esource Potential and Implications of

^ Mineral Development - i n the

South Pacific Papua New Guinea

East-West Center Resource Systems

Institute Summaries of the Papers Presented at the

Conference Held at

Arovo Island Papua New Guinea

September 1981 Commonwealth

Secretariat

r~x~~| EAST-WEST CENTER I n A ^ I H o n o l u l u - Hawaii

Resource Potential and Implications of Mineral Development

in the South Pacific

Summaries of the Papers Presented at the Conference held at Arovo Island, Papua New Guinea

September 11-15, 1981

East-West Resource Systems Institute East-West Center

1777 East-West Road Honolulu, Hawaii 96848

August 1982

[

ACKNOWLEDGEMENTS

It is my pleasure to acknowledge the support of our cosponsors, the Papua New Guinea government and the Commonwealth Secretariat, in organizing and assisting in funding the Arovo Island conference. Within these organiza­tions, Nigel Agonia and Pat Loseby in Port Moresby and Peter Freeman and Michael Faber in London were particularly valuable for their organizational assistance. O f the many participants in the conference, I especially thank The Honorable Wiwa Korowi, Papua New Guinea Minister for Minerals and En­ergy, and The Honorable Thomas Ruben Seru, Vanuatu Minister of Lands, for taking time out of their busy schedules to attend the sessions. The execu­tives of Broken H i l l Proprietary, Conzinc Riotinto of Australia, and Bougain­ville Copper shared their time and insights with us, and I greatly appreciate their participation. The courtesy extended by the management of Bougainville Copper Ltd. with respect to the tour of the Bougainville operations deserves a special note of appreciation.

The staff in the Raw Materials Program did a commendable job in putting together the conference and summary report. Research fellows Sam Pintz and Ron Richmond capably handled the conference, and the conscientious note-taking and editorial skills of Jean Brady and Annabelle Lee enabled us to pro­duce this summary report. The logistical support of our program secretary, Lillian Shimoda, was invaluable to the smooth running of the conference and to the preparation of this report.

To all these people and organizations, I express my most sincere apprecia­tion.

Charles J . Johnson Leader Raw Materials Program

u

CONTENTS

Acknowledgements ii Foreword v Opening Address by The Honorable Wiwa Korowi vii

Part I: Geology and Economics Geology, Tectonics, and Mineral Potential of the

Southwest Pacific (R. N . Richmond) 1 Regional Geological Mapping and Mineral Exploration

Activity in Papua New Guinea (K. W. Doble) 5 The Economic Geology of the Solomon Islands

(F. I. Coulson) 6 Economic Minerals in Vanuatu—Known and Potential

Resources (A. Macfarlane a n d j . Carney) 8 Minerals Development Policy and Resource

Classification: Fiji Case Study (D. Greenbaum and H . Plummer) 11

Economics of South Pacific Minerals Development (C.J .Johnson) 13

Perceptions of Risk in Petroleum Exploration (P. Freeman) 19

Part II: Legal Issues Minerals Legislation: The Relevant Legislative

Questions and Options (D. C . Frecker) 21 Petroleum: Current Legal Issues—The Challenge of

Choice for Non-Oil-Producing Developing Countries (C. W . Dundas) 23

Some Issues for Governments When Formulating Mineral Agreements (S. McGil l ) 24

Part III: The Implementation Context: Internal and External Influences Implementation Issues in Mineral and Petroleum Agreements (S. Pintz) 28

Pan gun a Mine, Bougainville Island: The 1980 Land Compensation Agreement (N. Agonia) 29

iii

Mineral Processing in the Pacific Island Countries: Problems and Opportunities (S. A . Zorn) 31

Future Supplies of Petroleum: Implications for the Asia-Pacific Region (F. Fesharaki) 33

Appendices Appendix A . Workshop Agenda 36 Appendix B. List of Participants 38

List of Tables 1. Prices required to induce commercial development of mines in the South

Pacific 2. Company internal rate of return and government share of project net cash

flow

3. Proposed timetable for mining agreements in Papua New Guinea

List of Figures 1. Metallogenesis at mid-ocean ridge, trench, and island-arc areas 2. Mineral occurrences in Papua New Guinea 3. Geologic map and mineral occurrences of Vanuatu 4. Fiji 's mineral resources classification system 5. a) Cumulative value of minerals production by country within the region

b) Cumulative value of minerals production in the region by.commodity 6. Copper-gold ore grades to produce specified recoverable metal values per

tonne of ore

iv

4

FOREWORD

Since 1979 the Resource Systems Institute's (RSI) Raw Materials Program has given increased attention to policy issues associated with mineral develop­ment projects in Asian and Pacific developing countries. This focus led to the convening of a mineral policies conference attended by mineral experts from 14 nations to discuss major policy issues associated with large mining projects. The increased attention to mineral policy issues has been accompanied by the articulation of a new set of interrelated research areas. These areas include: 1) the role of mineral assessment in national planning, 2) case studies in mineral policy, 3) arrangements between governments and transnational companies, and 4) economics of mineral development.

Following the 1980 Mineral Policies Conference, officials of several Pacific island nations suggested that the Raw Materials Program address the special problems of minerals development in their region. In response to these sugges­tions, the Raw Materials group initiated a three-phase study program which culminated in a conference held on Arovo Island, Papua New Guinea in Sep­tember 1981. In the first phase of the program, program leader Charles John­son visited several Pacific nations to collect firsthand information pertaining to the region's minerals potential and mineral development problems. Fi j i , Pa­pua New Guinea, Vanuatu, and the Solomon Islands were selected for special attention in a regional conference. The second phase involved the recruitment of two research fellows with policy experience in the South Pacific. Ronald Richmond, former director of the Fi j i Mineral Resources Department, and Sam Pintz, former assistant secretary of the Papua New Guinea Ministry for Minerals and Energy, joined the program and began to plan the Arovo con­ference.

From its inception it was realized that, while previous regional conferences had dealt with various tax and fiscal aspects of mining and petroleum produc­tion, there was only limited information available on other dimensions of mining development. Four topics of special interest to Pacific nations were se­lected for discussion at the conference, including 1) geology, 2) resource eco­nomics, 3) legislation and investor agreements, and 4) internal and external considerations in implementing major projects. In light of the national policy implications of the issues to be considered, ministers as well as civil servants were invited to the conference, and, in fact, ministers led the delegations from Papua New Guinea and Vanuatu. Papua New Guinea agreed to host the meetings and the Commonwealth Secretariat in London joined as the third sponsor.

The Bougainville Province of Papua New Guinea was selected as the venue

v

for the meetings as it provided participants with the opportunity not only to visit the massive Bougainville copper mine (one of the world's largest copper projects), but also to have firsthand discussions with local leaders about the implications of mineral development for local people. To further expand con­ference perspectives, executives of the two largest mining companies currently active in the region—Conzinc Riotinto of Australia ( C R A ) and Broken Hi l l Proprietary (BHP)—were invited to present their views regarding private sec­tor investment criteria and concerns. |

Seminars such as the Arovo Island conference represent RSI's ongoing at­tempts to meet the needs of resource policymakers in the Asia-Pacific region. The conference was conceived at the initiative of the participants and directed toward topics of special interest within a particular region. It was undertaken with two joint sponsors (the Papua New Guinea government and the Com­monwealth Secretariat), and included the active participation of private sector executives in order to provide participants with a broader range of policy viewpoints. Participants were given the opportunity to form firsthand impres­sions of modern mining projects and to discuss the environmental and cultural disruptions that can result from such development. We at the East-West Cen­ter hope that seminars conducted at the practical level of policymaking, aug­mented by the overview of experienced international specialists and academ­ics, can make an important contribution to the long-term development needs of countries in the Asia-Pacific region. '

Harrison Brown Director Resource Systems Institute

I

vi

OPENING ADDRESS by The Honorable Wiwa Korowi Minister for Minerals and Energy

Papua New Guinea

On behalf of my government, the East-West Center, and the Common­wealth Secretariat, I would like to welcome you to this conference on the "Re­source Potential and Implications of Mineral Development in the South Pa­cif ic ." Over the next few days we will be discussing a wide range of topics which may fundamentally affect the development prospects of our island na­tions.

I realize that our nations are at very different places in the development of their mineral resources. Historically, mining has taken place in all our coun­tries but with the exception of Fiji 's Emperor mine and our own Bougainville and Ok Tedi projects, mining is not a major economic activity in our region. However, in looking over some of the geological and economic assessments for this conference, it is equally clear that mining may very soon assume a new importance to our economies. We in Papua New Guinea believe that our re­gion has the potential to be of major importance in the production and pro­cessing of minerals. This assessment certainly appears to be supported by the conclusions of our colleagues at the East-West Center. Similarly, our region is rapidly becoming a target for petroleum exploration. Needless to say, oil and minerals have the potential to completely transform the economic develop­ment of our nations and to rapidly increase the living standards of our people, but unplanned development of our resources can cause great havoc with our small economies with the result that a potential blessing is transformed into a curse.

As Melanesians we share a common culture and a common view toward the resources that nature has bestowed on us. As ministers and public servants, we have the responsibility to our citizens to see that these natural resources are wisely developed in ways that will bring the greatest good to the largest num­ber of our people. In undertaking this public stewardship we must walk a nar­row path between many conflicting concerns and objectives. We inevitably will be forced to deal with outsiders who neither understand our culture nor are sensitive to our environment. We must bring this understanding to those who come to develop our resources or we will violate the stewardship with which the public has entrusted us. We must find wise, long-term policies that are sufficiently attractive to foreign investors while protecting the interests of our nations.

vn

The first step in the formulation of wise policies is to understand clearly the problems that must be faced. When I was originally discussing this conference with M r . Pintz, I insisted that we should consider the real policy questions as­sociated with mineral development and not let our conference become bogged down in abstract or academic questions. We must leave this conference with practical policy information and references that we can take back to our re­spective governments and translate into action.

In considering what topics should be discussed, our primary concern was to find areas that had not been discussed in previous international forums while focusing on those subjects that reflect the particular situation of our region. As you all know, the present Papua New Guinea government is a vocal supporter of regional approaches to Pacific problems. We must begin to think of our nat­ural resources as a common endowment which God has given to Pacific peo­ple. To this end, we must look to these concerns and attitudes that are com­mon to Pacific people and exchange information and experiences so that our region can prosper and advance.

It has always been clear that, even where common cultural and environ­mental attitudes exist, different nations may select different policy options to achieve their objectives. This is right and natural, and I deeply believe that so­lutions that work in Papua New Guinea may not be entirely appropriate for our Fi j i or Vanuatu brothers. Each nation must find its own path . . . its own policies . . . its own solutions. Thus, in the topics we will be considering over the next few days, each delegate should consider how each policy issue can be met within the particular political and social situation of his nation. There are no universally "right" or "perfect" solutions to these policy questions, and we must understand this from the outset. The most we can hope for is to achieve policies that are consistent with our national aspirations and that are consciously taken—not imposed by events! Beyond this, we can only trust that traditional Melanesian good sense and flexibility will give us the wisdom to adapt our policies to changing circumstances.

To provide the conference with the widest spectrum of views, we have invit­ed a wide spectrum of participants to present papers. First, of course, we turned to the sponsoring organizations to tap their considerable expertise. From Honolulu, the East-West Center agreed to contribute the geological ex­perience and the economic and negotiating skills to help us to better under­stand our mineral potential and the economic implications of development. From London, our old friends at the Commonwealth Secretariat have flown half-way around the world to discuss petroleum development and law. And for Papua New Guinea's part, we have arranged for our justice department to speak on agreements and regulations and for my departmental secretary, M r . Agonia, to talk on land acquisition and compensation.

In addition to contributions from the sponsoring organizations, we have been quite fortunate in being able to arrange for several outside speakers. First, two mining companies currently active in the Pacific—BHP and C R A —have graciously agreed to send senior executives to provide us with some in­sight into the motives and objectives of multinational mining companies. Also

viii

from the private sector, we have arranged for a representative of a Sydney law firm to speak to us about legislative questions related to mining.

I am particularly pleased that we have been able to invite several partici­pants who, because of their past involvement or specialized knowledge, have particular insight into the difficulties and problems associated with mineral and petroleum development. First, we are fortunate to have available to the conference the premier of the North Solomons province, who has been an in­strumental figure in ensuring that the social and cultural issues associated with mine development have been prominently discussed at both the national and provincial levels. In addition, we welcome the North Solomons provincial planner who, as much as any man in the province, has had firsthand experi­ence at meshing the day-to-day activities of the Bougainville mine with other socioeconomic policies. In an entirely different area, a consultant to the Unit­ed Nations in New York has prepared an exhaustive study of mineral process­ing, and a petroleum economist at the East-West Center has prepared a sum­mary of the energy and petroleum outlook for South Pacific countries.

As you can see, we have cast our net far and wide to bring together this group of people to share their specialized knowledge and insights with us. I hope all the preparations that have gone into the conference will yield a har­vest of stimulating ideas and provocative interchange among us all. In a very real sense this conference will be exactly what we choose to make it, so I hope that we can all feel free to exchange our ideas openly and without reservation and, in so doing, come to a better understanding of the problems and promises that mineral development may hold for our nations.

Finally, I would like to recognize the special contributions that our joint sponsors, the East-West Center and the Commonwealth Secretariat, have made in making the conference possible. Not only have these organizations contributed financially and administratively to this meeting, but, of equal im­portance, their sympathy with our needs and concerns is clear evidence that the poorer nations of the Third World have allies in the developed countries who are willing to build bridges of support and understanding.

Thank you.

IX

Part I Geology and Economics

In its initial sessions, the conference dealt with the regional geology of the South Pacific island nations and with the economics of mining projects that could occur within these geologic settings. The opening paper by Ronald Richmond provides an overview of the geology of the region and of the rela­tionship between metallogenesis and plate tectonics. Richmond combines these concepts to explain where economic mineral deposits occur or may occur in the southwest Pacific. In turn, the chief geologists of Papua New Guinea, (Kerry Doble), the Solomon Islands (Frank Coulson), Fiji (Howard Plum-mer), and Vanuatu (Alexander Macfarlane) presented papers containing de­tailed information on the geology and mineral potential of their respective countries. The last two papers in these initial sessions dealt with 1) the eco­nomics of developing various mineral resources in the region (Charles John­son), and 2) the perception of risk in petroleum exploration combined with a comparison of alternative taxation regimes (Peter Freeman).

Given the substantial potential for finding commercial mineral deposits in the southwest Pacific, the session concluded that additional efforts should be made by the governments in the region both in exploration and in ensuring that modern, effective minerals legislation is developed among all four na­tions. Such legislation should encourage active minerals exploration while en­suring that the governments receive maximum benefit as a result of the devel­opment of their minerals potential.

Geology, Tectonics, and Mineral Potential of the Southwest Pacific (R. N . Richmond)

Many writers have proposed a connection between plate tectonics and the genesis of mineral ores and hydrocarbons (see Figure 1). For example, at the rifts along mid-ocean ridge crests, metalliferous sediments enriched in manga­nese, iron, nickel, copper, zinc, cobalt, and lead are deposited. These massive sulfide deposits are somewhat similar to ophiolite massive deposits on land. Within igneous rocks of layers 1,2, and 3 of the oceanic crust and the underly­ing mantle, metal-bearing assemblages may occur, such as: 1) massive sulfide deposits containing mostly pyrite but also some copper sulfides such as chalco-

1

pyrite, chalcocite, and covellite in layer 2 basalts; 2) podiform chromite de­posits occurring as cumulates in layer 3 rocks; and 3) significant nickel con­centrations in the olivines of upper mande rocks. Manganese occurs as an accessory element throughout the basic and ultrabasic rock sequences.

Convergence of two oceanic plates, such as the Pacific and Australian plates, gives rise to an island-arc system, which is characteristic of much of the present southwest Pacific region. In Papua New Guinea the platform province belongs to the Australian plate and consists mainly of a stable continental crust of Paleozoic crystalline rocks that are overlain by Mesozoic and mostly flat-lying Tertiary sedimentary rocks. The oceanic crust and island-arc province belong to the Pacific plate; it contains oceanic-type rocks, such as an ophiolite sequence, and island-arc volcanism products, such as submarine and subaerial lavas and volcanoclastic sediments. Between the Australian and Pacific plates lies the mobile belt province of highly deformed geosynclinal sediments and associated plutonic rocks. The Solomons have four geological provinces—the southern atoll, the volcanic, the Pacific, and the northern atoll provinces. The structure was believed to have started forming during the mid-Tertiary when the Pacific plate was subducting under the Indo-Australian plate along the West Melanesian and the North Solomon trenches. Continued Imotion of the two plates resulted in collisions and shearing of plate margins. The Pacific province probably formed from shearing off of the Ontong Java Plateau sedi­ments against the inner wall of the trench system.

The Vanuatu archipelago is an active island arc underlain by a Benioff Zone dipping steeply to the east. The islands are mainly submarine and sub-aerial volcanic accumulations ranging in age from late Eocene to present. The Fiji platform is bounded on the south by the northeast-trending Hunter Frac­ture Zone, along which the Australian plate moves in a north to northeasterly direction. The Pacific plate moves in a westerly direction along the Fi j i Frac­ture Zone to the north of Fi j i . The movement of the two plates creates a com-pressional situation in Fi j i , and the resultant fault system is generally in a northeast to north-northwesterly direction.

Podiform chromite ores may be deposited along transform faults, such as the Fiji Fracture Zone or the Hunter Fracture Zone. Therefore, one can spec­ulate about the prospects of finding podiform chromite in Vanua Levu and Kandavu, Fi j i , and in the northern Solomon Islands. Ophiolites are suites of oceanic crust and, as mentioned earlier, ophiolites offer the possibilities of finding massive sulfides, podiform chromite, or nickel. Ophiolites are known in Papua New Guinea and in New Caledonia; they have also been found in the Solomons, Vanuatu, and Tonga.

The Papuan Ultramafics (ophiolite suite) form the lower part of a peri-dotite-gabbro-basalt complex. Nickel and copper sulfides occur in the gabbro layer, and copper sulfides occur with pyrite in the overlying basalts. Small quantities of alluvial platinum and osmiridium are associated with the ultra­mafics, and chromite is disseminated throughout the complex. No major de­posits of the above minerals have been discovered so far, but there is potential for discovering nickel sulfides in the higher reaches of the Papuan Ultramafic

2

MID-OCEAN RIDCE

(metal-rich exhalations; massive sulfide deposits)

TRENCH

(melange)

ISLAND A R C

(volcanics)

massive sulfides, podiform chromites

Kuroko-type Cu ores

mineralized 'copper porphyries

•50 km

0 ^

OO

LEGEND

oceanic lithosphere: basalt and gabbro

island arc volcanics

oceanic sediments (layer 1), metal-rich hori; at base ; fore-arc basin sediments

subduction melange: pillow lavas, basalts, glaucophane schists, and ultrabasic intrusives with chromite, nickel, asbestos, and ophiolites.

massive sulphides porphyries

granodiorites

fluids and light fractions from crust , melange, and mantle, partial melting "~'

\ ^ of the lithosphere,

150 km

Figure 1. Metallogenesis at mid-ocean ridge, trench, and island-arc areas.

Belt and for discovering more concentrated chromites and platinum minerals deposits in the area.

A number of pyrite-rich ophiolitic rocks (in the ultrabasic massifs) have been located in the Solomons. Other ophiolitic deposits include chromite sands on San Jorge beaches, pyritic copper on Santa Isabel, and some pyrites and chalcopyrites on Choiseul Island. Further exploration may lead to discov­eries of other ophiolite-associated minerals, such as nickel sulfides and later-ites, chromite, pyrite-chalcopyrite, and platinum minerals.

On Vanuatu the ultrabasics are only exposed on Pentecost Island. Nickel only occurs in the soil profile, and minor amounts of cobalt, iron, chromium, and pyrite-chalcopyrite are present. A more comprehensive search for copper and nickel mineralization needs to be made on Pentecost and Maewo.

Perhaps the best known correlation between metallogenesis and plate tec­tonics involves porphyry copper deposits. These ores consist of zoned deposits of disseminated copper and/or molybdenum sulfides with associated hydro-thermally altered host rock. They typically occur with calc-alkaline rocks, such as andesites and diorites, and are closely tied with active or recently active sub-duction zones in the Pacific, Caribbean, and Alpine orogenic belts. Porphyry copper deposits are known at Bougainville and Ok Tedi in Papua New Guin­ea, in Guadalcanal, the Solomons, Namosi, Fi j i , and may well occur else­where in the southwest Pacific.

The southwest Pacific island arcs have gone through a number of changes in location through rotation, migration, back-arc spreading, and flipping of sub-duction directions. Therefore, it is necessary to determine the position of the island arc relative to the trench in order to determine whether porphyry cop­per mineralization fluids came up at the same time as calc-alkaline magma-tism occurred. There also appears to be a close space-time relationship be­tween porphyry copper deposits, manganese ore deposits, and subduction zones. The manganese deposit at Forari on Efate Island probably formed from seawater leaching of the manganese from submarine andesitic pyroclastic sedi­ments.

Most of the world's largest hydrocarbon fields seem to occur along plate margins. For the convergent margins of the southwest Pacific, the best poten­tial areas would be the thrust-fault basins under continental slopes of island arcs adjacent to deep ocean trenches, and the block-fault basins in the mar­ginal seas areas. Block-fault basins in the Asia-Pacific region generally occur on the landward side of andesitic volcanoes. Such basins could occur in Bligh Water, Fi j i , the Central Basin in Vanuatu, the Central Trough in the Solo­mons, and the Cape Vogel and New Ireland Basins in Papua New Guinea. Thrust-fault trends in continental margins are prospective for oil and gas ac­cumulations because convergence between oceanic lithosphere and continen­tal lithosphere can result in the thermal generation of hydrocarbons in sedi­ments due to the rapid burial associated with subduction. Potential areas for such basins are the eastern Philippines, the southern margins of Indonesia, New Britain, and the Solomons. The Marianas, Vanuatu, Kermadecs, and Tonga should also have similar potential.

4

The evolution and advancement of plate tectonics theory has brought about new ideas concerning the reasons for metallogenesis around the world. As pre­viously discussed, the potential for finding valuable mineral resources in the southwest Pacific is very high. The exploration interest is now strong in the re­gion and will increase in the future. In order to ensure that the countries re­main attractive for exploration and that mining companies come in on a plat­form of mutual respect and understanding of the host country's laws and customs, it is essential that the current mapping programs in these islands be continued until all the islands have been completed. The mapping programs are extremely useful for mining companies and also for regional urban and rural planning within the countries. Governments may also need to conduct geochemical sampling programs and perhaps some limited drilling on and publication of prospective areas to attract private companies to explore them. The establishment of a firm policy is no longer a disincentive to mineral ex­ploration; companies prefer to see that a government's policies are stable and that they will be able to get a fair chance at achieving a reasonable return on their investment.

Regional Geological Mapping and Mineral Exploration Activity in Papua New Guinea (K. W. Doble)

The 1:250,000 geological map series covering Papua New Guinea is nearly complete. Al l the mainland sheets except for five in the southwest (areas where there are virtually no outcrops) are available either as preliminary editions (uncolored) or first editions (colored). First editions are also available for the main islands: Bougainville, New Britain, New Ireland, and Manus. A 1:100,000 mapping program was started in 1976 but may cease in 1982 unless arrangements can be made for technical aid.

Mineral exploration is fairly active despite a Prospecting Authority (PA) ap­plication moratorium since late 1980. Currently, there are 41 PAs in force throughout the country that cover an area of 41,500 square kilometers (sq km) (slightly less than 10 percent of the total land area), with an additional 27 PA applications outstanding. This is still far less than the peak in 1971 when there were 158 PAs that covered an area of more than 250,000 square kilometers. Mineral exploration in Papua New Guinea tends to be the domain of the large transnational miners such as Esso Papua New Guinea Inc., C R A Exploration Pty. Ltd. , and Goldfields Exploration Pty. Ltd. ; together these companies hold approximately 93 percent of the total land area under prospecting author­ity. National participation in the mining sector is limited to small-scale alluvial mining, which is reserved for national miners.

Although hampered by the current moratorium on PA applications, the 1980s should be an eventful period for Papua New Guinea's mineral sector. Construction of key infrastructure and the mine at Ok Tedi will begin soon. The mine is to be developed in stages with gold production commencing in 1984, copper concentrate production in 1989, and molybdenum concentrate production subsequent to that. The orebody at Porgera is estimated to have 50 million tonnes of 3 grams per tonne of gold. Negotiations between govern-

5

ment and the mining consortium early in 1982 are expected to set up a timeta­ble for a full feasibility study and eventual mine development. Other prospec­tive deposits (see Figure 2) are the chromite-lateritic nickel/cobalt deposit at Ramu, the porphyry copper-gold and massive sulphides deposit at Frieda, a porphyry copper deposit at Yandera, and the alluvial chromite deposits in on­shore and nearshore beach sands at Morobe.

The Economic Geology of the Solomon Islands (F. Coulson) The Solomons form a primary fractured arc of seven major island groups

that form an en echelon double chain extending from Bougainville to San Cristo­bal. A discontinuous series of trenches flank both sides of the arc. The geology can be described in terms of three structural/stratigraphic elements:

• a basement of upraised ocean floor basalts and cognate intrusions of do-lerite and gabbro, with ultramafic bodies in axial regions. Except for Malaita, the basalts are fractured and variously metamorphosed to am-phibolite facies.

• a sedimentary cover, predominantly of greywacke and associated types, but with extensive Miocene and Pliocene reef development. Volcani-clastic sediments predominate from Pliocene times. This cover lies un-conformably on the basement and is up to 5,000 meters thick.

• calc-alkaJine volcanics forming andesitic cones and volcanic lithosomes and which attain their maximum development in New Georgia during Plio-Pleistocene times. Intrusive subvolcanic stocks occur on Guadalca­nal and New Georgia.

Mineral occurrences form three broad categories by age and association: • Oceanic Basalt Association This comprises all occurrences within the pre-

Oligocene basement. It includes small veins and stockworks of copper sulphides found on most islands and Cyprus-type occurrences (Flor­ida Islands). Manganese oxides form exhalative volcanogenic deposits (Florida, Santa Isabel). Gold occurs in the Guadalcanal gabbro and de­rived gravels where nuggets up to 16 grams are recorded. Gabbros on Santa Isabel contain pyrrhotite and copper and nickel sulphides. Nickel silicates, asbestos, and chromite occur in the ultramafic rocks including known reserves of 24 million tons of 1.3 percent nickel on Santa Isabel.

• Calc-Alkaline Association The andesitic volcanic and parent dioritic stocks of Guadalcanal and New Georgia contain several porphyry copper-type deposits including known reserves of 50 million tons of 0.2 percent cop­per at Koloula, Guadalcanal. Low-grade disseminations of copper sul­phide occur in andesites and volcanic porphyries in these regions to­gether with rare native copper and copper carbonates. Gold occurs at Gold Ridge, Guadalcanal, as a low-grade epithermal deposit where fracture fillings reveal gold contents in excess of 5-10 parts per million.

• Residual Deposits Included are important trihydrate bauxite deposits on Rennell and Waghena (55 million tons at 47-48 percent AI2O3,) which contain low silica, high phosphorus, organic carbon, and moisture. These deposits were brought to the mining feasibility stage in 1978 until the depressed alumina market terminated the project. Nickeliferous lat-

6

Figure 2. Mineral occurrences in Papua New Guinea.

erite caps most of the ultramafic rocks in the Solomons with large ton­nages reported from Santa Isabel and San Jorge. Magnetite- and i l -menite-rich beach sands occur on most islands and the beach sands on San Jorge are also chromite-rich. Alluvial gold from the Gold Ridge areas of Guadalcanal is panned by local landowners who produced some 45,000 grams of gold in 1980. Up to 10.7 cubic meters of gold-bearing gravels are estimated to occur in this region, but gold values are erratic.

Hydrocarbons are not recorded in the Solomon Islands, but thick sedimentary accumulations offshore and the occurrence of buried Mio­cene reefs indicate some potential in the shallow shelf areas.

The tempo of mineral exploration in the Solomon Islands depends to a large extent upon the mineral investment climate in Australia. The 1960s and early 1970s represented a period of relatively intense prospecting; much of this was at the reconnaissance level although a few prospects were examined in some detail. Since that time, the tempo of prospecting activity has remained low.

The government's policy is to encourage mineral prospecting through a program of regional geological mapping and reconnaissance stream sediment geochemistry, and by the maintenance of geological information and advisory systems. The mining law vests minerals in the state and provides for the issue of a variety of prospecting and mining tenements.

Economic Minerals in Vanuatu—Known and Potential Resources (A. Macfarlane and J . Carney)

The Vanuatu archipelago, the subaerial expression of a northwest-southeast ridge of 200 kilometers average width, is bordered by the New Hebrides Trench to the west, and by the North Fiji Basin to the east (see Figure 3). The volcanics range in age from upper Oligocene to Recent and can be assigned to four separate provinces on the basis of age and composition: the western belt, the eastern belt, the central chain, and the marginal province. The western belt (Santo, MaJekula, and the Torres Islands) is an accumulation of subma­rine lavas and derived volcaniclastics of upper Oligocene to early middle Mio­cene age. Sedimentation of calcilutites, calcarenites, and mudstone/sandstone sequences followed in the Pliocene and Pleistocene. The oldest rocks in the eastern belt (Maewo and Pentecost) are terrigenous sediments and volcani­clastics that accumulated in the lower to early middle Miocene. Globigerina ooze and upper Miocene to lower Pliocene extrusions of submarine lavas were successively deposited. In the Pliocene major tectonism resulted in westerly tilting, anticlinal arching of the belt, and emplacement of an "ocean ridge-type" ophiolite complex. The central chain islands are a series of upper Plio­cene to Recent volcanoes of mainly basic lavas. The marginal province is a volcanic belt of Plio-Pleistocene age. It is subaerially exposed on Futuna Is­land-

Given the present stat>: of geologic knowledge in Vanuatu, the mineral re­sources can be assigned to six categories: 1) sedimentary associations, 2) in-

8

9

dustrial raw materials, 3) geothermal energy, 4) porphyry-type mineral asso­ciations, 5) ophiolite associations, and 6) offshore minerals. The first three types are known resources in that they have already been evaluated. The latter three are potential resources as they are still in the process of evaluation.

Manganese (Mn) at Forari Mine on the east coast of Efate was, until re­cently, the only mineral exported from Vanuatu. The deposit occurs as a to-dorokite and is of supergene origin, derived by leaching during weathering of the Pliocene acid tuffs in the interior of Efate. Opencast mining began in 1962 and peaked in 1965 with production that year of 71,401 tonnes. Production gradually declined since then, and the mine has been nonoperational since November 1978 due to low world prices and increasing extraction costs. Other substantial manganese deposits occur on Erromango. The northwest deposit occurs as concentrations within lagoonal sediments and contains an estimated 600,000 to 1,800,000 tonnes at 35 percent M n . The southwest deposit occurs within clay deposits on a Pleistocene terrace. Reserves are estimated at 9.6 million tonnes at 8 percent M n .

Industrial raw materials minerals include heavy mineral sands, limestones, and pozzolan. Black sands on several of the islands contain appreciable amounts of magnetite, derived from the erosion of volcanic rocks. Significant deposits occur in southwest Efate, east Erromango, and south Santo with 173,000, 128,000, and 1,151,000 tonnes of magnetite, respectively. Lime­stones occur on many of the islands; some are chemically very pure and may be suitable for metallurgical purposes. At present, however, they are utilized only as a source of road dressing and building aggregate. Pliocene tuffs and breccias on Efate and Pleistocene to Recent andesitic pyroclastics on Tanna are known to have good pozzolanic properties.

Vanua Lava, Efate, and Tanna are the principal islands that have geother­mal energy potential. The most extensive geothermal feature, "Frenchman's Solfataras," covers an area of about 5 square kilometers of the flanks of M t . Soretimeat on Vanua Lava. On Efate, the main concentrations of thermal springs are at Takara on the northeast coast and within the Teuma Graben in the center of the island. Hot springs, geysers, and fumaroles occur along a re­cently active fault which forms the western shore of Port Resolution in south­east Tanna.

The western belt islands of Santo and Malekula are part of a chain of Mio ­cene calc-alkaline volcanics. This feature is known to contain large porphyry copper deposits, for example, such as Bougainville in Papua New Guinea and Namosi in Fi j i . Sulphide mineralization (90 percent pyrite, 10 percent chalco-pyrite) is confined to basaltic, andesitic, and dioritic intrusions that were em-placed in early Miocene volcanics. Three types of mineralization can be recog­nized—disseminated, vein, and skarn mineralization. Geochemical surveys by mining companies during 1968-1975 have failed to locate major near-surface orebodies of economic potential.

Copper and iron sulphides have been found associated with ophiolite suites; the pre-middle Miocene ophiolites occur in south Pentecost. Offshore min­erals include hydrocarbons, metalliferous muds, and precious coral. Explora-

10

tion for offshore minerals is very much at the reconnaissance stage and is being carried out as part of a United Nations Development Program (UNDP) fund­ed regional project on behalf of C C O P / S O P A C member countries.

The mining legislation currently in operation in Vanuatu was enacted in 1957. A l l minerals defined therein are vested in the state; the definition does not include industrial minerals, geothermal energy, or offshore minerals. It is the intention of the government to bring the present regulation up to date with more modern legislation that will cover all areas of mineral exploitation both on land and offshore.

Minerals Development Policy and Resource Classification: Fiji Case Study (D. Greenbaum and H . G . Plummer) Mineral Resources. Fiji has a history of mineral exploration extending back to the last century. Mining for gold, manganese, and base metals has taken place. A summary of Fiji 's mineral resource potential is shown in Figure 4, which is an adaptation of the McKelvey box classification.

The Emperor Gold Mine at Vatukoula is the country's only operating mine with demonstrated economic reserves of about 600,000 tonnes at an average grade of about 8 grams of gold per tonne. In addition, approximately 500,000 tonnes will be available upon eventual mine closure. Inferred extensions of Emperor-type mineralization may exist in the mine environs. Other epithermal gold oc­currences have been explored in recent years, corresponding to various entries on Figure 4 under inferred and hypothetical submarginal deposits.

Apart from precious metals, Fiji possesses deposits of both porphyry copper and volcanogenic massive sulphides. The principal porphyry deposit occurs at Waisoi Creek where the indicated resource is 475 million tonnes of 0.48 per­cent copper ore, plus recoverable gold and molybdenum. Prefeasibility inves­tigations have shown that this deposit is paramarginal at the present low copper price. Other porphyry deposits in the area are poorly known but may be re­garded as inferred paramarginal resources.

Various other subeconomic mineral resources are shown in Figure 4. These include deposits of bauxite (demonstrated paramarginal and submarginal), magne­tite sands (demonstrated submarginal), massive sulphides (inferred and hypothetical submarginal), and marble (inferred paramarginal). Speculative and hypothetical re­sources include offshore petroleum/gas, geothermal power, gold placers, me­talliferous muds, and manganese nodules. Development Policy. For smaller less developed countries (LDCs) such as Fi j i , the considerable financial risks associated with mineral exploration, and the lack of technical expertise, finance, and possibly access to markets needed to develop a mineral discovery, make it both necessary and desirable to encour­age the early involvement of mining companies. Therefore, policies should seek to promote private sector interest by providing a suitable climate for ex­ploration and investment. A fair return to investors should be offered in return for the early and efficient development of the country's mineral resources.

O f fundamental importance in stimulating company interest is a data base of essential geological information. This should at least include regional and

11

Au Current 0 s

°o MnpRM

o

o

UJ

o

O z

o

o

UJ m

3 (/)

81 < S I*

< E

c5 8

P CD ® 3 ° c75^

I D E N T I F I E D D E M O N S T R A T E D Measured Indicated

I N F E R R E D Intensions to known deposits]

EMPEROR MINE 600,0001 <2D QqA

U N D I S C O V E R E D H Y P O T H E T I C A L (in known districts)

S P E C U L A T I V E (unknown districts and/or

deposit ty.ftaai

@ EMPEROR MINE 2 MT

PORPHYRY COPPER

(Waisoi/Wainambama) 500MT © o 5% Cu

BAUXITE (Wainunu)

2 3 M T

g @ MAGNETITE SANDS (Singatoka/Mba)

127 MT (a) 6Vo magnttitt

BAUXITE (other small occurrences)

33 MT

@ PHOSPHATE (Lau Islands) 2 M T

(MS MARBLE (Wainivesi)

(Cul (ftu) PORPHYRY COPPER (Waivaka)

ku) EPITHERMAL GOLD Mt Kasi/Vunda/Waimotu

Au) MASSIVE SULPHIDES

(Wainaleka/ThoTo-i-Suva/undu) (Mn) VOLCANOGENIC ^ A N D SEDIMENTARY

EMPEROR TYPE

GEOTHERMALPOWER

PORPHYRY - COPPER

(Au) EPITHERMAL/ ^ SECONDARY

£u)<£n> (fch VOLCANOGENIC ^ MASSIVE

SULPHIDES (Mn

^ P E T R O L E U M / G A S (OFFSHORE)

PHOSPHATE (ocean insular/ lagoonal)

@ GOLD P L A C E R S (coastal/offshore)

[CuJ<Zri><Au) METALLIFEROUS MUDS

(Submarine volcanogenic)

/Mn} M ^ U ] MANGANESE V Seafic) NODULES

INCREASING CERTAINTY OF OCCURRENCE

Figure 4. Fiji's mineral resources classification system

detailed geological maps and accompanying bulletins, and should ideally aim to include reports on geochemical, geophysical, and mineralization studies. In Fi j i , 1:50,000 geological maps and reports are available for most areas, as well as 1:250,000 metallogenic maps and the results of a regional stream sediment and an aeromagnetic survey. Fiji has also built up an economic geology data bank containing roughly 450 volumes of company reports and other informa­tion covering past exploration work. This data is fully catalogued and indexed and is available for open-file reference at the Mineral Resources Department.

Once private sector mineral exploration proceeds, it is essential to obtain full information on the work done. Whereas any one survey may fail in its pri­mary goal of discovering economic mineralization, the eventual discovery of an orebody may depend on the successive exploration programs of several companies, each building upon the results of previous work. In Fiji all pros­pecting licences require the submission of an annual geotechnical report con­taining full details of work done and results achieved. This data is used to monitor and guide ongoing exploration programs, and eventually may be added to the government open-file data bank if and when the licence is ter­minated. The data storage/retrieval system used need not be complex: all too often elaborate systems created by expatriates become obsolete after these staff members leave.

Beyond the need to provide basic geological information, private sector in­terest is encouraged by political stability, a realistic fiscal/tax regime, well-informed and aware decision makers, and an up-to-date legislative framework operated by an adequately staffed and efficient administration capable of time­ly response. In essence, investors need to feel confident that the circumstances and attitudes of a country are such that it would be worthwhile to develop a mineral deposit if one is discovered.

Despite such generalizations, the success or otherwise of a minerals policy ultimately can only be judged in regard to a host of local factors relating to an individual country's particular aims and aspirations, including alternative de­velopment opportunities. This fact should be borne in mind by smaller L D C s when receiving advice from outside advisors.

Economics of South Pacific Minerals Development (C. J . Johnson) The geology and geologic history of Fi j i , Papua New Guinea, the Solomon

Islands, and Vanuatu (hereafter referred to as the region) is conducive to the formation of major commercial mineral deposits, including bauxite, copper, nickel, gold, chromite, and possibly petroleum, as well as a number of min­erals of lesser importance such as magnetite sands, manganese, and phos­phate. The goal of the paper is to provide an indication of the size and relative economics of various mineral resource developments that are taking place or may take place in the region. This information may be particularly useful to government decision makers who must establish mineral policies and develop long-term strategies to ensure that their nation receives the maximum benefits from the development of its mineral resource potential.

To date, commercial production of copper, gold, silver, and manganese has

13

10.000

5p00

CD LU o E CL O CO

CD CD ZD

1JD00

500

50 h-

LLI ZD _ l < >

< LU

— $ 8 3 5 4

$ 1 8 7 2

$ 9 7

10

5h-

$ 7

1 4 1 — •

PNG FIJI VANUATU SOLOMON ISLANDS

Figure 5a. Cumulative value of minerals production by country within the region.

14

10,000

2 5poo

L $ 6 5 7 4

ipoo

LU 500

100

$ 3 4 2 1

$ 2 0 4

$ 1 3 1

GOLD COPPER SILVER MANGANESE ORE

Figure 5b. Cumulative value of minerals production in the region by com­modity.

15

produced a cumulative value at 1980 prices of approximately 10 U.S . billion dollars, or roughly one-third of the value of recoverable metals in known com­mercial mineral deposits in the region. Figure 5a shows the total cumulative value to 1980 of all metal commodity production by country, and Figure 5b shows the cumulative value by metal commodity.

Papua New Guinea accounted for about 81 percent of the value of produc­tion at 1980 prices, followed by Fiji with 18 percent, Vanuatu with 1 percent, and the Solomon Islands with about 0.1 percent. Ranking production by com­modity at 1980 prices as shown in Figure 5b places gold in first place with about 64 percent, followed by copper with 33 percent, silver with 2 percent, and manganese with 1 percent. Had historical prices been used, the promi­nent position of gold would be substantially reduced.

Al l four South Pacific countries have potential for commercial deposits. Table 1 shows the estimated prices required to induce development of large mines in the South Pacific at 1980 prices. Although the figures are rough and represent a hypothetical mine, they indicate that commercial investments in large copper, nickel, or aluminum operations are unlikely unless there are substantial increases in metal prices. The price situation in early 1982 was even worse than in 1980.

At present prices the most likely commercial metal deposit is a copper por­phyry rich in byproducts (usually gold in the South Pacific). Figure 6 illus­trates the combination of copper and gold grades that are required to produce a viable deposit—assuming economic viability will be achieved for ores having a recoverable metal value of US$15.00, US$17.50, US$20.00, or US$22.50 per tonne ore. Plotted in Figure 6 are the reported average metal values of four copper porphyries from the South Pacific, plus the Dizon mine in the Philip­pines. Today, a porphyry ore must have a recoverable metal value of approxi­mately $20.00 per tonne to warrant serious consideration for commercial de-

Metal

Copper 1

Nickel 3

Aluminum 3

Table 1 Prices Required to Induce Commercial

Development of Mines in the South Pacific

USS/pound in 1980 prices (excluding byproduct

credits)

1.45

6.05

0.90

US$/pound in 1980 prices (including byproduct

credits)

1.20

5.25

0.90

Estimated 1980 prices

in US$/pound

0.99

3.00

0.72

'Copper from a large porphyry, assume an average of $0.25 in byproduct metals. 2Nickel from a laterite deposit, assume an average of $ 1.20 in cobalt byproducts. 3AJuminum price includes mining, refining, and smelting with no byproduct credits.

16

velopment. Typical copper porphyries in the South Pacific have a grade of about 0.5 percent copper; therefore, to produce a $20.00 per tonne ore in Fig­ure 6 it is necessary to have 0.8 to 0.9 grams of gold per tonne.

Papua New Guinea, with 90 percent of the land area, more than 80 percent of the minerals production, and probably the majority of the remaining min­erals potential in the region, continues to receive most of the region's private sector exploration activity. The current state of relatively low exploration in­terest in the Solomon Islands and Vanuatu is probably due to a combination of factors, including a general downturn in exploration activity in developing countries, lack of past exploration success, and uncertainty about the terms for development of commercial discoveries. The potential for commercial mineral deposits is reasonably good; however, government assistance in a number of areas is important to increase the chances of commercial discoveries and devel­opments that are compatible with long-term economic development goals.

The following recommendations are suggested: • High priority should be given to private sector petroleum exploration

even though the chances-of discovery are considered relatively low in Fi j i , the Solomon Islands, and Vanuatu. The potential remains largely untested. However, companies are willing to explore, and a commer­cial discovery could generate government revenue equal to a large cop­per mine.

• A shift in government attention to greater emphasis on economic geol­ogy activities appears warranted. Work is needed to better understand the regional distribution and geologic associations of copper, gold-silver, molybdenum, nickel, and cobalt. Regional comparisons should extend at least to the four countries and perhaps to Indonesia and the Philippines.

• Although low-cost energy is not a panacea for the region's mineral de­velopment problems, it can act as a catalyst to attract interest in possi­ble minerals development and processing in the region. Each govern­ment's long-range energy strategy should include assessment of the potential of tow-cost energy.

• Small-scale mining activities present special problems needing govern­ment assistance. A technical and economic review of the small-scale mining potential and problems should receive medium priority.

• Clues to the next commercial mineral discovery in each of the South Pacific countries are probably already sitting in government files. With respect to most developing countries, only a small percentage of the geologic information collected is effectively used. Put another way, our geologic archives probably already contain information that will guide geologists to the ore deposits that will be explored in the foreseeable fu­ture. Therefore, a review of data collection, analysis, and storage ac­tivities is warranted to ensure that valuable information is not being overlooked.

• There appear to be many similarities in problems among the four South Pacific countries reviewed here. Al l governments must deal with similar economic geology problems, some of the same companies, data han-

17

G R A M S G O L D P E R T O N N E O R E b

a - Does not i n c l u d e the gold e n r i c h e d cap of the ore body b - Gold v a l u e i n c l u d e s o t h e r byproduct metals c o n v e r t e d t o e q u i v a l e n t g o l d

Figure 6. Copper-gold ore grades to produce specified recoverable metal values per tonne of ore.

dling, problems of ineffective legislation and regulations, problems of small mines, and the problems associated with conflicts between min­ing interests and traditional attitudes of the people toward their land. Working together, the four governments should be in a stronger posi­tion to define the problems and find workable solutions. It is worth con­sidering the establishment of a formal cooperative network for mineral policy and analysis among the four countries. This might lead to the fu­ture establishment of, say, a South Pacific Regional Center for M i n ­erals Policy, Data Collection, and Analysis. A regional focus on min­eral problems and the sharing of the cost of experienced expertise might benefit all countries and facilitate more efficient management of the region's mineral resources.

Perceptions of Risk in Petroleum Exploration (P. Freeman) The purpose of this paper is to assist those governments that are facing for

the first time the problems of establishing policies and negotiating agreements to govern the exploration and production activities of petroleum companies. The objective of such policies and negotiations is to secure substantial commit­ment of corporate funds for exploration while, at the same time, ensuring that corporate returns in the event of success represent no more than a fair reward for the risks taken.

The concept of fairness employed is not a moral one but rests on the as­sumption that investors will only commit funds if they expect to be better off by doing so. A framework of analysis is constructed in which the investor's ex­pectation is defined in relation to expected internal rates of return.

The paper traces the typical development of a company's interest in a new exploration area from its origins in geological evaluation, through a general consideration of the business environment, to a detailed assessment of the bal­ance between the risks and the potential rewards associated with an explora­tion program.

On the government's side, the paper considers some of the key questions in the formulation of policy such as state participation (How much? On what terms?); the typical elements of a financial regime (land rental, royalty, in­come tax, special profits taxes, cost recovery, and profit-sharing provisions); and the structure of agreements to govern petroleum exploration and pro­duction activities (production-sharing agreements and tax-based concession agreements). The functions of individual policy components and the interrela­tionships between them are considered first in general qualitative terms and second in specific quantitative terms by reference to some hypothetical but de­tailed calculations.

The calculations illustrate the case of a negotiation between a company and a government, utilizing the framework for risk analysis previously established. Hypothetical (but reasonable) parameters are attached to the specification of the target discoveries and to the subjectively-judged probabilities of discov­ering them. The evaluation of each target discovery is given for each of three different forms of a production-sharing agreement that could emerge from a negotiating process. The results derived from making each discovery are then

19

combined with the possibility of an abortive exploration program in order to calculate expected risk-adjusted rates of return under each form of the produc­tion-sharing agreement.

The effects of three different regimes are evaluated using the three model oil fields already identified as representative of possible discoveries. By applying some probabilities to the discoveries, an approximate idea of the "risk-adjust­ed" rate of return can be formed. It is assumed that the probabilities of discov­ering small, medium, and large oil fields are rated respectively at 5, 3, and 2 percent, representing in sum a one-in-ten chance of a commercial discovery. Regime A is where the government has no participation in the project. The profit sharing split is 40 percent to the contractor and 60 percent to the govern­ment after cost recovery. In regime B the government contributes 50 percent of the development costs and in return receives an additional 10 percent of the profit oil . Regime C uses the same amount of participation by the government and the same profit split as regime B, but also has an additional profns tax of 50 percent on net cash flows in excess of those required to earn a 25 percent in­ternal rate of return for the company (in current prices).

The summary table (Table 2) compares the company internal rate of return (constant prices) and the government share as percent of project net cash flows (current prices) for the three tax regimes considered.

Table 2 Company Internal Rate of Return (IRR constant prices)

and Government Share of Project Net Cash Flow (current prices)

Small Oil Field Medium Oil Field Large Oil Field Company Gov't. Company Gov't. Company Gov't.

ime IRR % IRR % IRR %

A 25.6 59.0 46.0 60.0 71.4 60.0 B 24.0 69.0 42.7 70.0 66.3 • 70.0 C 20.2 82.0 34.4 84.0 53.8 85.0

The detailed calculations (shown in the form of computerized tabulations) do not accurately reflect the parameters of any particular agreement but con­tain reasonably typical assumptions and should serve to illustrate one kind of analysis in which both companies and governments may engage to support their case in negotiations. Such analysis does not, however, in itself, deter­mine decisions as to whether the terms under discussion represent a fair re­ward in the light of the risks taken. The style of analysis illustrated is proposed as being sufficiently rigorous to provide objective assessment for both sides and sufficiently flexible to provide a basis for mutual understanding (if not mutual agreement) between the parties to a negotiation.

20

Part II Legal Issues

In its second series of meetings, the conference examined various legal is­sues associated with mining and petroleum development. David Frecker, a private Australian solicitor, and Carl Dundas of the Commonwealth Secretar­iat, outlined the policy questions to be addressed in modern mining legisla­tion. In addition to suggesting particular legislative problem areas, the speak­ers noted a range of solutions adopted in other developing countries. In their presentations, both Frecker and Dundas suggested that while modern legisla­tion is generally directed at a common set of problems, each nation must choose those provisions that best express national attitudes toward resource development. Thus, while a set of model questions was presented to guide leg­islative draftsmen, no single set of provisions is universally applicable to Pa­cific countries.

Stuart McGi l l of the Papua New Guinea Department of Justice described the major elements in investor agreements. McGi l l outlined the interaction between a general legislative framework set out in relevant statutes (e.g., on taxation, mining, land, and labor) and negotiated arrangements between the investor and host government that reflect the character of individual projects.

Minerals Legislation: The Relevant Legislative Questions and Options (D. C . Frecker)

Minerals legislation is a compromise between competing interests; in partic­ular the people who wish to explore for and develop mineral resources, the owners of the mineral resource, the owners of the land on which the minerals are located, and the state or government as guardian of the public and na­tional interest. The scope of such legislation is principally determined by the term "minerals"; minerals are commonly dealt with separately from petro­leum. In order to provide a separate licensing regime for certain types of sub­stances, separate definitions may also be included of building minerals and in­dustrial minerals.

Modern minerals legislation in a developing country should be based on the principle that the state owns the minerals in the ground, and that the minerals should be developed in the national interest and for the well-being of the peo-

21

pie. The state, as owner of the minerals, should provide a licensing system permitting and controlling access to those minerals by using minerals legisla­tion. A three-tiered licensing system is recommended under which there would be the following:

1. reconnaissance licences permitting exploration for minerals using re­mote-sensing techniques and surface geology over a wide area,

2. prospecting or exploration licences granted over a much smaller area allowing the licensee to carry out specific exploration work, and

3. mining licences allowing the licensee to mine and remove the minerals found in an identified ore body.

Building various elements into the minerals legislation and administration of a country may enable the government to exercise proper control over ex­ploration and ensure that active exploration programs are carried out. Some of these elements include the area and the term of licences, work programs and minimum expenditure requirements, auction or bidding systems, and report­ing requirements.

Mining companies want assurances that they will continue to have rights over an area where they do exploration work and discover minerals or identify an orebody, whereas governments want maximum discretion to ensure that their resources are being investigated and developed in the most expeditious and economic manner. These interests are diametrically opposed and min­erals legislation must provide for a compromise. This becomes critical at four points:

• upon application for renewal of an exploration or prospecting licence, • at the point of transition from an exploration or prospecting licence to a

mining licence, • upon application for the renewal of a mining licence, and • in circumstances in which there has been a breach of the conditions of

the licence that may lead to suspension or cancellation.

Minerals legislation usually provides that any assignments or dealings in l i ­cences are subject to approval of the minister or other issuing authority. This is an important control for a government but should be exercised judiciously so as not to become an unnecessary impediment upon normal commercial transactions. Companies often need to deal with exploration and mining rights as they endeavor to match their commitments with their financial resources. The best way for a government to keep track of such dealings is for the legisla­tion to provide for registration of such rights and interests therein.

The purposes of exploration and development of mineral resources inevita­bly conflict with the rights of landowners. Each country must determine the extent to which one is allowed to prevail over the other, especially in the mat­ters of compensation for landowners and occupiers, compulsory acquisition of land for mining purposes, and the restoration of land after mining ceases.

The following financial provisions are usually found in minerals legislation: • fees charged to persons applying for or holding licences,

22 '

• royalties payable to governments on mineral resources extracted from its territory, and

• surface rent or occupation fees (which are not generally recommended).

Many of the issues and solutions covered by petroleum legislation are simi­lar to those in mining legislation, but there are a few significant differences. Petroleum is a mobile material that can be recovered without large excava­tions or other vast disruptions of the environment, and so, land and property rights are not major issues. The high value of petroleum makes it important for governments to facilitate its rapid development, and thus greater incen­tives and better security of tenure are offered to licensees. The economic eval­uation of a petroleum potential is easier to determine than a hardrock mineral potential. Thus, development licences can have fairly fixed development pe­riods.

Petroleum: Current Legal Issues—The Challenge of Choice for Non-Oil-Producing Developing Countries (C. W . Dundas)

The dramatic escalation in oil prices in recent years has caused many non-oil-producing developing countries to reassess the development strategy for their petroleum potential. In this regard, it is important for such developing countries to create a realistic legal environment that will serve to protect their interest, while at the same time placing no undue fetters on the investment needed to carry out exploration programs. Many developing countries have found it necessary to undertake the task of designing a suitable legislative framework within which proper petroleum exploration activities can take place. The non-oil-producing developing countries should be made, aware of the policy options that are possible in the area of legislative framework for pe­troleum development.

There are three popular approaches available to non-oil-producing develop­ing countries wishing to introduce an operational legislative scheme to regu­late their petroleum exploration activities. Petroleum legislation may be de­signed to provide a mere framework, to cover all possible contingencies and details that arise in the course of exploration or production, or to stipulate the provisions governing the majority of issues but may leave a few important ones for settlement by negotiation. Practice has shown, though, that contrac­tual arrangements are more frequently used as the legal vehicle for the cre­ation of the legal relationship between the investor (oil company) and host country. For those non-oil-producing developing countries that do not have the expertise or experience to conduct keenly-contested negotiations, a care­fully designed legislative scheme will undoubtedly improve their ability to con­clude more favorable contractual arrangements for themselves with oil compa­nies.

There are several contractual forms presently available to a developing country that desires to conclude a petroleum agreement with an oil company. Many of these forms of petroleum agreements have emerged from a gradual process of improvement through the efforts of the developing countries in or-

23

der to provide better terms and conditions for themselves. Viewed in an his­torical perspective of the concessional arrangements that dominated the oil in­dustry until about two decades ago, the current popular forms of petroleum agreements are aimed at improving the general position of the host country. These contractual forms include the production-sharing contracts, service contracts, and joint venture arrangements. The effectiveness of a petroleum agreement depends largely on such issues as the following: duration of the agreement and size of area covered thereunder, allocation of blocks for ex­ploration and development, exploration strategies, determination of commer­cial discoveries, information access and confidentiality, host country participa­tion and role in management and control, access to petroleum by the oil companies, choice of law and settlement of disputes, natural gas development, training and employment, and territorial jurisdiction questions.

An acceptable solution can be found to the problem of designing a petro­leum agreement that takes adequate account of the interests of and risks as­sumed by the oil company, while at the same time preserving for the non-oil-producing host country the enjoyment of fair financial returns in the event of a commercial discovery of petroleum. In addition, the new contractual forms of petroleum agreements are capable of housing various legal devices that en­hance the stability of the legal and economic relationship created between the oil company and the host country.

Non-oil-producing developing countries have a relatively wide choice of policy options for legislative designs and forms of contractual agreements. The practice of some oil companies, however, tends to suggest that some of these countries could have their options arbitrarily affected in an adverse manner by being given too high a rating on the political risk chart as perceived by the companies concerned.

Some Issues for Governments When Formulating Mineral Agreements (S. McGil l )

The actual form of the agreement, whether it be a concession agreement, a production-sharing agreement, a service agreement, or a development agree­ment, should not be overemphasized, as aspects of these formats can be in­cluded in any agreement. In particular, the stance that a government takes on several legal-economic issues within the agreement has as much or more influ­ence on the nature of the agreement. These issues need to be considered by governments and are addressed in this paper in the following order: agree­ments as acts of parliament; issues of timing; equity and risk exposure; infras­tructure arrangements; currency availability undertakings; and termination, force majeure, and arbitration.

Agreements as Acts of Parliament Mining companies want agreements enacted in order to create a legal enclave for themselves. The advantage of enactment for a government is that it is not necessary to review other, possibly inappro­priate, laws, although this can lead to a lack of uniformity between projects and the general law. The best solution is to update laws particularly relevant to

24

major projects and to keep agreements to a minimum on such issues. When agreements are enacted, attention should be paid to avoiding legal conflicts that arise if the agreement purports to fetter an executive discretion as to whether a right should be granted. Also, preventions should be taken regard­ing any suggestion that future governments cannot change an agreement (bi­laterally or otherwise) due to entrenchment by a so-called "manner and form" provision in the statute.

Issues of Timing The chronological structure of a mineral agreement should reflect the various decision points for each of the parties and the things to be done at, and between, each such turning point. The parties usually decide to enter an agreement after prefeasibility studies in order that governments can have some assurance of, and control over, work done, while allowing compa­nies to obtain some rights to develop the potential project. This is thus the point at which the clock starts running, and thereafter time periods should be practical and relative to the weight of the matters being considered, while be­ing sufficiently demanding to ensure that the respective organizations imple­ment the project with a minimum of delay. A suggested timetable that has been devised for the Papua New Guinea standard mining agreement is set out in Table 3.

Equity and Risk Exposure In discussions of the advantages and disadvantages of equity participation, little attention has been paid to the problem of mini­mizing risk exposure and the bearing this can have on whether or not to be an equity participant. As well as providing equity funds, a government will nor­mally be required to provide loan support and appropriate contributions to any overrun financing. This is usually embodied in a shareholder's agree­ment, which means a government may have the unpalatable option of either making infinite financial contributions or facing a penalizing equity dilution. The ideal solution to this problem is to provide in the development agreement

Table 3 Proposed Timetable for Mining Agreements

in Papua New Guinea

Consecutive Time Periods Process

2-5 years Feasibility 'study and presentation of proposals and land applications by developers

4 months Consideration of proposals and their approval by the government

6 months Submission of financing and marketing strategy 2 months Approval of such strategies and government's election

regarding equity 2 months Creation of mining organization 6 months Grant of land

25

that all loan support is to be met by the developers. Overrun Finance above the financing plan limit shall also be the responsibility of the developers, with any additional equity being provided as nonvoting redeemable preference shares.

Infrastructure Arrangements Given that mining agreements now provide that developers construct all necessary infrastructure at their own expense, care must be taken to define when and where that responsibility ends so as to avoid the government having to meet hidden costs. In order to avoid later recrimi­nations, socioeconomic services that are likely to be provided to the local peo­ple by the developers should also clearly be the developer's responsibility. Where priority use of infrastructure is granted to the developers, they should be required to provide sufficient capacity to ensure that they have no de facto exclusive use of such infrastructure. Bearing in mind that there are some ad­vantages for the project when the government provides some infrastructure f i ­nance, any such provision should be via a user charge agreement. Such an agreement was used to fund the construction of the access road to the Ok Tedi project in Papua New Guinea. Lastly, third parties using a project's infras­tructure should not be required by existing developers to contribute to initial capital costs so as to allow an advantage to other, possibly subeconomic proj­ects.

Currency Availability Undertakings In order to retain autonomy with respect to fiscal and monetary policies, government should not grant developers an auto­matic right of capital remittance. Nevertheless, recent research indicates that many governments have already compromised themselves on this issue. A suggested position is that rights only be granted to allow foreign currency from export sales to meet payments with respect to dividends, current goods, and services and loan repayments. Fall-back positions on capital remittance in­clude allowing the creation of a foreign currency account within the country and allowing capital repatriation at a steady rate over a long period.

Termination, Force Majeure, and Arbitration A qualification upon the normal termination provisions (by default, the project: becomes the property of the government) is to agree that a receiver and manager have the opportunity to either restore project cash flow or sell it as a going concern. Such a provision enhances the prospect of obtaining project financing. Finally, arbitration is not cheaper or quicker than litigation, although it is confidential and experts can be utilized. The International Centre for the Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law ( U N C I T R A L ) rules appear to offer the best avenue of arbitration to governments.

26

Part III The Implementation Context:

Internal and External Influences

In the concluding sessions of the conference, discussion focused on the evo­lution of projects through the exploration, feasibility, construction, and opera­tional stages and described how external factors such as investor perceptions and the world energy outlook might influence project decisions. Emphasis was placed on the changing nature of policy concerns and investment priorities and on the manner in which early feasibility assumptions and interpretations changed as projects moved toward commercial production.

The opening presentation by Sam Pintz examined environmental, technical policy, and manpower questions within the context of the Bougainville and Ok Tedi projects in Papua New Guinea. Nigel Agonia then described the ar­rangements necessary to acquire land for mining purposes in Papua New Guinea and suggested various compensation schemes that had been nego­tiated with landowners. Following Agonia's presentation, the premier of Bou­gainville province, together with Agonia and other members of the provincial government, participated in a panel discussion on the social impact of mining and the reaction of local residents to development of the Bougainville copper mine. These discussions provided conference participants with useful insights into the differences in perception between the national and provincial govern­ments, and how these differences might be resolved.

In a special session on industry perceptions, David Adam and J im Byth, ex­ecutives of Broken Hi l l Proprietary and Conzinc Riotinto of Australia respec­tively, described how private companies evaluated the political and economic risks and the criteria used to assess specific investments. Following their intro­ductory comments, an open discussion took place on a range of policy issues as perceived, on the one hand, by private investors and, on the other hand, by government officials.

During the final day, two papers were presented that focussed on energy is­sues. The opening paper by Stephen Zorn examined the economics of metal

27

smelting and refining with special attention to the increasing importance of energy in overall processing economics. The paper by Fereidun Fesharaki considered the future outlook for petroleum prices and its implications for the Pacific region.

Implementation Issues in Mineral and Petroleum Agreements (S. Pintz) The successful implementation of large mineral or petroleum projects re­

quires clear understandings between investors and the host government. These understandings can either be in the form of specific contractual provi­sions or embodied in general statutory legislation. Whatever the form, the im­plementation issues are sufficiently complex and far-reaching to require sub­stantial analysis on the part of the host government. For small nations as in the South Pacific, the expertise for this specialized policy analysis may not be im­mediately available. By careful definition of problems and judicious use of out­side consultants, this shortcoming can be overcome. In some circumstances it may also be possible to preserve policy options at modest cost or to use the sub­stantial technical resources available to investors to evaluate alternatives.

Environmental policy toward a prospective mineral project must be formu­lated against several constraints. A few of these constraints are:

1. investors are unlikely to put up much money for environmental work until a project has been shown to be viable in the feasibility study,

2. conceptual project design (at least through the feasibility study stage) will be largely independent of ecological concerns,

3. no matter how carefully defined or carried out, environmental studies will seldom yield conclusive results until a mine is actually in opera­tion, and

4. the maintenance of environmental options can sometimes be facilitated by "incremental" capital programs or "contingency" pollution abate­ment installations that permit operational experience to be incorpo­rated into mine design at modest cost.

A major problem that is far too often ignored in environmental planning is the consequences of mine closure. Provision for ongoing maintenance of en­vironmental facilities must be made during mine operation if the avoidance of environmental catastrophes is not to become a burden on future government budgets.

A technical policy relating to the manner in which a mineral resource is de­veloped is a legitimate concern of host governments as well as investors and sponsors. Technical policy must be related to the government's principal ob­jective in undertaking the development—the maximization of the long-term value of the resource. Technical parameters such as cutoff grade, orebody va­luation, and mine capacity are often conservatively estimated during the feasi­bility stage of a project. In most cases this engineering conservatism reflects genuine uncertainties about how the mine will ultimately function, but on oc­casion, this conservatism can be a negotiation tactic to make a project appear less attractive. Technical and resource maximization issues are almost always

28

dealt with at the feasibility stage with provision made for government approval in the master agreement (rather than under general legislation). Experience suggests that it is very difficult for government negotiators to win technical de­bates with company engineers. However, by establishing a legitimate techni­cal point of view, the government can often change the tenor of other negotia­tions while sensitizing investors to fundamental long-term concerns.

Labor policy in a new mining project should be directed toward the follow­ing three goals:

• maximization of skills training for citizens (rather than simply maximi­zation of the number of people employed),

• integration of manpower training and localization targets into a single approval process that is linked directly to feasibility assumptions, and

• an active wage policy that is designed to minimize the disruptive effects that uncontrolled mine wage increases can have on small national econ­omies.

Labor departments and procedures in many countries are not equipped to deal with large resource projects. A particularly troublesome problem is cop­ing with the rapid build-up of foreign workers during the construction period. This problem may be compounded in the future with the rapid emergence of highly skilled Asian construction work forces who may have very different cul­tural patterns than those previously experienced by South Pacific people. A second problem that is most acute during the construction period is the social friction caused by the rapid influx of outsiders into a remote region. Residents are threatened by this outside socioeconomic competition and ways must be found to ensure not only an initial employment preference but an ongoing role in the operation of the mine for resident workers as well. Certain skills com­mon to both construction and operations (such as truck drivers or heavy equipment operators) can provide a transitional vehicle for local residents. Such an employment strategy for residents will necessitate a clear, preferably contractual, understanding both with the investor and with third parties such as construction contractors.

Although the implementation issues discussed must be considered of sec­ondary importance in the initial relations between investors and governments, the importance of these questions will mount rapidly with time. Each of the policy concerns discussed has a direct bearing on project economics and the sharing of costs and benefits between host government and investing com­pany. Solutions to each issue are essential to the successful development of all major resource projects; if decisions are not consciously taken they will be un­consciously imposed by events.

Panguna Mine, Bougainville Island: The 1980 Land Compensation Agreement (N. Agonia)

A n agreement on compensation and land occupation fees between Bougain­ville Copper Ltd. (BCL) and the Panguna Landowners' Association for land within the company's mining leases was signed in July 1980. The agreement

29

concerns the Panguna mine and covers the five-year period from 15 March 1979 to 14 March 1984. It provides for annual compensation payments in ad­vance by the company under four divisions. (The following definitions are taken from the July 1980 Agreement between B C L and Panguna Landowners Association.)

Bush Lands (Base year payment—K7.41 * per hectare): "Bush Compensation includes compensation for bush trees and other natural foliage damaged or destroyed, for interference with use and en­joyment of bush land, for severance of land, for loss of surface rights-of-way and hunting, and other rights associated with the bush.''

Physical Disturbance (Base year payment—K10.00 per hectare): "Physical Disturbance Compensation is compensation for land within the leases which is actually physically disturbed by the operations of the company."

Social Inconvenience (Base year payment—K15.00 per hectare): "Social Inconvenience Compensation includes compensation for nui­sance, inconvenience, disturbance to ways of life, social disruption and loss of traditional customs resulting from the company's operations."

Rivers and Fish (Base year payment—K151,000): "Rivers and Fish Compensation means compensation for loss offish and other marine creatures and for disturbance, inconvenience and loss of customary habits and rights related to fishing in and general use and en­joyment of the said rivers.''

Payment rates in the four divisions are increased each year by the percent­age increase in the regional Consumer Price Index for the previous calendar year. Social Inconvenience Compensation and retroactive Bush Compensa­tion is remitted to the Road Mine Tailings Leases Trust Fund, a trust fund established for the benefit of the landowners. The other two types of compen­sation (Physical Disturbance and Rivers and Fish) are paid directly to individ­uals. In most cases the direct recipients further distribute payments to family members.

In addition to the four types of compensation payments listed above, the company will pay the annual statutory Occupation Fee (minimum rate K5 per hectare), as well as the Panguna Regional Payment. The sum of the two pay­ments is fixed at K30 per hectare per annum. These payments are made in ad­vance directly to the individual landowners. The Panguna Regional Payment is recognized as a special payment to the Panguna landowners; an equivalent payment should not be required elsewhere in Papua New Guinea.

The July 1980 agreement may be seen as a model for compensation ar­rangements with respect to subsequent mining development in Papua New Guinea. As such it might be considered a benchmark in the history of Papua New Guinea's mining industry.

KM.00 = US$1.45

30

Mineral Processing in the Pacific Island Countries: Problems and Oppor­tunities (S. A . Zorn)

The present and potential production of several different minerals, in par­ticular copper, but also bauxite, nickel, manganese, and chromite, in various Pacific island countries is large enough to justify serious consideration of the establishment of processing facilities, at least to the stage of metal ingot or ferro-alloy, although probably not to the stage of semi fabricated products such as copper coil or aluminium extrusions.

On the basis, however, of a preliminary economic analysis of the processing of copper, nickel, and bauxite, it does not appear likely that such processing facilities could be built and operated in any of the Pacific island countries at a cost, taking both capital and operating costs into account, that would be com­petitive with the costs of existing and planned processing plants in other areas. The most relevant of these other areas include Australia in the case of alumina refining and aluminium smelting, the Philippines, Taiwan, South Korea, and Japan in the case of copper smelting and refining, and Japan and France in the case of nickel refining (although some expansion of processing in the case of New Caledonian nickel is clearly a possibility). Such a preliminary analysis, of course, needs to be supplemented by specific studies regarding particular pro­posals for the establishment of processing, but there is no a priori reason to ex­pect that capital and operating costs will be lower in the Pacific than they are elsewhere, as they may well be higher.

Energy costs are of critical importance in aluminium smelting and in the processing of nickel laterite ores. It appears unlikely, however, despite the presence of important energy resources, such as Papua New Guinea's hy­droelectric potential and offshore gas fields and the Solomon Islands' geother­mal potential, that the island countries are in a position to make power availa­ble for mineral processing at a cost that is significantly lower than that being offered in other locations (e.g., the power price charged to new aluminium smelters, based on coal-fired generating plants, in various Australian states). In light of the expected capital and operating costs, it appears unlikely that mineral processing in the Pacific island countries would be a highly profitable enterprise and, consequently, unlikely that the establishment of processing fa­cilities would be a source of significant tax revenues for the host governments.

In the case of copper, bauxite-aluminium, and nickel, any economic rents accruing at the mining stage can effectively be captured by the host govern­ments through such measures as excess-profits taxes (as in the Ok Tedi agree­ment and subsequent tax legislation in Papua New Guinea) or production lev­ies (as in the Jamaican bauxite levy). The establishment of domestic mineral processing facilities does not appear to be necessary in order to deal with po­tential transfer-pricing abuses by multinational corporations. The situation may, however, be different in the case of manganese and chromite, where cor­porate concentration worldwide is more extreme. It is more difficult to ascer­tain a fair market price for products at various levels of processing.

The Pacific island countries, both individually and collectively, lack certain basic attributes that would make domestic mineral processing more attractive.

31

The domestic markets of the countries are far too small to absorb the output of most processing plants, even if all the countries are considered together as a re­gional market. Moreover, the countries are also too small to contemplate the development of large-scale basic or capital-goods industries based on natural resources. The primary function of mineral development for the Pacific island countries can only be to provide revenue that the governments of the countries can then use to support development of other sectors, such as agriculture. As indicated above, mineral processing is not likely to contribute much toward this revenue objective.

The establishment of large mineral processing facilities in the Pacific island countries would, at least in the short and medium term, increase the depen­dence of these countries on foreign finance, technology, and management. The only way in which mineral processing could contribute to a reduction in dependence might be through the broadening of possibilities for the marketing of minerals. This single advantage would not appear to outweigh the various disadvantages cited above.

Copper Construction of a modern flash smelter and refinery would cost an average of US$1,850 per annual tonne of capacity (1980 dollars). Costs might well be up to 40 percent higher in an isolated "greenfield" location, such as Papua New Guinea. Using a capital charge of 12.5 percent per annum (rough­ly equivalent to a 10.9 percent real rate of return over 20 years, before taxes) and adding worldwide average operating costs of 13.6 U .S . cents per pound results in a total cost of about 25 cents per pound if the plant can be built for an average capital cost, and up to 30 cents if capital costs are higher than average. These figures compare with actual treatment charges paid by Bougainville Copper of only 21.5 cents per pound in 1980, indicating that, even on the most optimistic assumptions, a domestic smelter is unlikely to be competitive. Since energy costs are only a small proportion of total copper processing costs, and since significant new smelting capacity is being added in locations where low wages tend to reduce both capital and operating costs (e.g., Taiwan, South Korea, and the Philippines) it is unlikely that Papua New Guinea or any other Pacific island copper producer would have a cost advantage in pro­cessing, even on the basis of cheap local energy supplies.

NickelThe worldwide nickel market is currently in a severe state of oversup-ply; several new laterite projects are temporarily closed or operating at less than full capacity. Thus, most of the increase in worldwide consumption in the next decade can be expected to be met from the reactivation of existing facili­ties or through the relatively low-cost expansion of these facilities. No new nickel laterite operations appear likely to be undertaken in the 1980s unless they involve substantial by-product credits or significant low-cost financing and assumption of project risks by the host government (as in the case of the new Cerro Matoso project in Colombia).

While capital and operating costs for laterite projects vary widely, on aver­age one can say that capital and operating costs for laterite processing and mining together would be on the order of US&4-4.50 per pound (1980 dol-

32

lars), or substantially more than the current market price. These figures, it should be noted, do not allow for any host government revenue.

Bauxite-Aluminum Recently completed projects suggest an average capital cost, per tonne of annual capacity, of about US$675 for alumina refineries and $3,300 for aluminum smelters. Existing facilities, as one might expect, can be expanded at a substantially lower cost per tonne. In view of these basic capital costs, the price of electricity for smelting appears to be a key determinant in deciding whether a particular project will go ahead. If a smelter cannot obtain access to firm electricity supplies at a cost of less than 2.5 U . S . cents per kilo­watt hour (kwh), it is unlikely that investors would consider going ahead. The price being charged to new smelters in Australia by the various state electricity commissions, it should be noted, is on the order of 2.0-2.2 cents per kwh while the Bonneville Power Administration in the United States, which supplies the largest complex of smelting facilities in the world, is charging less than 2.0 cents per kwh.

Even a relatively low-cost hydroelectric facility in Papua New Guinea would be unlikely to offer power at a rate much below 2.5 cents. When the other cost and infrastructure disadvantages of establishing smelter facilities in a remote location are taken into account, it would appear that foreign investors have lit­tle incentive to establish smelters in the Pacific island countries.

In light of the economic realities described above, the host governments of Pacific island developing countries have several policy options:

• no expansion of domestic mineral processing; • economic inducement for processing, including subsidies and tax in­

centives; • political inducement for processing, including the establishment of a

"stable investment climate" and the reduction of political risk as per­ceived by foreign companies;

• coercion of foreign companies, using whatever bargaining power the host government may possess; or

• mineral processing without or with only limited participation of foreign corporations.

Policies of both inducement and coercion appear to have very high risks from the point of view of the host government. In most cases, it appears that a policy of no expansion of processing would, for the time being, serve the inter­ests of the Pacific island countries. Where processing does appear economi­cally feasible in a specific case, it might be productive for a host government to explore options other than that of total project control being given to a trans­national corporation.

Future Supplies of Petroleum: Implications for the Asia-Pacific Region (F. Fesharaki)

The oil market of the 1980s will continue to undergo structural changes that stem from the price shocks of 1973 and 1979. Likely trends include a con-

33

tinuing reduction in available oil from Organization of Petroleum Exporting Countries (OPEC) members and no significant increase in the volume of traded oil due to non-OPEC exports. This decline in the future availability of crude oil has to be assessed within the context of declining demand for oil in the industrial world. This decline in demand may continue in the 1980s or may stabilize, but in any case, demand for oil within O P E C countries and throughout the developing world is expected to continue to grow in the next two decades. Based on a synthesis of recent studies, projected supply-demand relationships can be summarized as follows:

• Oi l supply and demand for the non-Communist world is likely to be 52-55 million barrels per day (b/d) throughout the next 20 years.

• Organization for Economic Cooperation and Development (OECD) supplies will remain relatively stable during 1980-1990 but will fall by a few million b/d by the year 2000.

• The supply from non-OPEC oil producer;; will rise substantially as will the domestic demand of these countries.

• O P E C supplies are expected to be 24.6-31.6 million b/d during the next 20 years. (A higher estimate of 27-37 million b/d is given by the Office of Technology Assessment study.)

• Centrally planned economies are expected to be a net drain on world supplies. Many studies forecast that the Soviet bloc will either be self-sufficient or a net importer after 1985 while China will remain in the ex­port market throughout the rest of this century.

• The rise in O P E C ' s own consumption is likely to remove another 4 mil­lion b/d from the world oil market by 1990. By the year 2000, O P E C consumption will amount to about 50 percent of current export levels.

The price of oil is expected to rise again from 1982/83 onward. However, the extent of the increase will depend greatly on demand management in the oil-importing nations, and on the economic and political situation in the M i d ­dle East.

The nations of the Asia-Pacific region will continue to be major oil im­porters in the 1980s and beyond. They will not become self-sufficient, but in fact will continue to be very dependent on the Middle East for their crude. This geographical dependency will not change significantly without major measures to curtail demand and to develop alternative sources of energy.

The development of major refinery capacity in the Middle East poses an ad­ditional problem. By 1990, up to 30 percent of O P E C ' s exports may be in re­fined form. This development has major implications for domestic refineries in the oil-importing nations of the region. The developing nations of the re­gion face the added problem of imbalance between their refinery output mix and their demand pattern for petroleum products, which is further compli­cated by O P E C ' s exports of refined products. In addition, the increasing pref­erence of O P E C producers to make direct state-to-state sales with consuming countries (and the parallel decline in the importance of multinational oil com-

34

parties) will cause major changes in world oil trade. Several factors influencing this change include:

• availability of supplies will be on a short-term basis, (6-12 months); long-term contracts are unlikely to be awarded,

• oil sales will be more destination-controlled. The loss of flexibility of the international oil companies, the emergence of product exports, and partial control of transportation mean that destination controls will be easier to impose and monitor, and

• oil sales will be in package deals which may include the following link­ups: investment in exploration, establishment of petrochemical, refin­ing, or other industries; sales of refined products and petrochemicals despite surplus capacity available in the consuming countries; transport with OPEC-owned tankers; natural gas pricing and sales policies; arms sales, technology transfer, etc.; major concessions from the industrial world to the poor nations in a North-South type dialogue; and index­ation of O P E C investments in the industrial world.

In considering the possible options to minimize the expected difficulties, it is important not to lose sight of the root of the problem—oil import dependency. Measures such as regional groupings only postpone the day of reckoning, not avoid it. It is thus critical that all such steps be accompanied by major efforts in producing alternative sources of energy, energy conservation attempts at do­mestic oil/gas production, and well-formulated policies on domestic energy pricing. Near-term options which might be studied by Asia-Pacific countries include the following:

• A Regional Crude Purchasing Authority which might increase the bar­gaining position of small consuming nations vis a vis O P E C producers while minimizing tanker transport costs.

• A Regional Refining Authority which might, through aggregation of the product demands of member states, be in a position to balance over­all product mix against technical constraints and crude chemistry. Such a refining authority might lease excess Singapore capacity from its multinational owner and process oil obtained on a government-to-government basis.

• Emergency Sharing Programs for allocating product under emergency or force majeure conditions.

35

APPENDICES Appendix A: Workshop Agenda

Thursday, September 10 Evening reception, Arovo Island Resort Hotel

Friday, September 11 Field Trip to Bougainville Mine

Visit to mining area and processing plant B C L seminar on environmental issues and visit to training facilities Visit to Loloho Port loading facilities and power plant

Saturday, September 12 Opening Session Chairperson: Sam Pintz

Conference formally opened by the Honorable Wiwa Korowi, Papua New Guinea Minister for Minerals and Energy

Opening comments by Charles Johnson, representing the East-West Center Opening comments by Peter Freeman, representing the Commonwealth Sec­

retariat

Geological Resources and Economics Chairperson: Charles Johnson and Ronald Richmond

Regional Geology Overview Ronald Richmond Economic Geology of Papua New Guinea Kerry Doble Economic Geology of the Solomon Islands Frank Coulson Economic Geology of Vanuatu Alexander Macfarlane Economic Geology of Fiji Howard Plummer Economics of South Pacific Mineral Development Charles Johnson Economics of Petroleum Peter Freeman

Sunday, September 13 Legal Issues Chairperson: Carl Dundas and Stephen Zorn

Topics in Mineral Legislation David Frecker Agreements and Regulations Stuart C. McGill Legal Questions in Petroleum Development Carl Dundas Implementation Issues Sam Pintz

36

Monday, September 14 Land Issues Chairperson: Sam Pintz

Land Acquisition and Compensation Nigel Agonia Land Issues: Panel Discussion Leo Hannett, Mel Togolo, Theodore Maring,

Nigel Agonia Special Evening Industry Session C ha i rpe rso n: Nigel Agon ia

Perceptions and Evaluation of Private Companies David Adam andJim Byth

Tuesday, September 15 Energy and Processing Chairperson: Peter Agar

Mineral Processing in the South Pacific Stephen Zorn Petroleum Outlook for Asia-Pacific Fereidun Fesharaki, (paper presented by

Sam Pintz) Closing Session

Summary statements by country delegations and closing remarks by Charles Johnson

37

Appendix B: List of Participants

FIJI DELEGATION

M r . Howard G . P L U M M E R Director of Mineral

Development Mineral Resources Department Private Mai l Bag, G . P . O . Suva

Dr. David G R E E N B A U M Economic Geologist Mineral Resources Department Private Mai l Bag, G . P . O . Suva

M r . Jackson L U M Geological Survey Mineral Resources Department Private Mai l Bag, G . P . O . Suva

PAPUA NEW GUINEA DELEGATION

The Honorable Wiwa K O R O W I

Minister for Minerals and Energy

P . O . B o x 2352 Konedobu

M r . Nigel A G O N I A Secretary Department of Minerals and

Energy P .O. Box 2352 Konedobu

M r . Kerry D O B L E Policy and Planning Department of Minerals and

Energy P.O. Box 2352 Konedobu

M r . RobertJ. M O N T G O M E R Y

Assistant Secretary (Financial Policy)

Department of Finance P .O. Box Wards Strip Waigani

M r . Thomas R E I N E R Assistant. State Solicitor

(Commercial) Department of Justice Waigani

SOLOMON ISLANDS DELEGATION

M r . Frank I. A . C O U L S O N Chief Geologist, Geological

Division Ministry of Natural Resources P.O. BoxG24 Honiara

M r . Stephen D A N I T O F E A Geologist, Geology Division Ministry of Natural Resources P.O. BoxG24 Honiara

38

M r . Peter A G A R Head of Planning Central Planning Office Office of the Prime Minister Honiara

V A N U A T U DELEGATION

The Honorable Thomas Ruben S E R U

Minister of Lands The Ministry of Lands P .O . Box 151 Port Vi la

M r . Martin T. BINIHI First Secretary The Ministry of Lands P .O. Box 151 Port Vi la

Dr. Alexander M A C F A R L A N E Director, Department of

Geology, Mines and Rural Water Supplies

G . P . O . Port Vila

M r . Willie H A R R I S O N Senior Geological Assistant Department of Geology, Mines

and Rural Water Supplies G . P . O . Port Vi la

O T H E R PARTICIPANTS

M r . David A D A M Chairman Ok Tedi Mining Ltd. B H P House, G . P . O . Box 86A Melbourne, Victoria 3001 Australia

M r . J im B Y T H Advisor, Public Policy C R A Limited 55 Collins Street Melbourne, Victoria 3001 Australia

Ms. J i l l M . F E R G U S O N Secretary Bougainville Copper Limited Bougainville Island North Solomons Province Papua New Guinea

M r . David F R E C K E R Dawson Waldron, Solicitors 60 Martin Place Sydney, New South Wales Australia

M r . Leo H A N N E T T Premier North Solomons Provincial

Government P.O. Box 120 Arawa, N.S .P . Papua New Guinea

M r . D . S. K A R P I N Executive Manager

(Commercial)—Bougainvil Copper Limited

C R A Limited 55 Collins Street Melbourne, Victoria 3001 Australia

M r . Theodore M A R I N G Provincial Secretary North Solomons Provincial

Government P .O. Box 120 Arawa, N .S .P . Papua New Guinea

M r . Stuart C . M c G I L L A/Principal Legal Officer,

Major Projects Department ofjustice P.O. Box Wards Strip Waigani, Port Moresby Papua New Guinea

M r . Brian M E R R E T T Manager and Director C R A Minerals (PNG) Pty. Ltd. Papua New Guinea

M r . Peter M I G I L E Legal Officer (Conveyancing) Department ofjustice State Solicitors Office P .O. Box Wards Strip Waigani, Port Moresby Papua New Guinea

M r . Michael P A R I N Member of Provincial

Government North Solomons Provincial

Government P.O. Box 120 Arawa, N.S .P . Papua New Guinea

M r . Mel T O G O L O Provincial Planner North Solomons Provincial

Government P.O. Box 120 Arawa, N .S .P . Papua New Guinea

M r . J . R. T R E Z I S E Assistant General Manager C R A Limited 55 Collins Street Melbourne, Victoria 3001 Australia

C O M M O N W E A L T H SECRETARIAT

M r . Carl W. D U N D A S Special Advisor (Legal) Commonwealth Secretariat Marlborough House, Pall Mal l London S W l , England

M r . Peter F R E E M A N Chief Project Officer Technical Assistant Group Commonwealth Secretariat Marlborough House, Pall Mall London S W l , England

EAST-WEST CENTER

Dr. Charles J O H N S O N Research Associate and Project

Leader*

M r . Sam P I N T Z Research Fellow and Workshop

Coordinator*

M r . Ronald R I C H M O N D Research Fellow*

M r . Stephen Z O R N Research Fellow*

also Vice-President Tanzer Natural Resources

Associates 251 West 86th Street New York, New York 10024

Ms. Jean B R A D Y Degree Student and

Rapporteur*

40

Dr. Fereidun F E S H A R A K I Research Fellowt

•Raw Materials Program East-West Resource Systems

Institute 1777 East-West Road Honolulu, Hawaii 96848 U . S . A .

t Energy Program East-West Resource Systems

Institute 1777 East-West Road Honolulu, Hawaii 96848 U . S . A . Dr. Fesharaki submitted a paper but did not attend the conference.

TH E EAST-WEST RESOURCE SYSTEMS INSTITUTE is directed to the goals of understand­ing {1} how nations can maintain adequate, equitable, and reliable access to natural resources, and {2) how natural resource producing nations can efficient ly manage the development and utilization of their resources to achieve national development goals. The Institute consists of multidisciplinary research in three interrelated projects: Food Systems. Energy Systems, and Raw Materials Systems.

International research groups are collaborating with RSI staff to analyze and conduct research on these systems. A series of data bases and information exchange facilities is now being developed to support their studies. On an interdisciplinary basis, the various teams will explore these problems stressing their interrelationships in both local and international terms in the Asian and Pacific region.

Food Systems conducts research on the institutional and policy aspects of improving food security in the Asia-Pacific region; examines the complex interactions of administrative, technological, and social issues involved in developing food systems in marginal lands; and explores alternate food systems with special emphasis on: food and the city, food systems based on water environments, and institutional and policy aspects of biological nitrogen fixation.

Energy Systems provides analyses of the vulnerabilities of nations to disruptions in the flow of petroleum fuels including studies of downstream operations; collects and analyzes data on the supply, demand, social and environmental impacts, and future prospects of bio mass fuels in rural areas; evaluates fuels substitution and conservation potentials in the industrial sector of developing countries; and develops energy indexing methodologies and information exchange both within and among Asia-Pacific nations.

Raw Materials Systems is concerned with the identification and evaluation of policy and strategy options that will allow nations to benefit from the exploration and development of their minerals resource potential. The main research areas are: minerals assessment for national planning, innovative government-transnational company arrangements, case studies in mineral policies, and economics of minerals development. The focus of research in 1981 was on the minerals potential and policy options of selected South Pacific island nations. In 1982 research focus has shifted to ASEAN countries and Australia.

THE EAST-WESTCENTER—officially known as the Centerfor Cultural andTechnical Interchange Between East and West—is a national educational institution established in Hawaii by the U.S. Congress in 1960 to promote better relations and understanding between the United States and the nations of Asia and the Pacific through cooperative study, training, and research. The Center is administered by a public, nonprofit corporation whose international Board of Governors consistsof distinguished scholars, business leaders, and public servants.

Each year more than 1,500 men and women from many nations and cultures participate in Center programs that seek cooperative solutions to problems of mutual consequence to East and West. Working with the Center's multidisciplinary and multicultural staff, participants include visiting scholars and researchers; leaders and professionals from the academic, government, and business communities; and graduate degree students, most of whom are enrolled at the University of Hawaii. For each Center participant from the United States, two participants are sought from the Asian and Pacific area.

Center programs are conducted by institutes addressing problems of communication, culture learning, environment and policy, population, and resource systems. A limited number of "open" grants are available to degree scholars and research fellows whose academic interests are not encompassed by institute programs.

The U.S. Congress provides basic funding for Center programs and a variety of awards to participants. Because of the cooperative nature of Center programs, financial support and cost-sharing are also provided by Asian and Pacific governments, regional agencies, private enterprise, and foundations. The Center is on land adjacent to and provided by the University of Hawaii.

1777 East-West Road, Honolulu, Hawaii 96848