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SYDNEY (Reuters) - A dispute between Papua New Guinea and Canada's Nautilus Minerals threatens to sink plans to mine gold and other metals for the first time from the ocean floor.
It could also work against efforts by the South Pacific country to restore faith in its vast resources potential and entice more foreign companies to follow the likes of Exxon Mobil, Newcrest Mining and Barrick Gold and invest billions of dollars in resource projects.
The groundbreaking undersea venture hopes to use robots operating a mile deep to mine the sea floor near hydrothermal vents that deposit copper, gold and other minerals.
Hungry for foreign investment, Papua New Guinea (PNG), a nation of 7 million spread over an equatorial archipelago the size of California, had agreed in 2011 to pay 30 percent of the costs to build the Solwara 1 project in the Bismark Sea, which Nautilus said amounts to $80 million so far.
But in June, the government's investment arm, Petromin, said it was terminating the agreement. Without the funds, Nautilus says it cannot afford to proceed and the matter is now in arbitration in Australia under The United Nations Commission on International Trade Law (UNCITRAL).
Nautilus' shares have tumbled 60 percent since it said in mid-November it was laying off 60 workers and halting assembly work on the project to save cash. Chief Executive Michael Johnston said another round of job losses would follow on Friday unless a resolution can be reached.
"We don't know where we stand at the moment," Johnston told Reuters in an interview. "We're optimistic because we have to be, but we just don't know what Petromin is thinking."
Papua New Guinea has been described as an island of gold floating in a sea of oil, surrounded by gas, but consistently punches below its weight on the global resources stage.
The impoverished country has a long legacy of mining projects derailed by environmental disasters, landowner uprisings and corruption.
Mining from vessels is seen as a way of avoiding some of the landowner disputes that have plagued other projects. Still, the project has been criticized for failing to adequately assess environmental risks.
"No one knows what the impacts of this form of mining will be," said Wences Magun, national coordinator for Mas Kagin Tapani, a PNG environmental group.
"Communities want to know what concrete steps the prime minister will now take to ensure we are not being used us as guinea pigs in a sea bed mining experiment."
Nautilus's Johnston insists international environmental safeguards were applied to the project before a permit was granted in 2009 and that it poses no major threats since all the material mined is used, alleviating harmful waste generation.
"The deposits are mainly on the surface of the sea floor," he said. "No mountains need to be removed, no trees need to be cleared."
PNG's Petromin was set up five years ago to buy into foreign projects and safeguard revenues earmarked to help local communities.
The fund has invested in 17 projects, including a $19 billion liquefied natural gas project under construction by Exxon Mobil. It is also working with Shell to identify untapped oil and gas reserves.
It is allowed to take up to 30 percent of mining and 22 percent of oil and gas projects, which it must then help fund.
Petromin has said little publicly about the Nautilus dispute, other than that the Canadian firm had not met certain undisclosed obligations under its agreement, which entitled it to terminate the pact.
Petromin did not respond to requests for clarification over its reasons for terminating the agreement and Nautilus said it had no more details surrounding the decision.
Concerned it will run out of cash, Nautilus has suspended a three-year contract to supply 1.1 million metric tonnes of unrefined copper ore to Chinese smelting company Tongling Nonferrous Metals Group Co Ltd.
The dispute comes at an unfortunate time for Prime Minister Peter O'Neill, who is seeking to present his country as a secure place for foreign investment.
Faced with tighter credit markets, weaker commodity prices and uncertainty over the global economic outlook, the investment pipeline is looking less certain.
Elected in June, O'Neill has sought to maintain growth and replace the legacies of environmental disasters, mine closures and corruption with a new-found willingness to work with foreign companies.
In a bid to combat bribery and misallocation of foreign investors' funds, O'Neill has promised to establish an independent anti-corruption authority during the first session of parliament in 2013.
"No-one involved in corruption and fraud should feel safe," he told a mining conference in Sydney aimed at drumming up foreign investment.
The scale of the resource projects that are in operation means they have an outsized influence on the $10 billion economy. Exxon's PNG LNG project alone is expected to boost GDP by 20 percent at full production in 2015.
Last month, Exxon Mobil upped the estimated cost of the project by $3.3 billion to $19 billion.
Of that delays from work stoppages and land access issues accounted for $1.2 billion to the total.
Landowner protests against the project this year prompted the government to deploy troops to restore law and order, according to local media reports.
Also, the impact of above average rainfall for most of the last two years, was estimated to have added $700 million.
"When we started this project we were under no illusion of the road ahead," Exxon Mobil's project executive for PNG LNG, Decie Autin said at the investment conference.
Editing by Alex Richardson