O'NEILL GOVT'S DUMBEST INVESTMENT

by BRYAN KRAMER MP

On 21st September 2017 Kumul Petroleum Holding Limited (KPHL) a State Owned company sold off 149 million Oil Search shares it held on behalf of Independent State of PNG (8 million people of PNG).

The shares where purchased in March 2014 by O'Neill Government for AUD$1.225 Billion (K3 Billion) by securing a loan from UBS (Union Bank of Switzerland) Australian Branch.

Unable to repay the loan O'Neill was forced to sell the shares at a significant loss, using the proceeds from the sale to repay the balance owned on the K3 Billion loan.

On 24 September 2017 the National newspaper issued a misleading report suggesting the O'Neill Government had made a windfall (gain) from the transaction.

"THE Government has sold its shares in Oil Search Limited, making around K100 million from the transaction." the report stated.

It went on to quote the Chairman of Kumul Holdings Moi Avei saying KPHL made about A$35 million (K87.33mil) as a result of the transaction.

“So we’ve waited for the right moment when the share was trading at the right price and we’ve made the decision to divest the shares with Oil Search in this transaction.”

He said it did not mean cutting off all ties with Oil Search.

“We are a strong partner in the oil and gas projects in PNG. "We will continue to work with them. It’s just that we cannot go on with the UBS collar loan.”

Kumul Petroleum Holding Limited Managing Director Wapu Sonk was reported to have said "that the sale does not affect its [KPHL] relationship with Oil Search and they will continue to partner with the company in other petroleum and gas projects in the country."

When O'Neill was questioned on the floor of parliament by the former Prime Minister Sir Mekere Morauta asking him to disclose the real losses following the sale of shares, O'Neill avoided providing any direct answers. He instead claimed "the State’s investment in Oil Search was the right decision at the time as it helped maintain confidence in the oil and gas sector"

“This has been a business decision based on anticipated return on investment, and has delivered the most prudent outcome for the State considering the consequences of the earlier energy price lows,” O’Neill said.

So was it a great investment?

The short answer is No.

It will go down as one of the dumbest investments in PNG's history. This deal was never about the people of PNG's interest, it was about the interest of those who put the deal together and those that benefited from it.

Who were they?

Oil Search
UBS Bank
Morgan Stanley Bank
Lawyers
- Norton Rose Fullbright who represented the State
- Ashurst who represented UBS
Carlo Civelli (owner of Pacific LNG Group of Companies purchased by Oil Search for US&900m (K2.25 Billion)
Oil Search institutional shareholders (who acquired the majority of 149 million shares following the sale)

Biggest Loser being 8 million people of PNG represented by an incompetent and reckless Prime Minister Peter O'Neill who used the Office of the Prime Minister to ensure the deal was done.

So just how much did we lose?

Right now I believe it's between $270 million -$300 million (K800+ million) - made up of financing costs, principle and interest payments paid throughout 3.5 year term of the loan.

So what was the AUD$35 million (K100 million for?

It was the refund of the interest paid up front when the UBS loan was rolled over (extended) in 2016.

Following O'Neill's decision to sell off the 149 million oil search shares before the term of the loan expired or matured it meant whatever interest paid in advance yet to be accrued (earned) would be refunded.

All the proceeds from the sale of the shares were retained by UBS and Morgan Stanley Bank to repay what the State owed them from AUD$1.1 Billion (K3 Billion) loan.

What has not been disclosed by O'Neill, KPHL Chairman Moi Avei and its Managing Director Wapu Sonk are the real losses from the investment after considering loan repayments, interest and finance costs to put these deals together.

The most disturbing fact following the sell off of the shares is that O'Neill, Avei and Sonk seemed more concerned about ongoing relationship with Oil Search and overlooked the massive loss against by State. One would think they were employed by Oil Search when in fact they occupy offices and paid wages provided by the people of PNG.

It comes as no surprise the country's economy is struggling when O'Neill continues to mismanage it with little regard as to the impact of dumb investments have on the everyday Papua New Guinean who are struggling to survive.

So how was this deal put together?

It is an issue I will cover in my next article providing in-depth and full analysis behind the deal.

However after a number of days of researching this issue, the story goes beyond the UBS deal and perhaps best explains how a country so rich in billions of kina in resources, yet our people so poor.

A story of how a young Texas man from the United States of America turned up on PNG shores in early 1990's with his tambu (brother in aw) and nothing but a brief case between them only to end up Billionaires some 20 years later.

How? - by selling a piece of paper, oil & gas licence, providing rights to appraise (assess) oil and gas discovery called Elk Antelope. They achieved Billionaire status without developing, producing or exporting a single drop of Oil or LNG.

In contrast 90% of PNGeans find themselves struggling to find a job, put their kids through school and sadly in most cases put food on the table, all while their resources are being traded and sold literally right from under their feet.

This story will give an in-depth insight into how it all happens with those involved; allegations of fraudulent accounting, web of overseas companies set up to avoid visibility, all in an effort to access our country's vast oil and gas resources.

So where do we start?

Sometime in 1992 a Texas man called Phil Mulacheck and his tambu (brother in law) Frenchman Christian Vinson hatched an idea of exploring for Oil & Gas in PNG.

It was at around the same time when PNG's first commercial oil project (Kutubu Oil Project) was exporting high grade crude oil.

The project operator was Chevron, a major oil and gas company whose head office was in Texas. This perhaps explains how Mulacek a Texan found his way to PNG.

Mulaceck 32 at the time had a Bachelor of Science degree in petroleum engineering from Texas Tech University. A young entrepreneur hoping to strike rich in the oil and gas industry in PNG.

Christian Vinson migrated to the United States where he worked with a french auto-parts manufacturing company (NUC Corporation), as a service manager. He later married Mulacek's sister Kathleen, before joining his brother in law's company Petroleum Independent & Exploration Corporation (PIE Corp) in 1993; a small consultancy company setup by Mulacek in 1981 soon after graduating from university.

Mulacek realised that PNG was one of the only few oil exporting countries with no oil refinery to process the crude (raw) oil. It was instead exporting it offshore to Singapore and Australia where it was processed into commercial fuels (diesel, petrol, jet fuel kerosene etc) and imported back to PNG to meet the domestic market. The main importers of fuel at the time were major oil companies, Shell, Mobil and BP.

Mulacek saw the opportunity to establish a small oil refinery in PNG to replace imports and supply PNG and nearby markets.

The importing of refined fuels attracted the cost of transport and import duties where the importer would add a 20% margin that would be passed onto the customers. By establishing a domestic refinery and processing the oil coming out of Kutubu there was opportunity for greater margin of profit to be made from the savings from transport and import duties costs.

Such a project would also provide significant economic benefits to the country. Firstly, significant foreign investment to build and operate the facility. Secondly, contribution by means of training and technology transfer to PNGeans. Thirdly, creation of jobs in specialized industry and finally tax revenue to the Government.

However, it would also require significant funding in excess of USD$100 million (K300m) to build.

A project that size would be considered high risk given the uncertainties of PNG's economy and political landscape. There was no guarantee the Government wouldn't change it's policy, taxes or price control all which would have impacted on the profitability of the project.

So Mulacek realized if he was going to convince investors to fund the project he would need to provide some sort of guarantee that their investment was safe as well as demonstrate the project would return (profit) on their investment.

Mulacek's plan

1) build a refinery in PNG - to meet supply in PNG and nearby markets (North Australia) making profit from savings of transport and import duties.

2) raise $100 million to build it by convincing overseas investors to invest in it.

3) carry out exploration and oil and gas in PNG that will be processed at the refinery providing further profits.

For Mulacek the prize was number 3) oil and gas exploration. The challenge being, it costs hundreds of millions of dollars to find oil and gas resources and considered the riskiest industry in the world. In that a company may expend $50 million on a drilling program and come up empty.

For example in 2015 Oil Search spent $275 million (K900m) on its exploration and appraisal program. It spends on average around $250 million a year.

Before one can even consider carrying out oil and gas exploration they would need to obtain a licence, PPL or Prospecting Petroleum Licence. Obtaining licences in PNG is not easy. One must demonstrate they have financial backing and value proposition to convince the PNG regulatory body, in this case Department of Petroleum & Energy to grant them a licence.

Proposing to build PNG's first refinery is certainly one means of doing it. However you would need million dollar financial backing to carryout exploration.

To avoid a long winded article, I will limit each part to 1,000+ words.

In the next series of articles we will discuss how Mulacek was able to obtain the financial backing to turn a start up company in PNG (Interoil) into a billion dollar company in Canada.

Whether it was built on a foundation of fraud and the connection to the UBS deal.

In 1991 Chevron a major oil and gas company closed its Nikisiki Oil Refinery based in Alaska (North America). Established in 1963 the refinery was closed due to significant financial risks following stiff environmental laws passed by the Alaska Government in the wake of the 1989 Exxon Valdez oil spill.

The decision was also on account it would have had to invest $1.4 million to upgrade the aging refinery in order to comply with new environmental regulations.

At around the same time Mulacek was is in war-torn Kuwait processing waste oil when he met a group of Chevron executives based in Alaska and learned about the abandoned oil refinery that is was up for sale.

In 1992 - Mulacek travels to Alaska to inspect the closed oil Refinery.

In 1992 Chevron exports its first shipment of high-grade (sweet) crude oil from its Kutubu Oil Project in PNG. At the time PNG was one of a few oil exporting countries that didn’t have an oil refinery. We were importing our petroleum products (fuel, diesel, petrol, etc) from oil refineries located in Brisbane, Australia and Singapore some 2,200 km and 4,300 km away.

PNG’s domestic fuel market at the time was some 17,000 barrels a day of refined fuels while Kutubu Oil Project was exporting 85,000 barrels a day of raw crude oil out of PNG, majority of which was being shipped to Australia and Japan for processing.

In 1992/3 Mulacek travels to PNG to explore the possibility of dismantling the Alaskan Oil Refinery in the US and transporting it to Port Moresby, where it would be reassembled to meet PNG’s domestic fuel supply as well as markets in South Pacific and North Australia, (Darwin Cairns and Townsville). The estimated project cost at the time was US$100 million (K300m). The Refinery had the capacity to produce 36,000 barrels a day.

Mulacek plans to fund the project under joint venture partnership between four potential investors providing upto 40% equity (cash contribution) and the balance through debt financing (bank loans). However, the real challenge was raising $40 million (K120 million) to get the project off the ground.

Mulacek begins a recruitment drive of corporate executives to join his company, Petroleum Independent & Exploration Corporation (PIE Corp) to help him deliver the project.

It is important to note while company name implies and profile states it was established for the purposes of oil exploration, drilling, completion and production, it specialized in processing waste oil including salt water systems to clean up oil spills.

In fact there is very little public information about Mulacek's background or his company's operations other than that he established it in 1981, soon after graduating from Texas Tech University with a degree Petroleum Engineering.

In 1993 his brother in law, Frenchmen Christian Vinson joins the company as Vice President of Operations.

In March 1994, Paul Martin joins the company as Financial Executive Officer; Martin having 14 years experience in the banking sector including investment banking to help Mulacek raise the fiance to the purchase the oil refinery.

In April 1994, Mulacek strikes a deal to purchase Chevron's abandoned Nikiski oil refinery in Alaska. The purchase amount is not disclosed, why? - an issue we will discuss in a later article.

The project plan:

1) acquire (buy) Alaskan Oil Refinery Complex.

2) acquire Naphtha Reformer unit to enable the production of gasoline (petrol).

3) dismantle refinery complex and reformer unit and transport them by barge to a yard in Beaumont Texas to undergo refurbishment, modification and testing.

4) acquire two ocean-going barges suitable for transporting the process units to PNG.

5) acquire land in Port Moresby to commence site preparation to construct the plant (oil refinery).

6) secure project agreement with PNG Government to protect the interest of the project partners.

7) secure investor partners to provide 40% equity contributions ($40 million) to fund $100 million project.

8) carryout FEED - stands for Front End Engineering Design, relates to basic design and engineering of the project. FEED design focuses on the technical requirements as well as rough investment cost for the project.

9) secure third party debt financing from banks and other financial organizations to raise the balance ($60 million).

10) achieve Financial Close - Financial Close occurs when all the project and financing agreements have been signed and all the required conditions contained in them have been met. It enables funds (e.g. loans, equity, grants) to start flowing so that project implementation can actually start.

In November 1994 Mulacek acquires a shelf company in PNG called Scorpio No. 150 Pty Limited and later changes the name to P.I.E Refinery Pty Limited. A company that was set up to own and operate the refinery in PNG.

Mulacek then enters into the negotiations with the then Wingti Government in an effort to secure project agreement that would protect the interest of project partners. The terms of which included:

1) to ensure the refinery is able to purchase its crude oil requirements from local PNG production (Kutubu Oil Project) at competitive export rates;

2) to ensure domestic distributors in PNG purchase refined petroleum products first from domestic producers; and

3) to provide certain tax incentives including a five year tax-free period.

Wingti Government rejects the proposal.

In August 1994 Wingti is succeeded by Julius Chan following a Supreme Court ruling declaring Wingti’s flash resignation and re-election unconstitutional.

Mulacek pursues negotiations with the Chan Government.

In 1995, Mulacek convinces Gaylen Byker a good friend to invest in the project by acquiring shares in PIE Corp.

Byker, an oil executive and former partner in Offshore Energy Development Corporation, where he was Head of Development, hedging and project finance for gas exploration and transportation projects offshore.

Byker was about to become president of Calvin College, an educational affiliate of the Christian Reformed Church that is based in Michigan, US. It was reported that before taking the reins at Calvin College, Byker incorporated a small company to invest in Mulacek's refinery. A few months later, in mid-1995, Byker sells a portion of that company to his previous employer, the Offshore Energy Development Corporation for $1.3 million.

The funds are utilized to carryout preliminary development work.

In January 1996, Mulacek company PIE Corp injects K120,000 into PNG company PIE Refinery Ltd as a related party loan to commence early works.

In May 1996, PIE Refinery acquires land for K88,000 to build the plant site.

In 1996 Byker introduces Mulacek to a Swiss venture capitalist Carlo Civielli, financier and founder of an investment company Clarion Finanz. - with a history of investing in Canadian mining, and oil and gas start up companies.

Byker also makes the introductions to Enron International executives, a subsidiary company of Enron Corporation, one of the world's major electricity and natural gas companies, with its head office based in Huston Texas.

Fortune Magazine named Enron "America's Most Innovative Company" for six consecutive years. In 2000 it was reported to have some US$65 Billion (K216 Billion) in assets.

Enron International was set up with the primary focus for developing and building natural gas power plants outside North America.

With Enron as a project partner, offering its global reputation, it added significant investor confidence in Mulacek’s project.

However, it would all hinge on Mulacek securing a project agreement with the PNG Government ensuring the projects profitability and investment protection, without which the project was dead in water.

During 1996 PIE Corp purchases a Reformer, also previously owned by Chevron at its Cyril Oklahoma plant.

In August 1996, Enron agrees to become a joint venture partner in the project. It registers two offshore companies in Cayman Islands, Enron Papua New Guinea as a subsidiary of Enron International and EP Interoil Ltd (Enron PNG Interoil Ltd) as the joint venture company or project company to manage and develop the Oil refinery Project in PNG.

In November 1996, Civelli and Mulacek register the company “SP Interoil" in the Bahamas. (SP standing for South Pacific). Its shareholders included Mulacek company PIE Corp including executive officers.

Under the company articles of association (constitution) Mulacek’s company PIE Corp would act as the general manager with full control over the company's business affairs unlike the normal practice where a company is controlled by a board of directors. SP Interoil have no board.

The companies shareholders, Mulacek whose interest was held in PIE Group LLC, together with executives of PIE Corp, namely Christian Vinson, Paul Martin, Gyler Byker and Carlo Civelli, where their interests were held and hidden under affiliate companies, which included Bilhust Limited, Commodities Trading International, Nikiski Partners, Eurostar Fund, and Asia Pacific Refinery Investment.

Why register companies in Cayman Islands and Bahamas?

Both countries are popular tax havens, (safe from paying tax) and privacy.

American elites and large multinational corporations register companies there because there is no corporate or income tax on money earned outside of its territory. Instead of taxes, offshore corporations pay an annual licensing fee directly to the government.

Tax havens also provide privacy to persons or corporations who wish to conceal their ownership interests or profits earned. Companies are also not required to provide audited financial statements etc.

In this case Enron, a US based company plans to invest in an overseas project based in PNG so rather than remitting the profits earned from the project back to the US where it will be taxed 39.1%, it sets up a company in the Cayman Islands, a tax free haven where its profits will be held in an offshore bank account.

As of December 1996, according to 1997 Audit report SP Interoil purportedly held $46 million in assets - made up of $47,000 in cash, $6.5 million in investments and $39.7 million in capital assets.

In January 1997, SP Interoil and Enron Papua New Guinea sign a joint-venture agreement.

Under the joint venture agreement, SP Interoil and Enron PNG a joint venture company (EP Interoil Ltd) will manage and develop the Project, where SP Interoil has the right to earn a 60% interest and Enron PNG has the right to earn the remaining 40% interest.

The joint venture agreement provides that SPI and Enron PNG will jointly manage the Project Company and the development of the Project.

Upon signing of the agreement Enron contributes $500,500 while SPI contributes $495,000 in cash to EP InterOil.

The terms of agreement being Enron has agreed to contribute $28 million after the financial close.

However, Enron is also entitled to abandon the Project and terminate the Joint Venture Agreement at any time prior to the time when financing for the project is in place.

SP Interoil received 5,000,000 shares in the project company EP Interoil in return for contributing to EP InterOil the refinery assets, the naphtha reformer and all development work on the project to January 1997. The shares were valued at $55 million.

SP Interiol is required to contribute a further $11 million in cash and responsible for any additional costs involved in refurbishment of the plant equipment.

With only $47,000 in cash Mulacek and Civelli need to raise funds to meet the costs as well as further $11 million to honour its commitment under the joint-venture agreement.

To achieve this Civelli advises Mulacek to set up a Canadian company with the plan to have it listed on the Toronto Stock Exchange, in an effort to raise funds by offering it stock (shares) to potential public investors.

In January 1997, Mulacek and Civili register a Canadian company, South Pacific Interoil. SP Interoil (Bahamas) transfers 5.5 million of its shares to South Pacific Interoil (Canada) giving it 31.4% ownership interest in SP Interoil (Bahamas).

In March 1997, in the height of the Sandline crisis Julius Chan was forced to step aside as Prime Minister. John Giheno is appointed as acting Prime Minister.

On 29 May 1997, in the height of 1997 General Elections, the PNG Government purportedly signed project agreement with InterOil Ltd. 5 days later on 6 June 1997 Chan is cleared by the Sandline inquiry and reinstated as Prime Minister.

However Chan later loses his seat in 1997 Elections and is succeeded by Bill Skate as Prime Minister.

With a formal agreement in place on the same date (29 May 1997) Mulacek and Civili merge the Canadian company South Pacific Interoil Ltd with a dormant publicly listed company Cybermind Group under the new name “Interoil Corporation”.

Cybermind Group had a negative asset value of $22,000. The merger provided an easy path to obtaining listing on the Canadian stock exchange.

Interoil Corporation (Canada) and SP Interoil (Bahamas) sign a shareholder agreement where the shareholders of SP Interoil may exchange their shares in SP Interoil (Bahamas) for shares in InterOil Corporation (Canada).

Now what is interesting is while the company is listed on Toronto Stock exchange it has no actual employees or even an office in Canada.

Phil Mulacek is appointed Chairman and CEO, Paul A. Martin, Vice President, Chief Financial Officer, Director, Christian Vinson, Vice President and Gaylen Byker Company Director.

As of December 1997 Interoil Corporation net assets was purportedly $61 million made up of cash $275,000 and $60.7 million in investments (32.7% ownership it held in SP Interoil).

In part 4 we will discuss how SP Interoil (Bahamas) essentially a start up company registered on 22 November 1996 and within just 39 days of existence was valued at $206 million with only $145,000 in cash.

We will also discuss Enron PNG pulling out of the project and how its parent company in the US, Enron Corp ended up bankrupt after being exposed for massive corporate fraud.

We will review three key companies involved in Mulacek's oil refinery project - PNG registered company PIE Refinery (that later changes it name to Interoil Ltd) - Project company, EP Interoil (Cayman Islands) and SP Interoil (Bahamas) and lastly Interoil (Canada).

We will also discuss how Interoil's foundation shareholders including Paul Martin take Mulacek to court over allegations of fraud. Where Mulacek, to avoid liability, files bankruptcy protection and later settles out of court.

We will look at similar allegations leveled against Mulacek financial adviser and silent investor Carlo Civelli, as well as both mens connection to the UBS Loan.

Part 5 will cover Interoil upstream operations (oil and gas exploration) and whether it was misrepresenting its own value in an effort jack up its share value.

Picture: left to right Phil Mulacek, Christain Vinson, Paul Martin, Gyler Byker, and Carlo Civelli.