WSJ: Papua New Guinea to tap China loan
David Winning | Wall Street Journal
Papua New Guinea, an impoverished Southeast Asian nation known for its jungles and tribal society, plans to further tap a 6 billion kina ($2.9 billion) debt facility being negotiated with China, in the latest sign that Beijing is successfully extending its economic influence throughout the Pacific Rim.
The country plans to draw up to $200 million from state-owned Export-Import Bank of China next year to help pay for new roads and other infrastructure, Prime Minister Peter O’Neill told The Wall Street Journal in an interview Monday.
“China is basically trying to use their major state-owned enterprises to do the construction work for some of our major infrastructure projects,” Mr. O’Neill said. “We are working together with the Chinese companies which are in the Fortune 500 to develop many of the infrastructure [projects] for us.”
China has long used government-aid and infrastructure projects to woo resource-rich countries and extend its diplomatic influence. Much of the focus till now has been on Africa, given China’s growing reliance on foreign oil and strategic metals such as copper, but Beijing is stepping up efforts to court Southeast Asian economies and island nations dotted across the South Pacific.
Energy may also be at the heart of Chinese motives in Papua New Guinea. The country, which covers an area slightly larger than California, is poised to become one of the world’s newest significant energy producers from 2014 when the $19 billion Exxon Mobil XOM +0.02% Corp.-led PNG LNG project starts shipping cargoes of liquefied natural gas, or LNG, to Asian customers including China Petroleum & Chemical Corp., 600028.SH +1.50% known as Sinopec Corp.
With an estimated 26 trillion cubic feet of natural gas—roughly equivalent to U.S. consumption of the clean-burning fuel in a year—and vast reserves of metals such as copper and gold, Papua New Guinea has become one of the world’s hot spots for resources investment. France’s Total SA FP.FR +0.84% and Japan’s Mitsubishi Corp. 8058.TO -0.58% have each placed bold bets on the country this year by taking stakes in natural gas discoveries or exploration blocks.
Mr. O’Neill said China’s loan offer wasn’t tied to preferential access to Papua New Guinea’s resources.
“It’s a normal, commercial deal for the Exim Bank and other financial institutions,” he said.
Papua New Guinea needs to be fiscally responsible and not draw down the China loan too quickly, urged Mr. O’Neill, adding there appeared to be enough liquidity internally to meet most of the country’s borrowings in 2013.
“In terms of actual loans that we’ve received it’s less than $500 million so far for the various projects that we’re doing with Exim Bank of China. We’re very much conscious of the fact that we need to return our debt levels down to less than 35% of [gross domestic product], and we’ve framed our budget to that effect,” he said.
Mr. O’Neill was elected as prime minister by lawmakers last year after predecessor Michael Somare left the country for medical treatment for a heart condition, but the legality of his promotion was repeatedly challenged by Papua New Guinea’s Supreme Court and factions within the army. In January, a former colonel in Papua New Guinea mutinied and detained the head of the armed forces before order was restored.
A volatile nation, Mr. O’Neill said Papua New Guinea has regained stability following national elections in August that ended a power struggle with Mr. Somare, who led the country for many years following independence in 1975 from Australia.
Political uncertainty and a harsh climate have plagued investment in Papua New Guinea. Exxon Mobil said in November that the cost of building the PNG LNG project had blown out to $19 billion from a previous estimate of $15.7 billion because of foreign exchange swings, landowner disputes and torrential rain.
But Mr. O’Neill remains adamant about the potential to expand the PNG LNG project beyond its existing two gas processing plants.
“We believe that once the expansion takes place then the upside will outweigh the cost,” he said.
He also expressed confidence that Papua New Guinea would be able to finance a higher share of InterOil Corp.’s IOC +0.96% natural gas assets following an agreement reached in November. The state will more than double its interest in InterOil’s Elk and Antelope natural gas discoveries to 50% if it can finalize terms with the U.S. energy company.
“We’re restructuring all our assets in both minerals and the oil sector—the state’s direct interest in all the projects that we have,” he said. “We are now going to set up two separate companies that will have a very solid balance sheet and I think we can borrow off those balance sheets.”
