclusion in such an area entitles them to special consideration in the payment of compensation or the distribution of project-related benefits. Project operators have an obvious interest in limiting the size of such an area in order to treat broader social and environmental impacts as externalities for which they cannot be held accountable. On the other hand, there may be some circumstances in which the boundaries of the area affected by one project overlap those of the area affected by another project, and it is also possible to represent the areas affected by several different projects as part of a larger region which experiences the cumulative social and environmental impacts of all of them.

PNG has four tiers or levels of political organisation. The second tier consists of the National Capital District, 20 provinces and one autonomous region (Bougainville) that used to be a province. Each of these 22 entities has its own elected representative in the national parliament and 21 of these representatives are known as governors. At the next level down, there are 89 ‘open electorates’, also with their own elected representatives in the national parliament, three of which are subdivisions of the national capital, while the rest are known as districts in their own right. The fourth tier comprises 332 local-level governments, each with its own directly elected president who participates in decisions made at the district and provincial levels, but not at the national level. Twenty-nine of these local governments represent towns, most of which are provincial capitals, while the rest represent rural areas.

Since most of PNG’s provinces do not host a large-scale mining project, nor any of the facilities associated with the export of oil and gas, there is an ongoing political debate about the way that national revenues from the extractive industry sector should be distributed between the minority of project-hosting provinces and districts and the majority that cannot currently claim ownership of such a project. The point at issue here is the so-called ‘derivation principle’, which says that a national government should transfer some of the revenue it derives from any economic activity to the lower levels of government responsible for the area where the activity occurs so that these lower levels of government will have an incentive to support this activity. This is a national issue, not a local one, and is only indirectly connected to the distribution of revenues from foreign aid. Foreign aid now accounts for only 3 per cent of PNG’s gross domestic product, and its distribution across the country could not possibly compensate for the effects of the preferred area policy, even if policymakers thought this would be a good idea.

In the context of the mining industry in PNG, local-level politics seems to have a quite distinctive focus on the negotiation and implementation of promises to provide compensation and benefit packages to the customary owners of land in mine-affected areas, but also on the distribution of the contents of these packages among the people who are entitled to a share of them. The size of the enclaves that are demarcated for this purpose varies from one project to another, but the boundaries may also change during the course of the project cycle. At one extreme is the Lihir group of islands, which accounts for just one of the ten local government areas in PNG’s New Ireland Province. At the other extreme is the area now recognised as the one affected by the Ok Tedi mine, which has grown to include all or part of ten out of the 14 local government areas in Western Province. The larger the scale of a mine-affected area, the greater the scope for it to be internally divided into separate geographical zones, each of which may then become the site of a distinct set of political activities related to the mining project that affects it.

A mining enclave or mine-affected area cannot be neatly demarcated by lines on a map in the same way that a mine site or plant site is bounded and guarded by fences, gates and signposts. It is also constituted in an institutional and ideological sense, by means of its connections with different political and administrative levels and spaces. These connections can be made of legal rules or administrative norms, the distribution of shareholdings in different companies, networks of patronage or clientelism, or the positions assigned to the practice or promise of mining in different political imaginations. The multidimensional nature of the mining enclave or mine-affected area therefore means that local-level politics is not simply politics conducted within a particular physical space, or even at one level of political organisation.

One thought on “Large-Scale Mining Operations in Papua New Guinea”

  1. It’s great you talked about how there are compensation agreements between holders of a mining license and the landowners since they are agreeing to work and excavate whatever precious resource is within the land in exchange for a cut of the profit. Another thing is that there is also an agreement in place between the national government and the project head based on the amount that the project head provides to the government. While I obviously have no experience when it comes to talking about large-scale operations of this size, what I can say is that when it comes to land ownership and profit, there should always be an even share between two parties.

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