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.