EXCLUSIVE: THE TRUE STORY OF THE UBS LOAN: How Peter O’Neill and Peter Botten cost Papua New Guinea at least K1 billion
BY A SPECIAL
CORRESPONDENT IN SINGAPORE
Part 1 – How Peter O’Neill and Peter Botten cost Papua New Guinea at least K1 billion
The Oil Search Annual
General Meeting in Port Moresby earlier this year confirmed that the company is
acutely aware of the extent of corruption in the Papua New Guinea government of
Peter O’Neill.
Oil Search
executives privately commented to attendees after the AGM closed that "...
everything here in PNG is corrupt …" “… the government is so corrupt …”, "…
PNG has a lot of corruption issues …" and others in similar vein.
The cost of
O’Neill Government corruption is high, estimated to be several billion kina a
year. Now the contribution of Oil Search’s own questionable dealings with the O’Neill
Government has come under public scrutiny.
Late last month
stockmarket trading announcements revealed that the nation has lost at least K1
billion in an illegal sweetheart deal organised in secret between Prime
Minister O’Neill and Oil Search Managing Director Peter Botten.
The deal, in
which Union Bank of Switzerland loaned PNG $A1.3 billion (K3 billion) to buy a
10% shareholding in Oil Search, has now been unwound, at crippling financial
cost to the near-bankrupt Pacific Island nation.
Its collapse
renews questions about the transaction, known as the UBS Loan, and the
involvement of the Prime Minister and his cronies. Over the years a shadowy network
of corporate links has been traced, involving Oil Search, a PNG petroleum
company, Interoil Ltd, an international resources investment company, PacLNG Operations
Ltd, and a small PNG company, Insurance Partners PNG Ltd.
Central to the
allegations that the deal was corrupt, and that O’Neill benefitted personally,
is the extraordinary price paid to PacLNG by Oil Search for a slice of the
action in the large Elk-Antelope gasfield in PNG’s Gulf Province.
It has been
estimated that at least $US100 million found its way into the Prime Minister’s
pocket via Insurance Partners PNG Ltd and its connections in Interoil and
PacLNG.
The UBS Loan has
attracted a storm of criticism over the years, including from Transparency
International, the official National Research Institute, the private-sector
Institute of National Affairs, senior politicians and expert commentators, as
well as becoming the target of an investigation by the Ombudsman Commission.
It was signed
off by the Prime Minister himself as acting Treasury Secretary, but neither he
nor the National Executive Council (PNG’s version of Cabinet) sought the
required Parliamentary approval for it. The entire UBS Loan is illegal as a
consequence of that failure.
PARLIAMENTARY
APPROVAL REQUIRED UNDER CONSTITUTION
At the end of
last month the final tranche of State-owned Oil Search shares were sold at a
floor price of $6.70, well below the $A8.20 purchase price, the closing stockmarket
price on the day of $6.81, and the year high of about $A7.70.
This fire sale
of the secured shares by UBS and refinanciers JP Morgan was caused by the
failure of the O’Neill Government to repay the loan, fulfilling the dire
predictions of its many critics.
The loan was a
flow-on from Papua New Guinea’s original decision to buy its 19.5% share in the
PNG LNG project on behalf of itself and project landowners. The project is managed
by US giant Exxon-Mobil, and other partners are Oil Search and Santos of
Australia and Nippon Gas of Japan.
The loss on the share
trade alone stands at about K700 million. With the addition of advisory fees,
refinancing fees and other borrowing costs, interest, commissions, and the
original loan set-up charges, the deal probably stands to cost Papua New Guinea
much more than the current estimate of K1 billion, according to Opposition
Leader Patrick Pruaitch, Moresby North-West MP Sir Mekere Morauta and National
Party head Kerenga Kua, MP.
It is also
highly likely that UBS may have dipped into the State’s share of the LNG sales
revenue, which is held in a Singapore account as collateral for the loan. Total
revenue for sales so far is about $US5 billion, of which PNG is entitled to
19.5% less project and financing costs.
In addition,
Papua New Guinea now no longer owns any shares in Oil Search, which has been
regarded by successive governments as a critical strategic investment. It is
also facing the prospect of the company being taken over by a corporation much
less likely to be as sympathetic to the national interest and much less likely
to engage in illegal conduct with the Government.
Oil Search,
largely through MD Botten and executive director Gerea Aopi, has an almost
symbiotic relationship with corrupt PNG Governments going back many years,
first through the Government of Michael Somare between 2002 and 2012 and then
with the O’Neill Government from 2012 to date. The election of the Somare
Government in 2002 opened the floodgates of corruption, transforming what was
largely opportunistic theft into systematic abuse of government and semi-government
finances.
Corruption under
the Prime Ministership of Peter O’Neill has reached unprecedented levels, with the
nation officially one of the most corrupt on earth according to Transparency
International’s annual Corruption Index. It is by far the most corrupt nation
in the Asia-Pacific region.
In October 2012,
Sam Koim, the head of the former Operation Sweep anti-corruption agency, since
disbanded by O’Neill, concluded that almost half of PNG’s K7.6 billion
development budget for the period 2009 to 2011 had been lost through
corruption, misappropriation and mismanagement.
In April 2013
the then Works Minister, Francis Awesa, revealed that K9 billion appeared to
have disappeared from government-held trust accounts between 2007 and 2011.
Prime Minister
O’Neill himself admitted in February 2014 that billions of kina in taxpayers
money has been wasted, stolen or misused by state-owned corporations over the
last 40 years. He failed to state that he was a Minister or SOE head for much
of the preceding 15 years, including chairman of the government-owned Finance
Pacific, under which the Papua New Guinea Banking Corporation operated. During
O’Neill’s years at the helm the bank went from a prosperous near-monopoly to a
bankrupt near-monopoly.
Some estimates
put the value of corruption alone at K3 billion a year based on cases worth
approximately K1.5 billion per annum reported to the police fraud squad in 2016.
This is reported cases only – the tip of the iceberg. The true value is likely
to be higher.
The Oil Search UBS
deal and its $A1.7 billion precursor total $A3 billion, or almost K8 billion.
They were played out over almost 10 years, between 2008 and now, and fall
broadly within the corruption cost pattern.
The precursor
Oil Search deal was arranged during the Somare years, as part of a $A1.7
billion Government borrowing from Abu Dhabi’s International Petroleum
Investment Corporation to buy the State’s share in the PNG LNG Project.
At the very
least it involved illegalities, improper corporate conduct, conflicts of
interest and possible misappropriation and fraud.
It too cost the
people of Papua New Guinean many hundreds of millions of kina, and was highly
beneficial to Oil Search by making it takeover-proof, as did the UBS deal.
The deal was
arranged by the then government-owned Independent Public Business Corporation,
of which Gerea Aopi was a director at the same time that he was an executive
director of Oil Search. Aopi’s later position as chairman was illegal under the
IPBC Act provision preventing employees of companies in which IPBC has a
shareholding being directors.
In essence the
funding for the project was obtained using Papua New Guinea’s 17.6%
shareholding in Oil Search as collateral, creating a fundamental conflict of
interest for Aopi and Oil Search. Aopi acknowledged the conflict and said he
did not take part in discussions, but the PNG Treasury’s view was that this was
not enough and asked that he be removed. In the end the IPBC Act was amended to
give his position the appearance of legality.
The IPIC loan provided
a four-year window in which Oil Search was rendered impregnable to takeover at
a time when international predators were looking for undervalued assets..
Former Prime
Minister Sir Mekere Morauta said the transaction was neither transparent nor
appropriate and was enormously wasteful, estimating that it cost the taxpayers
at least $A360 million. In addition, he said, the PNG Government had to borrow
a further $A300 million to retain its level of equity in the PNG LNG project.
When the IPIC loan
matured in 2014 it became clear that the Government was unable to retain its
interest in Oil Search-- the deal arranged by Aopi and his team at IPBC and Oil
Search left IPIC in control of the Oil Search shares. This is exactly what
happened in the successor UBS Loan scandal arranged by O’Neill when he became Prime
Minister in an unconstitutional 2011 parliamentary coup.
The O’Neill
government wanted to maintain a shareholding in Oil Search both for long-term
strategic reasons and also as a way to participate indirectly in the
Elk-Antelope gas field discovered by Interoil Ltd. Elk-Antelope is shaping up
as a highly significant find likely to underpin a new LNG project.
To that end PNG borrowed
$A1.3 billion from UBS in order to finance 149,390,244 shares. Part of the Loan
required UBS to be given security over the shares as collateral. The O’Neill
Government was given unequivocal advice that the borrowing required
Parliamentary approval.
STATE
SOLICITOR ADVISES TREASURY THAT THE LOAN IS ILLEGAL
The loan remains
the subject of legal action and an Ombudsman Commission investigation. When the
then Treasurer, Don Polye, officially refused to sign the loan instruments and
pointed out the illegality, in a letter copied to Prime Minister Peter O’Neill
in March 2014, he was sacked on the spot.
O’Neill
immediately made himself acting Treasurer and signed off on the loan.
Given Aopi’s
former role as Treasury Secretary it is unimaginable that he and Botten were
also not aware of the illegality identified by Polye and also the PNG State
Solicitor. Nor would they have been unaware of the applicable requirements of
the Public Finance (Management) Act and the Fiscal Responsibility Act as well
as the IPBC Act.
In his letter
Polye also said that under the Constitution the loan required the approval of
Parliament, which it did not have, and that it was in breach of the Fiscal
Responsibility Act, which limits public debt. Nevertheless O’Neill personally
pushed the deal through Cabinet.
POLYE
ADVISES TREASURY SECRETARY AND PM THAT THE LOAN IS ILLEGAL
The most scandalous
aspect of the UBS loan was what the payment to Oil Search for its shares enabled
the company to do, and how it created an opportunity for grand corruption
through Pacific LNG Operations Ltd of Singapore, controlled by Swiss investor
Carlo Civelli.
PacLNG was the
founding partner with Interoil Ltd in the discovery of the world-class
Elk-Antelope field, and O’Neill in turn is a long-time crony of Interoil’s founder
Phil Mulacek and his offsider Christian Vinson. Vinson’s close friend,
Antoinette Amputch, is an executive director of the front company for O’Neill,
Insurance Partners PNG Ltd. One of O’Neill’s bagmen, Joseph Kup, is a large
shareholder in Insurance Partners.
As well as
owning a direct 23% of the Elk-Antelope gas field, PacLNG became a major
shareholder in Interoil. Civelli became a close associate of Interoil’s
Mulacek.
According to a
very well-sourced 2014 item in PNG Blogs, an anti-corruption web site, Mulacek
suggested to O’Neill that any deal for PNG to buy Oil Search shares would leave
Oil Search flush with cash and looking for further investment opportunities.
What better opportunity was there than a slice of the Elk-Antelope action
either through PacLNG or Interoil? It was in O’Neill’s personal interest to
push the deal, Mulacek told him.
In the event Oil
Search announced on 27 February 2014 that it was paying $US900 million, plus
further contingent payments, to buy PacLNG outright, giving it a 23% share in
the Elk-Antelope fields. $US900 million was regarded as a highly inflated price
at the time because shortly beforehand, Oil Search had been considering a $US200
million purchase of about 20% of the fields from Total France.
EXPERT
ANALYSIS OF THE ELK-ANTELOPE PURCHASE
HIGHLIGHTS ITS EXTRAORDINARY NATURE.
Oil Search’s
capture of its 23% of the Elk-Antelope field (Petroleum Retention Licence 15) by
buying PacLNG for $US900 million gives an implied value of $US3.9 billion for
100% of the field.
But a few weeks
later, on 27 March 2014, Total France announced that it had concluded a 40%
farm-in to PRL 15 at a cost of $US539 million. The implied value of 100 percent
of the field under this scenario is $US1.4 billion.
Oil Search paid
an implied premium of $US2.6 billion.
Many questions
about the deal will undoubtedly be raised by the Ombudsman Commission during
its investigation of the deal. In the meantime, Prime Minister O’Neill ignored the Ombudsman Commission directions
and sought a court stay to back his violation of its directions.
OMBUDSMAN
COMMISSION INTERVENES
Oil Search has
never given a detailed justification of the huge premium it paid, either to its
shareholders or the stock exchange, or explained how it came about.
And there are
questions about exactly what it was that Oil Search bought. The company’s
official stock exchange announcement states: “Oil Search is to acquire a
22.835% gross interest in PRL 15, containing the Elk/Antelope gas discoveries,
through the acquisition of the Pac LNG Group Companies for US$900 million.”
But in a 2015
interview PacLNG owner Civelli claimed that, contrary to Oil Search’s
statements at the time of the purchase, he still owned and controlled PacLNG.
Further, he
stated that PacLNG owned about 20% of the underlying Elk-Antelope acreage,
which is what he sold to Oil Search.
Who is telling
the truth here? Botten or Civelli? What is the reason for this apparent
discrepancy?
The
extraordinary thing about PNG’s purchase of the 10% Oil Search shareholding to
gain entry into the Elk-Antelope project was that it was completely
unnecessary.
Former
Attorney-General Kua said: “Right from the word go the State had a statutory
right to buy direct into the Elk/Antelope gas project”. He said the Prime
Minister was advised of this, and the fact that there was no commercial basis
for choosing any other option. “As the Attorney-General at the time I
advised Mr O’Neill on two separate occasions not to proceed unilaterally with
the Oil Search deal. But he refused to take my advice.”
The price that
would have been paid for a statutory share in Elk-Antelope would have been much
cheaper.
There are many other
questions about the PacLNG deal, for example who in Oil Search did due
diligence on it and was an independent valuation obtained? Were there any
beneficiaries from the sale other than the owner of PacLNG? Did any directors
or shareholders question the price paid to PacLNG or how the deal was done? Did
the Oil Search Audit Committee review the deal after serious allegations about
kickbacks to O’Neill and others emerged? If so, what were its conclusions?
PNG Opposition
Leader Pruaitch says everyone involved in the UBS loan benefitted, except the
people of Papua New Guinea.
UBS and other
foreign banks, and all the PNG and foreign advisers and middlemen, made
fortunes from the deal through sophisticated financial engineering
arrangements, and highly inflated fees, charges and commissions.
“The UBS
bridging loan of $A330 million and collar loan of $A900 million has been
regarded as one of the most lucrative deals ever done by UBS, with initial
interest charges starting at 3% and rising to between 7% and 12% within a year,”
Pruaitch said.
“It is
understood that as repayments were delayed, the collar structure was gradually
unwound through hedging mechanisms taken up by UBS and JP Morgan, which
refinanced the UBS loan in February last year.”
Pruaitch
questions the timing of the fire sale: the $A6.70 floor price was less than the
$6.81 market price at the time, and compared to the high of A$7.70 in the past
year. Her points out that major international broking firms have a current
target price of $A7.90 for Oil Search shares.
“Now that PNG has been forced to accept a huge
loss, Kumul Petroleum (the State-owned oil and gas corporation) has to act as a
scapegoat for a transaction that it did not negotiate,” Pruaitch said.
The loan was
transferred to Kumul Petroleum to keep it off the Government books and hence
off-Budget. Kumul Petroleum managing director Wapu Sonk last month conceded
that the company had incurred a cost of $US254 million (more than K750 million)
on the loan, a cost he, Kumul Petroleum and the Prime Minister had kept hidden
from public view.
Kumul Petroleum
is part of the State-owned holding company Kumul Consolidated Holdings, of
which the Prime Minister has made himself sole shareholder and trustee.
The Kumul group
is renowned for its lack of accountability and transparency. According to the
Auditor-General’s office, neither Kumul Consolidated Holdings nor Kumul
Petroleum have presented their books for audit.
Both are
required to present annual financial plans and statements to National Executive
Council for ratification once they have been audited – but reliable sources say
this has not been done. The Minister responsible is required by law to table
the Auditor-General’s report and the audited financial statements – this has
not been done.
KCH is
controlled by the Prime Minister through executive chairman Paul Nerau, a
notorious fraudster whose rape of Bougainville Development Corporation was a
major factor in the outbreak of the Bougainville civil war. KPH’s chairman is
failed politician Sir Moi Avei, another fraudster who was found guilty by a
Leadership Tribunal for misapplication of taxpayers’ funds.
The Kumul
group’s boards and management are dominated by cronies of the Prime Minister
and lazy and compliant businessmen. Immediately prior to the fire sale of Kumul
Petroleum’s Oil Search shares, the Prime Minister peremptorily dismissed the
CEO of the parent Kumul Consolidated Holdings and appointed Darren Young, an
employee and associate of Sir Theo Constantinou, one of O’Neill closest
cronies.
To enable both
companies to continue to operate illegally and under his personal control as
sole shareholder and trustee, the Prime Minister has removed both from the
ambit of the Public Finances (Management) Act, the principal legislation
guarding against misuse of government funds.
The Kumul group
has become a personal slush fund for the Prime Minister and a vehicle for covering
up and ostensibly legitimising grand corruption such as the UBS Loan.
COMING
IN PART 2: QUESTIONS ABOUT OTHER SWEETHEART DEALS BETWEEN PNG AND OIL SEARCH.
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