FORMER INTEROIL EMPLOYEES SPEAK OUT

PNGNews

This is the background brief outline provided by former interoil employees as the company face growing pressure from shareholders and PNGICC over announcement of Oil Search bid to buy out InterOil operation in Papua New Guinea, giving total monopoly over LNG production market in the country.

Jobs:
In 2013, InterOil had between 1,500 and 2,000 staff and contractors throughout Papua New Guinea. The current BOD and executive management changed the entire strategy of the company, and closed offices, sold assets, and sacked staff. Around 100 staff in Cairns Australia lost their jobs as the office was forced to close by executive decree. Then the layoffs started in PNG, whereby hundreds of PNG nationals lost jobs.
Critical roles such as safety training and inspection were “right-sized”, actually these roles were simply reduced and out sourced to foreign contractors ( at rates 3 times PNG nationals) that simply didn’t have the PNG experience that is needed in roles like that.

The reduction in safety, training, and inspection lead to the deaths of several people in the seismic projects. These deaths were never investigated publicly, and the internal investigations were hushed up, and the determination in each case was that the deceased was at fault. This meant that nobody was held accountable, and noting had change. As it stands now, InterOil employs only a skeleton staff in PNG, and the exploration, seismic, drilling, logistics and other support jobs that were part of the largest exploration projects in the history of Papua New Guinea, are gone.

InterOil has over the last two and a half years, increasingly contracted into a single office in Singapore, and they have showed that their promises of Jobs for life for the PNG Citizens, were never part of their strategy.

From the beginning, InterOil was intended to be a development resource. Certainly to develop hydrocarbons, but also to develop Papua New Guineas most precious resource: the people. The history of the company from 1997 through to mid 2013 shows quite clearly that this was the case. From the end of 2013 however the new Board and CEO swapped in a new set of corporate goals, and helping to build the nation of Papua New Guinea as swapped out.

Wasted_money:
As the new CEO and his team took control, and they stacked the BOD with their long time co-workers from past organizations, the entire fabric of InterOil began to change.
A program of displacement was implemented, and all the C-Level management were immediately replaced with former colleagues of the new CEO who were parachuted in at excessive salaries and the incumbents were shown the door.
These Executives then changed the focus of the company and started to perform the same displacement at the B and A levels of management.

They started by implementing an open-ended contract with AWT, and AWT CEO (Dave Kirk) took the role of VP Exploration, and AWT CFO (someone named Green) took the VP Drilling.
These people then acted as a funnel to introduce more and more contractors, until all the B and A Level management had been replaced, along with their PNG experience and in-country relationships – while costs doubled and tripled with poor results.
Since InterOil were now fully staffed with contractors at massive day-rates, rather than salaried employees, the Operation Expenditure spiraled out of control to accost that was 800% higher than the discoveries.

Realizing the mounting costs, the new management employed additional contractors to try to find savings with the payroll, and rather than look at the cost of the contractors, they began terminating non- management staff. This process started in Cairns, then spread to PNG.

During this process, as they were losing their critical staff, staff with considerable PNG experience, the new management embarked on the most ambitious drilling program that InterOil has ever done. Because of their inability to schedule resources, the meant that they had to obtain even more contractors, and then contract entire drilling rigs with additional helicopters, rig crews, and logistics teams, when the most cost effective method already existed. At one stage it got so out of control that helicopters were stacked up waiting their turn to land to refuel, and the danger was that they would spend 50% of their flight time waiting to refuel.
Added to this, was the conflicting instructions to the drilling teams, that seemed to be intended for internal political results rather than resource building.

The Antelope 4 well is a case in point. The executive management sitting in the office in Singapore, were instructing the Drillers on site, how the well needed to be drilled, despite the advice from the drillers that they were damaging the formation, or losing the balance of the wells. Because of this mismanagement the Antelope 4 well was drilled in the shape of a cork-screw.
With all this waste, the cost of drilling rose from around US$20Million per well to almost $US200Million for Antelope 4. ( meaning over Kina 600 million)

During this rush to drill, the company sold its only asset that was generating a positive cash-flow: The refinery. This asset was sold for $526Million, which was less than half of its on-book value, and most of the money realized was spent by the end of 12 months.
The Management performed the miracle of being able to spend $1Billion over two years in their drilling program, and have not found a single new commercially proven resource, and also have marginally been able to prove-up any additional value on the resources discovered prior to their arrival.

Finally, InterOil sold all their moveable assets, including Rig3, the rig that drilled Antelope and Elk wells for almost scrap. When hundreds of millions could have been saved.
InterOil sold 200 shipping containers to Pagini Transport, and in the process gave away several million US$ of drilling chemicals.
Hession & the BOD:
It has now been revealed that all of the executive management (C-Level), most of the Senior Management (B-Level) and 30% of the BOD, have worked with each other at previous employers. Most at Woodside, and the others at BP. All of them were previous colleagues of the new CEO Michael Hession.
The executive C-Level have managed to get added to their contracts, some very fat golden parachute clauses, that trigger when there is a change of control. The collective value of these contracts exceeds $60Million (K180 million) –while hundreds of PNG nationals have lost their job and careers.

Looking back on the last 2 1/2 years, we can see that the new CEO and his management team, and his weak BOD have dealt with InterOil in a manner that can only be described as shameful. It is obvious in the clarity of hindsight that they have collectively conspired to take care of their own compensation as the expense of the shareholders & national employees, to which they had a fiduciary duty of care.

The current BOD and Executive team have chosen to tie their hands with this new deal and to specifically exclude themselves from being able to re-enter the negotiation, either with OSH, or with an alternative potential suitor, at the cost of a $US60Million 

Break_fee.
The very fact that this break-fee even exists, and yet at the same time the agreement does not exist (because it has not been ratified by the shareholders), is testament to the inept and brutal manner in which this BOD and management have treated the owners of the company, the shareholders.
As they sold all the moveable assets, they showed that the long term strategy of the company no longer included exploration or even PNG for that matter, but it had been changed into a Singapore based company with millionaire lifestyles for Executive management.

The_current_proposal:
The current OSH/TOTAL proposal includes the quality PRL-15 Elk/Antelope and for free Triceratops, Raptor, and Bobcat, and for these resources there is exactly zero compensation. The current BOD and Executive management have given these resources away as gifts. How did this become a good thing for the shareholders? Lets get this straight here, Its the shareholders who are the owners of the company, NOT the BOD, NOT the management. At what point did the management just assume that they could throw away, assets worth millions of dollars to the shareholders? This is yet another oversight and governance failure. The ICCC questions the ability of competitive and this process should stop.
Looking at the text of the current agreement, it is clear that while we were negotiating in good faith with InterOil on the Shareholder meeting, InterOil on the other hand were clearly operating in bad faith toward the shareholders & PNG nationals,. The board had every intention to sell off the goods and chattels while the shareholders had their attention diverted on other matters. Swap the context to your house, and this becomes burglary.

PRL-15:
If the deal for PRL-15 must proceed under the new conditions, then the terms of the agreement must include prior agreed resource payments by TOTAL and exclude the TT, Raptor, and Bobcat resources. InterOil must be able to remain and operate those on behalf of the shareholders, in trust. They cannot all simply be bundled together and sold as a single aggregate along with PRL-15.
What needs to happen is that that the basic proposal should have the same intrinsic value to the shareholders and the previous Total deal. Instead, we see that if the resource proves up to the quality that the current management have been declaring it to be, then the shareholders are going to lose around US$25/share on this new transaction.
This proposal needs to cover 100% of the current debt facility for Antelope development; so that InterOil is debt free and can take up exploration on the other resources without having to shoulder the burden of this debt - over 350 million in drilling antelope wells and overhead.

TT, Raptor, Bobcat:
These resources can be developed by a smaller InterOil, one that is free from debt, and one that is also freed from the encumbrance of the current BOD and the current executive team.
An InterOil that has its own rigs, and has its own drillers.

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