OIL SEARCH LIMITED, A MONSTER BUILT BY TAX PAYERS OF PAPUA NEW GUINEA
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| Peter Botten - Photo Herald Sun |
The controversy surrounding the UBS/Oil Search Deal is too important to face a natural death with passage of time. Many experts and people in the know have openly described the deal as “not in the best interest” of Papua New Guinea. Much has been said about the impropriety and illegality of the loan hence I do not wish to labour on the same issue.
I am not an expert nor do I claim to have industry knowledge, but a recent cursory inquiry had taken me to realise some of the connected yet unconnected facts about an empire the people of Papua New Guinea have been building –Oil Search Limited (OSL). Lies and deceits have led us to build a monster that we rarely own nor benefit from.
According to Wikipedia online, OSL is acclaimed as the largest oil and gas exploration and Development Company incorporated in Papua New Guinea, which operates all of Papua New Guinea's oilfields. Founded in 1929, it is now one of Papua New Guinea's largest companies and in 2006 was responsible for 13% of Papua New Guinea's Gross Domestic Product. It is publicly listed on the Port Moresby and Australian Stock Exchanges, and is included in the S&P/ASX 50. It has a market capitalization of around US$3 billion. A 17.6% interest in the company is held by the government of Papua New Guinea, and for 2006 gave the state PGK24 million (US$8 million) as its dividend. The company also operates areas in Yemen, Egypt, Libya, and Iraq.
In 2002, OSL pushed to acquire the majority Government of PNG (GoPNG) owned company, Orogen. Orogen was a company used by the State to participate in the oil, gas and minerals industry. Oil Search was a relatively small player in the oil and gas industry then and was exposed to a takeover bid. In March 2002, under the leadership of Sir Mekere Morauta as the Prime Minister, decided to exchange the Government’s 51% shares in Orogen with Oil Search hence resulted in a merger where the State acquired 18 % of Oil search shares worth at that time around A$300 Million. The decision was made to give Oil Search a solid footing to bargain in the then (now abandoned) Queensland Gas pipeline project. At the time of the merger, Orogen was believed to worth more than Oil Search. It is not known how the costs benefit analysis was done before the merger. Whatever it was, Oil Search did manage to convince our decision makers to merge with Oil Search and further to scare off potential take-over bids.
Soon after the merger, in 2003, Oil Search, in its bid to raise capital, offloaded it’s now acquired shares (formerly PNG Government shares through Orogen) in Porgera Joint Venture to Durban Roodepoort Deep for $US52 million. After four years (in 2007), Durban Roodepoort Deep sold the same shares to Barrick for $US250 million. PNG therefore lost about $US 200 million in just a matter of four years in pursuit of building Oil Search.
Though the GoPNG was one of the major shareholders in OSL, it was not given any directorship on the board despite many requests by the PNG Government. How the company was run and dividends were distributed did not involve GoPNG.
The Somare Government decided to abort the Queensland Gas Pipeline project and decided to do downstream processing in PNG now called LNG 1. Exxon Mobil showed interest in developing the LNG 1 project together with other joint ventures.
The GoPNG had 22.5 % equity under the Oil and Gas Act to participate in the project directly. A number of proposals were submitted to the Government on how the funds could be raised to fund its equity. The most viable option was to sell its shares in Oil Search, raise the capital and funds its equity in the project directly. The dividends that OSL was paying were not sufficient to supplement the national budgets hence it would be perfect to sell the shares and directly participate in the project. It was also risky to hold shares in publicly listed companies like OSL.
That meant that OSL would be reduced by the Governments share in OSL hence would affect Oil Search capacity to participate in the LNG 1 project. OSL was vying to be a major partner in the LNG 1 project (now the 3rd largest partner). It also meant that OSL would be vulnerable to a take-over bid now that the Government was pulling out of the company.
Oil Search (Peter Botten of course) came up with a strategy and somehow convinced then Minister for Public Enterprises, Mr Arthur Somare. The strategy was off course to borrow from the International Petroleum Investment Company (IPIC) of United Emirates to fund the GoPNG participation in LNG 1. Minister Somare got introduced to the Arabs and he pushed through the Cabinet for the loan to be borrowed.
A loan agreement was reached between GoPNG and IPIC. It was further agreed that 15% of GoPNG shares in Oil Search would be used as collateral for the loan in exchangeable bond at a strike rate of A$8.55 per share. Oil Search share price at the date of the agreement was A$5. That meant that Oil Search share price was confidently estimated to be around A$8.55 on the maturity date of the loan, which was 5th March 2014. It was further provisioned that a number of State owned assets were used as collateral to repay any residual amount resulting out of an instance where the share price does not hit the targeted value of A$8.55 per share and IPIC was owed. Oil Search involvement in the IPIC deal is evidently clear as without Oil Search’s own forecasts how could IPIC and GoPNG know or speculate that the Oil Search share price would be A$8.55 in five years’ time? Sound advice from experts tells us that it was the most risky option GoPNG took, done to benefit Oil Search.
It is believed that the Government paid about A$300 million in 2011 to discharge the contingent liability of Exchangeable Bonds under the IPIC loan against the assets of PNG stated owned companies. That payment is kept off the books of the GoPNG and could not be found. On the maturity date of the exchangeable bond on 5th March 2014 with IPIC, IPIC claimed that the OSL shares were less in value hence PNG owes IPIC another $US70 million.
Oil Search dividends are not much. In a year, the Government was paid an amount under $20 million. If we disposed the GoPNG shares in Oil Search to raise the capital for the LNG 1 equity participation, imagine the rewards we would be reaping upon the shipment of the LNG 1 project coming July this year? No need for IPIC loan either!!
On the date of redemption, the IPIC Arabs refused to surrender the shares. Minister Ben Micah made five trips to Abu Dhabi but none of his competence won a single mile in convincing the Arabs to sell the shares. They (Arabs) wanted to convert the loan into the GoPNG shares in Oil Search hence now become major shareholders. As a result, the GoPNG was no longer on the Oil Search share register as one of the major shareholders, exposing Oil Search to the risk of a takeover bid from the Arabs.
At around the same time between February and March this year, Oil Search was vying for a major stake in the PRL 15 Elk/Antelope (LNG 2) project. French Giant Total SA was already in talks with Interoil Limited to be the operator in that project and purchase considerable shares in Inter-oil to enter in that project. In the Sydney Morning Herald, Analysts were reported to have said “any substantial acquisition is expected to require an equity rising given the financing of its share of PNG LNG has stretched Oil Search’s funding capacity”. They suggested OSL could raise up to $US400 million in order to participate in the Elk/Antelope LNG 2 project.
It was also foreseen that the upcoming acquisition came as Oil Search’s own ownership structure was also potentially set for a shake-up with the maturing on March 5 of convertible bonds held by Abu Dhabi’s state-owned International Petroleum Investment Co.
It was reported on the Businessspectator.com news on 27th February 2014 that the OSL shares were placed in a trading halt on February 25, 2014 pending the deal for the GoPNG share acquisition in OSL deal. This indicates that OSL knew that the deal was going to cause some turbulence hence suspended the listing on the share market to mitigate the risks. It is believed that Oil Search placed the GoPNG (PM O’Neill) under pressure and gave them two weeks within the suspension of shares period to make the deal happen. Botten told O’Neill:- “Namesake, please remove all roadblocks and make it happen. We’re running out of time.” As a result,
1. William Duma was removed as Minister for Petroleum & Energy on 25th February 2014, coincidentally on the date when OSL suspended its shares from trading –Duma is more aligned to Shell or another developer in the Elk/Antelope LNG 2 project and openly indicated his unwillingness to give OSL monopoly over the industry in LNG 2. Duma’s refusal may also be in relation to the Solwara 1 deal where he is known to have refused. Duma was likely to raise more eye brows of the OSL/UBS deal given that he had 8 years of industry knowledge as Minister for Petroleum and Energy.
2. Don Polye was removed as Minister for Treasury on 10th March 2014, coincidentally 1 day before signing the loan agreement –Polye refused to sign the loan. His reasons have been publicized after his removal.
3. PM O’Neill signed the loan in his capacity as Acting Minister for Treasury on 11th March 2014.
OSL had a motive and used its economical muscles, connections and inducements to lead us to increase our debts and increase its fat balance sheet. OSL should be investigated and prosecuted for economic crimes it continues to commit against the people of Papua New Guinea.
On the weekend (14/3/14), after PM O’Neill signed the UBS loan, jetted off to Singapore for purported talks with Singaporean lawyers to defend the State’s expropriation of Ok Tedi mine. Attorney General Kerenga Kua was already there by a day earlier (Thursday) and would competently engage Singaporean lawyers to represent the State. Kua has been doing law practice for many years and knows his game. There was no need for PM to travel the following day (Friday). It is believed he travelled to Singapore to organise his commissions and success fees payments after inking the UBS deal. It is also believed he took a private jet from Singapore and discreetly jetted into Hong Kong in the morning of Saturday where he opened a bank account for his Virgin Islands Shell company. (It is a requirement in Hong Kong that the holder of the account must personally present himself with his passport). He then travelled back to Singapore the same day and in the afternoon/next day he returned to PNG.
O’Neill and others had a motive to gain from this deal. Peter Barker of Institute of National Affairs was quoted as saying Commissions and success fees could be within the vicinity of 15%. These habitual corrupter should be prosecuted for the crimes they continue to perpetrate against the people of Papua New Guinea using their entrusted positions of power.
The NEC decision regarding the UBS deal reveal that most likely the State’s interest in the LNG 1 project held by Kroton of IPBC were used as collateral for the UBS loan. We have effectively surrendered the first fruits of the PNG LNG 1 project in order to be listed on the stock market, so to speak, and to help OSL. Why didn't OSL use its own interest in the LNG 1 project as collateral to raise capital and invest in LNG 2 if it so wished? I don’t understand how we are sacrificing our material gains in our direct investment in the LNG 1 in order to be on the speculative market….and call that as “best deal for the country….I don’t get it????. We are selling our real benefits for speculative benefits.
Hopefully the investment with Oil Search earns rewards for the people of Papua New Guinea. How much would OSL pay in dividends to supplement the National Budget every year as a result of the 10.1% investment if ever OSL decides to pay dividends? I see they have one too many dividends reinvestment plans without notices.
Oil Search, after the State raised its capital through the UBS loan of $1.2 Billion loan, purchased 22.835% off from Pac LNG Group to effectively participate in the LNG 2 Project. Oil Search announced that the State’s subscription of $1.2 Billion recently borrowed from UBS would help to pay for their 22% interest in they bought from Pacific LNG Group. The amount used was $US 900 Million (A certain fraction would have been retained by Oil Search from the UBS loan or misdirected from exchange variations). Secretary for Treasury, Dairi Vele was reported as boastfully saying we have saved about $US46.8 million.
Total SA on the other hand purchased 40.1% shares of the same Elk/Antelope interest from Inter-oil for $US400 million. How come OSL got its interest in the same Elk/Antelope LNG 2 ballooned? When pressed with the question on how their shares valued more, Peter Botten failed to explain how OSL arrived at that. All he said was that their shares were unique in that OSL also had pre-emptive rights in the LNG 2 project. OSL could not exercise those rights when Interoil sold its 40% stake to Total, proving OSL claims futile and unworkable. OSL tried to put up a show and reportedly initiated disputed proceedings but it is not clear how far that proceedings had taken.
THE LIES THAT PETER O’NEILL WAS TUTORED AND BLINDED BY MONEY TO FEED US:
PM O’Neill tells us that the UBS loan was obtained to give Papua New Guineans an opportunity to own their own resources. He was reported as saying “we don’t want to be tax and royalty collectors. We want to participate in the project”. Off course we do want to own our own resources. Who says we don’t? Sounds like a very convincing argument easily believable by naive and ignorant people. However, is it the best option to own our resources by investing into the speculative market and through third or fourth party indirect investments where along the way, we end up paying those parties and receive less return for our investment?
When the State Solicitor was reported in the media to warn the Government of its debt level and to keep the debt off the government books, PM O’Neill was quoted by Post Courier newspaper of 17th March 2014 as saying “the Government is keeping this transaction off the Government accounts by vesting it with Petromin just like IPIC loan with Kroton. Using Petromin, a technically bankrupt state owned company, as the vehicle for channelling this loan is inappropriate. Further, it needs to be noted that it is not Petromin’s revenue that will be used to repay this huge loan. It is the LNG revenues that are being mortgaged in this deal.
Well as a matter of fact, there is already NEC decision which nominated Petromin to take up the Government 22.5% equity participation in the Elk/Antelope project. Petromin has secured syndicated funding secure a 20.5% interest directly in the Elk/Antelope LNG. It is therefore unnecessary to invest in Elk/Antelope through OSL then Pacific LNG Group and eventually the project itself. For Petromin to include the new debt, it will literally be declared bankrupt on the date of entry of this debt.
Further, we have lost a lot through OSL’s deceits and lies. Any sound and reasonable thinking person would have thought the non-redemption of oil search shares in exchange of our loan debt was relieving news as we would no longer be involved with Oil Search. It’s better to participate directly than to be on the stock market with Oil Search.
IN SUMMARY
OSL WAS BUILT BY PNG GOVERNMENT THROUGH MERGER OF OROGEN.
OSL SOLD OROGEN ASSETS TO BUILD ITS CAPITAL BASE TO PARTICIPATE IN QUEENSLAND GAS PIPELINE
OSL DIVERTED GOVERNMENT AWAY FROM SELLING ITS SHARES IN OSL AND INSTEAD BORROWED FROM IPIC THAT COST THE STATE MILLIONS OF KINA THOUGH WE MANAGED TO INVEST IN LNG 1.
OSL MISLED AND PRESSURED PM O’NEILL TO BORROW K3B FROM UBS, BREAKING ALL LAWS, RAISING OUT DEBT LEVEL TO RECORD HIGH PER GDP.
OUR FIRST FRUITS OF LNG 1 ARE TIED AGAIN TO THE UBS LOAN.
WE SURRENDERED OUR MATERIAL INVESTMENT WITH THAT OF SPECULATIVE ONE.
OSL’S INTENTION TO KEEP THE GoPNG ON ITS SHARE REGISTER IS COSTING THE ORDINARY PEOPLE OF PAPUA NEW GUINEA HUNDREDS OF MILLIONS AND BILLIONS OF KINA.
AT THE CENTRE OF ALL THESE IS THIS MAN –PETER BOTTEN. HIS POSITION AS THE MANAGING DIRECTOR OF OIL SEARCH IS AS OLD AS THE CONTROVERSIES I HAVE JUST LISTED ABOVE. HE SHOULD BE PROSECUTED TOGETHER WITH ALL OTHERS.
****UPDATED 06-05-2014
