Commission of Inquiry into the UBS Loan – Final Submissions by Counsel Assisting

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    Outline of Final Submissions by Counsel Assisting the Royal Commission of Inquiry into Processes and Procedures followed by the Government of Papua New Guinea into Obtaining the Off-shore Loan from the Union Bank of Switzerland and Related Transactions.

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  • ROYAL COMMISSION OF INQUIRY

    INTO PROCESSES AND PROCEDURES

    FOLLOWED BY THE GOVERNMENT OF PAPUA NEW GUINEA

    INTO OBTAINING THE OFF-SHORE LOAN

    FROM THE UNION BANK OF SWITZERLAND AND RELATED TRANSACTIONS

    OUTLINE OF FINAL SUBMISSIONS BY COUNSEL ASSISTING

    24 February 2022

    May it please the Commission, we now make our closing submissions. This will take the best
    part of a day. Our aim is to say something of the background to the inquiry, its conduct, and
    scope and then proceed to submit key findings of fact and recommendations that we say should
    be made, thereby providing further natural justice and procedural fairness.1

    We emphasise to those listening that these are submissions by Counsel Assisting which you,
    Commissioners, may or may not yourselves make, especially having heard submissions, due in
    the next 2 weeks ie. by 10 March, from persons affected who have leave to appear.

    1
    This has also been provided in questioning of witnesses.

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  • What follows should be read with the opening statements we have earlier made.

    Establishment of the Commission

    This Commission of Inquiry was established by instrument dated 30 August 2019, amended in
    October 2021, both made under the Commissions of Inquiry Act. It followed the tabling in the
    National Parliament in May 2019 of the December 2018 Final Report of the Ombudsman
    Commission.2 In the circumstances outlined in the opening remarks period in December last
    year,3 the terms of reference were amended and further time provided to complete the hearings
    and the report.

    The Ombudsman Commission investigation had commenced in or about March 2014, shortly
    after the approval by the National Executive Council (NEC) for the State to enter into a loan
    agreement with the Union Bank of Switzerland (Australian Branch) (UBS) for AU1.39 billion to
    purchase approximately 149 million newly issued shares in Oil Search Limited, which before its
    recent takeover by Santos Ltd, was a long-established Papua New Guinea oil and gas exploration
    company listed on both the Papua New Guinea and Australian Stock Exchanges.

    The Ombudsman Commission’s investigation was slowed by various applications to the
    Supreme Court to resolve challenges to its jurisdiction by interested persons.

    2
    An Investigation into the alleged improper borrowing of AUD1.239 billion loan from the Union Bank of
    Switzerland, Aktiengesellschaft (Australia Branch) to purchase 149,390,244 Shares in Oil Search Limited and
    improper tender and procurement of consultants in relation to the borrowing.
    3
    ‘(a) Despite the efforts and the cooperation and assistance provided by many witnesses, up to the end of the August
    hearings, there remained matters which seemed to warrant further consideration.
    (b) That situation arose, unfortunately, due to a number of factors outside of the control of the Commission, in
    particular, delays occasioned by the late and incomplete production of important documents by a number of relevant
    persons and entities.
    (c) The need to consider documents produced at a very late stage (and since then, even more has been produced).
    (d) A desire to provide one further and final opportunity to hear from key witnesses who had not yet provided
    evidence, including those in jurisdictions outside of Papua New Guinea.
    (e) Continued complications caused by the Covid 19 Pandemic.’

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  • On assuming office as Prime Minister, the Honourable James Marape MP undertook to establish
    a commission of inquiry to investigate the facts surrounding the transaction. The Prime Minister
    at the time of the UBS transactions, the Honourable Peter O’Neill CMG MP, has told the
    Commission that he supported its establishment and work.

    In our submission, it is significant that both the current and former Prime Ministers have
    supported the work of this Commission and also have recently agreed with some of the
    recommendations which we now put forward.

    Jurisdiction

    The jurisdiction of the Commission is set out in the Commissions of Inquiry Act 1951.

    It is important to appreciate what the Commission can and cannot do. The Commission has the
    power to summons any person to attend the Commission to give oral evidence on oath (ss.6 and
    7).

    The Commission also has the power to summons the production of documents (s.6).

    It is an offence to fail, without reasonable excuse, to comply with a summons to give oral
    evidence or produce documents (s.9) or to give false evidence (s.10A) or to act in manner which
    amounts to contempt of the Commission (s.11).

    However, the Commission, as a commission of “inquiry”, is not an investigative agency with the
    kind of powers extended to those institutions with power to conduct investigations into criminal
    conduct and other offences.

    Relevantly:

    · the powers of the Commission do not have extra-territorial application and cannot
    compel oral evidence or the production of documents outside Papua New Guinea;

    · the Commission has no power to establish a taskforce to conduct investigations
    (although in a more limited sense the Minister may appoint “persons with the
    appropriate technical or professional expertise to assist the Commission”: s.4A(2));

    · the Commission cannot seek the assistance, nor resources, of counterparts in other
    jurisdictions – there is no comity of commissions of inquiry of the kind enjoyed by
    Courts or law enforcement agencies;

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  • · the Commission cannot issue or obtain a Court-ordered warrant to enter and search
    premises or seize documents or other records (for example, computer hard drives) or to
    use an interception device; the Commission also cannot make arrests;

    · the Commission has no ready access to data matching services with other authorities or
    bodies.

    Rather, the function of the Commission is to inquire into any matter of public welfare (s.2),
    assemble the facts using the powers available to it and report on its proceedings and the results of
    its inquiry (s.15) – that is, answer its terms of reference – for tabling in Parliament (s.17).

    It is then the function of other relevant investigative and law enforcement agencies in Papua New
    Guinea to investigate and prosecute conduct within their respective jurisdictions utilising the
    wider powers referred to above, for example, the Ombudsman Commission and Public
    Prosecutor (breaches of the Leadership Code), Public Prosecutor and the police (breaches of the
    Criminal Code or prosecutions of other offences) or ICAC (prosecution of corrupt conduct,
    including official corruption).

    Hearings

    The Commission began hearings soon after its establishment, however many factors delayed its
    progress, including the world-wide Covid-19 pandemic (which began in early 2020 and still
    continues), delays in finding further suitable persons who could undertake the work and who had
    no conflicts of interest, and thus, were to be found overseas, and obstructive approaches towards
    the Commission by some persons and entities with relevant information and documents. We
    continue to thank the many persons who did assist the Commission, in private and in public, and
    especially those under no legal compulsion to do so.

    We will later say something about the recalcitrant witnesses and entities, but we say this now
    about the State’s former bankers and lawyers who declined to appear in person or remotely by
    video: the Commission only had powers of compulsion over those within the Independent State,
    but as a nation State it is not defenceless, and both Mr Marape and Mr O’Neill have expressed,
    to you, Commissioners, in their oral evidence, their support in principle of our recommendation,
    that such persons or entities should be banned, if necessary by law, from doing any work for 5
    years for the State or its emanations.

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  • Following many directions hearings and return of summonses, and also the tragic death of
    former Commissioner Gilmour and the subsequent appointment of Commissioner White, and the
    appointments of those assisting, the principal hearings involving witnesses began in March 2021
    and continued, intermittently, until August 2021, following which amended terms of reference
    were subsequently issued. Hearings re-commenced in December 2021, continued in late January
    2022 and this month. Following today’s final submissions from Counsel Assisting and any
    responses by those with leave, the report is due by 31 March 2022.

    Especially because of Covid, the hearings have been conducted from APEC Haus, but with some
    counsel and some witnesses (and one Commissioner), at times, being located elsewhere and
    participating by video-link. Although this is not the traditional approach, it has created real and
    practical advantages: indeed we submit that it has been a resounding success. Thus, there has
    been a very large saving in the accommodation costs and travel expenses for witnesses, and
    those assisting, who have not had to travel to and from Port Moresby, some on multiple
    occasions. Persons who had covid-caused travel and health restrictions have still been able to
    appear. The hearings, which have been entirely in public, have been live-streamed on Facebook
    (with recordings placed on the Commission’s website), sometimes attracting more than 1000
    viewers at a time on the livestream. The Commission has been able to have witnesses from
    many overseas locations, sometimes, as in the case of experts, from multiple overseas locations
    simultaneously. We submit this has proved to be a flexible, practical and efficient model which
    should be used in the future.

    We later have some submissions as to amendments that might be made to the Commissions of
    Inquiry Act.

    The Commission has engaged experts to assist it. We acknowledge the detailed work of the
    Brattle Group who have provided significant financial analysis of the complex transactions
    which are the focus of this Commission. There has been nothing in the hearing which has cast
    any doubt on their assumptions, analysis or conclusions. Their reports should be accepted in
    their entirety. We shall return to their reports.

    Terms of Reference

    The Terms of Reference set out the Commission’s purpose, jurisdiction and the questions which
    must be dealt with.

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  • The instrument containing the Terms of Reference for this Commission begins with a brief
    explanation followed by the Terms of Reference:

    The objective of the Commission of Inquiry is to inquire into and establish facts
    surrounding:

    1. The decision by the Government to obtain the loan funding of USD1.3 billion;

    2. The decision to seek off-shore loan and the decision to select Union Bank of
    Switzerland as the preferred financier;

    3. Individuals and entities who were instrumental in the negotiation (the middlemen
    involved) for and on behalf of the State, how were they engaged and how much
    were paid as fees for their services as brokers and negotiators;

    4. Whether breaches of mandatory Constitutional requirements have occurred and
    the conduct on the part of Leaders and persons involved in the deal.

    The ultimate objective of the Commission of Inquiry is to establish whether there were
    breaches of PNG laws and Constitutional requirements in the process of negotiation and
    approval of the UBS Loan, and also establish whether PNG as a country had suffered as
    a result of this off-shore deal, and whether the persons involved in the deal can be held
    accountable for their conduct.

    Those Terms of Reference may be grouped under a list of financial transactions, following, and
    then key issues:

    (a) Orogen Minerals Merger with Oil Search Limited in 2002;

    (b) PNG LNG Project;

    (c) IPIC Loan;

    (d) UBS Loan of AUD1.39 billion to the State in 2014;

    (e) Purchase of Oil Search Shares by the State in 2014;

    (f) Elk/Antelope PRL-15 Transaction by Oil Search in 2014;

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  • (g) Sale of Oil Search Shares by a State-Owned Enterprise in 2017;

    (h) Sovereign Wealth Fund;

    (i) Who is responsible?

    (j) Who benefited?

    (k) What should be done: recommendations.

    Role of the Commission of Inquiry

    The Commission is directed to investigate, and establish, the facts relating to these financial
    transactions, their lawfulness and propriety, the nature of the conduct of those involved in them
    and the consequences for the State and the people of Papua New Guinea.

    The Terms of Reference require that this Commission ‘shall, so far as reasonably possible,
    inquire into, make findings and report on’ a list of matters designated by paragraph headings (a)
    to (gg) inclusive. Given time and Covid constraints and the limits of voluntary co-operation by
    those located off-shore, we submit that the inquiry has indeed gone ‘as far as reasonably
    possible’: yet your report may well lead to others taking action.

    The Commission is charged with making findings and recommendations arising out of its
    findings. We make two important submissions about what is involved.

    • First, the Commission is not reviewing the Ombudsman Commission report which was
    the catalyst for the establishment of this Commission

    • Second, as this Commission is an inquiry, not a court of law, it cannot make
    determinations of the legal rights and obligations of any persons or entities either within
    Papua New Guinea or elsewhere. Nor may it make binding determinations on legal
    issues, including those relating to constitutional matters. But it does not transgress those
    limits when, as we submit it should, the Commission expresses an opinion as to how laws
    should be construed.

    1. History, the Constitution, and key legal structures

    1.1 Answering the Terms of Reference requires some understanding of fundamental matters
    of Constitutional law and practice, and statute law, especially such as concern the

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  • commercial exploitation of natural resources, the potential role of the State in that regard,
    and parliamentary control of borrowing by the executive government of the day.

    1.2 The Inquiry’s initial phase of evidence involved obtaining evidence on these topics from
    some of the founders of the Constitution of the Independent State and contemporary
    experts: we refer you to the opening in March last year, and the evidence, particularly
    that of two key founders, Chief Dr John Momis GCL and the Right Honourable Sir Chief
    Julius Chan GCL GCMG KBE (who of course later became Prime Minister).

    1.3 Dr Momis in his evidence said that the founders such as himself saw the need to have:

    “…very strong parliamentary committees to make sure that non-ministerial members of
    Parliament would also keep a check on the government, make their contribution and at
    the same time you have got to allow the government, that is the National Executive
    Council, to take initiatives, knowing that they are being watched and they would not just
    do things without taking into account the importance of the benefits to the nation”.4

    1.4 Papua New Guinea became the Independent State in 1975 and the Constitution then came
    into force. By reflecting both spiritual and material links of the citizens to the country’s
    land and resources, the Constitution is unusual, and perhaps unique. Thus, its preamble
    states, in terms which must be continually borne in mind in this inquiry:

    “All persons in our country have the following basic obligations to themselves and their
    descendants, to each other and to the Nation …

    (d) to protect Papua New Guinea and to safeguard the national wealth, resources and
    environment in the interests not only of the present generation but also of future
    generations”

    and additionally, declares that

    ” … all citizens have an obligation to themselves and their descendants, to each other
    and to the Nation to use profits from economic activities in the advancement of our

    4
    Chief Dr John Momis GCL, oral evidence; transcript (29 April 2021) at page 173.

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  • country and our people, and that the law may impose a similar obligation on non-citizens
    carrying on economic activities in or from our country.”

    State borrowing

    1.5 It is not uncommon for countries from within the Commonwealth of Nations to have
    constitutional provisions requiring parliamentary approval for government borrowing and
    expenditure. So it is here. In the Independent State the key provision is s 209(1) of the
    Constitution, which provides:

    (1) Notwithstanding anything in this Constitution, the raising and expenditure of finance
    by the National Government, including the imposition of taxation and the raising of loans,
    is subject to authorization and control by the Parliament, and shall be regulated by an
    Act of the Parliament.

    1.6 The Ombudsman Commission’s report on the UBS Loan concluded that s 209(1) was not
    complied with in the case of the borrowing arrangements entered into by the State, as
    later that year novated to a State-Owned entity, Kumul Petroleum Holdings Limited
    (KPHL), concerning the UBS Loan of AUD 1.239 billion in 2014. The Commission
    received much evidence and submissions on this topic. For reasons we will come to, we
    submit you should not make the same findings that s 209 was transgressed.

    Exploitation of Papua New Guinea natural resources, law and practice

    1.7 The Independent State is rich in many natural resources, among them the valuable, and
    internationally marketable, commodities of petroleum and liquefied natural gas (LNG).

    1.8 National Goal 4 in the Constitution concerns natural resources and the environment of
    Papua New Guinea. It states:

    ” 4. Natural resources and environment.

    We declare our fourth goal to be for Papua New Guinea’s natural resources and
    environment to be conserved and used for the collective benefit of us all and be
    replenished for the benefit of future generations.

    WE ACCORDINGLY CALL FOR—

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  • (1) wise use to be made of our natural resources and the environment in and on the land
    or seabed, in the sea, under the land, and in the air, in the interests of our development
    and in trust for future generations; and

    (2) the conservation and replenishment, for the benefit of ourselves and posterity, of the
    environment and its sacred, scenic, and historical qualities; and

    (3) all necessary steps to be taken to give adequate protection to our valued birds,
    animals, fish, insects, plants and trees.”

    1.9 On this point, Dr Momis said in his evidence that:

    ” … the fourth National Goal and Directive Principles apply to natural resources and
    environment, … These provisions make clear – in a manner unusual, and perhaps unique
    to a national constitution – that the protection and management of natural resources are
    matters of the greatest importance.”[5]… Papua New Guineans are very closely related to
    natural resources, environment. In fact, their relationship has an eschatological
    dimension to it, in other words, both spiritually important and of course materially
    economically also important so it has a double base. People of Papua New Guinea are
    very close to their resources.”

    1.10 The proper role of the government in a capitalist system was spoken of at-length by the
    witnesses who gave evidence in the first phase of hearings. They spoke of four main
    governmental functions, namely:

    (a) the traditional and essential role of government to make good policies and laws
    that create an environment that is conducive for business growth but without direct
    government intervention, while the government focuses on provision of quality
    public services such as in education, health and law and order;”6

    5
    Supplementary Statement of Chief Dr John Momis (Exhibit “K.2”) at page 2, WIT.0088.0004.0001.
    6
    Statement of Sir Michael Somare (Exhibit “B”), page [5], WIT.0001.0002.0002; Sir Charles Lepani’s statement
    (Exhibit “C”) on page 2, WIT.0008.0003.0003.

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  • (b) the government raises tax revenue from private businesses to fund public goods
    and services;7

    (c) the government regulates business in order to achieve proper exploitation of labour
    and natural resources and to promote equitable distribution of economic benefits;8
    and

    (d) the government invests in public and private business enterprises.9

    1.11 There was no dispute over the first, second and third functions. The fourth attracted
    different views from witnesses.

    1.12 Although Grand Chief Sir Michael Somare passed away before he could give oral
    evidence, the Grand Chief’s testamentary evidence supported direct government
    investment. He referenced his time as Prime Minister when the government invested
    heavily in State-Owned Enterprises (SoE’s) which were managed by the then
    Independent Public Business Corporation (IPBC). These SoE’s included PNG Power
    Ltd, Air Niugini Ltd and PNG Ports Ltd. IPBC also managed the State’s investment in
    private business ventures such as the State’s 17.6% stake in Oil Search and a 19.4% stake
    in the PNG LNG Project.10

    1.13 In contrast Sir Julius Chan stated that ordinarily government should stay out of business
    because it involves a lot of risks.11 However, the notion that government ought to be
    involved in business is a good idea, as long as the government mitigate risks”.

    7
    Statement of Sir Charles Lepani (Exhibit “C”) on page [2], WIT.0008.0003.0003; Statement of Dr Osborne
    Sanida (Exhibit “E”) at paragraphs [28] and [31] to [32] on page [5], WIT.0009.0002.0001.
    8
    Statement of Sir Charles Lepani (Exhibit “C”) on page [2], WIT.0008.0003.0003.
    9
    Sir Michael Somare’s statement (Exhibit “B”) at page 8 to 11] WIT.0001.0002.0002, oral evidence of Chief Dr
    John Momis on 29 April 2021; transcript at page 164, Sir Charles Lepani’s statement (Exhibit “C”) at page 2
    WIT.0008.0003.0003, oral evidence of Dr Osborne Sanida; transcript at pages 182-183 (29 April 2021), oral
    evidence of Dr Lawrence Sause; transcript at pages 310 to 311(13 May 2021)
    10
    Statement of Sir Michael Somare (Exhibit “B”) at pages 8 to 11, WIT.0001.0002.0002.
    11
    Statement of Sir Julius Chan (Exhibit “H”), paragraphs [24] to [46], pages 3 to 5, WIT.0002.0004.0002; oral
    evidence of Sir Julius Chan; transcript at pages 282 to 285 (12 May 2021).

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  • 1.14 Dr Osborne Sanida of the Papua New Guinea National Research Institute said this:12

    “… the Government has been involved in economic affairs in the terms of trying to affect
    what happens in the economy as well as been involved in economic or business activities
    through the SoE’s and interest in the large projects … . The State, on the one hand,
    promotes the role of the private sector as the ‘’engine of growth’’ but on the other hand,
    also interferes in the economy by being involved in businesses in addition to running the
    public –sector affairs of the nation. Ideally, the main focus of the State should be on
    ensuring that public affairs/Institutions are functioning effectively and efficiently to
    provide a conducive environment for the private sector to perform its role as an engine of
    growth. However, there is a question as to whether or not the people are getting
    maximum benefit from all the economic and business activities. In my view, one of the
    reasons that governments get involved in business is the perceived view that the private
    sector is not doing enough for the people.”

    1.15 In our submission, you can find that there was general agreement amongst witnesses that
    under the capitalist free market economic system operating in the country, government
    appropriately tends to avoid involvement in private businesses, but if it considers it
    necessary to intervene in private business as an investor itself, it can do so, provided, and
    we emphasise the following proviso, any risks inherent in private business investment are
    managed properly so as to avoid losses.13

    1.16 Examples of government investment in natural resource development projects through
    equity participation includes the following models:

    (a) Government directly taking up equity in a joint-venture company with
    multinational companies such as the Porgera Gold Mine and OK Tedi Mining Ltd;

    (b) Government taking over a joint-venture company after purchasing shares of
    another joint venture partner, such as Ok Tedi Mining Ltd;

    12
    Statement of Dr Osborne Sanida, (Exhibit “E”), paragraphs [21] to [27] at pages 3-4, WIT.0009.0002.0001..
    13
    Statement of Dr Waine (Exhibit “F”) at page 5, WIT.0039.0005.0007.

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  • (c) Government taking up shares in a multinational company that operates the
    project, such as Bougainville Copper Limited; and

    (d) Government buying shares in a multinational corporation that is involved in a
    joint-venture with other multinational corporations to conduct a resource
    development project such as the proposed Papua LNG Project.

    1.17 The witnesses ‘broadly’ agreed that where business involves investment risks, the
    government must be cautious in engaging in business ventures and only undertake such
    investments using public funds after a thorough assessment of risk has been undertaken.
    The State obtaining loans to finance its equity or shares under any of the above models
    increases that risk and extra prudence is then required. Some witnesses expressed the
    view that the State should not be involved in a purely private business enterprise
    involving multinational companies in which the State does not hold any controlling
    interest14 because the risks are too high.

    1.18 This evidence sets the historical context for the events the Commission is inquiring into.
    The Terms of Reference of this Inquiry focus on a number of petroleum and LNG
    transactions in which the Government of Papua New Guinea and its agencies were
    involved.

    1.19 Before coming to those we mention some key legal provisions.

    1.20 There are laws such as the Mining Act 1992 and the Mineral Resources Authority Act
    2005 designed to prevent the improper exploitation of natural resources,15 and also to
    ensure that the State can participate in the commercialisation of its natural resources.16

    1.21 The Oil and Gas Act 1988:

    14
    See also Statement of Sir Charles Lepani (Exhibit “C”) at page 7, WIT.0008.0003.0003; statement of Sir Julius
    Chan (Exhibit “H”) at pages 3 to 5, WIT.0002.0004.0002; oral evidence of Sir Julius Chan; transcript at pages 284
    to 288, 12 May 2021; oral evidence of Dr Sanida; transcript at page 321 (13 May 2021).
    15
    See Mining Act 1992; Mineral Resources Authority Act 2005; Oil and Gas Act 1998, pt IV; Environment Act 2000
    s 4; Unconventional Hydrocarbons Act 2015.
    16
    See Oil and Gas Act 1998, s 165.

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  • (a) creates a licensing regime of five categories of licence including Petroleum
    Development Licence (PDL) and a Petroleum Retention Licence (PRL), 17

    (b) imposes a duty to compensate traditional landowners affected by the exploitation
    of natural resources, and

    (c) preserves an optional participating interest – the ‘back-in rights’ – for the
    Independent State in all petroleum and liquefied gas projects.

    1.22 Thus, s 165(1) of the Oil and Gas Act provides for ‘back in rights’ in these terms: The
    State has the right (but not the obligation) to acquire, directly or through a nominee, all
    or any part of a participating interest not exceeding 22.5% in each petroleum project.

    1.23 Where the State exercises this right, affected landowners are granted royalties or equity
    out of the State’s interest in the project.18 Historically, the State has opted to exercise this
    right through a State nominee.

    1.24 It is important to note that there are a number of different ways the State (and we include
    in this SoE’s) can participate in large petroleum/LNG projects.

    1.25 As already noted, some witnesses stated that the State has no role at all to play in such
    projects, beyond the traditional role of governments to provide an economically and
    politically stable State, which delivers public services as needed, and allows miners and

    17
    The licences are as follows:
    Petroleum Prospecting Licence, which provides exclusive rights to explore for oil and gas, and to complete the
    necessary appraisal processes to determine whether the resource is commercially viable; 17
    Petroleum Development Licence, which provides exclusive rights to explore for, appraise, recover and sell
    petroleum and liquefied natural gas;17
    Petroleum Retention Licence, which provides exclusive rights to explore, appraise gas fields and, with authorisation,
    carry out drill stem tests for appraisal of a petroleum pool;17
    Pipeline Licence, which is required to construct, alter or reconstruct a pipeline which is used for transport of
    petroleum or liquefied natural gas;17 and
    Petroleum Processing Facility Licence, which is required to construct or operate a petroleum or liquefied natural gas
    processing facility.
    18
    Oil and Gas Act 1998, ss 167 and 168.

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  • their workers to operate safely. (No-one in this Commission has argued for the
    theoretical alternative that the State should itself operate all aspects of petroleum/LNG
    projects.)

    1.26 Rather, in this inquiry, the debate has been between two available approaches, namely:

    (a) exercising (and paying for) the back in rights under s 165 of the Oil and Gas Act,
    so that when the LNG begins to be exported and sold, the State shares directly in
    profits made under the licence; or

    (b) Buying shares in a company which itself owns the licence, so that it receives such
    dividends as the company chooses to declare from time to time: there being no
    guarantee as to the amount or frequency of dividends.

    1.27 Another debate in this inquiry has been the role of the Sovereign Wealth Fund which is
    provided for by existing laws but not yet established. In the 4th Report by the Brattle
    Group, they said this:

    In general, Sovereign Wealth Funds can be designed to achieve several different
    purposes. Often these include: a) smoothing out volatile revenues in order to insulate
    spending programs from fluctuations, such as those caused by volatile commodity prices;
    and b) investing surplus revenues for use later (including possibly much later, to facilitate
    “intergenerational equity”). If a fund is mostly trying to smooth out volatile revenues, it
    is likely to invest mainly in low-risk, low-return assets such as bonds issued by
    governments with very strong credit ratings (such as the USA or Japan). Such
    investments generally hold their value from one year to the next but do not generate high
    returns over the long term. If a fund is mostly investing for the long term, it is more likely
    to invest in equities: although the value of equities is volatile, returns over the long term
    tend to be much higher than returns from investing in bonds. Thus the investment
    mandate of a Sovereign Wealth Fund will depend on whether it is mostly trying to invest
    surplus revenues for the long term or is mostly trying to smooth out volatile revenues to
    support current spending. The former will have relatively low and relatively stable
    returns, while the latter will have higher returns that are more volatile.

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  • 1.28 We heard some important evidence on this topic from Professor Sir Tim Besley CBE of
    the London School of Economics, an expert on developing economies, and Mr David
    Murray AO, former Chairman of the Board of Guardians of Australia’s Sovereign
    Wealth Fund, the Future Fund. We shall have more to say about this topic later on.

    2. Key Persons and Events

    2.1 Let me now mention some key persons and events.

    People

    2.2 The Prime Minister the Honourable James Marape MP

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  • 2.3 The Right Honourable Grand Chief Sir Michael Somare GCL GCMG CH CF SSI

    2.4 Mr Arthur Somare;

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  • 2.5 The Honourable Peter O’Neill CMG MP, the former Prime Minister;

    2.6 Mr Dairi Vele, relevantly the former Director of the Gas Production Coordination Office,
    Secretary and Acting Secretary of the Department of Treasury;

    2.7 Mr Wapu Sonk, CEO of Kumul Petroleum Holdings;

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  • 2.8 Mr Carlos Civelli

    2.9 Dr Clement Waine, former Secretary and Acting Secretary of the Department of Public
    Enterprises and State Investments;

    2.10 Mr Ben Micah, former Minister for Public Enterprises and State Investments;

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  • 2.11 Mr Anthony Latimer, former partner at NRFA;

    2.12 Mr Steven Moe, former Senior Associate at NRFA;

    2.13 Mr Vittorio Casamento, former Senior Associate at NRFA;

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  • 2.14 Mr Paddy Jilek, UBS;

    2.15 Mr Mitchell Turner, UBS;

    Companies

    2.16 Oil Search is a company which since 17 December 2021 has been merged with Santos
    Limited and is now part of the Santos Group, but before that has for many years described
    itself as ‘the largest single investor in [Papua New Guinea]’. For at least that reason, and
    because from time-to-time the State or its SoE’s have been significant shareholders in Oil
    Search, it has had significant economic and political influence in Papua New Guinea: but
    we are not thereby suggesting such influence was bad or inappropriate. For a long time
    Mr Peter Botten AC CBE was its CEO: its local representatives included the director Mr
    Gerea Aopi.

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  • 2.17 In 2002, Orogen Minerals Limited (Orogen) which was a publicly listed company in
    which Mineral Resources Development Company (MRDC) (a 100% State owned
    company) held 51% of the shares – merged with Oil Search. Orogen was created by the
    State to hold the State’s private investments in the mineral resource sector.

    2.18 UBS AG is a Swiss multinational investment bank and financial services company
    founded and based in Switzerland. The Australian branch of UBS AG was engaged as
    both financial advisor and financier to the Independent State on the UBS loan. UBS
    continues to operate out of Sydney, Australia and is not compellable by the Commission
    to provide evidence. UBS provided some assistance to the Commission, producing
    certain relevant documents, providing a statement of its view of relevant facts and
    answering specific questions from the Commission.19 Despite requests, it did not make
    any current or former UBS employees available to give evidence.

    2.19 Norton Rose Fulbright is an international law firm. The Sydney office of the Firm, Norton
    Fulbright Australia (NRFA), was engaged as a legal advisor for the State on the UBS
    Loan. NRFA was engaged on a number of other matters throughout 2012 and 2013.
    These related matters included:

    (a) advising on the establishment of a ‘Temasek style’ enterprise to own and operate
    certain SoE’s and hold certain investments for the State;20

    (b) the IPIC Exchangeable bonds refinancing; and

    (c) advising on the enabling legislation and regulations necessary to give effect to the
    Sovereign Wealth Fund and drafting such legislation and regulations.21

    19
    Statement by UBS AG, Australia Branch, 4 August 2021, UBS.0001.0002.0007; Supplementary Information from
    UBS AG Australia Branch – Response to questions from COI Solicitors Assisting received on 6 August 2021, 9
    August 2021, UBS.0001.0003.0001.

    20
    WIT.0015.0001.0691 at 0691 [2.2].

    21
    WIT.0015.0001.0691 at 0693 [2.5(3)].

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  • 2.20 The lawyers who were asked to give evidence in this inquiry (who declined) were Mr
    Latimer, Mr Moe and Mr Casamento.

    2.21 KPMG is a multinational network of professional firms providing audit, tax and advisory
    services. It advised the State on the UBS Loan.

    SoE’s

    2.22 We mentioned that various SoE’s have been created to participate in petroleum and
    liquefied natural gas projects. The main relevant entities for the purpose of this
    Commission are as follows:

    2.23 The key executives include Mr Wapu Sonk the inaugural CEO of Kumul Petroleum
    Limited, who still holds that role.

    Two LNG projects

    2.24 Commissioners, you will recall that two LNG projects are central to the work of the
    Commission, namely:

    (a) The PNG LNG Gas Project; and

    (b) The variously named Papua LNG/ PACLNG / Elk Antelope project.

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  • 2.25 As explained in the opening submissions in March last year, the PNG LNG Project is one
    of the most significant natural resources undertaken in Papua New Guinea. Operated by
    ExxonMobil, the PNG LNG Project has already contributed some USD19 billion to the
    development of Papua New Guinea’s economy.

    2.26 The PNG LNG Project stretches across the Hela, Western, Southern Highlands, Gulf and
    Central provinces. Gas for the project is primarily produced from the Juha, Hides and
    Angore gas fields before it is transported by pipeline for storage and liquefication at
    facilities located north-west of Port Moresby. The liquefied natural gas is then loaded
    onto ships for export.

    2.27 The PNG LNG Project produces approximately 6.9 million tonnes of liquefied natural gas
    each year,22 which is exported throughout Asia.

    2.28 The project is structured as an unincorporated Joint Venture.23

    2.29 Gas for the project is sourced from seven different gas fields, and nine PDL’s.24

    2.30 This project is central to the Commission’s Terms of Reference.

    2.31 The other gas project of relevance to this inquiry was known initially as the Elk-Antelope
    gas field. It is located to the west of Port Moresby. It was discovered in 2007 by
    InterOil, an oil and gas explorer. InterOil subsequently partnered with the French
    company Total which purchased a 60% interest.

    2.32 We now turn to some key transactions: the IPIC exchangeable bonds and the UBS Loans.

    2.33 As we said in opening last March:

    In 2009, the late Grand Chief Sir Michael Somare, the first Prime Minister of the
    Independent State, was again Prime Minister … [and], seeking to finance the

    23
    Between ExxonMobil, Oil Search Limited, Santos, JX Nippon Oil & Gas Exploration, and the Independent State,
    through Kumul Petroleum Holdings Limited and Mineral Resources Development Company Limited.
    WIT.0014.0001.0003 at .0005.
    24
    WIT.0014.0001.0003 at .0006.

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  • Independent State’s share of capital investment in the LNG Project, pledged, among other
    assets, its 14.7% stake in Oil Search to raise a large sum: AUD1.7 billion. However, the
    Oil Search shares were not worth AUD1.7 billion and so they were pledged against their
    future projected value in a deal with the International Petroleum Investment Company
    (IPIC) [a foreign Sovereign Wealth Fund]. Among other matters, it was initially
    proposed that IPIC agree that the Independent State would have the rights to buy back
    the shares in 2014, provided that the Independent State could then raise the money to do
    so. But the eventual agreement was more one-sided than that, with IPIC having the
    option of keeping the shares.

    2.34 When the bonds came due in 2014 the agreement was for IPIC to take the shares unless
    there was an agreement otherwise. The government did not seriously attempt to obtain an
    extension until it was too late, and despite its desire to retain the shares, IPIC held on to
    the Oil Search shares including the shares the government or its SoE’s had previously
    owned, thus leaving the State with a situation it had not faced since the Orogen merger
    that is, owning no shares in Oil Search. Former Prime Minister O’Neill said this was
    unacceptable so he persuaded his government to make the entirely optional decision to
    ask Oil Search to issue 10% of its share capital to the State in what we call the UBS loan.
    Oil Search agreed as it allowed it to purchase the PacLNG group that held a 22.8%
    interest in the Elk-Antelope field.

    2.35 The new Oil Search shares and the UBS Loan were swiftly transferred to the SOE, Kumul
    Petroleum.

    2.36 The evidence, in our submission, is that Kumul Petroleum didn’t want the shares or the
    large UBS Loan debt but for years it could not obtain the permission of its Trustee, Mr
    O’Neill, to sell the shares.

    2.37 The so called ‘vital strategic interest’ of the State in owning Oil Search shares, which was
    the stated justification for the UBS Loan, in our submission, having regard to the
    evidence, ceased to be vital when the shares were eventually sold, after the election which
    returned Mr O’Neill’s government, in 2017. If Mr O’Neill first withheld and then gave
    Kumul Petroleum permission to sell the shares for non-commercial purposes, as Mr Sonk
    says he did, that would in our submission, be a potential breach of his Trustee’s duties

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  • and as we later submit, could be a leadership Tribunal matter and thus would justify
    referral by this inquiry to the Ombudsman Commission; it could also, in our submission,
    amount to conduct relevant to the Organic Law on the Independent Commission Against
    Corruption Law 2019.

    2.38 Be that as it may, there can be little doubt that, unlike the IPIC Exchangeable bonds
    which provided the only realistic way for the State to exercise its valuable back in rights,
    and was cost effective, the UBS Loan was, for the State and its people, an unnecessary
    disaster – and we use both words unnecessary and disaster deliberately.

    2.39 It was entirely voluntary – there being no prior obligation to take out the loan; and
    entirely unnecessary – the stated rationale – continued ownership of a strategic parcel of
    Oil Search shares- was never convincing, and cannot withstand scrutiny in view of the
    almost immediate desire, following the UBS Loan in March 2014, and its novation to
    Kumul later that year, of both Kumul and Mr O’Neill for an early sale of the shares,
    which did not happen until 2017 for apparently non-commercial reasons. The disaster
    was the enormous loss of K862,000,000 (AUD 340m) and the lost opportunity to put that
    money lost to better use. A far better financial decision would have been to use money
    saved by not entering into the UBS Loan to establish the Sovereign Wealth Fund, to
    otherwise invest through back in rights which give direct access to profits of a petroleum
    licence, or to pay down debt rather than being beholden to a company for its dividend
    decisions.

    2.40 The complex UBS Loan was not well understood by the State and its in-house officials
    and advisers, but it turns out to have involved over-charging by UBS (above its separately
    declared fees) of approximately K456,000,000 (AUD180 million) – the State should in
    our submission ask for this money back and the Australian authorities should be asked to
    investigate and if appropriate take action.

    2.41 The governmental processes for the assessment of the UBS Loan were inadequate,
    uncoordinated and rushed.

    2.42 The NEC/Cabinet process – and the benefits of debate and consideration it should bring –
    was undermined by the then Prime Minister O’Neill’s decision to put to the NEC a UBS

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  • Loan of enormous complexity, based on a cabinet submission which no other Cabinet
    member including the Treasurer had prior sight of.

    2.43 We now turning to the sub-paragraphs of the Terms of Reference.

    3. TOR (A): What was the reasoning behind the decision by the Morauta Government
    to approve the sale of Orogen Minerals to Oil Search Limited?

    3.1 The background to this topic is as follows: the Mineral Resources Development Company
    (MRDC) was established in 1975 as a 100% State owned company to hold and manage
    the State and landowners’ equity interests in mineral and petroleum development projects
    in the State. In 1996, through a successful Initial Public Offering, MRDC launched a
    subsidiary company, Orogen Minerals Limited (Orogen), and listed it on the Australian
    Stock Exchange. MRDC offered a 49% stake in Orogen to the public and retained 51%.

    3.2 On 21 January 2002, Oil Search and Orogen announced a proposed merger. It was also
    announced that the State had indicated its support for the merger.25 Mr Botten’s evidence
    was that it was Oil Search who was approached by the State and asked whether it would
    be interested in putting forward a merger proposal with Orogen.26

    3.3 The merger terms were AUD0.45 and 1.2 Oil Search ordinary shares for each Orogen
    share. This valued Orogen at AUD632 million or AUD1.97 a share, 22% higher than the
    pre-announcement share price of AUD1.62 a share.27 The proposed merger would result
    in MRDC holding approximately 18% of the Oil Search shares.28

    3.4 On 21 March 2002, the then Prime Minister, The Right Honourable Sir Mekere Morauta
    KCMG, announced that NEC had endorsed a recommendation to accept the merger offer
    by Oil Search for Orogen.29

    25
    Company announcements – Text version – ASX.
    26
    Further Statement of Peter Botten dated 27 January 2022 [7], WIT.0021.0006.0001.
    27
    Company announcements – Text version – ASX.
    28
    OSL.0022.0001.0001 at .0011.
    29
    OSL.0022.0001.0259 at .0627.

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  • 3.5 At a Orogen shareholders meeting held in Port Moresby on 26 March 2002, 99.5% of the
    votes cast were in favour of the merger.30

    3.6 On 3 April 2002, the merger (by way of Scheme of Arrangement) was approved by the
    National Court.31

    3.7 As to the reasoning for the merger, the board of Orogen considered that the shares in the
    company were trading at a significant discount to their underlying value. Accordingly,
    they examined various options to maximise value for shareholders. The board noted that
    the Oil Search offer represented a premium on Orogen’s share price and that the merger
    was, in their view, the best way to unlock value in the company.32

    3.8 As noted, the proposed merger offer by Oil Search was supported by NEC, for the
    principal reason that it was the best way to move the “Gas-to-Queensland project” ahead
    and at the same time allow the State to participate in the project’s upside. 33

    3.9 ABN-AMRO, the State’s advisors, advised in favour of the proposed merger on the basis
    that it would assist Oil Search to move the Papua New Guinea Gas Project forward and
    allow the State to retain its exposure to the project.34 Similarly, Grant Samuel &
    Associates, who were engaged by Orogen to act as an independent expert to advise on the
    proposed merger, advised that the proposed merger was in the best interests of Orogen
    shareholders as the offer represented a premium to the recent Orogen share price and the
    merger would enable the company to participate in attractive growth opportunities,
    including the Papua New Guinea Gas Project.35

    3.10 From Oil Search’s perspective, Orogen was a “very profitable company”. Oil Search saw
    the proposed merger as an opportunity “to bring more value, not only to the Oil Search

    30
    Company announcements – Text version – ASX.
    31
    Company announcements – Text version – ASX.
    32
    Company announcements – Text version – ASX.
    33
    OSL.0022.0001.0259 at .0627.
    34
    WIT.0016.0005.0007.
    35
    OSL.0022.0001.0001 at .0082.

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  • shareholders but also to the [Papua New Guinean] Government”.36 In this regard, Mr
    Botten stated:37

    One of the factors that contributed to the discount of the Orogen share price to the
    underlying value of its assets was the majority ownership of the company’s shares by the
    State and associated market concerns relating to the State’s intentions in relation to
    future ownership, the independence of the Board and the preparedness of the State to
    permit new equity to be raised to finance new development projects.

    3.11 At the time of the merger, Mr John Francis Kaupa was the Managing Director and Chief
    Executive Officer of Orogen.38 Mr Kaupa described the acquisition of Orogen by Oil
    Search as “a very unfortunate and sad day for Papua New Guinea”. Mr Kaupa was
    concerned about the State’s decision to support the merger. In particular Mr Kaupa was
    critical of the merger, given the financial strength of Orogen and his view that the Oil
    Search offer undervalued Orogen.39

    3.12 Mr Kaupa said his attempts to discuss his concerns with the then Prime Minister Sir
    Mekere Morauta were “thwarted” and the attempts of Orogen’s board of directors to meet
    with the State were “spectacularly unsuccessful” as he was told to do his job and facilitate
    the acquisition and not to question the State’s decision to sell. 40

    3.13 However, we submit that this evidence is not of great significance as, ultimately, Mr
    Kaupa (along with the other directors) recommended that Orogen shareholders vote in

    36
    Transcript, Gerea Aopi, 28 July 2021, p 2261.
    37
    Further Statement of Peter Botten dated 27 January 2022 [7], WIT.0021.0006.0001.
    38
    Statement of John Francis Kaupa dated 19 May 2021 [4]-[5], WIT.0096.0002.0003.
    39
    Evidence of John Francis Kaupa T1886 (24 June 2021); Statement of John Francis Kaupa dated 19 May 2021 at
    [11]-[12], WIT.0096.0002.0003; Statement of John Francis Kaupa dated 22 July 2021 at [17]-[20],
    WIT.0096.0002.0003.
    40
    Statement of John Francis Kaupa dated 19 May 2021 at [13]-[17], WIT.0096.0002.0003; Evidence of John
    Francis Kaupa T1887 (24 June 2021).

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  • favour of the merger,41 and there was then overwhelming support for the merger and the
    courts approved it.

    3.14 So, in our submission, the submission as to TOR (A) is that the reasoning behind the
    decision by the Morauta Government to approve the sale of Orogen Minerals to Oil
    Search Limited was that provided by the NEC minutes, namely that ‘it was the best
    way to move the “Gas-to-Queensland project” ahead and at the same time allow the
    State to participate in the project’s upside’, a justification which was backed up by
    the advice of ABN-AMRO and Grant Samuel, and by the overwhelming support by
    shareholders for the merger.

    4. TOR (B): Were alternative structures / transactions considered? If so, why were
    these rejected?

    4.1 In November 2001, the State approached Santos Limited (Santos) to invite the company
    to make a bid for Orogen.42

    4.2 On 20 March 2002, Santos announced that it was considering making a takeover offer for
    Orogen at a case price of AUD2.00 per share, which would value Orogen at AUD642
    million.43

    4.3 The proposal by Santos was considered by the NEC on 19 March 2002 but rejected on the
    advice of ABN-AMRO on the basis that the Oil Search offer was the better option
    given:44

    (a) the cash consideration for the Santos proposal was still significantly below the
    underlying fundamental value of Orogen;

    (b) the Santos proposal was below the underlying fundamental value of the Oil Search
    offer;

    41
    OSL.0022.0001.0001 at .0057.
    42
    Company announcements – Text version – ASX.
    43
    Company announcements – Text version – ASX.
    44
    WIT.0016.0005.0007.

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  • (c) the Santos proposal had a number of unattractive conditions; and

    (d) the Santos proposal would give Santos blocking rights over the PNG Gas Project.

    4.4 On 21 March 2002, Orogen announced that it had not received a formal takeover proposal
    from Santos and that its board recommended to shareholders that, in the absence of any
    superior offer, they should vote in favour of the merger between Orogen and Oil Search.45

    4.5 The board of Orogen also considered a number of other alternatives to the merger with
    Oil Search but considered that the Oil Search offer was the best option for the company.46

    4.6 The advice to the State from ABN AMRO also considered (but recommended against)
    various other proposals.47

    5. TORs (C) – (D) – Impact

    5.1 The most notable impact of the merger was that Oil Search and the State (directly or
    through SoE’s) grew ever ‘closer’ in their dealings, and the large shareholding by the
    State/SoE’s in Oil Search came to be regarded by some at least as the normal course of
    events.

    5.2 Oil Search was the biggest company in the Independent State. It was not unreasonable
    for it to have a close relationship with the Independent State in the ordinary course of its
    business. That relationship became complicated with the State’s large shareholding in Oil
    Search as it had a direct interest in its success.

    6. TORs (E) – (K) : The PNG LNG Project

    Overview of the PNG LNG Project

    45
    Company announcements – Text version – ASX.
    46
    OSL.0022.0001.0001 at .0010.
    47
    WIT.0016.0005.0007 at .0027-0028.

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  • 6.1 The PNG LNG Project is one of the most significant (if not the most significant) natural
    resource projects in the Independent State.48

    6.2 In July 2007, the companies involved presented the State with a proposal to develop
    natural gas reserves in the Southern Highlands by transporting it to an LNG processing
    plant in the Central Province for international export.49 The rationale for the proposal was
    that the aggregate natural gas reserve was large enough to warrant the large costs
    associated with extracting, processing and piping the product; but each individual reserve
    was not.

    6.3 This led to significant negotiations between those companies and the State and a number
    of agreements being entered into in 2008 and 2009. The principal agreements were
    executed in May 2008.

    6.4 The Final Investment Decision for the PNG LNG Project was made on 8 December 2009
    and this immediately resulted in the commencement of comprehensive construction
    activities. Construction of the PNG LNG Project was completed by about April 2014.
    Gas production started around that time and the first gas export from the PNG LNG
    Project was on 25 May 2014.50

    6.5 Since its first export in 2014, the PNG LNG Project has exported approximately 7 million
    tonnes of LNG per year. The total capital expenditure by the project sponsors in the
    construction and commissioning period from 2010 to 2014 exceeded USD19 billion.

    48
    The PNG LNG Project is an integrated system of gas production, processing, liquefication and storage facilities
    stretching across the Independent State. It comprises gas fields and production facilities in Hela, Southern Highlands
    and the Western Province connected by some 700 kilometres of pipelines to the liquefication and storage facilities in
    the Gulf of Papua. The PNG LNG Project has the capacity to produce about 7 million tonnes of LNG each year.
    The gas is exported to international markets from the Gulf of Papua. The income is to be distributed amongst the
    PNG LNG Project equity holders (which includes the Independent State-owned companies). The PNG LNG Project
    was initiated by companies including ExxonMobil, Nippon Oil, Oil Search and Santos.

    49
    Policy Submission 73/2008 dated 20 May 2008, [3], WIT.0014.0007.0300.

    50
    Statement of Peter Graham dated 9 June 2021, Exhibit YY, WIT.0072.0003.0002.

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  • 6.6 The PNG LNG Project has produced significant revenue for the State, through KPHL.

    6.7 The principal agreement entered into for the Project is known as the Gas Agreement. It
    was made under sections 184 and 185 of the Oil and Gas Act and sets out the terms by
    which the State could exercise its back-in rights to become an equity participant in the
    PNG LNG Project.

    6.8 Through the Gas Agreement, the State acquired a 19.4% interest in the PNG LNG
    Project. The State had to find the substantial means to fund that involvement initially of
    its equity interest but subsequently its share of the development costs. The State’s total
    financing exposure to the PNG LNG Project was approximately USD 3 billion
    comprising equity financing of USD1 billion and project financing of USD2 billion. At its
    time, it was the largest fundraising that the State had ever attempted.

    6.9 It was this significant need for finance which directly led to what is known as the IPIC
    Exchangeable Bond transaction. That transaction links to paragraphs 1(e) to (k) of the
    Terms of Reference, which we now address.

    7. TOR 1(E): How the State Financed its Equity Participation in the PNG LNG Project

    7.1 The submission, in summary, as to this TOR is that the State financed its equity
    participation through the IPIC Exchangeable Bond Transaction.

    7.2 This was as agreed between IPBC and International Petroleum Investment Corporation
    (IPIC), a state-owned entity from Abu Dhabi. IPIC was a passive investment company
    involved in administering Abu Dhabi’s sovereign wealth fund, rather than an active
    commercial or trading organisation.

    7.3 The Exchangeable Bond Transaction sought to leverage IPBC’s ownership of General
    Business Trust assets and, in particular, the 17.6% shareholding that IPBC then held in
    Oil Search. IPBC had become the state’s nominee to hold the Oil Search subsequent to

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  • the merger of Oil Search and Orogen pursuant to the IPBC Act 2002.51 The key concepts
    of the transaction were as follows:

    (a) IPBC was to issue exchangeable bonds to IPIC. Fundamentally, IPIC would pay
    money to receive the bonds and at maturity, after 5 years, take IPBC’s
    shareholding in Oil Search as repayment. It is critical to understand this aspect.

    (b) At the time of the transaction, the Oil Search share price was about AUD4.33, but
    it was predicted to rise. This was because Oil Search was a participant in the PNG
    LNG Project and its share price was likely to rise as the Project progressed.

    (c) In order to raise sufficient funds to participate in the Project and to take advantage
    of the forecast rise in Oil Search’s share price, the value of the bonds was
    calculated not by reference to Oil Search’s then share price but to an agreed future
    price of AUD8.55. This enabled IPBC to raise AUD1.681 billion. This was
    significantly more than it could have raised from a simple loan secured against the
    current value of the Oil Search shares.

    (d) IPBC would use the funds generated from issuing the bonds principally to fund its
    equity participation in the PNG LNG Project. The funds were placed in
    quarantined US dollar and Australian dollar accounts for that purpose and to meet
    interest payments on the bonds.52

    (e) IPBC would keep the dividends paid on the shares up to a certain limit, after which
    the excess would be held in the quarantined accounts.

    (f) On maturity, the bonds would be exchanged for IPBC’s entire shareholding in Oil
    Search. When that happened, if:

    51
    Section 7(a) of the IPBC Act 2002 provided that IPBC were to act as trustee of the Trusts [including the General
    Business Trust] and hold assets and liabilities that have been vested in or acquired by it, on behalf of the State. IPBC
    were registered as shareholders of Oil Search in March 2004.

    52
    Bond Deed Poll Annexure A, cl. 17, WIT.0056.0006.0021

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  • (i) the Volume Weighted Average Price of the shares over a certain period of
    time was less than AUD8.55 a share, IPBC was obliged make up the
    shortfall in cash;

    (ii) if the Volume Weighted Average Price of the shares was greater than
    AUD8.55 a share, IPIC would only receive shares totalling the face value
    of the bonds and IPBC would keep the remainder of the shares. 53

    (g) IPIC also had early exchange rights. From 40 days after the bonds were issued
    until 10 days before maturity, IPIC could exchange the bonds for IPBC’s
    shareholding in Oil Search.54 On this early exchange, IPIC would receive all of the
    shares (even if the share price was above AUD8.55), but would not receive a cash
    payment if the share price was below AUD 8.55. The effect of this was to transfer
    the upside of the shares above AUD8.55 to IPIC as if the shares rose above that
    price, IPIC could take all of them.

    (h) The risk of having to make up the shortfall was the principal risk that IPBC took in
    the transaction.

    (i) IPBC was required to pay interest to IPIC at the rate of 5% per annum.55 About
    AUD390M of the funds raised by the bonds was placed in escrow to meet the
    interest payments as they fell due so that no further payments would be needed.

    (j) The Oil Search shares were held by an escrow agent for the duration of the bond to
    protect IPIC’s redemption rights. Also, IPBC was not permitted to grant security
    over any of the assets of the General Business Trust to secure financing debt
    unless it offered the same or equivalent security to IPIC.56

    53
    Bond Deed Poll, Annexure A, cl 7.5 WIT.0056.0006.0021

    54
    Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.0021

    55
    Bond Deed Poll Annexure A, cl. 6, WIT.0056.0006.0021 [To be tendered]

    56
    Bond Deed Poll Annexure A, cl. 15, WIT.0056.0006.0021 [To be tendered]

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  • (k) Subject to certain conditions, IPIC could exchange the bonds for IPBC’s
    shareholding in Oil Search before maturity, but it never sought to do so.

    (l) IPBC had the option to redeem the bonds but this depended on the average share
    price being above 130% of AUD8.55 (ie. the very high price of AUD11.115) for
    20 or more trading days during a period of 30 consecutive trading days. The price
    of the shares never gave rise to this option and, if it had, it is more likely that, by
    that point, IPIC would have already sought the early exchange of the shares.
    IPBC’s option to redeem early was, therefore, unlikely ever to be usable.

    (m) Neither IPIC nor IPBC had the right to seek a cash substitute for the shares.

    7.4 Over the years, some individuals expressed views showing a very significant
    misunderstanding about the exchange rights in relation to the shares and how the
    transaction was to end. Some people said that IPIC did not have a legal right to take the
    shares at maturity, or that IPBC had a right to repay IPIC in cash and so retain the shares.
    Neither is correct. IPIC was entitled to the shares on maturity. This was as IPBC and the
    NEC, which approved the transaction, intended and there was no misunderstanding about
    this at the time of the transaction. There was also no misunderstanding in the NEC during
    2012 and 2013.57 We submit you should be sceptical of those such who suggest they had
    that misapprehension at the relevant times.

    7.5 This exchange right was a conscious choice by IPBC and the NEC when each approved
    the transaction. In particular, IPBC was clear in its understanding that the shares would be
    transferred to IPIC on maturity of the bonds. Crucially, IPBC did not envisage that there
    ever would be an option to buy the shares back as IPBC would not have had the capacity
    to borrow the necessary sums to do so. Whilst the transaction would result in IPBC losing
    its investment in Oil Search, including any dividends flowing from the shares, this was
    considered an acceptable price to pay to obtain the much greater revenues that would
    ultimately flow from the PNG LNG Project.

    57
    NEC Decision 63/2012 (March 2012), WIT.0016.0001.0316, NEC Decision 117/2013 (April 2013)
    WIT.0016.0001.0331.

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  • 7.6 Anyone in Government circles who said that IPIC was legally obliged to return the shares
    to IPBC – such as Mr O’Neill – were mistaken. There should not have been any confusion
    about this. On 25 November 2008, a joint press release was issued by IPIC, the State and
    Oil Search announcing the deal. The release explained that, subject to certain conditions,
    IPIC would be acquiring the State’s shareholding in Oil Search.58

    7.7 Mr O’Neill’s misunderstanding or lack of recollection of the IPIC transaction in 2013 is all
    the more surprising as he was a member of the NEC which approved it. In truth this
    evidence of Mr O’Neill is not credible, in our submission, for the additional reason that
    Mr Vele, who discussed the refinancing of the bonds with Mr O’Neill, was clearly not
    under the same misapprehension.

    8. TOR 1(f): Whether due and proper legal and administrative processes were followed
    to obtain the loan to finance the State’s equity participation in 2009, including but
    not limited to:

    (i) How was the process commenced?

    (ii) How was IPIC selected?

    (iii) What process was utilised?

    (iv) What were the terms of the Loan from IPIC?

    1(f)(i): How was the process commenced?

    8.2 The history of the State’s consideration of how to find its equity share in the PNG LNG
    Project is complicated by a number of factors:

    (a) There were three organisations involved and a degree of competition between
    them as to how and through which entity the Project should be financed, so:

    58
    WIT.0027.0001.0538

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  • (i) Petromin appears to have considered itself to have been the most likely
    participant in the Project given its role in holding the State’s oil and gas
    assets.

    (ii) The Treasury necessarily had a role in advising on funding of such
    magnitude.

    (iii) IPBC, the eventual participant, originally had no interest in being involved
    nor notion that it might become so. However, it held assets which could be
    leveraged to raise the funds needed and, in particular, it held a substantial
    number of Oil Search shares. This was how it became involved and,
    ultimately, the holder of the State’s interest in the PNG LNG Project.

    (b) Two further complications were the question of how much money needed to be
    raised and when the money needed to be available to find the State’s equity
    interest. Financial close was not until December 2009 but the State needed to have
    its funding in place by September 2009.

    (c) The transaction also needs to be seen in its context. At the time that the finance
    was being sought, the world was in the midst of the global financial crisis. This
    presented significant challenges in raising funds.

    (d) The State was seen as being the weak link amongst the Project participants in
    raising funds. If the State succeeded in obtaining the funds at an early stage, it was
    thought that this would add momentum and credibility to the project.

    8.3 The Treasury started to take financial advice about funding the project in August 2007,
    using Lazard Freres. Lazard’s involvement continued through to the time that the NEC
    approved the IPIC Exchangeable Bond Transaction. The Treasury continued to seek
    funding alternatives even after the NEC had approved the deal.

    8.4 The Commission has less information about the steps that Petromin took to seek finance.
    An Oil Search document of May 2008 notes that ENI, the Italian oil and gas company,
    through Petromin, had approached the then Prime Minister to purchase the State’s
    shareholding in Oil Search. It is also understood that Petromin sought finance from Japan
    and South Korea.

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  • 8.5 For IPBC, the process commenced in late 2007 or early 2008. Oil Search approached
    IPBC about a proposal to use its shareholding in Oil Search to assist in raising the funds
    to pay for the State’s equity interest. This was the origin of the exchangeable bonds
    proposal. It appears that UBS, acting for Oil Search, may have had the original idea
    although they were not involved in the subsequent negotiations about it.

    8.6 Oil Search was itself a participant in the PNG LNG project and it therefore had something
    to gain by assisting the State in finding this funding. In addition, UBS had been engaged
    by Oil Search as advisors as Oil Search was seen as a possible takeover target. The State’s
    shareholding represented a significant impediment to a potential takeover. It may have
    been that Oil Search had an interest in ensuring that IPIC became the holder of that
    substantial shareholding, sufficient to deter potential takeover bids, as its style was to be a
    passive investor. IPIC’s involvement would also have enhanced Oil Search’s business
    prospects in the Middle East. It is clear that Oil Search had already discussed the concept
    of the exchangeable bonds with IPIC before raising it with IPBC.

    8.7 IPBC attended initial meetings in Dubai and Abu Dhabi in early 2008 with Oil Search and
    IPIC to discuss the proposal. It then reported to the Gas Committee about it. The Gas
    Committee directed IPBC to examine the proposal and consider whether it was in the
    State’s interests and was feasible.

    8.8 IPBC obtained legal advice from Freehills Lawyers and financial advice from Goldman
    Sachs JBWere.

    8.9 Therefore, the submission as to this TOR, as to how the process to obtain the
    Exchangeable Bond Transaction commenced, is that the idea of it originated with
    Oil Search. Oil Search raised it with IPBC and introduced IPBC to IPIC.

    1(f)(ii) How was IPIC selected?

    8.10 Goldman Sachs JBWere were initially engaged on a fact-finding mission in April 2008 to
    familiarise themselves with the proposal.

    8.11 On 13 May 2008, the NEC approved the IPBC appointing advisors and undertaking
    further analysis and work to finalise the funding offer in consultation with the Treasury

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  • before this would then be put before the NEC for approval. It also directed the Ministerial
    Committee on Gas to assess other financial options for the NEC’s consideration.59

    8.12 Goldman Sachs JBWere and Freehills largely ran the negotiations with IPIC. There was
    another meeting between representatives of Goldman Sachs JBWere, IPBC and IPIC on
    17 June 2008 in Singapore.60 Mr Botten, Mr Aopi and Oil Search’s CFO sought to attend
    that meeting but IPBC refused to allow them to do so. Their attendance was not thought
    appropriate as they were not a party to the proposal.61

    8.13 Goldman Sachs JBWere’s advice was that the IPIC Exchangeable Bond Transaction was a
    good structure for the State. If the PNG LNG Project completed, it was likely the Oil
    Search shares would go up in price. This was a factor in the decision about the reference
    price for the Oil Search shares in the deal. The price was reached through negotiation.
    Oil Search estimated that on production of first gas, its share price would be AUD12.50.
    IPBC had a figure between AUD8.25 and AUD8.70. The final figure of AUD8.55 was
    agreed between IPBC and IPIC.62

    8.14 IPBC also tried to get the term of the bonds to match as closely as possible with Exxon’s
    estimate of when the project would be completed and first gas delivered. This was the
    most important factor in determining the length of the bond. It too was a matter for
    negotiation and agreement with IPIC.63

    8.15 Throughout the negotiations, briefings for the State were held in Goldman Sachs
    JBWere’s office in Sydney. Generally at least four ministers were present. They were

    59
    NEC Decision 82/2008, WIT.0026.0001.0722

    60
    PwC Report, “Transaction Review Project Kumul”, p7 WIT.0056.0005.0001

    61
    PwC Report, “Transaction Review Project Kumul”, p43 WIT.0056.0005.0001 and Affidavit of Glenn Blake, 20
    December 2021, [23-24] Exhibit WWW WIT.0092.0001.0001

    62
    Affidavit of Glenn Blake, 20 December 2021, [29] Exhibit WWW WIT.0092.0001.0001

    63
    Affidavit of Glenn Blake, 20 December 2021, [31] Exhibit WWW WIT.0092.0001.0001

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  • usually the Minister for State Enterprise, the Treasurer, the Minister for Planning and Mr
    O’ Neill as the Minister for Public Services.

    8.16 In about August 2008, Backwell Lombard approached Mr Glenn Blake, the managing
    director of IPBC, with an alternative proposal from JP Morgan. Mr Blake rejected this
    proposal.

    8.17 Commercial terms for the Exchangeable Bond Transaction appear to have been agreed by
    12 September 2008. On that date, Goldman Sachs JBWere produced a document titled
    “Project Kumul – Post Negotiations Debrief Discussion Materials” reporting on the key
    terms.64 Mr Hogan of Goldman Sachs JBWere presented that document to the MCES and
    the directors of IPBC on that day.65

    8.18 The paper explained the key commercial terms agreed between the parties and provided
    Goldman Sachs JBWere’s evaluation of the transaction:

    (a) The terms were very attractive and offered a compelling source of financing. They
    exceeded what could be obtained in an on-market transaction.

    (b) There was a benefit in having funding certainty at that point given market
    volatility.

    (c) There was no recourse to the State.

    (d) IPBC and the State could consider alternatives, in particular a broader process to
    sell the Oil Search shares.

    (e) At that point, the IPIC transaction (absent any debt solution), economically and
    strategically, looked to be a better alternative for raising funds than an outright sale
    of the Oil Search shares via a broader process.

    64
    Project Kumul – Post Negotiations Debrief Discussion Materials WIT.0026.0001.0741

    65
    Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770

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  • (f) However, this was predicated on Oil Search shares remaining around the current
    levels prior to settlement (that is, the date upon which the bonds would be issued).

    (g) Using the Oil Search shares to fund the interest in the PNG LNG Project only
    made sense if IPBC held that interest – because it held the shares.

    (h) IPIC had introduced IPBC and the PNG LNG Project to six commercial banks.
    They had shown some interest in providing debt finance in the future for the PNG
    LNG Project.

    (i) It was unlikely that “concessional” funding would be delivered, however pressure
    should continue to be applied to obtain this.

    (j) As the bond was not a clean exit from Oil Search, there was a residual exposure to
    Oil Search’s performance during the life of the bond. This was partly mitigated by
    Oil Search’s value being linked to the PNG LNG Project.

    (k) To mitigate the market risk to which the transaction was naturally exposed, the
    State and IPBC should move as quickly as possible to decide if they wish to
    proceed along this path.

    8.19 The IPBC Board as a whole was first briefed66 on the proposal at a board meeting on 13
    September 2008.

    8.20 In our submission, the Commission should be surprised that the IPBC board had not been
    briefed about the proposal at an earlier date. It is the case that the IPBC board was in
    some disarray throughout 2008. There was no board meeting between December 2007
    and August 2008. In part this was because the board was inquorate as the government had
    not appointed sufficient directors. Mr Arthur Somare was then the minister responsible
    for making the appointments. In August 2008, the board could have been informed about
    the proposal but this was not done. Instead, the appointment of advisors for the State’s
    participation in the PNG LNG Project was tabled but not discussed. The minutes record

    66
    WIT.0026.0001.0770

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  • the shortage of members on the board and the volume of matters to be deliberated meant
    that the meeting would deal with urgent matters only.

    8.21 An additional issue is that two of the directors, Mr Aopi and Mr Baliki, appear, in our
    submission, to have been appointed to the IPBC board in contravention of section
    11(4)(b)(vi) of the IPBC Act as it then stood as both were employees of a business
    enterprise in which IPBC held an interest. Mr Baliki was an employee of BSP. Mr Aopi,
    who was appointed as the chair of IPBC, was a director of Oil Search, which is a
    particular concern. The evidence suggests that he did declare his conflict of interest but
    that he remained present when the exchangeable bonds proposal was being discussed. In
    our submission, he should not have been present. It created the risk and certainly the
    perception that IPBC’s confidential deliberations about the proposal would be reported
    back to Oil Search.

    8.22 The confusion over the constitution of IPBC’s board allowed the Treasury later to assert
    that IPBC’s decisions in relation to the exchangeable bonds were invalid. Legislation was
    required to correct the position. The Liquefied Natural Gas Project (State Participation)
    Act 2008 was introduced, which retrospectively repealed the relevant subsection of the
    IPBC Act and sought to expunge any invalidity.67

    8.23 In our submission, it is inexcusable for the government not to have complied with its own
    legislation in appointing Mr Aopi and Mr Baliki to the IPBC board. It is equally
    concerning that neither of them turned down the appointment on the basis that it was
    prohibited by legislation. When offered the position, they should have read the IPBC Act
    to understand the organisation that they were joining and this should have alerted them to
    the issue.

    8.24 Returning to the September board meeting, Mr Hogan of Goldman Sachs JBWere again
    presented the Project Kumul document.68 The minutes of the meeting record that:

    67
    First Statement of Anthony Yauieb 28 July 2021, [105] Exhibit BBB, WIT.0104.0002.0239

    68
    Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770

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  • (a) Mr Aopi declared his conflict of interest. The minutes record that Mr Aopi would
    stay in the meeting for Mr Hogan’s presentation but leave the meeting whilst the
    directors deliberated upon it. It was also recorded that he would not participate in
    the board’s decision on the proposal.

    (b) Mr Hogan informed the board that there had been “extensive” negotiations with
    IPIC that had resulted in the terms contained in the paper.

    (c) Mr Blake commented that Petromin posed a threat to the Oil Search shares and
    that this impacted upon the PNG LNG Project. The IPIC transaction was essential
    to protect the Oil Search shares from acquisition.

    (d) Mr Tosali, a nominee of the Treasury on the board of IPBC, questioned the
    serviceability of the coupon on the bonds and asked that Goldman Sachs JBWere
    should prepare a model that would show the merits of the transaction as against an
    outright sale of the Oil Search shares.

    (e) After Mr Hogan had left the meeting, the board questioned Goldman Sachs
    JBWere’s appointment. Mr Blake explained that Oil Search had been the source of
    the transaction. Subsequent discussions had led to the appointment of a financial
    adviser. Of the firms considered, Goldman Sachs JBWere was not conflicted and
    had experience of matters in Papua New Guinea. Mr Tosali expressed concern
    that the IPBC board had not been involved in Goldman Sachs JBWere’s
    appointment and asked about the fees to be paid to them.

    (f) Mr Blake responded that confidentiality meant that management had made the
    appointment, with the board to ratify this at the appropriate time. Mr Blake added
    that Freehills had been requested to ascertain what market rates were and that
    Goldman Sachs JBWere would be paid only to market rates.

    (g) The board noted that Lazard had been engaged as financial advisors to the State
    and that any financing options put together by the Treasury as an alternative to the
    IPIC transaction should be considered. It was recorded that there were “lengthy
    discussions in the nature of concerns that the Department of Treasury had on the
    IPIC Transaction”.

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  • (h) These concerns were noted but the board resolved to recommend the IPIC
    transaction to the NEC, subject to the Treasury being accorded the opportunity to
    comment on it. The board also ratified the appointment of Goldman Sachs
    JBWere.

    8.25 Thus, by this point, it is clear that the Treasury did not support the exchangeable bonds
    proposal.

    8.26 In addition, Petromin had been pursuing its own course to obtain funding. It appears that
    the government had not provided any clear guidance by this point as to who should be the
    State’s nominee for the Project. It may have been that the government wished to see
    which entity would find funding first before making such a decision. However, under the
    Gas Agreement, the government was required to decide on the nominee by November
    2008.

    8.27 On 25 September 2008, then Prime Minister Sir Michael Somare wrote to Petromin69
    stating his reasons for preferring the IPBC proposal.

    8.28 The letter noted that the Prime Minister was convinced that of Petromin and IPBC, IPBC
    was better placed to be the State nominee. The letter also noted that he had directed that
    the IPBC proposal be put to the NEC. The Prime Minister urged all State entities work
    together with Goldman Sachs JBWere and IPBC to conclude the transaction. The letter
    notes that it superseded previous letters, in particular his letter dated 4 September 2008 to
    the Minister for Public Enterprises.

    8.29 Prime Minister Michael Somare also wrote to Ministers Pruaitch, Tiensten, Duma and
    Arthur Somare in the same terms. The purpose of the letter (which is undated) was to
    inform the Ministers of recent decisions made by the Prime Minister concerning the PNG
    LNG Project: “Basically, the decisions seek to address misunderstandings that may have
    been inadvertently created during the course of the year…”.

    69
    WIT.0027.0001.0506

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  • 8.30 On 6 October 2008, Mr Arthur Somare wrote to Treasurer Pruaitch,70 noting the IPIC
    transaction was in its final stages of approval and inviting the Treasury’s detailed
    comments as soon as possible, providing a draft copy of the submission to the NEC which
    was to be presented at an MCES meeting the following day.

    8.31 On 10 October 2008, Mr Tosali71 gave a presentation to the MCES emphasising that
    financial close was not until December 2009 and the State was not required to provide
    equity until September 2009, and that the PNG LNG Project had not been subject to open
    competition or legal advice on the negative pledge. The presentation noted that Lazard
    and the State had been approached by numerous lenders and had commenced soliciting
    proposals.72

    8.32 On 10 October 2008, the MCES issued a directive instructing the Treasury to report to the
    MCES on 24 October 2008 with all financing alternatives so that the MCES could make a
    decision and recommendation to the NEC.

    8.33 By this time, Backwell Lombard had taken their JP Morgan proposal to the Treasury. It
    was not accepted.

    8.34 On 16 October 2008, Lazard wrote to the Prime Minister stating that they could see no
    basis for curtailing the competitive assessment and review process, and that they saw
    significant disadvantage to the State in doing so. They noted also that “time was on our
    side” and encouraged the Prime Minister to reinstate the assessment and review process.73

    70
    WIT.0104.0002.0095

    71
    Transcript, Wapu Sonk, 5 August 2021, p2621.

    72
    Presentation to the MCES “Financing of the State’s Entitlement in the PNG LNG Project” dated 10 October 2008
    WIT.0104.0002.0037

    73
    Letter Lazard Freres to Prime Minister, 16 October 2008, WIT.0104.0002.0173

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  • 8.35 On 20 October 2008, policy submission 167/2008 was produced for the NEC.74 It was
    signed by Mr Pruaitch and Mr Tiensten.

    8.36 The purpose of the submission was to seek the NEC’s approval of the terms that had been
    negotiated.

    8.37 The key points made in the submission were:

    (a) The State’s total financing exposure to the PNG LNG project was approximately
    USD3 billion comprising project financing of USD2 billion and equity financing
    of USD1 billion, making this the largest investment in the State’s project financing
    history.

    (b) In return, the State stood to benefit from its equity interest to about USD850
    million annually in addition to tax receipts. There were also substantial indirect
    benefits including generating jobs and accelerating economic growth and
    underpinning the future socio-economic growth and development of the State. In
    comparison, the State currently received USD16 million annually in dividends
    from its shareholding in Oil Search.

    (c) IPIC was regarded as a long-term strategic investor which was unlikely to launch a
    takeover bid for Oil Search with whom it already had a close association through
    Oil Search’s ventures in the Middle East. IPIC saw PNG as an attractive
    investment destination and considered the exchangeable bond transaction to be the
    beginning of a long-term presence in the region.

    (d) The involvement of IPIC would support the commercial value and position of Oil
    Search as the State’s strategic partner in long-term development of the hydrocarbon
    sector.

    (e) The involvement of IPIC and access to Abu Dhabi’s financing institutions was
    essential to create competitive tension with PNG’s traditional financing

    74
    NEC Submission 167/2008 dated 20 October 2008 [22] Exhibit BB, Annexure T, WIT.0027.0005.0216

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  • institutions. This would benefit the State’s commercial and development financing
    over the long-term.

    (f) The difference between the revenue currently received through the Oil Search
    shareholding and the revenues anticipated from the PNG LNG Project meant that
    it made more sense to monetise the Oil Search shares to finance the State’s full
    equity interest in the PNG LNG Project as opposed to selling down some of the
    State’s equity in the project to raise the finance. Maintaining the full equity interest
    was also consistent with the Government’s policy not to cheaply sell off assets but
    to add value to them.

    (g) Mr Pruaitch further explained the State’s reasons for not raising the finance by
    selling down the State’s interest in the PNG LNG Project in his supplementary
    affidavit of 30 July 2021.75 In summary, there was no financial need to do so.
    Consistently with its policy, the State wanted to benefit fully from the PNG LNG
    Project. Further, selling down the stake would create risks with the landowners
    who were looking for a greater share of equity from the State’s current interest in
    the project and might create doubt about the State’s commitment to the PNG LNG
    Project amongst the partners in the PNG LNG Project.

    (h) The nature of IPIC as a passive investor would allow the State to maintain its
    relationship with Oil Search.

    (i) A direct sale of the Oil Search shares would have opened the door to a takeover
    bid for Oil Search.

    (j) There should be no impact on the State’s finances from the proposed transaction.

    (k) The price at which the State was securing its equity interest in the PNG LNG
    Project was favourable in comparison to the value attributed by financial analysts
    to AGL’s 3.6% share of the PNG LNG Project in its equity sale process.

    75
    Supplementary affidavit of Patrick Pruaitch dated 30 July 2021, Exhibit ZZ.1, WIT.0028.0004.0003

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  • (l) The State’s dividend stream was unencumbered (although the Commission notes
    that this was not in fact the ultimate outcome of the transaction, nor was this
    statement consistent with a summary of the transaction prepared by Freehills).

    (m) The bond was compelling given the global credit squeeze and the expectation that
    the financial crisis would continue for at least the next year. It would be very
    difficult for the State to raise capital in its own right from capital markets or
    financial institutions.

    (n) The revenues from the PNG LNG Project would assist the State in exercising its
    back in rights in relation to other resource projects in the future.

    (o) The Government was seen to be the weakest link in raising equity for the PNG
    LNG Project. The transaction would add certainty to the overall project financing
    efforts.

    (p) There was no need to sell-down the State’s equity to finance reduced equity from
    the proceeds of that sale when the returns from the PNG LNG Project were
    extremely attractive and the transaction allowed the State to fund its full equity
    participation at effectively no cost.

    (q) Further, it was in the best interests of the State to preserve the value of its 19.4%
    stake in the Project so as to enable it to deal effectively with the Benefit Sharing
    Agreement process which could threaten the entire PNG LNG Project. Having the
    full stake would assist the State in negotiating the imminent issue of additional
    equity demanded by resource owners and pipeline communities.

    8.38 The submission also considered why the transaction should be concluded as soon as
    possible:

    (a) The primary motive was to bring certainty to the PNG LNG Project given that the
    State was regarded as the weakest link so far as equity was concerned. This was
    particularly relevant as dealings with debt financiers and rating agencies was
    intended to start in November 2008.

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  • (b) Delaying the transaction might put the transaction itself at risk. The State could not
    control the market.

    (c) Securing the deal would also support Oil Search’s share price. This was ultimately
    in the State’s interest.

    (d) The Treasury’s comments were important but further delay was unwarranted. The
    Treasury had been part of every step of the negotiation process. Further, the
    Treasury had a concrete financing option that was as conclusive and developed as
    exchangeable bond transaction.

    8.39 The submission described and discussed the terms of the proposed transaction:

    (a) The submission was clear in explaining IPIC’s rights to obtain the Oil Search
    shareholding and IPBC’s liability to make up any shortfall if, at the time of
    exchange, the Oil Search share price was below AUD8.55.

    (b) The submission stated that Oil Search dividends were excluded from the
    quarantine account. This was not correct. Rather, if dividends exceeded a certain
    threshold, the excess would be paid into the quarantine account. The Freehills
    document drew attention to the fact that dividend payments might be divided
    between the parties in some circumstances. The incorrect statement in the
    submission may have been derived from a draft of a Goldman Sachs JBWere
    presentation to the NEC dated 22 October 2008, which included the same
    misstatement.76 The Goldman Sachs JBWere presentation appears to have formed
    the basis for much of the NEC submission.

    (c) The submission explained the separate Australian and US dollar quarantined
    accounts and that the majority of the funds raised by the bonds would be converted
    into US dollars.

    76
    PNG LNG Project State’s Equity Financing, “Exchangeable Bond Option” Presentation to the National Executive
    Council 22 October 2008, WIT.0097.0005.0213

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  • (d) The submission stated that, on current modelling, the 5% coupon could be met by
    IPBC and the funds raised from issuing the bonds would be sufficient to cover the
    State’s equity-based capital expenditure in the PNG LNG Project. It was possible
    that there would be a residual fund of AUD500 million but this was highly
    sensitive to foreign exchange and interest rates.

    8.40 The submission also noted some risks in the transaction:

    (a) IPIC was undertaking legal due diligence to obtain comfort that IPBC would
    continue to hold the state’s shareholding in Oil Search during the term of the
    transaction. IPIC needed to be certain that IPBC would be the State’s nominee for
    the PNG LNG Project. This would require changes to be made to legislation.

    (b) The deadline for the State to determine its nominee under the Gas Agreement was
    November 2008 and there was still competition between Petromin and IPBC as to
    which of them should take that role. The Prime Minister’s letter of 25 September
    2008 informed Petromin that IPBC was better placed to do this and started the
    process of obtaining the State’s approval for this. Presenting the exchangeable
    bond transaction proposal to the NEC was a step in that process. The NEC needed
    to make an immediate decision on this issue as, without it, IPIC might pull out of
    the transaction.

    8.41 The submission noted that the transaction had the support of the Prime Minister and key
    economic ministers including the Ministers for Treasury and Finance, the Minister for
    National Planning and District Development and the Minister for Public Enterprise. There
    was also support from the Minister for Public Service and the Minister for Petroleum and
    Energy. The submission was signed by Mr Pruaitch and Mr Tiensten.

    8.42 In its concluding section, the NEC submission noted that:

    Cabinet should note that based on all available information, the exchangeable bond
    transaction being pursued by IPBC in consultation with the Department of Treasury, the
    Department of National Planning, key ministers, the Ministerial Economic Committee,
    the Prime Minister, and Cabinet, is the only serious financing option available to the
    Government at this point in time

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  • 8.43 On 21 October 2008, Mr Tosali wrote a lengthy letter to Mr Blake setting out the
    Treasury’s objections to the proposed transaction.77 The letter was copied to a number of
    people including the Prime Minister, Deputy Prime Minister, Mr Arthur Somare, Mr
    Pruaitch and the members of the MCES. The main points of objection to the transaction
    were that:

    (a) would give IPIC the right to acquire the Oil Search shares at an unknown time up
    to 5 years in the future at a price which would be the lower of AUD8.55 and the
    then market price. If the price was below AUD8.55, IPBC would be required to
    make a cash payment. If the price was below AUD5.50 at maturity, the State
    would have insufficient funds left from the transaction to finance its involvement
    in the PNG LNG Project and would need to raise further finance.

    (b) The Oil Search shareholding was a significant asset of the State.

    (c) The State was exchanging a liquid asset for an illiquid one and losing the
    diversification of assets that the shareholding in Oil Search represented.

    (d) Whilst Oil Search currently paid very low dividends, they were likely to improve
    in the future as a result of the PNG LNG Project. The PNG LNG Project itself
    would not generate a return to the State until 2015, resulting in a loss of revenue in
    the intervening period.

    (e) The transaction might increase the risk of Oil Search being taken over, including
    by IPIC.

    (f) The transaction was being entered into before the funds were needed and the bonds
    would need to be redeemed before the State started to receive any income from the
    PNG LNG Project.

    (g) There had not been open competition for the financing. It would be better for the
    State to establish and maintain competition for the financing for as long as
    possible. The State did not require committed finance until September 2009 and

    77
    Letter, Department of Treasury to IPBC 21 October 2008, WIT.0056.0006.0762

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  • would not need to actually have the funds until financial close on the PNG LNG
    Project. It was too early to say what the total PNG LNG Project cost would be.

    (h) A delay in obtaining finance would not affect the credibility of the PNG LNG
    Project given the other participants involved and the growing demand for LNG.

    8.44 In summarising its position, the Treasury strongly recommended that the State should:

    continue to evaluate all financing proposals, including the Bonds…There is sufficient
    time to carry out a traditional evaluation of financing alternatives…

    8.45 A presentation was made to the NEC by Goldman Sachs JBWere on 23 October 2008 on
    the exchangeable bonds option.78

    8.46 The NEC approved the exchangeable bonds proposal at its meeting on 23 October 2008,
    as recorded in NEC Decision 223/2008.79 The meeting also determined that the State’s
    shareholding in Oil Search should continue to be held by IPBC and that IPBC would be
    the State’s nominee for the PNG LNG Project.

    8.47 On 24 October 2008, IPBC’s board discussed and then approved its entry into the
    exchangeable bond transaction.80 Mr Tosali was represented at the meeting by Mr
    Yauieb. Remarkably, he stated that the Minister for Treasury (his own Minister) had not
    given the Treasury Department a hearing at the NEC meeting on the previous day and he
    therefore requested that the Treasury’s objections be recorded in the minutes of the
    meeting. The objections were in the nature of the exchangeable bond transaction not
    being an appropriate financing option to fund the State’s equity. Mr Yauieb was advised
    that the Treasury had previously been given the opportunity to comment on the
    transaction by 19 September 2008, but had failed to do so and so the board had proceeded
    to recommend the exchangeable bond transaction to the NEC. At this point in the

    78
    PNG LNG Project State’s Equity Financing “Exchangeable Bond Option” Presentation to the NEC 22 October
    2008, WIT.0097.0005.0213

    79
    NEC Decision223/2008 Exhibit BB Annexure R, WIT.0027.0005.0174

    80
    Minutes of IPBC board meeting 24 October 2008, WIT.0026.0001.0789

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  • discussions, the board apparently waited to have sight of the NEC decision 223/2008 of
    the previous day before passing resolutions to enter into the exchangeable bond
    transaction. Mr Aopi left the meeting whilst resolutions were being put to the board and
    resolved.

    8.48 And so that is how IPIC was selected.

    8.49 On 23 November 2008, IPBC and IPIC entered into the exchangeable bond transaction.
    The bonds were issued in March 2009.

    8.50 Remarkably, the Treasury continued to explore alternative financing options despite the
    fact that IPBC had already entered into the exchangeable bond transaction, as approved
    by the NEC.

    8.51 It is also important to note Mr Blake’s evidence that IPBC never saw itself as a long-term
    holder of the interest in the PNG LNG Project because the plan was that the revenues
    generated by the project should go into a sovereign wealth fund. Once the fund was
    established, the revenues from the project would either pass through IPBC into the fund
    or be held by a different entity altogether.81

    1(f)(iii) What process what utilised?

    8.52 While the process for its election was somewhat disorganised and ad hoc it was infinitely
    more careful, thoughtful and appropriate than that leading up to the UBS Loan. The
    following matters deserve emphasis:

    (a) IPBC, the Treasury and Petromin all had professional advice to assist them in
    trying to identify potential sources of finance. There are no grounds for criticising
    the advisors’ work so that, at that level, each entity’s process was as would
    normally be expected.

    (b) It is clear from Sir Michael Somare’s undated letter sent in September 2008, that
    there had been a degree of confusion about who should be the State’s nominee on

    81
    Affidavit of Glenn Blake, 20 December 2021, [46] Exhibit WWW, WIT.0092.0001.0001

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  • the Project. This may well be because the State simply did not know who the
    nominee should be and that it was the IPBC exchangeable bonds proposal which
    forced a decision. As that proposal provided some certainty in a very uncertain
    financial context, it is easy to understand that it became the catalyst for deciding
    who the State’s nominee should be.

    (c) Whilst there was disagreement and a degree of competition between Petromin, the
    Treasury and IPBC, this may have been helpful rather than destructive. Certainly,
    Mr Blake, the managing director of IPBC, gave evidence that he did not feel in
    competition with Petromin and had a very good relationship with its CEO. To the
    extent that there was disagreement, this reflected a testing of the market and the
    options available to the State; a ground upon which the exchangeable bond
    transaction has been criticised in the past.

    (d) The transaction also received significant consideration by the MCES and the NEC.
    It is notable that the MCES gave the Treasury a further opportunity to submit a
    competing proposal. It is also Mr Blake’s evidence that IPBC looked for
    alternative proposals, including approaching Exxon Mobil for finance and
    receiving a proposal from JP Morgan via Backwell Lombard.

    8.53 We again emphasise that there is a marked and unfavourable contrast between the largely
    careful process preceding, and the time taken for the State to deliberate over, the IPIC
    Exchangeable Bond Transaction, and the few hours that the NEC was permitted to
    consider the UBS loan and the purchase of Oil Search shares in 2014.

    8.54 Nevertheless, particularly because of the State’s limited resources, it is clear that a more
    efficient process could have been to have a single set of advisers testing the market and
    considering the best way forward.

    1(f)(iv) What were the terms of the Loan from IPIC?

    8.55 The State did not obtain a loan to finance its equity participation in the PNG LNG Project.
    The exchangeable bonds were not a loan although in some respects they were similar to
    one.

    8.56 The main terms of the bonds have already been explained.

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  • 8.57 This Commission retained financial experts, the Brattle Group, to consider the terms of
    the exchangeable bonds. They did this in the first report that they submitted to the
    Commission in July 2021.

    8.58 Brattle’s largely favourable observations on the objective of the transaction and alternative
    means of achieving it are as follows:

    (a) The aim of the transaction was to raise the funds required to enable the State to
    participate to the full extent of its equity interest in the PNG LNG Project.

    (b) At the time of the IPIC transaction, the State’s interest in the PNG LNG Project
    was worth between USD3 and 5 billion. Its share of the equity funding was likely
    to be about USD1 billion.

    (c) Selling about one fifth of the State’s equity interest in the PNG LNG Project would
    have been likely to have raised sufficient funds to pay for the equity contributions
    attributable to the remaining four-fifths.

    (d) The State could also have sought to sell its entire interest rather than seek to
    participate in the PNG LNG Project, but Brattle do not know whether a sale of
    such magnitude would have been achievable at that time.

    (e) It is unlikely that the State could have funded its participation by issuing sovereign
    bonds given the economic climate of the time.

    (f) The State would not have been able to raise sufficient funds from concessional
    loans from multi-lateral organisations.

    8.59 In relation to these points, the Treasury did initially favour the State selling its entire
    interest in the PNG LNG project and benefiting from it solely through tax and royalties.
    However, when it appreciated that the government wished the State to have a direct
    interest in the project, it accepted this and considered other alternatives. This included
    selling part of the State’s interests to finance the equity funding for the remainder.

    8.60 There was apparently no detailed consideration of issuing a sovereign bond at the time.
    Given the global financial crisis at that time, this is not surprising.

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  • 8.61 Goldman Sachs JBWere gave advice to IPBC about concessional funding and considered
    that it would not raise sufficient funds.

    8.62 Brattle’s views on the terms of the IPIC transaction are:

    (a) From March 2009 to March 2014, the State was exposed to the downside risk of
    the Oil Search share price, and the upside risk up to AUD8.55, but it had
    transferred to IPIC all of the upside in the Oil Search shares above AUD8.55.

    (b) A fair interest rate for such an exchangeable bond would have been lower than the
    fair rate on a regular bond which did not give the lender the benefit of the upside in
    the Oil Search share price above AUD8.55.

    (c) The interest rate on the bond was fair if IPIC assessed the credit risk of IPBC
    failing to pay a required cash top-up as non-negligible, but was too high if IPIC
    perceived there to be no such risk. It is not known what assessment IPIC in fact
    made of this credit risk.

    (d) To illustrate the magnitude of the relationship between credit risk and fair pricing,
    Brattle valued the bonds at the time the bond documentation was executed. If there
    was no credit risk, so that it was certain that IPBC would pay any cash top up
    required on maturity, the bonds were worth 119% of face value. Conversely, if it
    was certain that IPBC would not pay any cash top up that might be required on
    maturity, the bonds were worth 69% of face value. In Brattle’s view, issuing the
    bonds for 100% of face value was consistent with fair pricing of a bond with a
    non-negligible degree of credit risk. Further, Brattle concluded that the
    circumstances of the transaction made it reasonable to assume that IPIC did
    consider there to be a non-negligible credit risk and that, on that basis, the bonds
    were fairly priced.

    8.63 On the basis of Brattle’s views, it is submitted that the terms of the exchangeable
    bonds were commercially reasonable and not unfair to the State.

    9. TOR 1(g): Who were the legal and financial advisors engaged in the IPIC
    exchangeable bond transaction

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  • 9.1 IPBC received legal advice from Freehills and financial advice from Goldman Sachs
    JBWere.

    10. TOR 1(h): Were legal and administrative processes followed to engage in any legal
    and financial advisors?

    10.1 The Commission received evidence on this question from Mr Glenn Blake, the managing
    director of IPBC at the time.

    10.2 Freehills were on a panel of law firms used by IPBC at the time.

    10.3 IPBC sought KPMG’s assistance in finding a suitable financial advisor. KPMG were
    instructed to identify a financial adviser based in Sydney that had global capacity and was
    of high calibre. KPMG recommended that IPBC should consider engaging Goldman
    Sachs JBWere and this is what transpired.

    10.4 Mr Blake also gave evidence that KPMG was engaged to model the anticipated revenue
    flows from the PNG LNG Project.82

    10.5 Freehills and Goldman Sachs both started work on the matter in early 2008. Goldman
    Sachs JBWere were initially engaged on a fact finding mission in April 2008 to
    familiarise themselves with the proposal. Initially, their engagement was on a month-to-
    month basis. IPBC did not need NEC authority for this. 83

    10.6 On 13 May 2008, the NEC approved the IPBC appointing advisors and undertaking
    further analysis and work to finalise the funding offer in consultation with the Treasury
    before this would then be put before the NEC for approval. It also directed the Ministerial
    Committee on Gas to assess other financial options for the NEC’s consideration.84

    10.7 An IPBC board meeting was held on 20 August 2008. The appointment of advisors for
    the State’s participation in the PNG LNG Project was tabled but not discussed. The

    82
    Affidavit of Glenn Blake, 20 December 2021 [26], Exhibit WWW, WIT.0092.0001.0001

    83
    Affidavit of Glenn Blake, 20 December 2021, [21] Exhibit WWW, WIT.0092.0001.0001

    84
    NEC Decision 82/2008, WIT.0026.0001.0722

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  • minutes record the shortage of members on the board and the volume of matters to the
    deliberated, led to the board agreeing that the meeting would deal with urgent matters
    only.

    10.8 On 29 August 2008,85 the NEC noted Statutory Business Paper No. 87/2007 and:

    (a) noted the appointment of Goldman Sachs JBWere as the IPBC advisors on the
    funding;

    (b) noted the appointment of Freehills Lawyers as the IPBC’s probity advisors; and
    then

    (c) approved the fee structure for those advisors.

    10.9 The NEC decision attaches a summary of the fee structure for Goldman Sachs JBWere
    but not Freehills. The structure was:

    (a) 1% of the gross proceeds of any bond or exchangeable offering or sale of assets;

    (b) 0.1% of the aggregate loan facility to be agreed with IPIC;

    (c) 0.5% of the aggregate facility limit of any investor introduced by Goldman Sachs
    to PNG;

    (d) 0.4% of the aggregate facility limit of any other loan facility or other capital
    raising executed as part of the financing.

    10.10 Mr Blake noted that NEC approval was necessary at this point because Goldman Sachs
    JBWere’s remuneration included success fees.86

    10.11 The minutes of an IPBC board meeting on 13 September 2008 record that the board of
    IPBC ratified the appointment of Goldman Sachs JBWere on that date. Mr Simon Tosali,
    an ex officio member of the board as the Secretary of the Treasury at the time, raised

    85
    NEC Decision 189/2008 was made at Special Meeting No: 30/2008 WIT.0027.0001.0498

    86
    Affidavit of Glenn Blake, 20 December 2021 [21], Exhibit WWW, WIT.0092.0001.0001

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  • concerns at the meeting that the board had not been part of the appointment process. Mr
    Tosali also questioned the level of fees that would be paid to Goldman Sachs JBWere.87

    10.12 The Commission does not have any evidence to show the board of IPBC was involved in
    appointment of Goldman Sachs JBWere and Freehills, the selection of IPIC or the
    negotiations with IPIC until the proposal was put to them at the meeting on 13 September
    2008. The evidence suggests that within IPBC, the transaction and the appointment of
    advisors was led by Mr Blake.

    10.13 In the result:

    (a) The fees paid to Freehills for their work on the Exchangeable Bond Transaction
    were AUD1.136 million.

    (b) The fees paid to Goldman Sachs JBWere were AUD16.895 million.88

    11. TOR 1(i): What was the rationale for allowing payment to be made by an election of
    either cash, or the mortgaged Oil Search shares or a combination of both?

    11.1 The exchangeable bonds did not permit payment to be made by an election of cash or
    shares or a combination of the two. Also, the Oil Search shares were not the subject of a
    mortgage in a technical legal sense although they were held in an escrow account to
    preserve them for the maturity of the bond.

    11.2 The bonds could be redeemed in the following ways as noted to an extent above:

    (a) Prior to maturity:

    (i) from 40 days after the bonds were issued until 10 days before maturity,
    IPIC could exchange the bonds for IPBC’s shareholding in Oil Search.89 On
    this early exchange, IPIC would receive all of the shares (even if the share

    87
    Minutes of Meeting No. 1 of 2008 of the Board of Directors of IPBC WIT.0026.0001.0730

    88
    PwC Report, “Transaction Review Project Kumul”, p21 WIT.0056.0005.0001

    8989
    Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.0021

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  • price was above AUD8.55), but would not receive a cash payment if the
    share price was below AUD 8.55. Acting rationally, IPIC would not
    exercise this right unless the relevant average share price was above
    AUD8.55 and therefore able to redeem the bonds in full. Had the share
    price risen to that level, it is likely that IPIC would have chosen to exercise
    its early exchange rights in order to obtain the full Oil Search shareholding
    rather than wait until maturity when, under the mandatory exchange
    provisions, it would only be entitled to take shares up to the face value of
    the bonds. In the event, however, the Oil Search share price did not provide
    this opportunity.90

    (ii) after the payment of the sixth interest payment date, 15 October 2011,
    IPBC had the option to redeem the bonds but this depended on the average
    share price being above 130% of AUD8.55 (ie. AUD11.115) for 20 or more
    trading days during a period of 30 consecutive trading days.91 If IPBC
    sought to redeem the bonds, it only needed to provide shares to the face
    value of the bond but needed to redeem all of the bonds. The share price
    never reached this level;

    (iii) Importantly, if IPBC chose to seek early redemption, IPIC had 25 business
    days following receipt of notice of the desire to redeem in which to decide
    whether to exercise its rights to an early exchange. It is almost inevitable
    that IPIC would have exercised its rights to an early exchange in that
    circumstance because the shares would have reached a value (130% of
    AUD8.55) that would redeem the bonds in full and leave some upside for
    IPIC;

    90
    Brattle 1, [114], Exhibit VV, WIT.0132.0001.0002

    91
    Bond Deed Poll, Annexure A, cl 7.2 WIT.0056.0006.0021

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  • (iv) The effect of this is that whilst IPBC had the right to seek to redeem the
    bonds early if the share price rose sufficiently, it is unlikely that it would
    ever have been able to exercise that right.

    (b) On maturity, the bonds would be exchanged for IPBC’s entire shareholding in Oil
    Search. When that happened, if:

    (i) the Volume Weighted Average Price of the shares over a certain period of
    time was less than AUD8.55 a share, IPBC was obliged make up the
    shortfall in cash;

    (ii) alternatively, if the Volume Weighted Average Price of the shares was
    greater than AUD8.55 a share, IPIC would only receive shares totalling the
    face value of the bonds and IPBC would keep the remainder of the shares;92

    (iii) IPBC did not have a right to seek to redeem the bonds in cash at maturity.

    11.3 In summary, given the conditions attached to either party’s early exchange rights, it was
    likely that the exchangeable bonds would run to maturity. At that point, they would be
    redeemed through IPIC taking IPBC’s holding in Oil Search up to the value of the bonds
    and IPBC paying any shortfall between the share price at that point.

    11.4 The rationale behind IPBC’s agreement to this appears to be an acceptance that IPBC
    would never have the funds to be able to redeem the bonds in cash. Its best option was
    therefore to enter into a transaction which might be likened to a deferred sale of the
    shares. This allowed it to take advantage of any increase in the price of the shares during
    the period of the bonds.

    11.5 In February 2014, IPIC issued the Mandatory Exchange Notice. It received the State’s Oil
    Search shares and IPBC was required (after litigation) to pay AUD74 million.

    12. TOR 1(j): What was the rationale for allowing the mortgaged Oil Search shares to
    be used in payment of the Loan?

    92
    Bond Deed Poll, Annexure A, cl 7.5 WIT.0056.0006.0021

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  • 12.1 In our submission, it has always been clear that the exchange of Oil Search shares as the
    means for redeeming the bonds was mandatory under the terms of the IPIC Exchangeable
    Bond Transaction.

    12.2 The rationale for the exchangeable bonds appears to have been that:

    (a) It was considered at the time to be the best way of leveraging IPBC’s most
    significant asset, namely the Oil Search shares. The shares were low in value at the
    time that the transaction was negotiated, but were considered likely to rise (and in
    fact did so) during the term of the bonds as the PNG LNG Project advanced.
    Although interest was payable on the bonds, it was considered that this would be
    more than compensated by the likely increase in the value of Oil Search’s shares
    which meant that the deferred sale that the exchangeable bonds represented was
    better than an immediate sale of the shares in 2008.

    (b) Whilst the Commission has not confirmed this (and it would be likely to be
    information only available within IPIC), it seems likely that the fact that the bond
    would be partially or fully redeemed against the Oil Search shares reduced the
    interest rate sought by IPIC by removing some risk for IPIC. It may also have
    increased the amount that IPBC could raise from the bond.

    (c) The exchange right was a conscious choice by IPBC and the NEC (which included
    Mr O’Neil) when each approved the transaction. Whilst the transaction would
    result in IPBC losing its investment in Oil Search, including any dividends flowing
    from the shares, this was considered an acceptable price to pay to obtain the much
    greater revenues that would ultimately flow from the PNG LNG Project.

    (d) There were limited alternatives for raising the significant sums required given the
    global financial crisis at the time and that the sum was too big to be raised through
    concessional loans. There were also concerns about the delays that might arise
    with concessional loans.93 Neither Petromin nor the Treasury were able to present
    a competing offer at the time that the IPIC Exchangeable Bond Transaction was

    93
    PwC Report, “Transaction Review Project Kumul”, p40 WIT.0056.0005.0001

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  • being considered by the NEC that matched it in terms of the amount that it would
    raise and the certainty of delivery.

    (e) Whilst the funds were raised some time in advance of when they were needed, this
    is explicable on the basis that the funding of the State’s equity participation would
    add credibility to the PNG LNG Project and a concern that in the economic
    climate of the time, the IPIC transaction might prove to be the only option
    available and one that might not be available at a later date.

    13. TOR 1(k): Whether IPIC has the sole election as to method of payment in
    satisfaction of the State Loan from IPIC, and if so what was the rationale for giving
    IPIC the right of sole election to either accept cash, the mortgaged Oil Search shares
    or a combination of both

    13.1 IPIC did not have a right of election as to the manner in which the exchangeable bonds
    would be dealt with on maturity. They were to be exchanged for Oil Search shares using a
    reference price of AUD8.55 with IPBC being obliged to make up any shortfall between
    the actual price of the shares at that date and AUD8.55.

    14. When and what decision did IPIC make on the repayment of the Loan?

    14.1 It appears that up until the end of 2013 or early 2014, IPIC may have been open at least in
    principle to discussion about accepting cash to redeem the bonds or refinancing (ie
    extending) the bonds rather than proceeding with the mandatory exchange. This was for
    example IPIC’s stated position at a meeting in Abu Dhabi on 30 October 2013.

    14.2 It is not known at what precise point after that IPIC’s position changed, but, by 13
    February 2014, it had rebuffed the State’s belated attempt to meet with it in Abu Dhabi
    and, on that day, it issued the formal notice to require the exchange of the shares for the
    bonds.

    Other issues

    The Currency Risk

    14.3 The bond was paid in Australian dollars and interest was payable in Australian dollars.
    However, the payments for the PNG LNG Project were required to be made in US

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  • dollars. In addition, the funds were being received some considerable while before they
    were needed. These factors created a currency risk.

    14.4 Mr Vele criticised the IPIC transaction on the basis that it created a currency risk that was
    not well managed and in particular the timing of the exchange into US dollars. He noted
    that during the period after the exchange, the Australian dollar went on a “once in a
    generation ride” reaching highs in excess of USD1.10.

    14.5 Mr Vele also questioned whether it was necessary to exchange all of the Australian
    dollars into US dollars. Whilst the cash calls on the equity contributors to the PNG LNG
    Project would be in US dollars, much of the underlying expenditure on the project would
    be in Australian dollars.94

    14.6 But the currency risk was recognised at the time. The evidence is that Goldman Sachs
    JBWere had tried to negotiate for the loan to be in US dollars as that was to be the
    currency of the capital expenditure on the PNG LNG Project. However, IPIC required
    the transaction to be in Australian dollars as this was the currency of Oil Search’s share
    price.95

    14.7 IPBC received advice from Goldman Sachs JBWere about how to deal with the currency
    risk. Over a period of months in the lead up to the bonds being issued, it considered that
    advice and ultimately, it decided to follow the course that its financial advisor proposed.

    14.8 In our submission, nothing adverse arises in relation to currency risk. The risk was
    understood, IPBC took advice which it considered and then followed.

    Investment of the bond funds until needed

    14.9 A similar issue arose from the funds being received long before they were needed for the
    PNG LNG Project. This created the need to try to enhance the value of the funds

    94
    Affidavit of Dairi Vele, 26 April 2021 p25-26, Exhibit QQ WIT.0014.0007.0001

    95
    PwC Report, “Transaction Review Project Kumul”, p10 WIT.0056.0005.0001

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  • received to minimise the risk that there might be a shortfall against the sums required to
    fund the State’s interest in the PNG LNG Project.

    14.10 IPBC and its advisors recognised this need. IPBC approached Goldman Sachs JBWere
    about the rates that they might offer on the investment of the funds until the funds were
    needed at financial close. Goldman Sachs advised that the conservative risk profile
    needed for the funds did not warrant using any of their investment products. IPBC then
    looked at other banks for rates to invest. Mr Blake’s recollection was that they approached
    Westpac, Commonwealth Bank of Australia and to other banks.96

    14.11 In our submission, there is nothing untoward in the manner in which IPBC dealt with this
    issue.

    The Treasury’s opposition and other funding alternatives

    14.12 The Treasury opposed the proposed transaction on a significant number of bases in its
    letter of 21 October 2008, outlined above.

    14.13 PricewaterhouseCoopers were engaged by the Treasury years later in 2011 to review the
    IPIC Exchangeable Bond Transaction. The PwC report provides further information
    about the Treasury’s views on the transaction.97 Relevantly, the report states that:

    (a) Treasury’s initial view was that the State should not take up its equity position in
    PNG LNG Project given the risks and costs involved. It prepared a comparison
    which demonstrated that the projected tax receipts would be twice as much as the
    PNG LNG Project’s equity dividends. However, the government’s determination
    to maintain a stake in the project, consistent with its policies, meant that the
    Treasury directed its attention to supporting the government’s ambition.

    (b) Between October and mid-December 2008, the Treasury sought to evaluate the
    various financing options that might be available. This was despite the
    exchangeable bonds being approved in October 2008 and the agreement being

    96
    Affidavit of Glenn Blake, 20 December 2021, [36] Exhibit WWW WIT.0092.0001.0001

    97
    PwC Report, “Transaction Review Project Kumul”, p12 WIT.0056.0005.0001

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  • signed in November 2008. However, the PwC report states that none of the
    options considered by the Treasury allowed the equity to be fully funded. Some of
    the options considered included:

    (i) discussions with concessional lenders such as the Japanese bank for
    International Cooperation, the Asian Development Bank (ADB), the
    European Investment Bank (EIB) and the World Bank;

    (ii) talking to possible strategic equity investors such as Nippon Oil, LNG
    Japan and Shell;

    (iii) evaluating the proposals put forward by IPBC and Petromin, and

    (iv) considering limited domestic financing through the market or direct budget
    support.

    (c) Whilst it was clear that the equity finance would not be required until late 2009,
    the MCES believed that it would be an advantageous to the State to raise the
    finance at an earlier date and decided that it needed to make a decision on the
    source of finance by 24 October 2008. It then told the Treasury that it would only
    consider proposals that would enable the State to take up its full direct interest in
    the PNG LNG Project and would not result in the State taking on additional debt.

    (d) These requirements reduced the options available considerably and effectively
    precluded the Treasury from pursuing any further options. The Treasury then
    presented four options to the MCES that were immediately available:

    (i) a combination of ADB and EIB debt of USD400m, state budget funding of
    USD230, international bond issue of USD600 million and domestic bond
    issues for any cost overruns;

    (ii) a Japan Bank for International Cooperation proposal whereby the State and
    other Project sponsors would sell up to 5% of the PNG LNG Project to a
    Japanese party with JBIC financing the State’s participation in the PNG
    LNG Project on concessional terms;

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  • (iii) an international oil and gas company would enter into a transaction with the
    State which would allow the State to take up its full entitlement in the PNG
    LNG Project and retain its shareholding in Oil Search. The international oil
    and gas company would finance the State’s equity on favourable terms;

    (iv) the State assignee would enter into a joint venture with the oil and gas
    company with the State holding the majority position and the company
    paying the State for its equity in the joint venture. The company would fund
    the balance if the proceeds from the sale of the State’s interest was
    insufficient to fund the balance of the State’s interest.

    (e) The PwC Report noted that one of the oil and gas company options involved an
    major oil and gas company acquiring control of Oil Search and then assisting the
    State to finance its equity involvement in the PNG LNG Project. That commitment
    would be up to a maximum of USD 650 million and would be secured only against
    the State’s interest in the PNG LNG Project. The financing would be repayable
    over four years following first production and carry an interest rate equal to the
    blended PNG LNG Project debt. The price to be offered for the Oil Search shares
    was at a significant premium to the then prevailing share price.

    (f) The Treasury’s proposal was presented to the MCES but it was not supported
    despite the Treasury considering it to be a better proposal than the exchangeable
    bonds. The Treasury reported to PwC that they did not receive a clear explanation
    for the rejection of the proposal but one of the grounds was a concern that Oil
    Search might fall into the hands of a foreign entity. PwC noted Mr Aopi’s position
    as the chair of IPBC and as an employee of Oil Search in this context, but without
    drawing any inferences from this.

    14.14 In summary, the Treasury had been operating on the basis of a longer timescale to raise
    the funds. The Treasury’s timescale was governed by when the funds would be needed.
    The MCES appears to have been guided by a concern, in a challenging economic
    environment, to seize the opportunity presented by the exchangeable bond transaction.
    This was not only to secure funds that might not otherwise be available but also to inject
    credibility and momentum into the PNG LNG Project.

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  • 14.15 A notable feature of the Treasury’s work is the apparent disagreement between the
    Minister and his department. Mr Tosali is recorded in minutes of IPBC’s board meeting of
    24 October 2008 as stating that the Minister, Mr Pruaitch would not let him speak at the
    NEC meeting on 23 October 2008. It is unsatisfactory that there was a disagreement
    between the Minister and his department in Cabinet, a position which also arose albeit in
    a different fashion in relation to the UBS Loan discussed below. But in the PNG system,
    as in the Westminster system more generally, disagreements between Ministers (who are
    elected) and Departments (whose officers are not) are generally resolved in favour of the
    former.

    Conclusions

    14.16 Save for Treasury, there was little disagreement as to whether the State should participate
    in the PNG LNG Project. According to the PwC Report, the Treasury was initially
    against the idea based on the costs and risks involved. Its modelling suggested that it may
    have been financially better for the State to sell its equity stake and simply receive tax
    royalties and other indirect benefits as the PNG LNG Project proceeded. It does not seem
    that the Treasury’s view was explored in detail given the government’s determination to
    participate in the PNG LNG Project. The Treasury then focused on exploring the best
    options for how to do that.

    14.17 There was much more debate about how the State should finance its participation in the
    PNG LNG Project.

    14.18 In our submission, the decision to enter into the exchangeable bond transaction was a
    rational and justifiable decision in the circumstances then prevailing which would (and
    did), over the long term, generate greater revenues for PNG than the shareholding in Oil
    Search and in providing the State with an equity interest in its most significant resource
    project. The State took a risk that the Oil Search share price would rise over time to
    eliminate or reduce any shortfall that it might have to pay to IPIC at maturity but the
    prevailing view at the time was that the share price would rise, not least as a result of Oil
    Search’s involvement in the PNG LNG Project, and it did.

    14.19 As Oil Search was itself a participant in the PNG LNG Project, it was not unreasonable
    for the State to consider that its share price would be likely to rise over the term of the

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  • bonds as the well regarded PNG LNG Project advanced. Indeed, at the date of maturity
    of the bonds, the share price was over AUD8.55, although it had not been above that price
    for sufficiently long to avoid the need for IPBC to make a top up payment to IPIC at that
    point.98

    14.20 Alternative ways of raising the funds were put to the State but rejected; it would appear
    for the reasons set out in policy submission 167/2008.

    14.21 In our submission, viewed overall, the IPIC Exchangeable Bond Transaction received
    appropriate levels of review and scrutiny before being approved by the NEC.

    14.22 However, as noted, the process by which the State obtained funding for its entry into the
    PNG LNG Project was somewhat inefficient.

    15. UBS Loan

    15.1 We now turn to the genesis and detail of the UBS Loan which is complex.

    98
    Brattle 1, [114] Exhibit VV WIT.0132.0001.0002

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  • 15.2 We begin by saying something about the collar loan concept. Collar loans are complex
    but are standard products within the banking industry. These loans are commonly used
    when the sum lent is used to purchase shares which then provide the security for the
    lender. The essence of the loan is that it is generally structured so that the lender has no
    risk of default by the borrower. This is done by ensuring that all of the interest is paid at
    the outset of the loan, having the shares as collateral and using options. As will be seen,
    the options provide the ‘collar’ which gives this type of loan its name.

    15.3 In 2014, the stated purpose of the loan was to enable the State to buy about 10% of shares
    in Oil Search. The purchase price was $8.20 a share but of course, there was market risk
    about how the share price would move over the two year period of the loan, as
    occurred. No doubt UBS would have conducted some extremely complicated modelling
    about how to design the collar element of the loan, and in particular what strike prices to
    use in the options. This modelling will have been done using a mathematical model
    called Black Scholes. This model is in widespread use in the banking industry. It
    includes assumptions about how a share price might move over time and requires inputs
    to be made about the expected volatility of the share price in question. As a result of this,
    whilst the banks generally use the same model, the variable inputs and assumptions will
    often lead to different outcomes.

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  • 15.4 The modelling allowed UBS to provide the State with not only the loan but a series of put
    options, one for each share purchased. Each option had a date upon which it could be
    exercised and a ‘strike price’ for the shares to which it related. The put options allowed the
    State to sell or ‘put’ the shares to UBS at the strike price if, at the date that the option was
    to be exercised, the share price was below the strike price of the option.

    15.5 The strike prices of put options and the amount of the loan were calculated so that the
    total amount that UBS would lend would be equivalent to the strike prices of all of the put
    options. The effect of this was that if the share price fell below the strike price of the put
    options, the options would provide the State with the means to repay UBS in full. This
    had two important effects:

    (a) First, it meant that the State did not need to worry about finding funds to repay the
    loan. If it just allowed the loan to mature according to its terms, the loan would be
    repaid.

    (b) Second, it meant that UBS had no exposure to the State as a credit risk from the
    loan because repayment was assured through the put options. In other words, it
    did not have to worry about whether the State would be able to repay the loan.

    (c) If a lender has no exposure to the borrower’s credit risk, as in this case, the interest
    payable on the collar loan should be at or close to the risk free rate, because the
    lender has no significant credit risk. As will be seen, that did not happen here with
    UBS charging unwarranted interest of about AUD 56 million..

    15.6 The put options therefore provided a floor for the loan as far as the State was
    concerned.

    15.7 In return for the protection provided by the put options, the State provided a call option
    for each share to UBS. As with the put options, each call option had a date upon which it
    could be exercised and a ‘strike price’ for the share to which it related. The call options
    allowed UBS to buy or ‘call’ for the shares from the State at the strike price if, at the date
    that the option was to be exercised, the share price was above the strike price of the
    option.

    15.8 The call option therefore provided a ceiling for the loan.

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  • 15.9 For each share, there is a put option and a call option with the same expiry date. Together,
    the puts and calls provide a notional collar of protection for both parties.

    15.10 A relevant phrase in this context is to describe an option as being ‘in the money’. A put
    option is in the money when the market price of the share is below the strike price of the
    option so that the borrower makes a gain by putting the share on the lender for more than
    the share is then worth. A call option is in the money when the market price of the share
    is above the strike price of the option so that the lender makes a gain by calling for and
    obtaining the share for less than it is then worth.

    15.11 If an option is in the money, the difference between the value of the share in the market
    and the strike price of the option is said to be the ‘intrinsic value’ of the option. The
    intrinsic value therefore varies with the share price.

    15.12 If at any option date, the share price is between the put and call options, neither option
    can be exercised. The share is still sold to repay the loan and the excess above what is
    needed to repay the loan (which is the strike price of the put option) is returned to the
    borrower.

    15.13 What has just been explained describes the position in relation to a single share. To
    illustrate the complexity of the UBS loan, it should be remembered that each share had its
    own put and call option. There were therefore 137 million put options and 137 million
    call options. The dates upon which the options could be exercised spread over a period of
    some months towards final end date of the loan and the options had a range of different
    strike prices. With so many options, many of the strike prices and exercise dates were the
    same.

    15.14 The significance of this is that it is beyond the abilities of borrowers to be able to fully
    understand the risks involved in the option structure unless they have the assistance of a
    highly sophisticated financial advisor who can conduct their own Black Scholes
    modelling to test the fairness involved in the options structure proposed: as UBS would
    have, and as the Commission has through the unchallenged work of Brattle. In particular,
    this modelling was necessary in order to check that the pricing of the collar loan was fair.
    The State did not have or obtain the ability to do this and was vulnerable to being

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  • overcharged as a result. But it is clear that the State, notably Mr Vele, did not appreciate
    this risk.

    15.15 A further relevant term is ‘nil premium’. The State was told by UBS that the collar option
    structure was nil premium. Its normal meaning in this context (and there was no
    suggestion it was not being used in its normal meaning by UBS) meant that nothing was
    payable to UBS for providing the collar option structure and that the downside protection
    that the State received from all of the put options was equal to the value of the upside
    protection that UBS received from all of the call options. That is, nil premium in this
    context was a clear representation by UBS that it was not separately profiting from the
    pricing of the option structure over and above its declared fees. Again, the State had no
    ability to verify this. This matters because, far from being nil-premium, the premium or
    excessive profit UBS made in this regard was substantial at about $25 million, but it
    never told the State this.

    15.16 Two other concepts should be mentioned.

    (a) The first is hedging. Although UBS had no exposure to the State as a credit risk, it
    was possible that at the maturity of the loan, it would be left holding shares that
    were worth less than the principal that it had lent to the State. UBS traded Oil
    Search shares in the market to hedge against or mitigate this risk.

    (b) The second is value. In the Brattle report, there are frequent discussions about
    value being transferred by one party to the other. A transfer of value is not
    necessarily a transfer of money at that point. It describes a transaction between the
    parties at a different price to what Brattle considered to be a fair price. Thus, for
    example, if, as Brattle advise, the collar loan option structure was not nil premium
    and was unfairly slanted against the State so that the call options that UBS
    received were worth more to a potential purchaser than the put options that the
    State received, this would represent a transfer in value from the State to UBS at the
    date that the transaction took place. As the loan matured, that transfer of value
    might then be realised depending on how the options came to be exercised at that
    point. The value could also have been realised in other ways, including selling the
    options in the market.

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  • 15.17 In summary, the key points are these:

    (a) once the loan was created, and interest paid in advance, as it was, the State had
    nothing further to pay and had no risk of defaulting;

    (b) this meant that UBS had no exposure to the State’s credit risk,

    (c) the State had no ability to understand the fairness of the option structure;

    (d) the nil-premium statement was untrue, quite misleading and expensive for the
    State.

    16. TOR (L): Why and when did the State commence the procedures to obtain a loan
    regarding the debt to IPIC and/or purchase Oil Search shares

    16.1 The State first decided to initiate discussion with IPIC and to investigate options for
    refinancing the IPIC Bond on 14 March 2012.99 Although the NEC decision does not
    record why the decision was made, a number of witnesses gave evidence to the
    Commission that it was thought important to the State to remain a shareholder of Oil
    Search.

    16.2 But no steps were taken in relation to initiating discussion with IPIC or to investigate
    options for refinancing the IPIC Bond until after the 2012 election.

    16.3 In the second half of 2012, the then Minister for Public Enterprise and State Investments,
    Mr Ben Micah, had initial discussions with and engaged Backwell Lombard Capital to
    provide advice on the IPIC Bond.100

    16.4 On 5 December 2012, IPBC formally retained NRF to provide legal advice on the IPIC
    Exchangeable Bonds.101 NRF’s engagement letter records retaining the Oil Search shares
    as the objective of the engagement.102

    99
    NEC Decision NG 63/2012, WIT.0016.0001.0316.
    100
    Letter Backwell Lombard Capital to Minister Micah dated 16 October 2012, WIT.0155.0001.1624
    101
    Affidavit of Dairi Vele, 26 April 2021 at [189] and exhibit DV16, Exhibit QQ, WIT.0014.0007.0001
    102
    WIT.0015.0001.0691.

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  • 16.5 The first meeting with IPIC did not occur until on or about 15 March 2013.103 It was
    apparently promising in relation to the possibility of the State refinancing the IPIC Bond
    and regaining ownership of the Oil Search shares.104 The second meeting occurred on or
    about April 20013. Dr Waine’s evidence was that IPIC’s attitude towards the refinancing
    had changed by this meeting and it required the IPIC Bond to be redeemed within two
    weeks. The State did not have the funds to meet this deadline.105

    16.6 Despite this imperative, no further engagement with IPIC appears to have occurred until
    September and October 2013. In the meantime, the evidence before the Commission
    suggests that there were a number of parallel processes including:

    (a) IPBC’s efforts through Mr Kumarasiri who was appointed as Managing Director
    of IPBC on 5 April 2013.106 These included:

    (i) in early April 2013, a Goldman Sachs proposal;107

    (ii) engagement with Helmsley Capital.108

    (b) proposals by Shell, Marubeni and others to Mr Kramer and Mr Sonk.109

    (c) Minister Micah’s engagement of Backwell Lombard Capital on 31 May 2013 as
    Lead Manager and Arranger in consultation with his advisors on a non-exclusive
    basis;110

    103
    An email from Mr Paki to Mr Latimer of 15 March 2013, copied to Dr Waine, stated that as at that date, Dr
    Waine and Mr Kumarasiri were in Abu Dhabi with Mr Botten: NRF.001.001.2153
    104
    Transcript, Dr Clement Waine, 11 February 2022, page 4055; see also Supplementary Statement of Dr Clement
    Waine dated 11 February 2022, Exhibit SSSS, WIT.0039.0007.0001.
    105
    Transcript, Clement Waine, 6 August 2021, page 2632-5
    106
    NEC Decision No. 117 of 2013, NRF.001.001.2368
    107
    NRF.001.001.2245
    108
    Transcript, Dr Clement Waine, 11 February 2022, p 4058.
    109
    Email, R Paki to A Latimer, 3 April 2013, Re: Goldman Sachs IPBC Overview, NRF.001.001.2273
    110
    Letter Minister Micah to Backwell Lombard, 31 May 2013, WIT.0155.0001.1597

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  • (d) engagement with UBS by Mr Vele and his adviser and former business partner Mr
    Mortensen;

    (e) the IPIC Bond Review Committee and its near relative the IPBC internal review
    committee;

    (f) the Bank of Papua New Guinea’s review.

    16.7 These processes were duplicative and inefficient: but, critically, they focused on
    something other than an acquisition of newly issued shares from Oil Search.

    16.8 In a formal sense, the State commenced the procedures to obtain the UBS Loan to
    purchase the Oil Search shares on or about 23 February 2014 following a meeting
    between then Prime Minister Peter O’Neill, Mr Vele, Mr Botten and Mr Aopi, whose
    recollections vary.

    17. TOR (M): whether legal and administrative processes were followed regarding the
    loan from UBS including but not limited to:

    (i) How was the process commenced?

    (ii) How was UBS selected?

    (iii) What process was utilized?

    (iv) What were the terms of the loan?

    What processes have been utilised in the past to obtain loans?

    Section 209

    17.1 Before turning to the factual evidence before the Commission, this TOR raises for
    consideration section 209 of the Constitution and particularly the Loans (Overseas
    Borrowings) No 2 Act.

    What view was taken in 2014 about what s 209 and the Loans (Overseas Borrowings) No 2
    Act required?

    17.2 On 5 March 2014, Mr Vele wrote to Mr Rolpagarea, as State Solicitor, requesting that he
    review the documents relating to the proposed UBS transaction and “provide clearance”

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  • before the documents went to the NEC on 6 March 2014.111 The documents were
    provided to the State Solicitor by Pacific Legal Group earlier on 5 March 2014.112

    17.3 Later on 5 March 2014, the State Solicitor replied to Mr Vele’s letter. The State Solicitor
    advised that “section 209 of the … Constitution also requires the Parliament’s approval be
    obtained for this Bridge and Collar Loans which totals up to Australian dollars 1.225
    billion through the budgetary process.”113

    17.4 On 6 March 2014:

    (a) Prime Minister O’Neill announced a proposal to the NEC for the purchase of
    149,390,244 million Oil Search shares for AUD1.239 billion, funded by UBS; and

    (b) the NEC advised the Governor General to approve the UBS loan pursuant to
    section 2(1) of the Loans (Overseas Borrowings) Act 1976.114

    17.5 On 7 March 2014, Mr Vele wrote to the State Solicitor communicating to him the NEC
    decision and requesting the State Solicitor’s “legal clearance”.115

    17.6 On 9 March 2014, the State Solicitor replied to Mr Vele’s letter. In his reply, the State
    Solicitor advised that the appropriate person to execute loan agreements on behalf of the
    State was the Minister for Treasury pursuant to section 2(7) of the Loans (Overseas
    Borrowings) (No. 2) Act 1976. Mr Rolpagarea reminded Mr Vele of the statements in
    relation to the transaction raised in his 5 March 2014 letter. The State Solicitor stressed
    the need to comply with section 209 of the Constitution, but, given the urgent nature of
    the transactions, approved the Minister for Treasury to execute the documents.116

    17.7 On 10 March 2014:

    111
    Statement of Daniel Rolpagarea dated 22 June 2021, Annexure B, WIT.0019.0004.0001.
    112
    Statement of Daniel Rolpagarea dated 22 June 2021, Annexure A, WIT.0019.0004.0001.
    113
    Statement of Daniel Rolpagarea dated 22 June 2021, Annexure C, WIT.0019.0004.0001.
    114
    Advice from NEC to Governor General (WIT.0019.0002.0392).
    115
    Statement of Daniel Rolpagarea dated 22 June 2021, Annexure D, WIT.0019.0004.0001.
    116
    Statement of Daniel Rolpagarea dated 22 June 2021, Annexure E, WIT.0019.0004.0001.

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  • (a) the State Solicitor advised the Governor General to execute the UBS transaction
    documents upon receipt of advice from the NEC;117 and

    (b) the IPBC board approved the execution of the Payment Direction Deed by NPCP
    while noting the State Solicitor’s advice in respect of section 209 of the
    Constitution.118

    17.8 On 26 March 2014, Mr Vele sent a letter to the State Solicitor regarding the section 209
    constitutional approval for the UBS transaction. The letter requested confirmation in
    writing of the advices given and steps taken by the Office of the State Solicitor to obtain
    the necessary authorisation of the National Parliament under s 209(1) of the
    Constitution.119

    17.9 On 27 March 2014:

    (a) the the State Solicitor replied to Mr Vele’s letter;120 and

    (b) the NPCP board met and discussed the UBS transaction and the advice received
    from external counsel including concerns about the application of section 209 of
    the Constitution. The NPCP company secretary, Mr Rogen Wato, sent a text
    message to Mr Steve Lewin, an external lawyer, regarding this concern. Mr Lewin
    responded “reaffirming his view that the State/UBS Loan transaction has not been
    in breach of s 209 of the Constitution” but asked that management obtain a second
    opinion and provide it to the NPCP board.121

    17.10 In his reply of 27 March 2014, the State Solicitor advised that section 209 approval could
    be obtained retrospectively and that this was appropriate for the UBS transaction, as it
    was impracticable for NEC to call Parliament at the time it made its decision, due to the

    117
    Letter from Rolpagarea to PNG Governor General WIT.0019.0003.0030.
    118
    Statement of the Honourable Don Poyle dated 1 June 2021 WIT.0051.0008.0045.
    119
    Letter from Dairi Vele to Daniel Rolpagarea: section 209 – Constitution of the Independent State of Papua
    New Guinea NEC Decision No 79/2014 State Acquisition of Shareholding in Oil Search Ltd and Consequential
    Borrowing WIT.0007.0004.0844.
    120
    Letter from Daniel Rolpagarea to Dairi Vele WIT.0007.0004.0751.
    121
    Minutes of Meeting No 2 of 2014 – Held on 27 March 2014 at 9.14 AM WIT.0036.0001.0284

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  • urgency of the matter. The State Solicitor also noted section 212 of Constitution,
    regarding expenditure without prior Parliamentary approval. Ultimately, the State
    Solicitor advised that Parliament may invoke its power under section 212 “to facilitate the
    transaction” that had by then already been entered into. He advised it was important that
    the approval by Parliament be expressed to have retrospective effect.

    17.11 On 19 May 2014, former Treasurer Don Polye filed an application in the Supreme Court
    of Justice pursuant to section 18(1) of the Constitution seeking declarations that, on the
    proper interpretation and application of section 209 of the Constitution and the Organic
    Law on the Sovereign Wealth Fund 2012 (PNG), the executive actions of the Prime
    Minister and NEC in entering into the UBS transaction without Parliamentary approval
    (which Polye had opposed) were unconstitutional and illegal and that the transaction was
    illegal and unenforceable against the State.122 That application appears to have been
    discontinued in 2017.123

    17.12 On 5 September 2014, Mr Pruaitch, as the new Treasurer, made a Ministerial Statement to
    Parliament in relation to the UBS transaction and tabled the relevant transaction
    documents.124

    17.13 On 18 November 2014, Treasurer Pruaitch presented the 2014 Supplementary Budget and
    the 2015 National Budget to Parliament. Mr Pruaitch said: “the O’Neill-Dion
    Government made the decision to purchase 10.1 per cent stake in Oil Shares as part of the
    2014 Supplementary Budget in accordance with Section 209 of the Constitution we have
    appropriated for interest payments.”125

    What is the proper construction of s 209 and relevant legislation

    17.14 We have earlier submitted that this Commission cannot make binding determinations on
    parties as to the meaning of the Constitution or any other law. But that does not mean the

    122
    WIT.0035.0001.5718.
    123
    Letter Don Polye to the Commission of Inquiry, 18 July 2020, p 3 WIT.0051.0002.0001.
    124
    Hansard, 5 September 2014, pp 2-10, WIT.0014.0012.0015.
    125
    Hansard, 18 November 2014, pp 3-30, WIT.0014.0015.0088.

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  • Commission should not express its considered view of their meaning in answering the
    questions posed by the terms of reference and making recommendations accordingly.

    17.15 We thus submit the proper construction is as follows.

    Constitutional provisions

    17.16 Section 109(1) of the Constitution invests the Parliament with power, subject to the
    Constitution, to make laws for the peace, order and good government of Papua New
    Guinea and the welfare of the People. Section 109(2) provides that: “Acts of the
    Parliament, not inconsistent with the Constitutional Laws, may provide for all matters that
    are necessary or convenient to be prescribed for carrying out and giving effect to this
    Constitution”.

    17.17 Sections 209-210 and 212 of the Constitution relevantly provide:

    209. Parliamentary Responsibility

    (1) Notwithstanding anything in this Constitution, the raising and expenditure of finance
    by the National Government, including the imposition of taxation and the raising of loans,
    is subject to authorization and control by the Parliament, and shall be regulated by an
    Act of the Parliament.

    (2) For each fiscal year, there shall be a National Budget comprising—

    (a) estimates of finance proposed to be raised and estimates of proposed
    expenditure by the National Government in respect of the fiscal year; and

    (b) separate appropriations for the service of that year in respect of—

    (c) the services of the Parliament; and

    (d) general public services; and

    (e) the services of the Judiciary; and

    (f) such other supplementary Budgets and appropriations as are necessary.

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  • (3) Before any Budget or appropriation is prepared for submission to the Parliament, the
    National Executive Council shall consult with any appropriate Permanent Parliamentary
    Committee, but this subsection does not confer any right or impose any duty of
    consultation after the initial stages of the preparation of the Budget or appropriation.

    210. Executive initiative

    (1) The Parliament shall not provide for the imposition of taxation, the raising of loans
    or the expenditure of public moneys of Papua New Guinea except on the
    recommendation of the Head of State, acting with, and in accordance with, the
    advice of the National Executive Council.

    (2) Subject to subsections (3) and (4), Parliament may reduce, but shall not increase or
    re-allocate, the amount or incidence of, or change the purpose of, any proposed
    taxation, loan or expenditure.

    212. Revenue and expenditure without prior approval

    (1) If at the beginning of a fiscal year the Parliament has not made provision for public
    expenditure by the National Executive or expenditure by the Parliament or the
    Judiciary for their respective services for that year, the National Executive, the
    Parliament or the Judiciary, as the case maybe, may, without authorization other
    than this section but in accordance with an Act of the Parliament, expend amounts
    appropriated out of the Consolidated Revenue Fund for the purpose not exceeding
    in total one-third of its respective budgeted expenditure during the immediately
    preceding fiscal year.

    (2) The authority conferred by Subsection (1) lapses when the Parliament has made
    provision for the public expenditure for the fiscal year in question, and any
    amounts expended by virtue of that subsection are a charge against the expenditure
    so provided for and shall be properly brought to account accordingly.

    17.18 Part 2 of Schedule 1 of the Constitution contains various provisions relating to the
    interpretation of the Constitution. Similarly, section 24 states that certain material may be

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  • used as aids to interpretation of the Constitution, including, relevantly, the Final Report of
    the pre-Independence Constitutional Planning Committee dated 13 August 1974.

    17.19 Section 2(1) of the Loans (Overseas Borrowings) Act 1973 relevantly provides that:

    The Head of State, acting on advice, may, on behalf of the State, borrow from or through
    overseas financial institutions, in such manner and on such terms and conditions as are
    agreed on by the Head of State, acting on advice, and the institutions, sums not exceeding
    in total the sum of K65,000,000.00 or the equivalent in other currencies, for [various
    listed purposes].

    17.20 Section 2(1) of the Loans (Overseas Borrowings) (No. 2) Act 1976 is in similar terms,
    although one of the listed purposes for borrowing is “the purchase of equity in
    companies” and the limit for the sum borrowed “shall be such that the total value of
    overseas commercial debt which will be owed by the State after any borrowing shall not
    exceed 125% of the estimated internal revenue for the year in which the borrowing takes
    place except only as a result of any bridge financing and subject to Subsection 2(b)”: see
    section 2(3).

    17.21 Section 2(8) requires the Minister to cause a copy of the loan agreement to be laid before
    the Parliament for its information “[a]s soon as practicable after the execution of a loan
    agreement”.

    17.22 The Loans (Overseas Borrowings) (No. 2) Act 1976 appears to have been enacted because
    the view was taken that the borrowing authority in the Loans (Overseas Borrowings) Act
    1973 had been exhausted, although the 1973 Act continues in force.126

    17.23 Sections 35 and 36 of the Public Finances (Management) Act 1995 are also relevant and
    provide as follows:

    35. Restrictions on borrowing

    126
    Statement of David Crichton Frecker dated 29 January 2022 [21], Exhibit EEEE, WIT.0143.0001.0001.

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  • (1) The State may not borrow money except under and in accordance with an Act of
    the Parliament.

    (2) Moneys borrowed under Subsection (1) from whatever sources shall not exceed
    the limit provided for by the Central Banking Act 2000.

    (3) All debt charges for which the State is liable in respect of loan moneys shall be
    charged on the Consolidated Revenue Fund.

    36. Advances and overdrafts

    (1) The Minister may, for and on behalf of the State, borrow moneys–

    (a) from such domestic and external sources; and

    (b) on such terms and conditions,

    as the Head of State, acting on advice, approves, in order to meet temporary deficiencies
    in revenue in a fiscal year.

    (2) Moneys borrowed under Subsection (1) from whatever sources shall not exceed
    the limit provided for by the Central Banking Act 2000.

    (3) The principal and interest on moneys borrowed under Subsection (1) shall be
    charged to the Consolidated Revenue Fund and are payable from the Fund.

    17.24 The limit provided for in the Central Banking Act 2000 is K100,000,000.00 (or such other
    adjusted amount as agreed by the Governor and National Executive Council from time to
    time and published in the National Gazette for the sole purpose of taking into account
    movements in the general level of prices in Papua New Guinea): see section 55(4)(a).

    17.25 There has been limited judicial consideration of s 209.

    17.26 In Mairi v Tololo, Secretary for Education [1976] PGSC 9; [1976] PNGLR 125 (15 April
    1976) there was a challenge to the imposition of a fee of K400 per pupil for students
    attending multi-racial schools in the Independent State. In the course of determining that
    there was no power to impose the fee under the Education Act 1970, it was held, in the
    context of examining section 209 of the Constitution, that “[t]o render imposition of tax
    for the raising of revenue constitutional, the statutory grant of power must be clear and

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  • unambiguous and the circumstances bringing it into operation sufficiently clear” (Prentice
    DCJ and Williams J) and that section 209 required “clear authorization by Parliament”
    (Frost CJ).

    17.27 Papua New Guinea Forest Industries Association Inc v Tomuriesa [2017] PGSC 24;
    SC1601 (1 September 2017) was a proceeding concerning the validity of section 121 of
    the Forestry Act 1991. The Supreme Court held: “The vesting of wide and ambiguous
    taxation powers on the Executive to make decisions on essentials of the imposition of
    taxation in the form of a levy of the type found in s 121 … cannot be Constitutionally
    justified”. Rather, section 209 of the Constitution required “the essentials of imposition
    of taxation to be determined by an Act of the Parliament”. However, the Court also held
    that section 209(1) of the Constitution did, in principle, permit a statute to authorise a
    revenue system outside of the National Budget framework found in section 209(2).

    17.28 Then Treasury Secretary, Mr Vele, stated in evidence that: “The process for loans from
    the private sector is the Loans (Overseas Borrowing No 2) Act 1976”, and that “[a]ll types
    of Loans must also have Section 209 of the Constitution authorisation by way of the
    budgetary process”.127 Further, where a loan is negotiated, executed and drawn down in
    the same year, the authorisation for the purposes of section 209 is obtained by way of a
    supplementary budget.128

    17.29 Mr Vele said that the Parliament did not need to approve the UBS transaction before it
    was entered into. Significantly, Mr Vele conducted an analysis of 288 external loans to
    the State and could not find one in which the loan terms and conditions were approved
    prior to its execution. We submit that none was of the consequence or size of the UBS
    Loan. Mr Vele considered that loans could be executed and then subsequently approved
    in the following National Budget.129

    17.30 Mr Vele stated that in 2014 he followed the advice of Ashurst and Norton Rose that the
    “mechanics” of section 209 were contained in the Loans (Overseas Borrowings) (No. 2)

    127
    Affidavit of Dairi Vele sworn 5 August 2021 [57]-[58], Exhibit MMM, WIT.0014.0015.0012.
    128
    Affidavit of Dairi Vele sworn 5 August 2021 [67]-[68], Exhibit MMM, WIT.0014.0015.0012
    129
    Transcript, Dairi Vele, 24 June 2021, p 1908.

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  • Act 1976 and that by fulfilling the requirements of this statute the requirements of section
    209 were also complied with.130 He said he followed the advice of the State Solicitor of 5
    March 2014 that Parliamentary approval could be obtained through the budgetary process
    and that such approval could be given after the relevant NEC decision.131

    17.31 The State Solicitor’s advice referred specifically to the case of Tomuriesa in support of
    the proposition that statutes for the purposes of section 209 should not seek to restrict the
    exercise of overall financial control by Parliament. In the State Solicitor’s view:132

    The Act(s) of Parliament referred to in Section 209 prescribe in detail the requirements
    and processes for revenue generation activities or expenditure within the broad limits set
    by Parliament for any given year. These Acts of Parliament include inter alia: the Public
    Finance (Management) Act 1995 (PFWIA), the Loans (Overseas Borrowings) Act
    Chapter 133 (Loans Act), and the National Procurement Act 2018 (NPA), and are applied
    depending on the aspect of Section 209 which it regulates.

    … The Loans Act is the principal Act of Parliament that exists for the purposes of Section
    209(1) regarding the obtaining of loans…

    In summary, the Parliament sets the parameters for the activities of the Executive by
    passing Acts of Parliaments to regulate activities prescribed under Section 209, through
    legislation such as the Loans Act. The Parliament further exercises continuous control
    and authorization by scrutinizing annual budget submissions and by passing annual
    Appropriation Acts, whereby it sets ceilings on certain revenue generation activities and
    expenditure.

    17.32 The State Solicitor further stated in oral evidence that “borrowing or the expenditure by
    the State must first be approved and authorized by parliament and then it can be processed
    through the legislation”.133 The State Solicitor noted that section 4 of the Loans
    (Overseas Borrowings) (No. 2) Act 1976, which provides “All payments of principal and

    130
    Affidavit of Dairi Vele sworn 26 April 2021 [559]-[560], Exhibit PP, WIT.0014.0007.0001..
    131
    Affidavit of Dairi Vele sworn 26 April 2021 [563], Exhibit PP, WIT.0014.0007.0001.
    132
    Statement of Daniel Rolpagarea dated 28 July 2021 pp 2-3 [5]-[7], Exhibit OO.2, WIT.0019.0005.0003.
    133
    Transcript, Daniel Rolpagarea, 23 June 2021, p 1823.

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  • interest and other charges payable under a loan agreement shall be made out of the
    Consolidated Revenue Fund”, indicated that even if a loan was effected under that statute
    it still had to be reflected in the Budget process.134

    17.33 In relation to the possibility of retrospective approval, the State Solicitor’s view was that
    “Outside of Section 212, I am of the view that prior parliamentary approval is mandatory
    for all matters concerning revenue raising and expenditure.”135

    17.34 In relation to the UBS transaction, the State Solicitor’s view was that it “ought to have
    been pre-approved by Parliament during the 2014 budgetary process” and that the
    requirements of section 209 were not complied with.136

    17.35 Dr Kalinoe, the Secretary for Justice, agreed with the State Solicitor’s approach and
    interpretation of the law, specifically including the State Solicitor’s advice of 27 March
    2014.137

    17.36 Former Attorney-General the Honourable Kerenga Kua noted that s 209 of the
    Constitution begins with the phrase “notwithstanding anything else in the Constitution or
    elsewhere”, which he took to mean that whatever the Loans (Overseas Borrowings) No 2
    Act 1976 states, the Constitution overrides and prevails.138 He considered that the
    “minimum requirement of section 209 … is the retention of the power to approve or reject
    [a] particular loan … done by a law made by parliament once all the preparatory work is
    done and brought to the parliament for approval”.139 Mr Kua’s view was that
    retrospective approval pursuant to section 212 of the Constitution was possible in limited
    circumstances, not including borrowings or revenue raising for the purposes of
    commercial investment purposes.140

    134
    Transcript, Daniel Rolpagarea, 23 June 2021, p 1824.
    135
    Statement of Daniel Rolpagarea dated 28 July 2021 [10], Exhibit OO.2, WIT.0019.0005.0003.
    136
    Statement of Daniel Rolpagarea dated 28 July 2021 [18]-[19], Exhibit OO.2, WIT.0019.0005.0003.
    137
    5.05.14 Dr Lawrence Kalinoe_Brief Attorney General.pdf (WIT.0019.0002.0506)
    138
    Transcript, Kerenga Kua, 18 June 2021, p 1512.
    139
    Transcript, Kerenga Kua, 2 August 2021, p 2522.
    140
    Transcript, Kerenga Kua, 2 August 2021, p 2523.

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  • 17.37 Mr Kua considered that section 209 had been breached in the context of the UBS
    transaction. His view was that if the State wanted to proceed with the UBS loan, it should
    have brought a bill urgently before the parliament and sought parliamentary approval,
    irrespective of the urgency of the transaction (and that the urgency of the transaction did
    not allow the State to bypass constitutional and statutory procedures). This may have
    involved the urgent recalling of Parliament.141

    17.38 Other witnesses also gave their views as to whether the UBS transaction complied with
    section 209 of the Constitution. Prime Minister Marape stated that in 2013 there should
    have been an indication to the Parliament as to the transaction which was to occur in
    2014.142

    17.39 Mr Pruaitch143 and Mr Yauieb144 were of the view that section 209 was not complied
    with.

    17.40 Mr Lupari said that retrospective Parliamentary approval was possible.145

    17.41 Mr O’Neill considered that the UBS transaction was an investment and therefore did not
    fall within the scope of section 209.146 Mr O’Neill’s view was that investments and
    expenditure by State Owned Entities were not required to be approved by Parliament.147

    Our submissions on statutory and constitutional construction

    17.42 The key provision is s 209(1) which states:

    Notwithstanding anything in this Constitution, the raising and expenditure of finance by
    the National Government, including the imposition of taxation and the raising of loans, is

    141
    Transcript, Kerenga Kua, 18 June 2021, pp 1517-1518.
    142
    Transcript, James Marape, 21 June 2021, p 1643.
    143
    Affidavit of Patrick Pruaitch sworn 28 June 2021, pp 13-14 [75]-[77], Exhibit ZZ, WIT.0028.0003.0002.
    144
    Statement of Anthony Yauieb dated 28 July 2021, pp 12-15 [47]-[59], Exhibit BBB, WIT.0104.0002.0239.
    145
    Transcript, Isaac Lupari, 2 August 2021, p 2506.
    146
    Transcript, Peter O’Neill, 17 June 2021, p 1493.
    147
    Transcript, Peter O’Neill, 17 June 2021, p 1494.

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  • subject to authorization and control by the Parliament, and shall be regulated by an Act
    of the Parliament.

    17.43 It will be noticed that:

    (a) Section 209(1) is a provision which applies ‘Notwithstanding anything in this
    Constitution’;

    (b) It concerns ‘the raising and expenditure of finance by the National Government,
    including the imposition of taxation and the raising of loans’ ;

    (c) It provides that such activity is ‘subject to authorization and control by the
    Parliament’ and mandates that such matters ‘shall be regulated by an Act of the
    Parliament’.

    17.44 We respectfully adopt the approach to construction enunciated in the statement and
    evidence to you by the very experienced Papua New Guinea and Australian lawyer,
    David Frecker, as follows:

    (a) section 209 of the Constitution is a general statement of constitutional principle
    about the supremacy of Parliament in all matters pertaining to taxation and the
    control of public finances;

    (b) it must be balanced with the function of the executive government to manage
    finances in a responsible manner (see section 210).148

    (c) no additional authorisation by Parliament is required if there is to be a new loan
    which is authorised by and under an existing Act of Parliament, and similarly a
    specific loan is not required to be included in or pre-approved by the National
    Budget prepared for each fiscal year.149 (He was only aware of one instance where
    the Parliament had passed a specific Act to authorise a specific loan, being the

    148
    Statement of David Crichton Frecker dated 29 January 2022, p 3 [14], Exhibit EEE, WIT.0143.0001.0001.
    149
    Statement of David Crichton Frecker dated 29 January 2022, p 5 [17], Exhibit EEE, WIT.0143.0001.0001.

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  • Loans Act 2011 which gave authority for the State to borrow an amount to fund its
    participation in the PNG LNG Project.150)

    (d) the State has the power under section 209(1) of the Constitution to raise loans and
    that power can be exercised in the manner set out in the Loans (Overseas
    Borrowings) (No. 2) Act 1976, which provides for matters required for carrying
    out and giving effect to s 209. That is, the Loans (Overseas Borrowings) (No. 2)
    Act 1976 was an “Act of the Parliament” within the meaning of the phrase
    “regulated by an Act of the Parliament” in section 209(1).151 This Act deals
    specifically with borrowing from overseas commercial institutions.152

    (e) the UBS transaction was thus validly entered into by the State under the Loans
    (Overseas Borrowings) (No. 2) Act 1976.153

    (f) the requirement in the Act for the relevant loan agreements to be laid before
    Parliament “as soon as practicable after execution” (see section 2(8)) meant that
    the loan agreements were required to be laid before Parliament without
    “unreasonable delay”.154 He considered that, in circumstances in which Parliament
    had sat for more than a couple of days in a period from March to November, a
    delay over this period in laying documents before Parliament would not be
    consistent with section 2(8) of the Loans (Overseas Borrowings) (No. 2) Act
    1976.155 [However, we would add, this may breach section 2(8) but it could hardly
    retrospectively invalidate the loan: if there is a remedy for breach of the tabling
    requirement it apparently lies in parliamentary scrutiny].

    150
    Transcript, David Frecker, 2 February 2022, p 3567.
    151
    Statement of David Crichton Frecker dated 29 January 2022, p 6 [27], Exhibit EEE, WIT.0143.0001.0001;
    Transcript, David Frecker, 2 February 2022, p 3571-3572.
    152
    Transcript, David Frecker, 2 February 2022, p 3567.
    153
    Statement of David Crichton Frecker dated 29 January 2022, p 6 [25], Exhibit EEE, WIT.0143.0001.0001.
    154
    Statement of David Crichton Frecker dated 29 January 2022, p 6 [25], Exhibit EEE, WIT.0143.0001.0001.
    155
    Transcript, David Frecker, 2 February 2022, p 3568.

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  • 17.45 Mr Frecker also noted that the Constitution does not specifically require a referral of a
    loan of significance to the Public Accounts Committee (whose function is to review
    matters of public finance), 156 and he was not aware of any instances where the Public
    Accounts Committee has had loans referred to it, nor held public hearings.157

    17.46 The view Mr Frecker enunciates and which we adopt also corresponds with almost
    invariable State practice since Independence.

    17.47 In our submission you can thus conclude that in your (necessarily non-binding) opinion, s
    209 was not breached in relation to the UBS Loan. However, it is submitted that you
    should make recommendations designed to ensure that there be greater legal procedural
    safeguards, including the statutory amendment to require both State Solicitor and
    Attorney-General confirmation as to the Constitutional and statutory validity of a
    commercial loan over a specified monetary threshold.

    17.48 The other matter of specific recommendation concerns the easy avoidance of the statutory
    borrowing limits on the State by novating the UBS loan to Kumul Petroleum prior to the
    next budget: we recommend amendments to avoid a reoccurrence.

    17.49 We now turn to some factual questions.

    How was the process commenced?

    17.50 The process of obtaining a loan from UBS to acquire new Oil Search shares commenced
    on 21 February 2014. On that date Mr Vele met with Mr Botten and Mr Aopi in Sydney.
    Mr Vele said that the State expected to received funding from UBS for the purchase of

    156
    Statement of David Crichton Frecker dated 29 January 2022 [20], Exhibit EEE, WIT.0143.0001.0001.
    157
    Transcript, David Frecker, 2 February 2022, p 3566.

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  • Oil Search shares.158 On 22 February 2014 Mr Turner sent Mr Vele a briefing paper for
    meeting with Prime Minister O’Neill and the subsequent meeting with Mr Botten.159

    17.51 On 23 February 2014, Prime Minister O’Neill and Mr Vele met with Mr Botten and Mr
    Aopi in Port Moresby. At this meeting Mr O’Neill said that the State wished to retain at
    least a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the
    State as a placement, as part of Oil Search’s capital raising to fund its acquisition of an
    interest in PRL-15.

    How was UBS selected?

    17.52 UBS appears to have been selected by Mr Vele and Prime Minister O’Neill as the
    financier for the purchase of new Oil Search shares as it had been chosen as the preferred
    financier for refinancing the IPIC Exchangeable Bond.160

    17.53 On 27 February 2014, Prime Minister Peter O’Neill wrote to UBS AG to advise that the
    commercial terms proposed by UBS were “expected to be acceptable to the State” but
    were subject to an approval process.161

    17.54 On the same date, Oil Search announced to the ASX that, subject to approvals, the State
    would purchase 149 million new shares at AUD 8.20, for a total of AUD 1,225 million.
    Once this purchase was complete, the State would have a 10.1% shareholding in Oil
    Search.162

    158
    See, e.g., Statement of Peter Botten dated 14 June 2021, Exhibit JJ, WIT.0021.0003.0001; Email A Latimer to D
    Vele, 22 February 2014, Re: PM briefing paper, NRF.001.001.5052

    159
    Email M Turner to D Vele, 22 February 2014, Re: PM briefing paper, NRF.001.001.5054, attaching
    NRF.001.001.5055.

    160
    Affidavit of Dairi Vele dated 26 April 2021, p 42 [280], p 43 [284], Exhibit PP, WIT.0014.0012.0011.

    161
    P O’Neill letter to UBS, 27 February 2014, UBS.0001.0001.0029.

    162
    Oil Search ASX Announcement, 27 February 2014, ASH.002.008.6760.

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  • 17.55 Mr Vele also issued a press release.163

    What process was utilised?

    17.56 No formal process was utilised.

    What were the terms of the loan?

    17.57 The UBS Loan comprised two interdependent loans:

    (a) the ‘Collar Loan’; and

    (b) the ‘Bridge Loan’.

    17.58 The Collar Loan was for an amount of AUD 1.011 billion, being AUD 904.56 million for
    the purchase of the Oil Search shares and approximately AUD 106 million for interest.

    17.59 Its terms included:

    (a) a term of two years;

    (b) a stated interest rate of 4.95%. However, all of the interest was paid up front rather
    than over the life of the loan, which was equivalent to 5.3% every 12 months in
    arrears;

    (c) the State providing sufficient security for the AUD 1.011 billion (in Oil Search
    shares and put options);

    (d) UBS providing the State with 137 million put options (one per share) with an
    average strike price of AUD 7.38 per share;

    (e) the State providing UBS with 137 million call options with an average strike price
    of AUD 10.00 per share.

    (f) UBS was given title to the shares held as collateral as part of their hedging
    programme but the parties shared dividends in agreed amounts.

    163
    Press Release, 27 February 2014, WIT.0064.0002.0370.

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  • 17.60 The Bridge Loan was for an amount of AUD 335 million and was used to pay AUD 14.6
    million in fees and expenses and to purchase 39.1 million Oil Search shares.164 Of these
    shares, 12.4 million were used as collateral for the bridge loan. The remainder were
    collateral under the collar loan

    17.61 Its terms included:165

    (a) an initial term of 6 months, but could be extended once at the State’s option for a
    further 6 months;

    (b) an initial interest rate spread of 5.5% over BBSY, increasing to 6.5% after 3
    months, then to 7.5% after 6 months and finally to 9.5% after 9 months;

    (c) an establishment fee of 2% (of the total amount available to be borrowed), and an
    extension fee of 1.5% (of the amount then borrowed).

    17.62 The Brattle Group summarised the UBS Loan as follows:166

    (a) the effect of the options was that the State’s exposure to the Oil Search share price
    was limited for the shares covered by the options (about 92%). Up to the expiry of
    the options (two years), if the share price fell significantly, the State’s maximum
    exposure on the shares covered by the options was AUD 0.82 per share, and the
    State’s maximum upside if the share price rose significantly was AUD 1.80 per
    share. These sums are the difference between the average put option strike price
    and the average call option strike price and the price at which the State acquired
    the shares;

    (b) the Independent State was fully exposed to share price movements on the
    remaining 8%.

    164
    Payment Direction Deed, clause 2, UBS.0001.0001.0608; Brattle Group, p 50 [146], WIT.0132.0001.0002.

    165
    Brattle Group, p 50 [148] – [149], WIT.0132.0001.0002.

    166
    Brattle Report, p 7 [20], WIT.0132.0001.0002

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  • (c) the State pledged all of its Oil Search shares as security for the money it borrowed
    from UBS;

    (d) as a result of the hedging in the collar, UBS had reduced exposure to Papua New
    Guinea credit risk: even if the Oil Search share price fell, the put options in the
    collar loan would most of the total principal outstanding under both loans to be
    repaid.

    What processes have been utilised in the past to obtain loans?

    17.63 Mr Vele gave evidence before the Commission that there “are essentially two types of
    foreign loans being firstly loans from multilateral partners and secondly loans from the
    private sector.”167

    17.64 The process for obtaining loans from multilateral partners is governed by the Loans and
    Assistance (International Agencies) Act 1971, whereas the process for obtaining loans
    from the private sector is governed by the Loans (Overseas Borrowing No 2) Act 1976.168

    17.65 This legislation regulates the process for obtaining the respective loans, not the
    authorisation of expenditure. Authorisation is governed by s209 of the Constitution.

    17.66 Mr Vele provided the below outline of the ordinary process for obtaining a foreign loan:

    (a) Treasury together with Department of National Planning (DNP) identifies funding
    need;

    (b) Treasury and DNP then seek approval to negotiate loans from the Treasurer;

    (c) the Treasurer then sponsors an NEC submission for approval by NEC;

    (d) Treasury together with the Office of the State Solicitor then negotiates the funding;

    (e) the loan is executed in accordance with the provisions of the governing legislation;

    167
    Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022, [55], Exhibit MMM.

    168
    Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022, [56] – [57], Exhibit MMM.

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  • (f) the loan is tabled before Parliament as soon as practicable following execution;
    and

    (g) a provision is made in the Budget papers for the loan and expenditure for the year
    in which it is intended to be used.169

    17.67 As evidence of this process, Mr Vele provided a table summarising some 30 project loans
    obtained by the State from the previous 10 years.170 The examples provided by Mr Vele
    were “multilateral partner” loans administered and therefore not comparable to the UBS
    Loan which was a loan between the State and a private commercial entity.171

    17.68 It is submitted that in these circumstances, little weight can be given to Mr Vele’s
    evidence on processes followed for prior loans as none were governed by the Loans
    (Overseas Borrowings No 2) Act 1976.

    17.69 The Commission also received evidence from Mr John Leahy whose then firm, Leahy
    Lewin Lowing & Sullivan, was engaged to provide advice on Papua New Guinea law to
    IPIC in the IPIC Exchangeable Bond transaction.

    17.70 Mr Leahy gave evidence that he was “generally uncomfortable with relying on the
    Overseas Borrowings Legislation” for the purposes of satisfying the requirements of s209
    of the Constitution.172

    17.71 Accordingly, the Liquefied Natural Gas Project (State Participation) Act 2008 was
    drafted and laid before Parliament. This legislation was drafted specifically to authorise
    the IPIC Exchangeable Bond transaction and accordingly, set out key elements of that

    169
    Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022-0023, [60] – [65], Exhibit MMM.

    170
    Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0130, Annexure DV-18, Exhibit MMM.

    171
    Transcript 12 August 2021, TS3203.14-3206.12 (XXN of Hon Don Polye MP by Ms Twivey-Nonggorr).

    172
    Witness Statement of John Edmund Leahy dated 2 February 2022, WIT.0144.0001.0001 at 0004, [22].

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  • transaction such as a nominee of the State acquiring an interest in the PNG LNG
    Project.173

    18. TORs 1(n) and (o) The rationale as to why the State determined to buy shares in Oil
    Search in 2014 and when the decision was made to purchase the Oil Search shares.

    18.1 It is convenient to consider Term of Reference (n) – the rationale as to why the State
    determined to buy shares in Oil Search in 2014, and Term of Reference (o) – when the
    decision was made to purchase the Oil Search shares – together.

    18.2 Mr Botten gave evidence in his Further Statement dated 27 January 2022 that “[d]uring
    most of 2011 and early 2012 the PNG Government and PNG Petroleum Minister publicly
    admonished InterOil for its recalcitrance in moving the PRL-15 development ahead” and
    that “given the importance of PRL-15 and the PNG Government’s concerns about the lack
    of progress, there would have been many discussions between representatives of Oil
    Search and representatives of the PNG Government about PRL 15 prior to 22 February
    2014.”174

    18.3 This evidence is largely uncontested, except by Mr O’Neill, who gave evidence (which we
    say cannot be accepted) that he had no knowledge of Oil Search’s intention to purchase
    an interest in PRL-15 until 2014.175

    Q: But your evidence remains that you simply did not know about what Oil Search were
    going to do with the UBS loan monies which purchased the Oil Search shares and in
    particular you did not know about it that they were going to buy an interest in the Elk
    Antelope?
    A: Quite frankly I was a bit disappointed that this information did not come to
    government’s notice or particularly at leadership level. It could have been discussed at

    173
    Witness Statement of John Edmund Leahy dated 2 February 2022, WIT.0144.0001.0001 at 0004, [23] – [25].

    174
    Further Statement of Peter Botten, 27 January 2022, page 9 [52] WIT.0021.0006.0001.

    175
    Transcript, Peter O’Neill, 17 June 2021, p.1468; Transcript, Peter O’Neill, 7 February 2022, p. 3765.

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  • the lower levels but if I had known that this was a transaction being discussed on the
    sides it would have been a different conversation.176(emphasis added)

    18.4 In mid-2012, Oil Search and Total decided to make a joint bid to acquire an interest in
    PRL-15.177

    18.5 During the period from 2012 to 2014, Oil Search “engaged in negotiations with several
    parties, including InterOil and the Pac LNG companies, concerning a possible acquisition
    of an interest in PRL 15”.178 This period commenced with a joint bid by Oil Search and
    Total, made on 17 August 2012,179 to January 2014 when the negotiations between
    InterOil and Oil Search stalled as a result of InterOil insisting on “increased consideration
    terms”.180

    18.6 Throughout 2012 and 2013 the NEC approved several decisions authorising various
    representatives of the State to negotiate the refinancing of the IPIC Exchangeable Bonds.
    None of these NEC Decisions proposed or contemplated a new or additional purchase of
    Oil Search shares.181 Mr O’Neill in his appearance before the Commission indicated that
    the NEC Decisions were very clear and were aimed at retaining the Oil Search shares held
    by IPIC under the Exchangeable Bonds.182

    18.7 However, evidence before the Commission indicates that an on-market purchase of Oil
    Search shares was being contemplated as early as 8 August 2013. The Background Notes
    prepared by then Acting Secretary of Treasury Mr Vele and Mr Mortensen for

    176
    Transcript, Peter O’Neill 7 February 2022, p. 3765.

    177
    Further Statement of Peter Botten, 27 January 2022, page 7 [44]–[46], [51]–[52] WIT.0021.0006.0001.

    178
    Further Statement of Peter Botten, 27 January 2022, page 9 [55] WIT.0021.0006.0001.

    179
    Further Statement of Peter Botten, 27 January 2022, page 9 [55](a) WIT.0021.0006.0001.

    180
    Further Statement of Peter Botten, 27 January 2022, page 9 [55] (a)–(j) WIT.0021.0006.0001.

    181
    NEC Decision NG 63/2012, WIT.0016.0001.0316; NEC Decision 117/2013, WIT.0016.0001.0331; NEC
    Decision 241 of 2013, WIT.0016.0001.0394.

    182
    Transcript, Peter O’Neill, 9 August 2021, pp.2916-2917; Transcript, Peter O’Neill, 9 August 2021, p.2914.

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  • prospective financial advisors / financiers as part of the IPIC Exchangeable bonds
    refinancing identified one of the key priorities of the State as:

    Securing a State Equity position in Oil Search after the maturity date of the
    Exchangeable Bonds of somewhere between 10.1% and 19.99% of the total issued
    capital of Oil Search.

    This can most obviously be achieved in one of two ways:

    • Securing agreement with IPIC in respect of the repurchasing of all or part
    of the Exchangeable Bonds; or
    • By making on-market acquisition of Oil Search shares during the period
    leading up to Bond maturity. [emphasis added by us in bold]

    18.8 On 13 August 2013, Mr Ben O’Dwyer of Backwell Lombard Capital together with his
    lawyer met with Messrs Vele, Mortensen and Latimer at the NRFA offices in Sydney.
    During this meeting Mr Vele is reported to have said that he and Mr Mortensen were of
    the opinion that buying new shares on market would be better than refinancing the IPIC
    Exchangeable bonds.183

    18.9 On 23 September 2013, an internal Oil Search email, later sent by Mr Botten to the Oil
    Search Board, also drew attention to a shift in thinking taking place in the State. Mr
    Botten then went on to say that Mr Vele had “…openly canvassed the use of money to
    support an acquisition by Oil Search of an interest in Elk Antelope for the issuance of
    shares to the State” and that this “would be preferable to the State rather than necessarily
    dealing with IPIC.”184 There is no reason why this contemporaneous record should not be
    accepted.

    183
    Statement of Mr Ben O’Dwyer dated 10 February 2022, WIT.0155.0009.0592 at .0608 [107(h)];
    Contemporaneous file note of meeting between Mr Ben O’Dwyer and Messrs Vele, Mortensen and Latimer
    WIT.0155.0002.0050 at 0051.

    184
    Draft email prepared by Diana Danielson on behalf of Peter Botten and later circulated to Oil Search Board, 23
    September 2013, OSL.0007.0001.1190.

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  • 18.10 Dr Waine, in his supplementary statement to the Commission also recounted that:

    “In or around September 2013, I attended the offices of Pertusio Capital Partners
    (Pertusio Capital) to meet with Mr Lars Mortensen. Mr Mortensen had invited me there
    to discuss a proposed purchase of new Oil Search shares. This was the first time I became
    aware that a purchase of new Oil Search shares was being considered. At this meeting
    Mr Mortensen provided me with a report he had prepared regarding this proposed
    purchase.”185

    18.11 Mr Vele denies this allegation, but has instead indicated he was exploring all options
    available to the State.186 But Mr Vele was unable to explain why a number of witnesses
    before the Commission provided contemporaneous evidence contradicting his own
    version of events. In our submission his recollection on this is incorrect.

    18.12 Further, in his statement dated 8 February 2022, Mr Kumarasiri gave evidence that “on
    multiple occasions Dr Waine and Mr Sonk raised the possibility of Oil Search issuing
    new shares for the Independent State to purchase.”187

    Oil Search acquisition of Elk-Antelope and associated financing

    18.13 Between September 2013 and February 2014, as we outlined earlier, a number of parallel
    processes were taking place in an effort to refinance the IPIC Exchangeable Bonds.

    18.14 The Commission has received evidence that in November 2013, Oil Search engaged
    Goldman Sachs to consider financing the potential acquisition of PRL-15. Three options
    were identified:188

    (a) the acquisition of the PAC LNG companies; or

    185
    Supplementary Statement of Dr Clement Waine dated 11 February 2022, WIT.0039.0007.0001 at 0003, [30].

    186
    Transcript, Dairi Vele, 11 August 2021, p.2999; Transcript, Dairi Vele, 11 August 2021, p.3018.

    187
    Statement of Bamanu Arachchige Wasantha Kumarasiri, 8 February 2022, page 6 [56] WIT.0055.0002.0001.

    188
    Further Statement of Peter Botten, 27 January 2022, page 10 [57] (a)–(c) WIT.0021.0006.0001; see also
    Statement of Peter Botten, 14 June 2021, page 3 [28] WIT.0021.0003.0001.

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  • (b) a back-to-back agreement with InterOil whereby InterOil would purchase the PAC
    LNG companies and then sell to Oil Search part of the PAC LNG companies’
    interest in PRL 15; or

    (c) partnering with ExxonMobil or Total to acquire InterOil’s interest.189

    18.15 From 3 January 2014 to 8 January 2014, internal Oil Search emails distributed copies of a
    document titled “1312xx Purchase of interest in PRL15 TOTAL v21 OSL
    Proposed.docx”. This is a draft press release titled “Oil Search to Acquire 19.35% Interest
    in PRL 15 (Elk/Antelope)” was dated December 2013. The three copies of this document
    which were distributed each state under ‘Acquisition Financing’:

    “Oil Search intends to fund the acquisition and associated future commitments
    with existing available liquidity. A new USD[X]m short-term debt facility has been
    arranged to fund the acquisition costs. The Company is evaluating options to
    refinance this facility in the future, including the potential for an equity offering. If
    an equity offering is undertaken, it is Oil Search’s intention to utilise a pro rata
    renounceable entitlement offer to all shareholders.”190

    18.16 On 29 January 2014, an internal Oil Search email sent to Oil Search’s Board of Directors
    attached a board pack titled ‘ 140129 – Project Heron – Draft Valuation Impact – Final &
    Cover Note’. The Board Pack, dated 29 January 2014, states under “Project Heron
    Financial Assumptions” that AUD900m would be raised by a placement with share price
    set at AUD8.20 per share, but no longer mentions Oil Search taking on its own short-term
    debt facility to fund the acquisition.191

    18.17 This latter document demonstrates a shift from Oil Search’s view in December 2013/early
    January 2014 that the PRL-15 acquisition would be funded by Oil Search taking on its

    189
    Further Statement of Peter Botten, 27 January 2022, page 10 [57] (a)–(c) WIT.0021.0006.0001.

    190
    OSL.0019.0003.7797; OSL.0019.0003.7808; OSL.0019.0003.7933; OSL.0019.0003.7944;
    OSL.0019.0003.8974.

    191
    OSL.0002.0011.1142; OSL.0002.0011.1145.

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  • own short-term debt facility, to a view that the acquisition would be funded entirely by a
    share placement. While the document does not name the prospective purchaser of the
    shares, it is notable that the share price is set at AUD8.20/share, being the price which the
    State specifically negotiated with Oil Search.

    18.18 In February 2014, Oil Search and PAC LNG commenced negotiations during which Mr
    Carlo Civelli said to Mr Botten “words to the effect that the Prime Minister [Mr O’Neill]
    and PNG Government supported the transaction”.192 Mr Botten said this “was consistent
    with conversation that [Mr Botten] had with the Prime Minister [Mr O’Neill] in which
    [Mr O’Neill] supported the engagement of Oil Search with the PAC LNG companies as a
    means to address an impasse that had arisen between the PAC LNG companies and
    InerOil as a result of a reluctance on Mr Civelli’s part to sell the PAC LNG companies to
    InterOil”.193

    18.19 Notwithstanding Mr Botten’s evidence, Mr O’Neill’s oral evidence was that he had no
    knowledge of how Oil Search would use the funds received through the eventual share
    placement to the Independent State.194 That evidence of asserted ignorance by the former
    Prime Minister should be rejected.

    18.20 Mr O’Neill’s evidence must be rejected in light of the contemporaneous Oil Search
    documents already cited and the following:

    (a) the State’s own press release from 27 February 2014, which stated:

    The State looks forward to maintaining a material shareholding in Oil Search with
    a view to participating in the additional upside of Oil Search’s existing projects
    and the Elk-Antelope project.195

    192
    Further Statement of Peter Botten, 27 January 2022, page 9 [56] WIT.0021.0006.0001.

    193
    Further Statement of Peter Botten, 27 January 2022, page 9 [56] WIT.0021.0006.0001.

    194
    Transcript, Peter Botten, 7 February 2022, 3764.

    195
    Press Release by Secretary of Treasury Vele, 27 February 2014, WIT.0064.0002.0370.

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  • (b) Oil Search’s press release from 27 February 2014, which discussed the share
    placement and PRL 15 acquisition, and stated:

    We are delighted to have reached an agreement with the PNG Government to
    facilitate their continued investment in the Company. There remains strong
    alignment between Oil Search and the PNG Government, with Oil Search
    regarded as a key player in driving the future development of the country’s
    abundant gas resources.196

    (c) Oil Search’s press release from 12 March 2014, which discussed the share
    placement and PRL 15 acquisition, and stated:

    We welcome the continuation of the Government shareholding in Oil Search,
    underscoring our alignment with the State through the next phase of oil and gas
    development in Papua New Guinea.197

    (d) Mr O’Neill’s public statement in 2017 that:

    The Government’s intervention to buy shares in Oil Search had a positive
    influence in the direction Oil Search has taken and boosted investor confidence in
    Papua New Guinea.

    The Government and Oil Search have continued co-operation and mutual interests
    across a range of activities in Papua New Guinea. Oil Search has an outstanding
    reputation delivering for its shareholders, and has been an extremely responsible

    196
    Oil Search Press Release enclosing PNG Press Release, 27 February 2014, WIT.0064.0002.0369.

    197
    Oil Search Press Release confirming completion of share placement to PNG, 12 March 2014,
    OSL.0002.0005.5201.

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  • corporate citizen, investing millions of Kina in social development programs that
    help people around Papua New Guinea.198

    (e) Mr O’Neill’s statement in 2017 that the purpose of State’s acquisition of new Oil
    Search shares in 2014 was done “to secure our interest in the biggest employer and
    biggest taxpayer in our country and protect our national interest”.199

    Mandatory Exchange Notice and subsequent negotiations

    18.21 On 13 February 2014 IPIC issued the Mandatory Exchange Notice, confirming IPIC’s
    irrevocable election to exchange the Exchangeable Bonds into Ordinary Shares.200
    Accordingly, the O’Neill Government was faced with the long foreshadowed reality that it
    would shortly lose all of the State’s Oil Search shareholding for the first time since the
    merger of Orogen Minerals in 2002. This event led directly to the UBS loan. The State’s
    justification for obtaining a large new Oil Search shareholding – said to be strategic –
    remains unconvincing even given the evidence of those who spoke of the significant
    position that Oil Search then held in the eyes of the people of Papua New Guinea. This
    position is best summarised by Mr Botten in his further statement when he said:

    The depth and magnitude of Oil Search’s contribution over the years to PNG’s economic
    and social development, and its promotion and advocacy of PNG, has resulted in
    longstanding relationships with local communities, landowners, businesses and
    successive PNG Governments.201

    198
    Pacific Islands Report, ‘PNG PM Dismisses Claims That The Divesting Of Shares In Oil Search Limited Cost The
    Gov A Major Loss’, 25 September 2017, WIT.0036.0006.0151.

    199
    https://www.thenational.com.pg/pm-defends-shares-sale/.

    200
    Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

    201
    Further Statement of Peter Botten dated 27 January 2022, WIT.0021.0006.0001 at p.15 [92].

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  • 18.22 Mr O’Neill in his appearance before the Commission also emphasised the important role
    played by Oil Search in filling gaps where successive Governments were not able to
    deliver services such as health care and education in remote communities.202

    18.23 On 14 February 2014, Mr Botten provided the Oil Search board of directors with an
    update on the Independent State’s progress in refinancing the IPIC Exchangeable Bonds.
    In this email Mr Botten noted:

    The Prime Minister has expressed a strong interest in remaining a shareholder of
    OSH and is keenly interested in potentially receiving shares in any potential
    capital raising carried out as part of an Elk Antelope transaction. This is
    especially relevant if he is unable to buy back the shares from IPIC. He has the
    financing to do this from UBS. He has been informed of the very low probability
    of PNG being successful in any buy back from IPIC.203

    18.24 Again, there is no reason why this contemporaneous note by Mr Botten should not be
    accepted.

    18.25 On 14 February 2014, Mr Jilek of UBS responded to an email from Mr Botten of Oil
    Search following the issuance of the mandatory exchange notice stating:

    Thanks. I am inclined to encourage the government to engage nevertheless, to test
    their desire to hold the entire bloc.204

    18.26 On 21 February 2014, Mr Botten and Mr Aopi of Oil Search met with Mr Vele and then
    Governor of Bank of Papua New Guinea Loi Bakani in Sydney. At this meeting Mr Vele
    explained that the State was not able to refinance the IPIC Exchangeable Bonds and noted

    202
    Transcript, Peter O’Neill, 17 June 2021, pp. 1444-1445.

    203
    Email P Botten to K Constantinou, F Harris, G Aopi, A Kantsler, R Lee, B Philemon, K Spence and Z
    Switkowski, IPIC Update, 14 February 2014, OSL.0007.0001.0647.

    204
    Email P Jilek to P Botten, Re: Fwd: Update, 14 February 2014, OSL.0007.0001.0855.

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  • the State would be willing to fund the PRL-15 purchase through an acquisition of new Oil
    Search shares. Mr Vele stated that the State expected to receive funding from UBS AG.205

    18.27 In the days following this meeting Mr Vele would receive a number of emails from UBS
    AG providing draft loan documentation for the proposed financing and a term sheet.206

    18.28 On 23 February 2014, Mr Botten met with Prime Minister O’Neill, Mr Vele and Mr Aopi
    in Port Moresby. At this meeting Mr O’Neill stated that the State wished to retain at least
    a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the State
    as a placement, as part of Oil Search’s capital raising to fund its acquisition of an interest
    in PRL-15.207

    18.29 Mr Botten said that the AUD8.20 share price was negotiated by Mr O’Neill in Port
    Moresby on or around 23 February 2014:
    At the time of the meeting I thought that the price of AUD8.20 per share was negotiable,
    given that the market price at the time was substantially higher than AUD8.20 per share.
    It subsequently became clear that the Prime Minister and State were not going to move
    from AUD8.20 per share.208

    18.30 Mr Botten’s assertion that the State negotiated Oil Search down to the AUD8.20 share
    price necessarily implies one of two possible scenarios:

    (a) that the AUD8.20 share price was negotiated with the State by 29 January 2014
    (hence why it appears in the Board Pack from same date); or

    205
    Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at p 5, [50-51].

    206
    Email M. Turner to D. Vele, Financing Authority Diligence, 22 February 2014, NRF.001.001.5059; Email M.
    Turner to D. Vele, FW: Proposed scope of work for the Big 4 quote request, 22 February 2014, NRF.001.001.5094;
    Email M. Turner to D. Vele, Bridge Facility Term Sheet, 23 February 2014, NRF.001.001.5062; Engagement Letter,
    25 February 2014, ASH.003.008.0001.

    207
    Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at pages 5–6, [54]–[55].

    208
    Statement of Peter Botten, 14 June 2021, page 6 [56] WIT.0021.0003.0001.

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  • (b) that Oil Search were open to making the placement at AUD8.20 per share from
    January 2014 onward, and that the negotiations were an opportunity to see if the
    State would pay more than that amount.

    18.31 On the morning of 25 February 2014, Mr Botten, Mr Aopi and Mr Vele met at the Grand
    Papua Hotel. Mr Aopi gave evidence that:

    To the best of my recollection, at that meeting I was told that Prime Minister
    O’Neill was maintaining his position that he wanted the State to take a placement
    of Oil Search shares which would give it an interest of approximately 10% in Oil
    Search, and that State would pay AUD8.20 per share.209

    18.32 At 6:30pm on 25 February 2014, Mr Botten, Mr Aopi and Mr Vele met at the Grand
    Papua Hotel. At this meeting Mr Vele reiterated that Mr O’Neill was maintaining the
    position that the State wanted to acquire approximately 10% of Oil Search shares at
    AUD8.20 per share.210

    18.33 On 26 February 2014, Mr O’Neill sent a letter to Mr Botten formally expressing the
    Independent State’s interest in investing an amount of AUD1.225 billion at a subscription
    price of AUD8.20 per share before 10 March 2014.211

    18.34 On 27 February 2014, the State and Oil Search issued separate press releases,212 the
    release of which was coordinated,213 confirming:

    (a) that Oil Search would be acquiring a 22.835% interest in PRL-15/Elk-Antelope;

    209
    Statement of Gerea Aopi dated 16 June 2021, WIT.0059.0003.0001 at p.3, [24]; OSL.0017.0001.0043.

    210
    Statement of Gerea Aopi dated 16 June 2021, WIT.0059.0003.0001 at pp.3-4, [25]; OSL.0017.0001.0043.

    211
    OSL.0001.0001.5671.

    212
    WIT.0007.0005.0036; WIT.0027.0001.0630.

    213
    NRF.001.001.5576 attaching NRF.001.001.5578

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  • (b) that this acquisition would be funded through a placement of 149.39 million Oil
    Search shares to the State; and

    (c) noting the IPIC Exchangeable Bonds had been the subject of a Mandatory
    Exchange Notice so that an exchange of the relevant Oil Search shares then held
    by IPBC would occur as prescribed under the Exchangeable bonds.

    NEC Decision

    18.35 On 6 March 2014, the NEC through NEC Decision 79/2014214 formally approved:

    (a) for the State to acquire 149,390,244 shares in Oil Search Limited;

    (b) for the State to borrow AUD1.239 billion from UBS AG (Australia Branch),
    initially comprising two facilities (an AUD335 million bridge loan facility and an
    AUD904 million collar loan facility); and

    (c) for the State to engage UBS as its advisors on the financing and acquisition of Oil
    Search shares.

    This marked the formal decision by the Government of the day to enter into the UBS
    Loan and purchase the Oil Search shares.

    Findings

    18.36 According to Mr O’Neill, the rationale for the State’s purchase of Oil Search shares in
    2014 was what he perceived to be the strategic alignment between the government and
    one of PNG’s oldest and largest companies with a broad presence throughout the State’s
    resources industry. He was adamant, too, that the purchase had nothing to do with PRL-
    15.

    18.37 It is submitted that it is open to the Commission to reject the rationale put forward by Mr
    O’Neill for the following reasons:

    214
    NEC Decision 79/2014 WIT.0016.0001.0610.

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  • (a) The submission to the NEC on 6 March 2014 makes it clear that the NEC and
    therefore Mr O’Neill who signed the submission, knew that Oil Search was buying
    into PRL-15 and that this was how the State’s funds were going to be used.

    (b) The Government thought that the Oil Search share price was likely to rise and
    noted that the share price had reacted positively to the news that Oil Search would
    participate in PRL-15.

    (c) By December 2015, Mr O’Neill and the NEC had given broad authority to KPHL
    to deal with the shares; this included selling them. This demonstrates that by this
    time, the government had no interest in remaining a long term shareholder in Oil
    Search for all of the broader benefits that it had been thought that such a
    shareholding would bring. It is easy to infer that the reason for the change of
    position was because the real purpose of the share purchase had been completed,
    namely providing the means of enabling the sale of the PAC LNG Companies to
    Oil Search.

    (d) If the State was intending to be a long-term shareholder at the 10% level, it would
    be expected that it would seek a board position in order to have more influence
    over, and knowledge concerning, a company with which it sought strategic
    alignment. This does not appear to even being considered.

    18.38 It is therefore submitted that it is impossible to disconnect the State’s purchase of Oil
    Search shares from Oil Search’s acquisition of an interest in PRL-15. Leaving aside the
    question of whether it is appropriate for the State to invest in listed companies, there is
    nothing inherently wrong in the State’s finances being used in a way that promotes the
    development of one of its resources. This is particularly so when the State would have
    back-in rights to take a stake in the resource in due course.

    18.39 At T1470 on 17 June 2021 and again on T3765 on 7 February 2022, Mr O’Neill was
    questioned about what would have happened had he known that Oil Search were going to
    purchase an interest in PRL15 with the money provided by the Independent State in the
    UBS Loan. At T1470, Mr O’Neill gave evidence that he was:

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  • …certainly sure that it will be a different transaction and if I had knowledge of
    that that particular discussions going between Oil Search and Elk Antelope
    partners, PNG government would have reviewed its position.

    18.40 At T3765, Mr O’Neill further stated:

    I would have negotiated with Oil Search, InterOil or Elk Antelope to buy their
    shares in the PNG LNG Project because that project was ongoing. Combining
    these two projects would have given us a better sizeable interest in the current
    existing development so it would have been a different transaction, we would have
    had a different conversation but what has happened, has happened.

    18.41 It would be expected that Mr O’Neill as the then Prime Minister would be fully
    conversant with developments over PRL-15 and be actively involved in trying to
    accelerate the exploitation of the resource. Mr Vele was certainly aware of what was
    going on.

    18.42 In those circumstances, Mr O’Neill’s attempts to distance himself from PRL-15 are
    extraordinary and so unconvincing that they give rise to the question of whether he might
    be wishing to conceal something and if so, what. For example:

    (a) At T3761 on 7 February 2022, Mr O’Neill was referred to an email from Mr
    Botten of 14 February 2014 [OSL.0007.0001.0647] in which it was stated that
    Prime Minister O’Neill was keenly interested in potentially receiving shares in any
    potential capital raising carried out as part of an Elk-Antelope transaction. Mr
    O’Neill said that there was absolutely no reason why “we” would want to be part of
    that transaction. We say why not? And more to the point, this is exactly what the
    State then did.

    (b) At T3764, he said there was never any discussion about Oil Search using the
    money to buy Elk-Antelope yet the submission that he signed on 6 March 2014
    expressly mentions this.

    (c) Mr Maladina gave clear evidence that, despite Mr O’Neill’s denials at T3763, he
    had attended two meetings at which Mr O’Neill and Mr Carlos Civelli were
    present and Mr O’Neill and Mr Civelli had private conversations at each. Ms

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  • Amputch’s evidence denying this should not be accepted given that she is a close
    business associate of Mr O’Neill and telephoned him immediately after she
    received the Commission’s summons and no-one sought to challenge Mr Maladina
    by cross-examination.

    (d) At T4148, Mr Vele said that he would have discussed Oil Search’s potential
    acquisition into PRL-15 with Mr O’Neill after the ill-fated trip to Abu Dhabi in
    February 2014. He believed that Mr O’Neill would already have been aware of
    rumours about this as he himself had been. At T4149 , he was surprised that Mr
    O’Neill said that he was not aware of the rumours.

    18.43 It is submitted that balance of the evidence suggests that a significant driver of the
    transaction, perhaps the dominant one, may have been to assist in ensuring that the PAC
    LNG companies were bought out of PRL-15 and Oil Search take over their interests in the
    resource.

    18.44 If the Commission were to accept Mr O’Neill’s rationale, it would then be submitted that
    the rationale does not stand scrutiny and was not clear or strong enough to be used to
    justify a loan of more than $1.2 billion that the State had no means to repay.

    18.45 Brattle considered this in their first report. They took the view that a strategic investment
    in relation to shares is one where the investor expects an additional return over and above
    the ordinary return that all investors in those shares would receive through dividends and
    share price appreciation. They then noted that the material that they had reviewed did
    not explain how owning Oil Search shares would provide value to Papua New Guinea
    over and above any dividends and share price appreciation that the State might receive
    (and which all other Oil Search shareholders would receive). Brattle concluded that a
    significant objective for the Government was to benefit from dividends and/or a rising Oil
    Search share price. If the Government had a strategic investment objective, the documents
    they reviewed did not explain why or how the proposed shareholding would influence Oil
    Search behaviour to the benefit of Papua New Guinea. Further, if the Government’s
    objective included holding more than 10% of the shares in Oil Search, as they stated, it
    failed to maintain this holding after about a month of acquiring the shares.

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  • 18.46 Further, there was no need for the State to seek to participate indirectly in PNG resource
    projects through holding shares in Oil Search when it had the means to have a direct
    interest in the project through back-in rights.

    18.47 We submit that in relation to Term of Reference (o) it is open to the Commission to find
    that:

    (a) by August 2013, parties acting on behalf of the State, including Mr Vele, were
    considering an acquisition of new Oil Search shares and that Mr Vele in fact
    preferred this option over the refinancing of the IPIC Exchangeable Bonds;

    (b) a decision (albeit unofficial) to issue a new placement of Oil Search shares had
    been made before February 2014, and certainly before the Mandatory Exchange
    Notice was issued on 14 February 2014;

    (c) that the decision to purchase the Oil Search shares was made on either 23 February
    2014 or 27 February 2014 before the NEC meeting on 6 March.

    19. TOR 1(p) The rationale as to why the State determined to utilize the UBS Loan to
    purchase Oil Search shares

    19.1 Between 2012 and January 2014, the State conducted a tender process with a number of
    prospective financiers to refinance the IPIC Exchangeable Bonds. In August 2013, Mr
    Vele flew to Sydney to meet with prospective financiers from amongst others JP Morgan,
    Morgan Stanley and UBS.

    19.2 On 16 August 2013, following those meetings Mr Latimer sent emails to the prospective
    financiers to update them on next steps. Representatives from JP Morgan and Morgan
    Stanley received identical emails noting that they could expect a response within a
    week.215 Mr Jilek of UBS, on the other hand, received an email requesting a formal
    engagement letter.216

    215
    NRF.001.001.3693; NRF.001.001.3694.

    216
    NRF.001.001.3697.

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  • 19.3 On 22 August 2013, Mr Jilek wrote to Mr Latimer and advised that he had spoken with
    Mr Vele who had “made it pretty clear that we are likely to be appointed formally
    following his meeting with the PM”.217

    19.4 As identified earlier, between August 2013 and December 2013 a number of parallel
    processes considered proposals from potential financiers, including UBS, Citibank, ANZ
    Barclays and Helmsley Capital.

    19.5 On 13 February 2014, IPIC issued the Mandatory Exchange Notice confirming it had
    elected to exchange the Exchangeable Bonds for the State’s ordinary shares in Oil
    Search.218

    19.6 As noted earlier:

    (a) on 14 February 2014, Mr Botten provided the Oil Search board of directors with
    an update on the Independent State’s progress in refinancing the IPIC
    Exchangeable Bonds.219

    (b) On 21 February 2014, Mr Botten and Mr Aopi of Oil Search met with Mr Vele and
    then Governor of BPNG Loi Bakani in Sydney. At this meeting Mr Vele explained
    that the State was not able to refinance the IPIC Exchangeable Bonds and noted
    the State would be willing to fund the PRL-15 purchase through an acquisition of
    new Oil Search shares. Mr Vele stated that the State expected to receive funding
    from UBS AG.220

    19.7 On 22 February 2014, Mr Vele received an email from Mr Mitchell Turner of UBS AG
    advising that the Independent State could finance the acquisition of the Oil Search shares
    by borrowing pursuant to the Loans (Overseas Borrowings) (No.2) Act utilising the

    217
    NRF.001.001.3856.

    218
    Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

    219
    Email P Botten to K Constantinou, F Harris, G Aopi, A Kantsler, R Lee, B Philemon, K Spence and Z
    Switkowski, IPIC Update, 14 February 2014, OSL.0007.0001.0647.

    220
    Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at p 5, [50-51].

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  • authorised purpose of “purchasing equity in companies”. The advice included a
    requirement that the decision be ratified by a decision of the NEC.221

    19.8 On 23 February 2014, Mr Turner of UBS sent Mr Vele, Mr Mortensen and Mr Latimer a
    briefing paper for the meeting with Mr O’Neill and subsequent meeting with Mr Botten.
    UBS had drafted it in a way that could be used as a base for a subsequent NEC
    submission. Mr Jilek was copied into the email.222

    19.9 On 23 February 2014, Mr Botten met with then Prime Minister O’Neill, Mr Vele and Mr
    Aopi in Port Moresby. At this meeting Mr O’Neill stated that the State wished to retain at
    least a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the
    State as a placement, as part of Oil Search’s capital raising to fund its acquisition of an
    interest in PRL-15.223

    19.10 The Commission has heard evidence relating to the conduct of UBS during the IPIC
    Exchangeable bonds refinancing tender process:

    (a) circumventing the tender process by obtaining IPIC Exchangeable bonds
    transaction documents224

    (b) of the tendering parties, they were the only ones who requested the independent
    financial advisors to IPBC be excluded from the presentation of their refinancing
    proposal;225

    (c) objecting to the need to participate in a tender process;226

    221
    Email M. Turner to D. Vele, Financing Authority Diligence, 22 February 2014, NRF.001.001.5059.

    222
    NRF.001.001.5061

    223
    Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at pages 5–6, [54]–[55].

    224
    NEC Policy Submission – draft (Kumarasiri/Waine); Email P Jilek to A Latimer, PNG, 22 August 2013,
    NRF.001.001.3856.

    225
    Affidavit of Igimu Momo dated 17 December 2021, WIT.0141.0001.0001 at page 9, [64].

    226
    Affidavit of Igimu Momo dated 17 December 2021, WIT.0141.0001.0001.

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  • (d) making threatening phone calls to the State’s decision makers;227 and

    (e) making threats to parties acting on behalf of the State that should UBS not be
    selected “UBS will have to look at its other options in terms of the IPIC Bond” and
    that this “may not be a benefit for the State”.228

    Findings

    19.11 It is open to the Commission to find that:

    (a) from 16 August 2013 parties acting on behalf of the State, including Mr Vele, Mr
    Latimer and potentially Mr O’Neill, considered UBS to be the favoured financier
    for the IPIC Exchangeable bonds refinancing;

    (b) the State did not engage in a tender process to evaluate proposals from prospective
    financiers in relation to the purchase of 149.39 million shares in Oil Search;

    (c) UBS’ threatening conduct throughout the tender process whilst not an overriding
    consideration by parties acting on behalf of the State may have featured in the
    decision-making process; and

    (d) the State determined to use the UBS Loan to acquire the Oil Search shares because
    UBS following the issuance of the Mandatory Exchange Notice encouraged parties
    acting on behalf of the State to engage with Oil Search regarding an on-market
    purchase of shares.

    20. TOR 1(q): Whether legal and administrative processes were followed to buy Oil
    Search shares in 2014.

    20.1 Section 40(1) of the Public Finances (Management) Act 1995 (PNG) requires that tenders
    must be publicly invited and contracts let for the purchase or disposal of property or
    stores or the supply of works and services the estimated cost of which exceeds a
    prescribed amount. However, section 40(3)(b) provides an exception to section 40(1),

    227
    Supplementary Statement of Dr Clement Waine dated 11 February 2022, WIT.0039.0007.0001 at page 4, [41].

    228
    Email C Waine to B O’Dwyer enclosing email chain, RE: IPIC, 21 October 2013, WIT.0155.0001.2525.

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  • where a Supply and Tenders Board certifies that the inviting of tenders is impracticable or
    inexpedient.

    20.2 Section 117 of the Public Finances (Management) Act 1995 allows for the issuing of
    Financial Instructions, not inconsistent with the Act, as to any matter prescribed by the
    Act to be so provided for, or that are necessary or desirable for carrying out or giving
    effect to the Act and in general for the better control and management of public moneys
    and public property.

    20.3 Financial Instruction 1A/05 (“Supply and Tenders Board Operations”) are such Financial
    Instructions. Clause 11.1 of this relevantly provides that a certificate of inexpediency
    cannot be issued retrospectively to cover a contract already executed. Clause 11.2
    provides that a certificate of inexpediency will only be issued in situations where a
    declared natural disaster, defence emergency, health emergency, or situation of civil
    unrest exists, and procurement processes must be undertaken urgently to remedy the
    situation. Clause 11.2 further provides that: “Lack of forward planning by departments is
    no longer acceptable. Departments must now be planning their major procurements in a
    timely manner”.

    20.4 Schedule 2, clause 3 of the UBS side letter229 and the Bridge Facility Agreement230
    included as a condition precedent the issuing of a certificate of inexpediency.

    20.5 On 6 March 2014, Mr Vele wrote to the Chairman of the Central Supply and Tenders
    Board (CSTB), Mr Philip Eludeme, requesting that the Chairman urgently consider and
    approve the enclosed request for certificate of inexpediency to cover the advisory fees of
    Pacific Legal Group and Pacific Capital Limited up to a limit of K9,000,000, and to UBS,
    Ashurst, Norton Rose Fulbright and KPMG limited to AUD14,555,759.231

    229
    NRF.001.003.5499.
    230
    NRF.001.003.5690.
    231
    Letter D. Vele to P. Eludeme, Financial Accommodation for The Independent State of Papua New Guinea (the
    State), 6 March 2014, WIT.0019.0002.0435.

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  • 20.6 The request for certificate of inexpediency was a pro forma document. There was a
    section titled “reason for certificate”, which listed the four grounds in clause 11.2 of
    Financial Instruction 1A/05 as boxes to be ticked. However, none of the boxes were
    ticked. In the request, the explanation for urgency was expressed as that the State had
    until 4pm on Thursday 6 March to approve a share placement and until 5pm on Thursday
    6 March for the relevant documentation to be executed, failing which the State would not
    secure a shareholding and would be exposed to costs of up to AUD18,000,000.232

    20.7 On 7 March 2014, the CSTB met and resolved to issue the certificate of inexpediency.
    The minutes of the meeting noted that the CSTB “is satisfied that all process have been
    followed and the award was made in accordance to the Provisions of the Public Finance
    (Management) Act”. The decision was not expressed to be conditional. The State
    Solicitor was not present at this meeting but his alternate, Deputy State Solicitor Jeklin
    Talonu, was present.233

    20.8 On 10 March 2014, Mr Eludeme wrote to Mr Vele explaining that the CSTB had
    approved the issue of certificates of inexpediency in respect of the local and international
    advisors but qualified the approval by noting that it was subject to the State Solicitor’s
    clearance and receipt of the original authority to pre-commit.234

    20.9 On 12 March 2014, the Acting Board Secretary of the CSTB, Mr Babaga Naime, wrote to
    the State Solicitor seeking advice in relation to the certificate of inexpediency.235

    20.10 On 20 March 2014, the State Solicitor wrote to Mr Naime declining to give the required
    legal clearance for the certificate of inexpediency on the basis that it was not requested for

    232
    WIT.0019.0002.0438
    233
    Minutes of CSTB meeting no. M-0/14, 7 March 2014, WIT.0023.0001.0028, p 6 (8.5).
    234
    Letter P. Eludeme to D. Vele, Application for certificates of inexpediencies for the engagement of financial, legal
    and technical advisors in connection with the purchase and related financing of the purchase by the State, 10 March
    2014, WIT.0019.0004.0038.
    235
    Letter D. Vele to D. Rolpagarea, Request for issuance of legal clearance – CSTB Col 02/14 – application for
    certificate of inexpediencies for engagement of financial, legal and technical advisors in connection with the
    purchase of shares in Oil Search Limited and related financing of the purchase by The State of Papua New Guinea,
    12 March 2014, WIT.0019.0002.0431.

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  • one of the four grounds listed in the relevant Financial Instructions and could not be
    issued retrospectively to cover a contract that had already been performed. However, he
    advised that: “Treasury and the Central Bank may consider paying for the services
    rendered by the Consultants on a Quantum Meruit basis,” and noted: “the payment for
    legal services should be done in consultation with the Attorney General.”236

    20.11 On 28 March 2014, Mr Eludeme wrote to Mr Vele attaching the letter from the State
    Solicitor dated 20 March 2014 and noting that the certificate of inexpediency cannot be
    issued nor could the CSTB retrospectively approve the payments of services for the
    engagement of the consultants. Mr Eludeme advised instead that: “The engagement and
    payment of legal services from private firms must be done in consultation with the
    Attorney General. Payment for the provisions of legal services should be made on
    Quantum Meruit basis provided the State is fully satisfied with the services rendered.”237

    20.12 On 3 April 2014, the CSTB met and resolved to rescind its decision to engage the
    consultants in reliance on the State Solicitor’s advice in relation to the certificate of
    inexpediency.238

    20.13 On 10 April 2014, Mr Eludeme wrote to Mr Vele advising of the CSTB’s rescission of its
    decision and advising that this “effectively nullifies the issuance of the Certificate of
    Inexpediencies for these engagements.”239

    236
    Letter D. Rolpagarea to B. Naime, RE: Request for Issuance of Legal Clearance – CSTB Col 02/14 – Application
    for Certificates of Inexpediency for engagement of Financial, Legal and Technical advisors in Connection with the
    Purchase of Shares in Oil Search Limited and related Financing of the Purchase by the State of Papua New Guinea,
    20 March 2014, WIT.0025.0001.0190, p 4 (18).
    237
    Letter P. Eludeme to D. Vele, Legal clearance for applications for certificates of inexpediencies for the
    engagement of financial, legal and technical advisors (x3) in connection with the purchase and related financial
    advice of the proposed purchase of shares in Oil Search by the State, 28 March 2014, WIT.0025.0001.0203.
    238
    Minutes of CSTB meeting no. M-05/14, 3 April 2014, WIT.0025.0001.0194, p 6 (8.7).
    239
    Letter P. Eludeme to D. Vele, Rescinding award of contracts and nullifying issurance [sic] of inexpediencies for
    the engagement of financial, legal and technical advisors (x3) in connection with the purchase and related financial
    advice of the purchase of share in Oil Search by the State, 10 April 2014, WIT.0023.0001.0046.

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  • 20.14 Mr Vele incorrectly contended that that the CSTB had an “unfettered discretion” to issue
    a certificate of inexpediency if it determines that it is inexpedient or impracticable to
    require a tender process. He also contended that the Financial Instructions which limit the
    grounds on which a certificate of inexpediency can be issued are inconsistent with the
    Public Finances (Management) Act 1995.240

    20.15 It is submitted that clauses 11.1-11.2 of Financial Instruction 1A/05 are not inconsistent
    with the Public Finances (Management) Act 1995. It is not inconsistent with section
    40(3) of the Public Finances (Management) Act 1995 for Financial Instructions to be
    made which prescribe the grounds on which the CSTB may certify that the inviting of
    tenders is impracticable or inexpedient. This facilitates the better control and
    management of public moneys and public property.

    20.16 Further, in Robmos Ltd v Punangi [2008] PGNC 70; N3372 (14 May 2008) (a case cited
    by the State Solicitor in his advice dated 20 March 2014), the relevant Financial
    Instructions were in issue and there was no suggestion or finding that they were invalid.241
    The National Court also held that the Financial Instructions have “similar force and
    effect” as the Public Finances (Management) Act 1995.

    20.17 It is clear that the issuing of the certificate of inexpediency by the CSTB on 7 March 2014
    was done contrary to clauses 11.1-11.2 of Financial Instruction 1A/05. This is because:
    a) there was no declared natural disaster, defence emergency, health emergency, or
    situation of civil unrest in existence; and b) it was effectively issued retrospectively. The
    request for the certificate was also deficient and should have been recognised as such.

    20.18 Further, there was no power in the Public Finances (Management) Act 1995 for the CSTB
    to issue a conditional certificate of inexpediency, to the extent that it purported to do.

    21. TOR (r) What role did Papua New Guinean and international legal and financial
    advisors play in relation to the UBS Loan

    240
    Affidavit of Dairi Vele sworn 26 April 2021, WIT.0014.0007.0001 [521].
    241
    See in particular Robmos Ltd v Punangi [2008] PGNC 70; N3372 (14 May 2008) [58]-[59], [61], [63].

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  • UBS

    21.1 As noted earlier, the Australian branch of UBS AG was engaged as both:

    (a) the State’s sole financial advisor and sole lead arranger (on 25 February 2014) in
    relation to:

    (i) the management of the State’s investment in Oil Search; and

    (ii) associated matters flowing from the issuance of the 2009 IPIC
    Exchangeable Bonds in respect of the State’s shareholding.242

    (b) exclusive arranger of the financing facility to the State (27 February 2014).243

    21.2 As previously mentioned, an expert report prepared by the Brattle Group indicates that
    over the life of the UBS loan, 2014-2016, the Independent State paid an estimated
    AUD336,300,000 to UBS.244 The Brattle Group further assessed that the loan involved a
    transfer of AUD174,800,000 in value from the State to UBS (excluding fees).245

    21.3 The two key personnel involved on behalf of UBS were Patrick “Paddy” Jilek and
    Mitchell Turner. Both were the persons named in the “Key Man Provision” in clause 8 of
    the advisory mandate letter and were identified as “Senior Team Members”.

    242
    Letter UBS AG, Australia Branch to Dairi Vele, 25 February 2014, WIT.0015.0001.1425.

    243
    Commitment letter – financial accommodation for the Independent State of Papua New Guinea, 27 February
    2014, WIT.0015.0001.1063.

    244
    Exhibit PPP, Third Brattle Report to the Commission of Inquiry into the UBS Loan, WIT.0132.0003.0002 at
    0037, [111].

    245
    Exhibit PPP, Third Brattle Report to the Commission of Inquiry into the UBS Loan, WIT.0132.0003.0002 at
    0039, [116].

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  • 21.4 Mr Turner was a witness to the execution of the financing mandate letter, and both Mr
    Turner and Mr Jilek were also involved in the financing engagement by UBS.246 Each
    declined repeated invitations to give evidence.

    21.5 It is noted that clause 9(b) of the advisory mandate letter contained an acknowledgement
    on behalf of the State that UBS may engage in various activities notwithstanding that a
    conflict of interest exists or may arise. Clause 9(c) referred to the creation of “permanent
    or ad hoc arrangements/information barriers … for the purposes of managing conflicts of
    interest … where appropriate”. However, there does not appear to be any evidence of
    such arrangements or information barriers being used in the circumstances of UBS’s
    engagement by the State. Finally, clause 12 provided, in effect, that it was not the
    intention of the parties to create a fiduciary relationship between them.

    21.6 There were similar provisions in the financing mandate letter, including an
    acknowledgement by the State that UBS may provide financial advisory services to the
    State and that conflicts of interest may arise (and a consent by the State to such activity),
    and an exclusion of any fiduciary relationship.

    21.7 Both engagement letters were governed by the law of New South Wales. In New South
    Wales, a party in the position of an investment bank such as UBS may, by contract,
    exclude or modify the operation of any fiduciary duties: Australian Securities and
    Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007]
    FCA 963; (2007) 160 FCR 35, 77 [278]-[281], 82 [323].

    21.8 However, regardless of whether UBS effectively excluded any fiduciary duties it had to
    the Independent State, it is clear from UBS’s involvement as both advisor and financier
    and the involvement of key UBS personnel on both engagements that the State’s was not
    receiving proper and independent advice and representation in relation to the UBS loan.
    This no doubt lead to the poor financial outcome to the State from the loan.

    246
    See, for example, WIT.0099.0007.0034; WIT.0099.0007.0037; WIT.0099.0007.1196; ASH.002.003.7510;
    ASH.002.001.5327.

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  • NRFA

    21.9 On 6 March 2014, NRFA was retained to advise the State on the UBS Loan. Despite
    requests from its former client for the production of all relevant documents including
    retainers, NRFA did not produce the relevant retainer to the Commission.

    21.10 No evidence has been provided to the Commission that a public tender process was
    utilised before the awarding of work to NRFA under any of the above identified retainers.

    21.11 No evidence has been provided to the Commission about the amount paid to NRFA for its
    work under the various retainers. The UBS Loan documentation247 indicates that a
    payment of AUD600,000 was made to NRFA from the total amount borrowed for the
    Bridge Facility.

    Anthony Latimer

    21.12 Mr Anthony Latimer was a key advisor to the State and the NRFA partner responsible for
    much of the legal work in respect of UBS Loan transaction.

    21.13 In his appearance before the Commission, Mr Jimmy Maladina outlined Mr Latimer’s
    history in the Independent State:

    … The family, we have known him for a longer period of time because his parents
    used to run a plantation up in Goroka, Eastern Highlands Province early in the
    ’50s and the ’60s. And my dad used to operate in Goroka and I was born in
    Goroka so that family connections were there. They used to run a Latimer
    Plantation in the Bena Bena region of Goroka, Eastern Highlands. So, that
    connection – I do know the family longer than that but professionally about 10
    years from 2014.’248

    247
    Bridge Facility Agreement – Drawdown Notice, WIT.0015.0002.1265 at 1266.

    248
    TS2506.8-14 (2 August 2021).

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  • 21.14 Mr Latimer had also previously been a Partner with Corrs Chambers Westgarth and had
    advised on a number of transactions in the State.249

    21.15 Mr O’Neill when pressed on the role played by Mr Latimer in the UBS Loan transaction
    commented that:

    He would have been advising some of our departments and of course our SoE’s but
    not directly to government.250

    21.16 This is a very limited articulation of Mr Latimer’s role. As will be established Mr
    Latimer’s involvement with the UBS Loan was extensive.

    21.17 Mr Latimer is no longer a partner with NRFA. Mr Latimer is based in Australia and is not
    a compellable witness. Given Mr Latimer’s integral role in the UBS Loan the Commission
    made a number of requests for Mr Latimer to appear on a voluntary basis to give
    evidence. Mr Latimer through his lawyer Mr Yeldham of KWM confirmed receipt of
    those requests but did not appear before the Commission.

    Involvement of NRFA following MEN

    21.18 While NRFA was formally retained on 6 March, evidence before the Commission
    indicates that it was involved in the UBS Loan transaction immediately following the
    issuance of the Mandatory Exchange Notice on 14 February 2014.251

    21.19 Mr Latimer accompanied representatives of the State including Governor of BPNG Loi
    Bakani, Mr Vele and Mr Botten and Mr Aopi of Oil Search to Abu Dhabi in February
    2014 to meet with IPIC and discuss the Exchangeable Bonds.252

    249
    TS1906.22-25 (24 June 2021).

    250
    TS1447 (17 June 2021).

    251
    Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

    252
    Affidavit of Dairi Vele dated 26 April 2021, WIT.0014.0007.0001 [276].

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  • 21.20 From 22 February 2014, Mr Latimer engaged with Mr Vele and other representatives of
    the State regarding the below:

    (a) providing advice on a briefing paper prepared for Mr Vele by UBS253 in advance
    of Prime Minister O’Neill’s meeting with Mr Botten including:

    (i) that UBS recommended the State appoint NRFA as its legal advisors;

    (ii) the State should obtain a term sheet from UBS to ensure terms of funding
    were clear;

    (iii) the State should not commit to a deal with Oil Search until funding was in
    place;

    (iv) the need to identify possible funding risks flowing from other financing
    arrangements;

    (v) querying whether the State would be able to obtain the required approvals
    in the following week.254

    (b) corresponding with Mr Vele noting the urgency of transaction completion;255

    (c) preparing draft NEC submissions regarding the appointment of UBS as financial
    advisor and NRF as legal advisor;256

    (d) engaging KPMG to provide advice on the UBS financial modelling;257

    253
    Email M Turner to D Vele, 22 February 2014, RE PM Briefing Paper, NRF.001.001.5054.

    254
    Email A Latimer to D Vele, 22 February 2014, RE: PM Briefing Paper, NRF.001.001.5052.

    255
    Email A Latimer to D Vele, 26 February 2014, RE: PNG – letter and announcement attached URGENT,
    NRF.001.001.5334.

    256
    NRF.001.001.4090.

    257
    Email A Latimer to M Blake KPMG, 26 February 2014, PNG State – Proposed scope of work,
    NRF.001.001.5248.

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  • (e) advising the State on the draft term sheet;258

    (f) advising on draft transaction documents;259

    (g) together with PLG, Mr Maladina and Mr Chang co-ordinating steps required for
    the State to execute the agreements;

    (h) coordinating meetings between Mr Mortensen, UBS and KPMG.260

    21.21 On 26 February 2014, NRFA sent an email to Mr Vele and Mr Mortensen providing
    initial advice on the Term Sheet for the Collar financing transaction.261 Subsequent to this
    other NRFA solicitors took a larger role in the drafting of transaction documents and
    coordination of execution.

    NRFA engagement with the Commission

    21.22 It is necessary at this stage to address the conduct of NRFA and their legal representatives
    King Wood Mallesons (KWM) with regard to their interaction with this Commission.

    21.23 The Terms of Reference made it very clear that all SoE’s were duty bound to cooperate
    with the Commission.

    21.24 Those Terms of Reference were made available to KWM on 15 March 2021.262

    258
    Email A Latimer to D Vele, 24 February 2014, RE: Bridge facility term sheet, NRF.001.001.5087.

    259
    NRF.001.002.7597.

    260
    Email A Latimer to C Roberts, 28 February 2014, KPMG Meeting, NRF.001.001.6565.

    261
    Email T Hoser to D Vele and L Mortensen, 26 February 2014, Project Kumul – Bridge and Collar Financing
    Transaction – Norton Rose Fulbright comments, NRF.001.001.5225.

    262
    Letter Solicitors Assisting to A Dietz of NRFA, 15 March 2021, COU.0001.0001.0001.

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  • 21.25 Despite initially indicating their willingness to assist, NRFA through KWM consistently
    stalled and delayed the work of this Commission. NRFA had been retained under a
    number of retainers between 5 December 2012 and 6 March 2014.263

    21.26 It became apparent that:

    (a) the records held by NRFA were not kept in an appropriate matter with documents
    from all three retainers becoming intermingled;264 and

    (b) the records held by NRFA did not adequately identify their client.265

    21.27 KWM requested that a client authority be provided for each retainer. The Commission
    attended to same and provided copies to the KWM. Even so, KWM continued to withhold
    disclosure despite instructions to the contrary. KWM then wrote to the signatories seeking
    to confirm that they had indeed signed the client authorities.266

    21.28 In August 2021, after 5 months of the Commission seeking the production of the
    documents, NRFA through their solicitors KWM produced the relevant documents. It is
    worth noting however, that these documents:

    (a) were provided during the August 2021 hearings of this Commission (which at the
    time were scheduled to be its last);

    (b) were not provided in accordance with the Commission’s document production
    protocol; and

    (c) failed to include key metadata significantly complicating the review processes.

    Pertusio

    263
    Letter T Toemoe to D Kavanamur, 14 April 2021, COU.0001.0001.0033.

    264
    Letter T Toemoe to Solicitors Assisting, 3 June 2021, COU.0001.0001.0168.

    265
    Letter T Toemoe to Solicitors Assisting, 30 April 2021, COU.0001.0001.0115.

    266
    Letter T Toemoe to D Manau, 19 May 2021, COU.0001.0001.0153.

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  • 21.29 Pertusio Capital Partners Limited (Pertusio Capital) is a company incorporated in the
    Independent State.267 Pertusio Capital was formed “as an investment advisory business
    and investment holding company”.268

    21.30 The company was incorporated on 1 July 2009, with Lars Mortensen as its sole Director
    and Shareholder.269 Mr Mortensen is presently based in Australia and is not a
    compellable witness. At the request of the Commission he appeared before the
    Commission to give evidence.

    21.31 In March 2010, Nathan Chang became a Director of Pertusio Capital, and on 16
    November 2011 became a Shareholder.270 Mr Chang is presently based in Australia and is
    not a compellable witness. At the request of the Commission he appeared before the
    Commission to give evidence.

    21.32 Mr Vele, following work on the establishment of Kroton No. 2 Limited which later
    became Kumul Petroleum Holdings Limited (the Independent State’s holding company
    for its participating interest in the PNG LNG Project)271, left the public service to join
    Pertusio Capital with the goal of building “a strong investment advisory business”.272
    From November 2011 until 31 March 2012, Mr Vele was a Director and Shareholder of
    Pertusio Capital.273

    21.33 However, emails provided to the Commission by NRF indicate that Mr Vele, despite
    supposedly leaving Pertusio Capital, continued to use his Pertusio Capital email address

    267
    Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [2].

    268
    Statement of Lars Rune Mortensen dated 21 June 2021, WIT.0100.0002.0001 at 0003, [9].

    269
    View Local Company (ipa.gov.pg).

    270
    Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [2].

    271
    Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [3].

    272
    TS.1674.5 (21 June 2021)

    273
    Affidavit of Dairi Vele sworn 29 April 2021, WIT WIT.0014.0009.0011 at 0018, [42].

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  • in August 2013 in correspondence with Mr Latimer, NRF and Mr Mortensen.274 Further,
    the necessary documents reflecting Mr Vele’s cessation as shareholder and director were
    not lodged until April 2014.275

    21.34 In August 2013, Mr Vele, as a member of the recently formed IPIC Bond Committee,
    requested that Mr Mortensen accompany him to meetings in Sydney with several
    international investment banks to discuss proposals to act as advisors and arrangers to the
    State in its endeavours to retain a significant shareholding in Oil Search.276 Mr Mortensen
    stated that following his involvement with the bank meetings in August 2013 his role was
    limited to providing ad hoc advice to Mr Vele until February 2014, when he was brought
    back in to advise on the UBS Loan.

    21.35 Mr Chang was absent from the Independent State in 2013 and was generally aware of but
    had limited involvement in the work performed by Mr Mortensen.277 Mr Chang returned
    to the State in early 2014. Mr Chang described his role between February and March of
    2014 as “assistance with transaction management in Port Moresby in support of the
    Treasury and under instructions from Acting Secretary for Treasury, Mr. Dairi Vele” in
    relation to the UBS Loan.278

    21.36 However, there was no evidence of a formal contract ever being entered into between the
    State and Pertusio Capital.

    274
    NRF.001.001.2761; NRF.001.001.3597; NRF.001.001.3664; NRF.001.001.3683; NRF.001.001.3740;
    NRF.001.001.3794; NRF.001.001.3797; NRF.001.001.3808; NRF.001.001.3824; NRF.001.001.3840;
    NRF.001.001.3848; NRF.001.001.3858; NRF.001.001.3861; NRF.001.001.3877; NRF.001.001.3883;
    NRF.001.001.3886; NRF.001.001.3886; NRF.001.001.4040; NRF.001.001.4087; NRF.001.004.2455;
    NRF.001.004.2616; NRF.001.004.2995; NRF.001.004.3093; NRF.001.004.3098; NRF.001.004.3115.

    275
    WIT.0155.0001.2966; WIT.0155.0001.2979.

    276
    Statement of Lars Rune Mortensen dated 21 June 2021, WIT.0100.0002.0001 at 0005 [18], Exhibit II.

    277
    Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [7].

    278
    Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [10].

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  • 21.37 Pertusio Capital were included in the certificate of inexpediency, but when this was
    revoked were ultimately paid K1.25 million based on Mr Vele’s quantum meruit
    assessment. This payment was paid directly by Pacific Legal Group to Pertusio Capital.279

    21.38 There is a question about whether Mr Vele as a former director and shareholder should
    ever have been involved in approving Pertusio Capital’s fees when he became a public
    official.

    Pacific Legal Group

    21.39 Pacific Legal Group Lawyers (‘PLG’) is a law firm based in Port Moresby, Papua New
    Guinea.

    21.40 Mr John Beattie, the managing partner of PLG, appears to have been the primary point of
    contact with Mr Latimer and Mr Maladina, holding discussions with both to discuss the
    nature of the transaction and the role that PLG was to play in regard to same.280 This was
    a pattern that was continued when it came to determining amounts to be paid to the
    relevant advisors and how invoices were to be issued to the Independent State. Mr
    Maladina testified that the three discussed an appropriate amount to be charged by Mr
    Maladina and how that would be presented to the Department of Treasury.

    21.41 On 26 February 2014, Mr Moe of NRF sent an email to Mr Beattie, the Managing Partner
    of PLG and requested PLG provide an opinion, from a Papua New Guinea law
    perspective, on the proposed UBS Loan under the Loans (Overseas Borrowings) (No. 2)
    Act.281 The email from Mr Moe contained a thread of emails including an advice offered
    by Mr Frecker of Ashurst. The understanding of Mr Beattie was that “PLG was
    requested to review the advice from Ashurst and advice NRFA if the advice was in

    279
    Letter from Nathan Chang to the Commission dated 19 January 2022, pp 2-3, WIT.0095.0006.0006.

    280
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [13]).

    281
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0002
    [7]) [Exhibit RR]; Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021
    (WIT.0099.0006.0001 at 0002 [8]); NRF.001.001.5206.

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  • order”.282 On 27 February 2014, Mr Beattie responded to Mr Moe and confirmed the
    advice from Ashurst was in order.283

    21.42 Shortly after 26 February 2014, PLG was engaged by NRF following discussions between
    Mr Beattie, Mr Latimer and Mr Maladina.284

    21.43 Messrs Beattie and Asigau identified two relationships that were key to PLG being
    engaged in the matter. The first was:

    … a long standing association with Anthony Latimer and NRF. PLG has acted as
    agents for NRFA on various transactions and matters prior to and after the UBS
    loan transaction.285

    21.44 The second key relationship was with Mr Maladina, who is variously referred to as a
    Consultant with and client of PLG.

    21.45 As PLG was engaged by NRF, and not the Independent State directly, a formal tender
    process under the PFMA was not required. No formal retainer or letter of engagement
    has been provided to the Commission. Mr Beattie in his sworn statement noted:

    282
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [9]) [Exhibit RR].

    283
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [12]) [Exhibit RR]; Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021
    (WIT.0099.0006.0001 at 0003 [13]); NRF.001.001.5925.

    284
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [14]) [Exhibit RR].

    285
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [15]) [Exhibit RR].

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  • I do not recall any formal retainer being signed with NRFA in respect of the
    transaction. The instructions were issued and accepted on the basis of the existing
    association between PLG and NRFA.286

    21.46 Without a formal letter of engagement the scope of PLG’s engagement is unclear. Mr
    Asigau understood that PLG was engaged to act as NRF’s “PNG legal advisors on the
    transaction”.287 Mr Beattie, characterised the role played by PLG as “town agents in
    certain aspects of the transaction … ”.288 Records of correspondence provided to the
    Commission indicate that PLG took a more active role than town agents, liaising with
    lawyers for UBS, and advising NRF on compliance with laws of the Independent State.

    21.47 By reference to the contemporaneous documents, PLG’s role in the transaction included:

    (a) between 1 and 6 March 2014, reviewing and providing commentary and advice
    from a Papua New Guinea law perspective transaction documents including but
    not limited to:

    (i) Bridge Facility Agreement;

    (ii) Security Trust Deed;

    (iii) Specific Security Deed;

    (iv) Participant Sponsorship Agreement;

    (v) Payment Direction Deed;

    (vi) Subscription Agreement; and

    286
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0004
    [17]) [Exhibit RR].

    287
    Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0003,
    [18]). [EXHIBIT M]

    288
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [16]) [Exhibit RR].

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  • (vii) Board Resolutions.289

    (b) liaising generally with NRF regarding same;290

    (c) attending meetings with Secretary Vele, Mr Mortensen, Mr Chang, Mr Maladina,
    Mr Latimer and Mr Jilek, at the PLG offices to discuss same;291 and

    (d) on 5 March 2014, Mr Asigau delivering a letter dated 4 March 2014, enclosing
    copies of transaction documents to State Solicitor.292

    21.48 Secretary Vele understood PLG to be local counsel for NRF. However, as NRF did not
    have an office in the Independent State at that time “our dealings with them were both as
    external counsel – foreign counsel and domestic counsel”.293

    21.49 On 20 March 2014, despite being engaged by NRF, PLG issued an invoice in the amount
    of K1,600,000.00 to Secretary Vele.294 The invoice did not set out specific hours worked
    by individual lawyers, although it is unclear whether this was required by the Department
    of Treasury prior to making payment. When examined on the reasoning behind the
    decision to issue invoices to the Independent State for payment rather than NRF, Mr
    Asigau observed:

    “It would be a little bit impractical for the client to pay our fees to Norton Rose in
    Australia and then for Norton Rose Australia to then send the money back to us. It

    289
    Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
    [22]). [EXHIBIT M]

    290
    Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
    [24]). [EXHIBIT M]

    291
    Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
    [24]). [EXHIBIT M]

    292
    Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0005,
    [28]). [EXHIBIT M]

    293
    TS254.1-4 (30 April 2021).

    294
    WIT.0014.0015.0056.

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  • would not make much sense to do that based on the effect issues that we would
    have.”295

    21.50 Of the K1.6 million paid to PLG by the Independent State, K1 million was paid directly
    to Mr Maladina296 for his role in referring work to the firm. PLG was paid K600,000 for
    approximately 3 weeks work.

    Mr Maladina

    21.51 Mr Maladina was a consultant lawyer with PLG during the relevant period of the UBS
    Loan.297 In his capacity as consultant, Mr Maladina was billed by PLG for use of office
    space, employed his own staff and paid for his own overheads.298 Mr Maladina was also
    a source of referrals for and, at times, a client of PLG:

    PLG has also had an association with Jimmy Maladina, who from time to time,
    has acted as a source of referred matters for various clients and as a consultant on
    transactions in which the firm was involved. Mr Maladina was at the time and is
    currently a client of PLG.299

    21.52 Mr Maladina’s involvement in the UBS transaction stemmed from a pre-existing
    professional relationship with Mr Latimer of NRFA. Mr Maladina described himself as
    Mr Latimer’s “point man” and “his contact in Port Moresby”.300

    295
    TS1572.21 (18 June 2021).

    296
    TS2270.21 (28 July 2021).

    297
    Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0003 [3])
    [EXHIBIT III]

    298
    TS2501.26-30 (2 August 2021).

    299
    Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
    [15]) [Exhibit RR].

    300
    TS2507.35 (2 August 2021).

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  • In or around late [September]301 2013 Mr Latimer approach[ed] me to see if we
    could work together if his firm North Rose Lawyers was successful in getting the
    mandate to work for the State of PNG on matters generally regarding the
    refinancing of the IPIC bonds from the Arabs.

    During these discussions I recommended that his firm, North Rose Lawyers
    engage the legal services of PLG as the local firm to advice on PNG Laws.302

    21.53 In his statement to the Commission, Mr Maladina described his role in the transaction:

    As a consultant with PLG I attended meetings and reviewed documents on the UBS
    transaction in consultation with Norton Rose Lawyers before these advices were
    provided to the State of PNG.

    … I verily believe that my role was purely providing legal advice in conjunction
    with PLG on the local laws and presenting the transaction documents before the
    State Solicitor for his advice and legal clearance.

    This is the extent of the role I played as a consultant in the UBS transaction.303

    21.54 Mr Beattie, appearing before the Commission described Mr Maladina’s role “ … as a
    consultant in a liaison type arrangement between the State agencies, UBS team, lawyers
    involved and other parties”.304

    21.55 Contemporaneous records of correspondence provided by PLG and NRF indicate that Mr
    Maladina’s role included:

    301
    TS2510.4-6 (2 August 2021).

    302
    Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0004 [9-
    10]) [EXHIBIT III]

    303
    Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0004 [12-
    14]) [EXHIBIT III]

    304
    TS.2461.17-18 (30 July 2021).

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  • (a) reviewing and providing commentary on transaction documents to NRF through
    Messrs Beattie and Asigau305 and providing approvals of draft transaction
    documents;306

    (b) providing internal PLG advice on general transaction requirements;307

    (c) coordination with Secretary Vele and others in relation to the State’s conditions
    precedent;308

    (d) briefing Prime Minister O’Neill on progress of the UBS loan together with
    Secretary Vele;309

    (e) correspondence with and delivery of documents to the State Solicitor for his legal
    clearance;310

    (f) correspondence with Ashurst and UBS regarding requirements for contract
    completion;311

    (g) together with Nathan Chang attending to the logistics of the signing of various
    transaction documents by representatives of the Independent State;312 and

    305
    NRF.001.001.7065; NRF.001.001.6871

    306
    NRF.001.003.2935.

    307
    NRF.001.001.7064.

    308
    ASH.002.009.2313; NRF.001.001.6615.

    309
    NRF.001.001.7070;

    310
    NRF.001.004.3085; WIT.0099.0007.1100;

    311
    ASH.002.009.2930.

    312
    ASH.002.002.7438 at 7439; NRF.001.003.2932; NRF.001.003.4739

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  • (h) notifying Prime Minister O’Neill that payments under the UBS Loan would be
    made monthly, requesting use of Oil Search dividends for use as first payment.313

    21.56 While it might be the case that Mr Maladina was not formally employed as a lawyer he
    was still exerting some control over the advice issued by PLG. Mr Maladina’s own
    evidence indicates that prior to PLG issuing a legal opinion or correspondence relating to
    “other practical issues … as to matters on UBS transaction either John or Emmanuel
    always consults me before they move things or release them from the office, yes”.314
    However, as Messrs Beattie and Asigau were the lawyers on record, all correspondence
    was issued in their names.

    21.57 Between 10 May 2013 and 31 December 2014, Mr Maladina was the holder of a
    restricted practicing certificate under the Lawyers Act 1986.315 Mr Maladina gave
    evidence he was nominally employed by Twivey Lawyers for the purposes of his
    unrestricted practising certificate.316 Mr Maladina does not appear to have provided any
    legal advice directly to NRF, rather issuing advice to a Partner of PLG who then provided
    it to NRF.

    21.58 Evidence before the Commission indicates that in April or May of 2014, upon payment of
    its K1.6million invoice, PLG paid K1 million to Mr Maladina. Mr Maladina gave
    evidence that the payment from PLG would have been paid to either Flavalea Limited or
    Property and Investment Consultant Limited.317 Mr Maladina is the sole Director and

    313
    NRF.001.004.3145.

    314
    TS2517.37-39 (2 August 2021).

    315
    Exhibit III.2 (WIT.0101.0004.0003); Exhibit III.3 (WIT.0101.0004.0004).

    316
    TS2677.1-10 (6 August 2021).

    317
    TS2503.27 (4 August 2021).

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  • Shareholder of Flavalea Limited318 and a director and shareholder of Property and
    Investment Consultants Ltd.319

    21.59 This payment has been described as being both a referral fee and a fee for services. Mr
    Maladina in his appearance before the Commission noted that the figure was arrived at
    following discussions with Messrs Latimer and Beattie. Mr Maladina estimates his fees
    were between K900,000 and K1.2 million: ” … we agreed on a fixed figure, a ball park
    figure of a million kina and that is why I rendered that fee to Pacific Legal Group. I have
    no problems I believe I earned that money.”320

    21.60 Mr Maladina gave evidence that his hourly rate in 2013/2014 was between K1,000 and
    K,1500 per hour.321 Mr Maladina stated that he no longer holds records of the time spent
    on the matter. However, it appears accurate time records were not kept as Mr Maladina
    indicated ” … I do estimations sometimes and I put it on a weekly basis into the record …
    “.322

    KPMG

    21.61 KPMG was initially contacted on 26 February 2014 by Mr Latimer of NRFA with a
    proposed scope of work. Mr Latimer noted:

    “In essence the State is requesting KPMG to advise the State on a monetised collar
    currently being contemplated by the State.”323

    318
    View Local Company (ipa.gov.pg).

    319
    View Local Company (ipa.gov.pg).

    320
    TS2511.35-40 (4 August 2021).

    321
    TS2550 (4 August 2021).

    322
    TS2513.23-24 (4 August 2021).

    323
    Email A Latimer to M Blake (part of broader internal KPMG email chain), 26 February 2014, PNG State –
    Proposed scope of work, KPM.0001.0001.0804 at 0806.

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  • 21.62 Later that day Mr Blake advised Mr Latimer that Mr David Heathcote the Head of
    KPMG’s Transaction Services business would lead the KPMG team on this matter.324

    21.63 Mr Mortensen of Pertusio Capital was also involved in instructing KPMG and gave
    evidence that KPMG was engaged because of:

    … the need to have the financial modelling of the collar loans validated from the
    logic and accuracy plus also validating some of the work that had been done in
    relation to pay-off diagrams. Pay-off diagrams being what happens in the Oil
    Search share price become XYZ during the tenure. So, KPMG’s involvement there
    was to provide that sign off or as to logic and accuracy of the modelling as well as
    some analysis of the consequences of various collars as well as various exposed
    outcomes.325

    21.64 On 28 February 2014, representatives of KPMG, Mr Mortensen and Mr Latimer attended
    the UBS offices in Sydney to review the collar loan facility.326

    21.65 On 4 March 2014, KPMG issued a formal engagement letter to Secretary Vele, later
    executed on 6 March 2014.327 The engagement letter identified KPMG’s scope of work
    as:

    (a) reviewing the terms of the Collar and associated bridge loan to provide a summary
    to the Department of Treasury; and

    (b) providing analysis of:

    324
    Email M Blake to A Latimer (part of broader internal KPMG email chain), 26 February 2014, RE: PNG State –
    Proposed scope of work, KPM.0001.0001.0804 at 0806.

    325
    TS2662.42-TS2663.7 (3 August 2021).

    326
    Email C Roberts to A Latimer, 28 February 2014, RE: KPMG meeting, NRF.001.001.6562; Email V Casamento
    to J Ng, 28 February 2014, RE: Finance docs – UBS Bridge Facility NRF.001.001.6609; KPMG engagement letter
    executed by Mr Vele, 6 March 2014, KPM.0001.0001.0087; TS2662.42 – TS2663.7.

    327
    KPMG engagement letter executed by Mr Vele, 6 March 2014, KPM.0001.0001.0087.

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  • (i) any downside price protection imbedded in the Collar;

    (ii) any potential value foregone imbedded in the Collar under various agree
    scenarios;

    (iii) commercial and economic risks associated with the Collar;

    (iv) the effective cost of financing for the Department of Treasury implied
    through the Collar under various agreed scenarios; and

    (v) the pricing mechanics of the Collar and comment on the comparison to
    “fair market value” (taking into account notional size and market liquidity).

    21.66 KPMG was required to complete the above scope of work between 28 February 2014,328
    when they were notified they would be engaged, and 6 March 2014 when they provided
    their final advice.329 Internal KPMG correspondence indicates that, given the short time
    frame, their advice was limited to a high level commentary of the UBS Loan.330

    21.67 The Independent State paid KPMG AUD166,221.00 for the work completed.331 These
    funds were paid out under the Bridge Facility Agreement – Drawdown Notice.332

    21.68 No public tender took place as required by the PFMA. The Commission has not been
    provided with evidence of the criteria on which KPMG was evaluated prior to their
    engagement. No evidence has been provided to the Commission that inquiries were made
    with any other financial advisory firm.

    22. TOR 1(s): Which individuals or organisations benefitted from the UBS Loan or
    related transactions.

    328
    KPM.0001.0001.0800.

    329
    KPM.0001.0001.0197; KPM.0001.0001.0198.

    330
    NRF.001.002.5425.

    331
    KPM.0001.0001.0071; NRF.001.002.7826.

    332
    Bridge Facility Agreement – Drawdown Notice, WIT.0015.0002.1265 at 1266.

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  • 22.1 The following parties benefited in the ways set out below. The notion of ‘benefit’ does
    not connote inappropriateness unless otherwise stated.

    22.2 Oil Search. The transaction enabled it to buy the PAC LNG companies. However, it had
    alternative plans to raise the finance necessary for these acquisitions. The UBS Loan and
    associated placement of shares with the State was therefore not its only route into PRL-
    15.

    22.3 UBS. UBS amply benefited from the UBS Loan through fees charged to the State, the
    payment of interest and inappropriately from the unfair pricing of the loan and the
    misleading nil premium representations. Its fees for the March 2014 transactions
    amounted to AUD28.4 million. UBS also benefited from the refinancings in December
    2014 and February 2016 (although it did not charge fees for those transactions) as well as
    from the ultimate sale of the shares in September 2017. Its excessive or overcharging
    amounts to AUD180 million as explained in detail by Brattle which should be repaid.

    22.4 The State’s advisers. The State’s advisers received significant fees for their work on the
    transaction. Some of these fees appear to be out of proportion to the work done by the
    advisers concerned:

    22.5 KPMG were paid AUD166,221.

    22.6 NRFA were paid AUD600,000.

    22.7 Pacific Legal Group were paid K1.6 million. At the time, this was about AUD678,000
    and therefore more than NRFA was paid for a lesser role in the transaction. Of this sum
    K1 million was paid to Jimmy Maladina. There is no evidence of work by him that
    would justify a fee of this amount although he sought to explain it by saying that it
    reflected a longer period of work that just work on the transaction. He said that he agreed
    his fee with Mr Latimer of NRFA and Mr Beattie of Pacific Legal Group.

    22.8 Pertusio Capital was paid K1.25 million.

    22.9 Mr Vele was authorised by the State to pay these fees using a quantum meruit assessment.
    Mr Vele admitted in his evidence that he did not understand what this required and simply
    paid the advisers the fees that they had requested. For Pacific Legal Group, there was no

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  • fee agreement and no information provided with the invoice to explain how it was
    calculated yet Mr Vele approved it without question. In our submission, the fees seem to
    have been agreed without reference to time spent on the matter. Mr Vele failed to assess
    them on a proper quantum meruit basis. In any event we repeat our earlier submission
    about the unfortunate perception of Mr Vele, as a public official, personally authorising
    payment to his former business partners, when others could have done so.

    22.10 Ashurst. Ashurst provided legal advice to UBS but their fees were paid by the State by
    being included in the Bridge Loan. Ashurst were paid AUD812,500.

    23. TOR: 1(t) What would the State’s (and its government owned enterprises) financial
    positions have been had the UBS loan to purchase Oil search shares and the
    purchase of oil search had not been entered into?

    23.1 Brattle have assessed the total loss to the State as AUD340.3 million. This is made up of
    the AUD336.3 million that they identified in their third report and a further AUD4 million
    of professional fees incurred by KPHL of which Brattle was unaware until Mr Sonk gave
    evidence of this.

    23.2 The principal loss of AUD336.3 million arises as follows, with numbers in brackets
    showing payments to the State:

    Item AUD million

    Bridge Loan interest payments 22.0

    Dividends (23.2)

    March 2014 Bridge Loan extension fee 5.0

    Funds from Letter of Credit 270.3

    Front Collar Additional Consideration 97.4
    Amount

    Unwind payment from February 2016 (35.1)
    Collar Loan

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  • Total 336.3

    23.3 The loss can also be shown in another way, looking at what it would have cost the State to
    hold the Oil Search shares if the transactions with UBS had been fairly priced. In Brattle’s
    opinion, the State actually paid a net AUD80.9 million to UBS, but if the transactions had
    been fairly priced the State would have received AUD94.0 million from UBS. Thus the
    transactions in aggregate transferred AUD174.8 million of value from the State to UBS.

    Item AUD million

    Purchase Oil Search shares at AUD8.20 1,225

    Fair value of the UBS transactions (94.0)

    Value transferred to UBS 174.8

    UBS Bridge Loan fee 11.7

    UBS advisory fees 16.5

    Other fees 3.1

    Sell Oil Search shares at AUD6.70 (1000.9)

    Total 336.3

    23.4 If the State had not sought to refinance the loans in February 2016, and simply allowed
    them to expire according to their terms, the State’s loss would have reduced by between
    AUD74.4 and AUD75.1 million, giving a total loss of between AUD261.2 million and
    261.9 million plus whatever proportion the AUD4 million of KPHL professional fees
    would still have been incurred.

    23.5 If the State had allowed the February 2016 loan to expire according to its terms rather
    than closing it out in September 2017, the loss to the State would have been AUD51
    million less, giving a total loss of between AUD285.3 million plus whatever proportion
    the AUD4 million of KPHL professional fees would still have been incurred.

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  • 23.6 If the State had not entered into the UBS loan and avoided these losses, and those funds
    could have been put into an operational sovereign wealth fund, from Brattle’s fourth
    report, it would appear that they would have generated a return of between 2% and 9%.

    Sovereign Wealth Fund

    23.7 Evidence before the Commission indicates that the establishing legislation for a Papua
    New Guinea Sovereign Wealth Fund has already been passed by Parliament. However,
    few steps have been taken in the past 7 years to implement that legislation and get a
    Sovereign Wealth Fund operational.

    23.8 The Prime Minister, the Honourable James Marape MP gave evidence before the
    Commission that it is his Government’s policy to make the Sovereign Wealth Fund
    operational when possible. 333 The Prime Minister noted however that administrative
    requirements for the establishment of the Trust and the appointment of the Sovereign
    Wealth Fund Board have not yet been attended to. A priority for the State was ensuring
    that it “set up a solid structure for the Sovereign Wealth Fund”. 334

    23.9 The Prime Minister’s predecessor, Mr O’Neill, in his evidence to the Commission also
    endorsed the State taking steps to implement the Organic Law on Sovereign Wealth
    Funds. 335

    23.10 In this regard, the Commission received important evidence from Professor Sir Tim
    Besley and Mr David Murray AO. Professor Besley is presently a Professor at the London
    School of Economics with expertise in economic policy formulation. Mr Murray has had
    a significant career in the Australian banking industry culminating in 13 years as the CEO
    of Commonwealth Bank of Australia and being later appointed the inaugural Chair of the
    Australian Sovereign Wealth Fund (called the Future Fund) and he also served as Chair of
    the International Forum of Sovereign Wealth Funds.

    333
    Transcript 31 January 2022 of the Prime Minister the Hon James Marape MP, TS3539.18.

    334
    Transcript 31 January 2022 of the Prime Minister the Hon James Marape MP, TS3541.37-38. .

    335
    Transcript, Peter O’Neill, 7 February 2022, p 3752.

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  • 23.11 Professor Besley and Mr Murray agreed that the Sovereign Wealth Fund did present an
    opportunity for the State. However, they did note some potential challenges.

    23.12 Mr Murray noted that significant amount of time had passed since the Organic Law on the
    Sovereign Wealth Fund was first approved by Parliament and that the position of the
    State had changed. In 2015, it was customary for countries in the position of Papua New
    Guinea for money to flow into a stabilisation fund which would smooth the budget due to
    the fluctuating nature of commodity prices. Then money would flow from that fund into a
    savings fund. 336

    23.13 Since that time a number of complicating factors have arisen in Papua New Guinea
    including:

    (a) Government debt as a proportion of GDP has risen significantly;

    (b) it has a B- credit rating implying a very high interest rate premium; and

    (c) it has a real bond rate of 6%.337

    23.14 Each of these factors, Mr Murray, noted would necessitate the Government first
    prioritising fiscal consolidation, repayment of debt and restating fiscal policy. 338

    23.15 Both Professor Besley and Mr Murray observed that the position of the State’s
    institutional framework on the corruption index needed to be addressed to ensure
    international credibility.

    23.16 Professor Besley also noted that to improve overall condition it would be key for the State
    to prioritise developing a strong private sector to develop the economy across the board
    but that this could not be achieved in the absence of effective management of public

    336
    Transcript 10 February 2022, TS3990.5-10.

    337
    Transcript 10 February 2022, TS3990-3991.

    338
    Transcript 10 February 2022, TS3991.6-7.

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  • resources. Merely creating a SWF will not fix these problems. 339 Professor Besley also
    noted the need to determine whether the establishment of a SWF would result in the best
    return on assets compared to improving the fiscal position by using the resources in the
    State’s possession more wisely.

    23.17 Speaking more broadly on the topic of corruption Professor Besley said the State’s place
    on the corruption index is a reflection of the inadequate structures in place for
    transparency. Professor Besley, while emphasising the need for the State to develop a
    bespoke and responsive approach to corruption340 best suited to address its needs, noted
    that properly functioning Parliamentary Committees had an important role to play in
    providing oversight and scrutiny. 341

    23.18 To negative perceptions of corruption Mr Murray suggested the appointment of a panel of
    experts under the auspices of the IMF, World Bank or Asian Development Bank to
    review the formula under which funds would flow from the State’s budget to the SWF’s
    stabilisation fund or savings fund. This panel could be charged with recommending:

    (a) how funds flow from the budget into normal budgetary expenditure;

    (b) defining how SoE’s should operate in terms of returns, dividend payments, new
    investments and indebtedness; and

    (c) how given all of that funds would flow into the stabilisations funds or savings
    funds. 342

    Conclusion

    23.19 Ultimately, the question of whether the Commission recommends the establishment of the
    Sovereign Wealth Fund is a matter for you Commissioners. It is the view of Counsel

    339
    Transcript 10 February 2022, TS3991-3992.

    340
    Transcript 10 February 2022, TS3993.

    341
    Transcript 10 February 2022, TS3994.16-17.

    342
    Transcript 10 February 2022, TS3996.

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  • Assisting the Commission that the State is best served from the Sovereign Wealth Fund
    becoming operational as soon as practicable. But we do rate the impact of perception of
    official corruption on the capacity of the State to obtain investment and loans.

    24. TOR: 1(u) The history of the Elk/Antelope PDL and PRL; (v) The approvals
    process for PRL-15; and (x) Which entities have interests in Elk-Antelope PRL-15
    since its inception

    24.1 Before setting out the history of PRL 15, it is relevant to refer to the entities and people
    involved in the companies that held interests in it.

    24.2 Mr Carlo Civelli is a Swiss citizen,343 residing at the material time in Singapore and later
    Monaco.344 Mr Civelli founded Clarion Finanz AG, an asset management services firm
    incorporated in Switzerland.345

    24.3 Mr Philippe Mulacek is a US citizen346, who considers himself a resident of Singapore.347
    Mr Mulacek founded InterOil and was its CEO until around 6 May 2013.348 InterOil was
    a Yukon Territory, Canadian corporation.

    24.4 The nature of the business relationship between Mr Civelli and Mr Mulacek was the
    subject of a decision of the High Court of Singapore.349 The relevance of the Singapore
    proceeding is that on either party’s case, Mr Civelli had de facto control of InterOil shares
    and money from 2002 to 2014.350 Through subsidiaries, InterOil applied to be granted the
    full title to PRL 15 in 2009. It later divested its interest in PRL 15. At the same time that

    343
    Civelli v Mulacek [2019] SGHC 182, [4].
    344
    Ibid [4].
    345
    WIT.0030.0004.0010 at 5.
    346
    Civelli v Mulacek [2019] SGHC 182, [4].
    347
    Civelli v Mulacek [2019] SGHC 182, [4].
    348
    Cf Form 6-K filed with the SEC dated 6 May 2013 (link) and Form 6-K filed with the SEC dated 7 May 2013
    (link).
    349
    Civelli v Mulacek [2019] SGHC 182. Note that appeals were dismissed by the Court of Appeal of Singapore in
    Mulacek v Civelli [2020] SGCA 59.
    350
    Civelli v Mulacek [2019] SGHC 182, [4]–[7].

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  • Mr Civelli had de facto control of InterOil shares, he also controlled a group of
    companies which became known as the PAC LNG companies. The PAC LNG
    companies held interests in PRL 15 from 2009 until mid-2014 when those interests were
    sold.

    24.5 Given that Mr Civelli had control of InterOil shares and the PAC LNG companies, much
    of the proceeds of sale of PRL 15 interests held by InterOil and the PAC LNG companies
    would have been received by entities under Mr Civelli’s control.

    24.6 A notable feature of the evidence in this Commisison is that Mr O’Neill and to a lesser
    extent Mr Vele wished to distance themselves from any dealings with Mr Civelli. In the
    case of Mr O’Neill this involved false statements to the commission that he had never met
    or spoken to Mr Civelli in 2012/3 when Mr Maladina said he had done so. Critically the
    Commission can find that Mr O’Neill had spoken with Mr Civelli about Elk-Antelope. If
    Mr O’Neill’s denials were false as we submit they were, the question is why Mr O’Neill
    went to such lengths to deny it: a the very least it raises suspicions that such conversations
    may not have involved legitimate business dealings.

    Issue of PRL 15 by the State in 2010

    24.7 A Petroleum Retention Licence (PRL) allows the licence holder(s) to carry out work to
    evaluate the commercial and technical options for developing the underlying resource
    (including whether it is worth developing at all).351 Essentially a PRL will be granted
    where an oil or gas field is known to exist, but its commercial viability is not yet
    established.352

    24.8 PRL 15 covers a gas field in the Gulf Province called Elk-Antelope. Commercial
    development of the Elk-Antelope field has been called the Papua LNG Project (not to be
    confused with the PNG LNG Project).

    351
    Department of Petroleum and Energy, Petroleum Policy Handbook (November 2005,
    <https://petroleum.gov.pg/wp-content/uploads/2020/02/PNG-Petroleum-Policy-Handbook.pdf>) page 11 [2.6].
    352
    Oil and Gas Act 1998, s 39(1); Department of Petroleum and Energy, Petroleum Policy Handbook (November
    2005, <https://petroleum.gov.pg/wp-content/uploads/2020/02/PNG-Petroleum-Policy-Handbook.pdf>).

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  • 24.9 In 2005, InterOil entered an indirect participation agreement (and amendments of the
    same) (IPI) with various investors. The purpose of the IPI was for InterOil to raise funds
    for its exploration drilling program in the State. Under the IPI, the investors paid money
    to InterOil in return for InterOil granting the investors a right to convert their share in the
    IPI into a direct interest in the licences covered by the IPI (including what is now PRL 15
    which was ultimately issued out of Petroleum Prospecting Licences (PPL) 237 and PPL
    238). Clarion Finanz AG was a party to the IPI as an investor.353

    24.10 On 5 August 2009, SPI (208) Limited (a PNG incorporated subsidiary of InterOil) (SPI
    208) lodged an application to be granted the title to PRL 15.354

    24.11 In August 2009, SPI (208) and SPI (220) Limited (another PNG incorporated subsidiary
    of InterOil) agreed to sell to Pacific LNG Operations Limited BVI, a British Virgin
    Islands Company, (PAC LNG Operations) a 2.5% interest in PRL 15.355 The transfer
    was subject to Papua New Guinea Ministerial approval.356

    24.12 The State subsequently issued PRL 15 to SPI 208 on 30 November 2010.357

    24.13 In June 2011, SPI (208) agreed to transfer a 2.5% interest in PRL 15 to Pac LNG
    Operations. Approval of the transfer pursuant to the Oil and Gas Act 1998 was approved
    on 14 December 2011 and the transfer was entered into the register the following day.358

    24.14 On 21 May 2012, PAC LNG Operations transferred its 2.5% interest to its subsidiary,
    PAC LNG Investments Limited (PAC LNG Investments), a company incorporated in
    Papua New Guinea.359

    353
    WIT.0042.0007.0766, page 37.
    354
    WIT.0042.0005.0009, page 3.
    355
    Referred to in Instrument of Transfer of PRL 15 dated 11 June 2011, WIT.0042.0003.0542, page 12.
    356
    WIT.0042.0003.0542, page 13.
    357
    Referred to in Amendment No. 2 to Amended and Restated Indirect Participation Interest Agreement dated 24
    July 2012, WIT.0042.0007.0875, page 3, Recital B.
    358
    WIT.0042.0003.0542, page 9.
    359
    WIT.0042.0007.0043.

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  • 24.15 The IPI was amended and restated on 24 July 2012.360 The list of investors is different
    from the IPI explained above. Relevantly, PAC LNG Operations is listed as an investor
    in the amended and restated IPI.361

    24.16 On 26 September 2012, SPI 208 and PAC LNG Operations entered into an agreement
    entitled Elk/Antelope Joint Venture Operating Agreement (PRL 15 JVOA). The PRL 15
    JVOA provided for the rights and obligations between the PRL 15 JVOA parties in
    developing PRL 15, including the sharing of costs and profits. It provided for SPI (208)
    to be the operator at the date of the agreement.

    24.17 On 25 March 2013, SPI (208) transferred further interests totalling 20.33% to PAC LNG
    companies.362

    History of Oil Search’s negotiations regarding PAC LNG and PRL 15

    24.18 Mr Botten’s evidence was that during most of 2011 and early 2012, the State and Minister
    Duma publicly admonished InterOil for its recalcitrance in moving the PRL 15
    development ahead. In May 2012, Minister Duma formally issued a 120 day notice to
    InterOil in respect of breaches of the project agreement.363 Mr O’Neill’s evidence was
    similarly that the government was concerned that the project was not being developed.364

    24.19 Mr Botten’s said that, in mid-May 2012, against the backdrop of a rapidly deteriorating
    relationship between InterOil and the PNG Government, Oil Search was made aware that
    InterOil was running a competitive bidding process for the sale of its interest in PRL
    15.365

    360
    WIT.0042.0007.0875.
    361
    WIT.0042.0007.0875, pages 3–4.
    362
    (a) 6.75% interest in PRL 15 to PAC LNG Assets Limited; (b) 5.1% interest in PRL 15 to PAC LNG
    International Limited; (c) 5% interest in PRL 15 to PAC LNG Overseas Limited; and (d) 3.485% interest in PRL 15
    to PAC LNG Holdings Limited.
    363
    Further statement of Peter Botten dated 27 January 2022 at [51] PNG government still aims to deliver InterOil
    project – Keith Jackson & Friends: PNG ATTITUDE
    364
    Transcript of evidence of Peter O’Neill at [3763] (7 February 2022).
    365
    Further statement of Peter Botten dated 27 January 2022 at [51] (WIT.0021.0006.0001).

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  • 24.20 During the period from 2012 to 2014 Oil Search engaged in negotiations with several
    parties, including InterOil and the Pac LNG companies, concerning a possible acquisition
    of an interest in PRL 15.366

    24.21 The negotiations culminated in a joint bid made by Oil Search and Total for either 100%
    or 85% interest in PRL 15 in August 2012, with revised joint bids made throughout 2013
    until the announcement in early December 2013 by InterOil that Total were the successful
    bidder of PRL-15, which resulted in the Total SPA. In accordance with agreements that
    were already in place, Oil Search proceeded with negotiations to acquire a 5% (net)
    interest in PRL 15 from InterOil and a 10% (net) interest in PRL 15 from Total. Mr
    Botten says negotiations between InterOil and Oil Search stalled in January 2014 because
    InterOil insisted on increased consideration terms.367

    24.22 In early February 2014 negotiations between Oil Search and the Pac LNG companies
    regarding PRL-15 recommenced when Mr Civelli, on behalf of the PAC LNG
    Companies, approached Oil Search in early February 2014.368 These negotiations led to
    the transaction by which Oil Search acquired those companies. Mr Botten’s evidence
    was:369

    During these negotiations Mr Civelli said to me words to the effect that the Prime
    Minister and PNG Government supported the transaction. By this I understood
    Mr Civelli to mean that the Prime Minister and the PNG Government had no
    objection to Oil Search acquiring a stake in PRL 15 by acquiring the Pac LNG
    companies if such a transaction were to eventuate. This was consistent with
    discussions I had with Prime Minister O’Neill in which he supported the
    engagement of Oil Search with the Pac LNG companies as a means to address an
    impasse that had arisen between the Pac LNG companies and InterOil as a result
    of a reluctance on Mr Civelli’s part to sell the Pac LNG companies to InterOil

    366
    Further statement of Peter Botten dated 27 January 2022 at [55] (WIT.0021.0006.0001).
    367
    Further statement of Peter Botten dated 27 January 2022 at [55] (WIT.0021.0006.0001).
    368
    Further statement of Peter Botten dated 27 January 2022 at [69] ,WIT.0021.0006.0001.
    369
    Further statement of Peter Botten dated 27 January 2022 at [56], WIT.0021.0006.0001.

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  • 24.23 Mr Botten says there would have been many discussions between representatives of Oil
    Search and representatives of the PNG Government about PRL 15 prior to 22 February
    2014. A common subject in those discussions was concern about the lack of progress and
    Oil Search’s interest in acquiring an interest in PRL 15.370

    24.24 Mr O’Neill denied any knowledge that Oil Search wished to raise money in issuing shares
    to the State to acquire interest in PRL15 or that he had any dealings with Mr Civelli.371
    Mr O’Neill said the basic knowledge that the government or the leaders had was that Mr
    Mulacek was the principal behind InterOil.372 But Mr Maladina subsequently gave
    evidence that Mr O’Neill and Mr Civelli, in the company of Mr Mulacek, had met on at
    least two occasions.373

    24.25 On 25 February 2014, Oil Search agreed to purchase the PAC LNG companies that
    together held 22.835% in PRL 15 for USD 900 million.374 In its 2014 annual report, Oil
    Search explained that it funded this purchase by the sale of shares to the State.375 Mr
    O’Neill’s evidence is that there was never any discussion about Oil Search using the funds
    raised from the issue of the shares to purchase the PAC LNG Companies or an interest in
    PRL 15 and that he that he never discussed with Mr Botten the purchase price for the
    shares which were purchased as part of the UBS deal.376 You would reject this evidence.

    24.26 Mr Botten says Oil Search acquired the Pac LNG companies, rather than a direct
    participating interests in PRL 15, as this provided the owners of the Pac LNG companies
    with a complete exit (which was something that all parties wanted), meaning that any
    pre–emption rights were not triggered. It also allowed Oil Search, through its ownership
    of the Pac LNG companies, to became a party to the existing PRL 15 JVOA.377

    370
    Further statement of Peter Botten dated 27 January 2022 at [51] – [52], WIT.0021.0006.0001.
    371
    Transcript at 3770 – 3771 (7 February 2022)
    372
    Transcript of evidence of Peter O’Neill at [3763] (7 February 2022)
    373
    Affidavit of Jimmy Maladina dated 9 February 2022, WIT.0101.0005.0001.
    374
    Oil Search ASX release ‘Oil Search to acquire interest in PRL 15’ (27 February 2014, link).
    375
    Oil Search Annual Report 2014 (link), page 73.
    376
    Transcript of evidence of Peter O’Neill at [3764] (7 February 2021)
    377
    Further statement of Peter Botten dated 27 January 2022 at [59], WIT.0021.0006.0001.

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  • 24.27 On 28 February 2014, SPI (208) Limited agreed to transfer 40.127529% of its interest in
    PRL 15 to SPI (200) Limited.378 The sale price was a nominal price of PGK 10. The
    agreement was approved by the Honourable Nixon Duban MP (then-Minister for
    Petroleum and Energy) on 6 March 2014 and entered into the register on 7 March
    2014.379

    24.28 Accordingly, the Commission understands that PRL 15-ownership as at 7 March 2014
    was as follows:380

    (a) 77.165% held by InterOil subsidiaries:

    (i) SPI (208) Limited – 35.483871%;

    (ii) SPI (200) Limited – 40.127529%;

    (iii) SPI Security Holdings Limited – 1.5536%;

    (b) 22.835% held by Oil Search through the PAC LNG Companies.

    24.29 As a result of Oil Search acquiring the PAC LNG companies’ interest on 25 February
    2014, the Total SPA could not be completed because the Total SPA was contingent on
    InterOil acquiring the minority interests in PRL 15 from the PAC LNG companies.
    InterOil and Total subsequently entered into another transaction, announced on 26 March
    2014, whereby a subsidiary of the Total SA Group agreed to purchase an InterOil
    subsidiary that held a 40.1% participating interest in PRL 15 for USD 540.1 million.

    24.30 While Oil Search disputed the validity of Total acquiring 40.1% of PRL 15 through
    purchasing SPI (200) Limited and the dispute was referred to an arbitration sitting in
    London before the International Court of Arbitration of the International Chamber of
    Commerce, the Total SPA was subsequently given effect by instrument of transfer and
    registration with the State.

    378
    WIT.0042.0003.0542, page 3.
    379
    WIT.0042.0003.0542, page 1.
    380
    WIT.0042.0003.0542, page 6.

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  • 25. TOR (w): The scale and quantity of the PRL 15 resource

    25.1 The scale and quantity of the PRL 15 resource has been queried.

    25.2 For example, the Commission was provided with a report known as the “Sarkal report”
    which concluded that the Elk-Antelope gas field, contained within PRL 15, may contain
    no more than 0.52TCF381 of recoverable gas.382

    25.3 The Commission summonsed various relevant reports and engaged an independent
    expert, Dr John Hornbrook from DeGolyer and MacNaughton, to give his opinion on the
    reasonableness of the evaluations of the gas resource in the reports and provide a review
    of the Sarkal report.

    25.4 Dr Hornbrook concluded that, in general, the various estimates of raw gas resources
    associated with the Elk-Antelope gas field are consistent and that variations in estimates
    over time are in line with variation that should be expected with additional data and / or
    additional analysis. Dr Hornbrook noted that the “best estimate” of gross raw gas
    resources had ranged from 9.08TCF (31 December 2009), to 6.60TCF (31 December
    2011), to 7.00TCF (31 December 2013), to 6.80TCF (30 June 2016), to 6.35TCF (31
    October 2021). Dr Hornbrook noted that, while he did not have sufficient data to
    independently review the specific calculations, the evaluations followed industry standard
    procedures.383

    25.5 In relation to the Sarkal report, Dr Hornbrook disagreed with the report’s conclusion of a
    “gas initially-in place” of 0.52TCF. In Dr Hornbrook’s view, this was likely to be a
    significant underestimate.384

    381
    TCF or TSCF = trillion cubic feet.

    382
    WIT.0148.0001.1068, page 1.

    383
    WIT.0148.0001.0001 at .0002, pages 1-2.

    384
    WIT.0148.0001.0001 at .0002, pages 2-5.

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  • 25.6 Oil Search also engaged an expert, Gaffney Cline & Associates (Gaffney Cline), to
    comment on the Sarkal report. The Gaffney Cline report also concluded that the Sarkal
    report’s gas initially-in place estimate of 0.52TCF was unrealistically low.385 The Gaffney
    Cline report concluded that there was nothing in the Sarkal report which caused it to
    change Gaffney Cline’s opinion that the best estimate of recoverable raw gas of the Elk-
    Antelope field is 6.8TCF as of 30 June 2016.386

    25.7 It is accordingly submitted that there has been no mis-representation of the size of the
    PRL 15 gas resource estimated in the various reports (other than the Sarkal report).

    26. TOR (y): Which individuals or organisations benefitted from the 2014 sale of PAC
    LNG Group of companies to Oil Search Limited and related transactions

    26.1 The State borrowed more than AUD 1.2 billion to fund its purchase of 149.39 million Oil
    Search shares at AUD 8.20 per share. Oil Search paid USD 900 million of that to various
    entities. In effect, the State’s purchase of Oil Search shares funded Oil Search’s purchase
    of PAC LNG companies, which in turn went to the beneficial owners of the entities listed
    below, which includes the PAC LNG companies.

    26.2 Shortly after 12 March 2014, Oil Search made the following payments from a USD
    account it held with Westpac Bank PNG Limited:387

    Payment to Beneficiary Amount (USD) %of
    total

    IPWI Partners LP IPWI Partners LP AUD 0.6776
    6,099,283.82 98

    John Mack John J Mack AUD 4.3528
    39,175,352.87 17

    385
    Gaffney Cline, ‘Comments on Sarkal Energy Report’, 1 February 2022, p 4 [12], OSL.5030.0001.0001 [12].

    386
    Gaffney Cline, ‘Comments on Sarkal Energy Report’, 1 February 2022, p 4 [12], OSL.5030.0001.0001 [7].

    387
    OSL.0019.0006.0243; OSL.0019.0006.0515.

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  • Bruce Hendry Sawmill Trust AUD 4.3528
    39,175,352.87 17

    Pacific LNG Operations Limited Pacific LNG AUD 64.713
    Operations Ltd 582,425,889.33 9

    Aton Select Fun Ltd Aton Select Fund AUD 20.669
    Limited 186,026,644.12 63

    Papua’s Crude Investment Papua’s Crude AUD 1.7406
    Investment 15,665,401.61 00

    Polygon PNG LP Polygon PNG LP AUD 3.3762
    30,385,988.50 20

    King & Spalding LLP King & Spalding LLP AUD 0.0554
    498,653.36 06

    Baker Botts Baker Botts AUD 0.0372
    335,000.00 22

    Maples and Calder Maples and Calder AUD 0.0106
    96,087.37 76

    Leahy Lewin Nutley Sullivan Pacific LNG AUD 0.0129
    Lawyers Operations Ltd 116,346.15 3

    TOTAL AUD 100
    900,000,000.00

    Brattle’s Opinion

    26.3 Brattle considered whether the price paid by Oil Search for the interest in PRL 15 was
    objectively justifiable, assuming an arm’s length transaction between the buyer and seller.
    Brattle noted that the temporal proximity of the Total SPA and Oil Search purchase

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  • indicated that they might expect the two transactions to have a similar price, having taken
    account of the differing sizes of the interests acquired.388

    26.4 Brattle noted that the sums paid were structured differently. Both had a fixed payment
    and then a variable component depending on the scale of the resource. Oil Search’s fixed
    payment was greater than Total’s but its variable payment less.

    26.5 Which price would ultimately be best would depend on the scale of the resource. If it
    were 7Tcf, then the prices paid were about the same. If the resource were smaller than
    that figure, Oil Search would have paid more. The position would reverse if the resource
    was greater than 7Tcf.

    26.6 Brattle concluded that they had not seen any evidence to suggest that the price paid by Oil
    Search was not justified and that the prices paid by Oil Search and Total were similar.389

    26.7 In February 2014, Oil Search estimated that the Elk/Antelope gas field contained 5.3Tcf.
    If that estimate was accurate, Oil Search would pay more than Total. According to
    Brattle 1, at that volume, Oil Search would pay USD0.74 per mcfe whereas Total would
    pay USD0.47.

    26.8 The strengths of Total and Oil Search’s negotiating positions would have been different.
    This is also likely to have been reflected in the prices ultimately agreed.

    27. TOR (aa) the rationale as to why the State/Kumul Petroleum Holdings Limited sold
    the Oil Search shares in 2017 and (bb) whether legal and administrative processes
    were followed in the sale of the Oil Search shares?

    The December 2014 Novation

    27.1 After the State entered into the UBS loan to acquire the Oil Search shares on 12 Mach
    2014, various other associated transactions occurred in the intervening period leading to
    the ultimate disposal of the shares in September 2017.

    388
    Brattle 1, page 67, Exhibit VV, WIT.0132.0001.0002.
    389
    Brattle 1, page 71, Exhibit VV, WIT.0132.0001.0002.

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  • 27.2 The State was never able or intended to be the long term borrower from UBS, although it
    needed to be the initial borrower and shareholder in Oil Search. It could not have done so
    without breaching its debt to GDP ratio and it always intended to transfer the loan to
    another entity to remove the loan from the State’s balance sheet. As the loan was
    connected with the purchase of the Oil Search shares, it followed that the State’s rights in
    relation to the Oil Search shares should be transferred to the same entity.

    27.3 On 2 September 2014, the NEC issued decision 264/2014,390 pursuant to which the NEC
    acknowledged the establishment of NPCP Holdings Limited (which later changed its
    name to KPHL) as a wholly owned subsidiary of IPBC. It directed that all petroleum
    assets of the State, including the Oil Search shares held by the Department of Treasury, be
    consolidated into NPCP Holdings Limited and NPCP Kroton.

    27.4 By December 2014:

    (a) the UBS Bridge Facility component of the UBS loan had been novated from the
    State (NPCP Kroton) to KPHL;

    (b) the Bridge Facility component of the UBS loan had been discharged by repaying
    most of it through letters of credit and converting the remainder of the loan into a
    collar loan;

    (c) the Oil Search shares held by NPCP (Kroton) had been transferred to NPCP
    Holdings (which became KPHL).

    27.5 In short, both the asset (the shares) and the debt became the concern of NPCP (KPHL).

    NPCP/KPHL are reluctant shareholders

    27.6 Simply put KPHL never had an appetite to hold the Oil Search shares. Mr Sonk was quite
    definite about this. He said:

    (a) the Board of KPHL did not consider it part of their mandate ⎯ which was
    pursuant to section 7 of Kumul Petroleum Holdings Limited Authorisation Act

    390
    Affidavit of Wapu Sonk dated 21 June 2021, Exhibit FF, Annexure WRS-21, WIT.0036.0001.0321.

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  • 2015 to hold and develop gas and oil interests, including participation in the
    exploration, development, production, processing, transportation and marketing of
    oil and gas products391 ⎯ to include holding shares for investment on behalf of
    the State, whether in Oil Search or any other company;392

    (b) from the outset, the board “never wanted KPHL to hold the Oil Search shares” and
    wished to dispose of them as the shares and their associated debt was a burden on
    KPHL;393

    (c) as a result the board of KPHL commenced looking for ways to dispose of the Oil
    Search shares almost as soon as they were novated to KPHL.394

    27.7 The evidence of Frank Kramer, the chair of NPCP Kroton, was to the same effect.395

    Structure of KPHL

    27.8 NPCP Holdings had originally been a subsidiary of IPBC which later changed its name to
    KPHL. In September 2015, this structure was changed as a result of the Kumul
    Petroleum Holdings Limited Authorisation Act 2015 (KPHL Act).

    27.9 By section 5 of the KPHL Act, the shares of NPCP Holdings (and its subsidiaries) were
    transferred to the Kumul Petroleum Trustee (Kumul Trustee) and NPCP Holdings’ name
    was changed to KPHL.

    27.10 The Kumul Trustee is the then current Prime Minister who holds the shares on trust for
    the benefit of the State.

    27.11 The KPHL Act limits the authority of the board of KPHL. Section 13 of the KPHL Act
    requires KPHL to prepare an annual plan which must then be approved by the Kumul

    391
    10 August 2021 statement [26-27], WIT.0132.0001.0002.

    392
    10 August 2021 statement [28], WIT.0132.0001.0002.

    393
    10 August 2021 statement [28], [32], WIT.0132.0001.0002.

    394
    10 August 2021 statement [34], WIT.0132.0001.0002.

    395
    Exhibit CCC, statement of Francis Kramer, 5 November 2020 [32], WIT.0037.0003.0002.

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  • Trustee and the NEC. Section 13 also prohibits the board of KPHL from effecting
    transactions that total more than K10 million in any accounting period unless they are in
    accordance with the annual plan. The Kumul Trustee has the power to increase this
    amount to K25 million in any accounting period but that power has never been
    exercised.396

    27.12 To effect a transaction above the K10 million threshold, the board of KPHL must refer
    the matter to the Kumul Trustee (that is, the Prime Minister). The trustee then refers it to
    the NEC for approval. As Mr Wapu Sonk put it in his statement, the “effect of Section 13
    of the Act is therefore that any significant decision must involve the Prime Minister.
    Without the involvement of Trustee (PM), no major decisions of [KPHL] can be made.”397

    27.13 The Prime Minister is the trustee of the Kumul Petroleum Share Trust. The property of
    the Trust is broadly defined but essentially includes the entire share capital of KPHL and
    all rights and benefits attached to it, including dividend and other property.398 The
    beneficiary of the Trust is the State.

    27.14 Clause 7 and 8 of the Trust Deed provide for limitations on the liability of the trustee and
    an indemnities for any such liability. Importantly, the limitations and indemnities
    expressly do not apply in the event of “fraud, gross negligence, breach of trust or wilful
    default of the Trustee including as a result of breach of fiduciary duties”.

    396
    Evidence of Mr Sonk, T3101 (12 August 2021).

    397
    Exhibit NNN, Witness Statement of Mr Wapu Sonk dated 10 August 2021 [23] WIT.0036.0006.0004

    398
    KPHL Trust Deed (dated 26 May 2016) is at 10 August 2021 statement [15], WRS2-1, WIT.0132.0001.0002 (Affidavit),
    WIT.0132.0001.0002 (WRS2-1).

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  • The February 2016 refinancing

    27.15 On 27 October 2015, NEC decision 308/2015 authorised KPHL to deal with the collar
    loans, including terminating the loans and disposing of the associated Oil Search
    shares.399

    27.16 Whilst KPHL was, pursuant to that decision, authorised to deal with the collar loans as it
    pleased, any such course required the approval of the Trustee, which, for the time being,
    was not forthcoming.

    27.17 In January 2016, the board of KPHL resolved to seek Mr O’Neill’s consent to unwinding
    the collar loans.400

    27.18 It is evident that Mr O’Neill refused this request because in February 2016, the March and
    December 2014 collar loans were refinanced again,401 with the new collar loan provided
    by UBS, but with JP Morgan providing some of the loan funds to UBS.

    27.19 It is unclear why KPHL elected to refinance the March 2014 and December 2014 collar
    loans rather than simply allowing them to mature.

    27.20 In their fourth report, Brattle assessed that if KPHL had done this, the loss that the State
    suffered as a result of the entire transaction, which Brattle assessed at AUD 336.3 million,
    would have been reduced by between AUD 74.4 and AUD 75.2 million, giving a reduced
    total loss to the State of AUD 261.2 to AUD261.9 million for the State. It is therefore
    clear that KPHL lost money by deciding to refinance. The principal components of this
    difference are that:

    (a) the State would have avoided paying UBS to unwind the March 2014 and
    December 2014 collar loans and, later, the February 2016 collar loan;

    399
    Bundle of Documents comprising 22 pages provided by Grace So-On, page 1 and see amendment dated 30 October 2015 at pages 13-14
    WIT.0016.0001.0747.

    400
    WIT.0036.0012.0003

    401
    Statement of Wapu Sonk 10 August 2021, Exhibit NNN [51] WIT.0036.0006.0004

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  • (b) the State would have received different amounts in dividends. The dividend policy
    under the March 2014 and December 2014 collar loans was more generous to the
    State that the policy under the February 2016 collar loan, and

    (c) the State would have received payments from UBS as the March 2014 and
    December 2014 collar loans matured and the Oil Search shares were disposed of
    between March and July 2016.

    27.21 In addition to reduced losses, KPHL would have been freed of the loans and the shares,
    an objective that it wanted to achieve so that it could undertake other projects that fell
    more clearly within its mandate (in its view, holding Oil Search shares did not).

    27.22 The February 2016 refinancing was not fairly priced, according to Brattle, and favoured
    UBS. Whilst the interest rate in the February 2016 loan was reduced, it was still above a
    fair rate and the State received less than fair value when unwinding the March 2014 and
    December 2014 collar loans. Brattle estimated in their third report that a fair payment to
    unwind the March 2014 Collar Loan and December 2014 Collar Loan would have been
    AUD 127.9 million paid to KPHL as the rights that KPHL was releasing had value. A
    fair payment to refinance with the February 2016 Collar Loan would have been AUD
    191.0 million paid to UBS. On net, therefore, a fair payment would have been AUD 63.0
    million from KPHL to UBS. KPHL in fact paid AUD 101.8 million. Thus, in aggregate,
    these transactions transferred AUD 38.8 million of value from KPHL to UBS

    Attitude of the Trustee

    27.23 Throughout 2016, the Board of KPHL maintained their view of exiting the collar loans as
    soon as possible. For example, at a Board meeting on 28 January 2016 it resolved: “that
    the Managing Director should return to the Shareholder to seek endorsement for KPHL to
    unwind and not replace the existing equity collar on the basis that it is not commercially
    viable.”402

    402
    Kumul Petroleum Holdings Limited, Extract of Meeting Minutes – 28 January 2016, WIT.0036.0012.0003.

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  • 27.24 According to Mr Sonk’s written evidence, KPHL received advice about the sale of the
    shareholding from a number of sources:403

    (a) From January 2015, it had received advice from Tony Kelly.

    (b) From about March 2017 to the sale of the shares in September 2017, KPHL’s
    primary adviser was Mr Robert Acevski, KPHL’s CFO.

    (c) From time to time, Mr Sonk would talk with Mr Jilek and Mr Turner of UBS.
    They would discuss the market, the performance of the options and when the right
    time to sell might be, amongst other matters.

    (d) By a letter dated 10 October 2015, Mr O’Neill had exercised his powers as trustee
    of KPHL to appoint Dr Jacob Weiss as economic and financial advisor to himself
    as trustee. The letter of appointment stated that Dr Weis was to be invited to all
    KPHL board meetings and have the right to express his views and advice to the
    board on economic and financial matters.404

    27.25 As mentioned above, KPHL required, in effect, Mr O’Neill’s approval as trustee to sell the
    Oil Search shares. Mr Sonk said that he had discussed the sale with Mr O’Neill over a
    lengthy period of time. His written evidence was:405

    (a) At the time of the 2016 refinancing of the collar loans, Mr Sonk and Mr O’Neill
    had several discussions in which Mr O’Neill had agreed that KPHL should unwind
    the collar loans if it was unable to refinance the loans with a cheaper and more
    traditional style of loan.

    (b) From those discussions, Mr Sonk was also aware that Mr O’Neill wanted the State
    to get out of the Oil Search shareholding because the collar loans were expensive

    403
    Statement of Wapu Sonk dated 10 August 2021 [42-46] Exhibit NNN, WIT.0036.0006.0004

    404
    Statement of Wapu Sonk dated 10 August 2021, Annexure 2-4, Exhibit NNN WIT.0036.0006.0063

    405
    Statement of Wapu Sonk dated 10 August 2021, [35]ff, [64]ff and [70]Exhibit NNN WIT.0036.0006.0063

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  • for KPHL to maintain in comparison to the minimal returns on dividends and Mr
    O’Neill wanted KPHL to invest in the Papua LNG project.

    (c) Whilst there was no disagreement between Mr Sonk and Mr O’Neill about whether
    the shares should be sold, Mr O’Neill (in Mr Sonk’s estimation) saw a difficulty in
    managing this politically. This was not a concern of KPHL but because of Mr
    O’Neill’s dual roles as Prime Minister and Kumul Trustee and the scale of the
    transaction, KPHL had to wait for Mr O’Neill to give his approval to sell the
    shares.

    (d) KPHL was therefore seemingly waiting for the politics, share price and other
    factors to align before the shares could be sold. Mr Sonk noted that whilst the
    timing had to be right for KPHL, the primary consideration of Mr O’Neill, as Mr
    Sonk understood it, was a politically acceptable narrative.406

    27.26 Mr Sonk further explained in oral evidence:407

    Q. Well, the obvious question then, Mr Sonk, is if you already had approval – final
    approval from the NEC at the end of October 2015 to finally exit this transaction,
    why did it take until 2017 for you to actually exit the transaction?

    A: There were two in this transaction – there is two trigger points that we looked at.
    One was where is the share price and in relation to the put of $7.38. If it came below
    $7.38, we would exit without paying any more money; that was our target and also
    the political sensitivity around this decision because the same trustee made the
    decision to go in and the same trustee has made the decision to come out. So we were
    sensitive to something like that so we would be sensitive about making such a
    decision.

    406
    Statement of Wapu Sonk dated 10 August 2021 [35-39] Exhibit NNN, WIT.0036.0006.0004

    407
    Evidence of Mr Sonk, T3108-3110 (12 August 2021).

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  • Q. … So, let us just clarify this. The NEC decision that we were looking at was dated
    October 2015 so is your evidence that from somewhere even a little bit before
    October 2015, you had discussions with Prime Minister O’Neill that he wanted to get
    out of the Oil Search shareholding?

    A: He was prepared to get out hence these decisions, yes.

    Q: And that is only what 18 months after the transaction was entered into in the first
    place?

    A: Correct.

    Q: And why – so you have told us that one of the things that you were keeping an eye
    on was the share price but also you referred to the politics of it. Now, can I take you
    to paragraph 37. You say that what you understood from the discussions you had
    with Prime Minister O’Neill was that the issue was not disagreement about whether
    KPHL should dispose of the Oil Search shares but the difficulty the then Prime
    Minister saw in managing this politically. What did he say to you about the politics of
    this decision to sell Oil Search shares?

    A: It is just 2016 – he did not say, I am just – politics is around the corner in 2017.
    He did not say that but I am just saying that we saw it as him thinking about the
    consequences of 2017 politics when making these decisions in 2016.

    Q: You had regular discussions with the Prime Minister about this topic?

    A: Not about his politics and how to manage these things [but] about the shares, yes.

    Q: And that continued from the latter half of 2015 all the way to September 2017
    when the shares were finally sold, is that right?

    A: Correct

    Q: And you see paragraph 38, you say KPHL had to wait for Prime Minister O’Neill
    to give his approval to sell the Oil Search shares, without that approval KPHL could
    simply not sell I take it? So, again despite having the authorization to deal with the

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  • shares, however you please, since October 2015 and the NEC decision, you say that
    you still needed Peter O’Neill’s approval to sell the shares?

    A: Yes. And also I do not think a lot of people, even the politicians and even the
    trustee maybe did not understand that the right time to sell was when the share price
    was at the put or below so we would not pay anything else and come out. That would
    look like we are selling at a loss and hard to message that was one of the difficulties.

    Q: And the issue of the share prices is something that you regularly kept the Prime
    Minister informed about?

    A: Correct. Well, discussions around that and where it is at.

    Q: You say in paragraph 29 that the timing had to be right for KPHL and I will just
    stop there, that is the share price. So in your mind the timing was timing in relation
    to share price, is that right?

    A: Correct.

    Q: And you said the primary concern for Prime Minister O’Neill was a politically
    accepted narrative, And what narrative is that?

    A: Narrative and explaining exactly why we are getting out and putting a positive
    spin when the share prices are below $8.20 that was announced in 2014 that we are
    getting into.

    27.27 However, Mr Sonk later clarified that he did not recall any actual conversations with Mr
    O’Neill about his need to manage the issue politically and that the only reasons Mr
    O’Neill gave for his position were that the collar loans were expensive in comparison to
    the returns on dividends and Mr O’Neill wanted KPHL to invest in the Papua LNG
    project.408

    408
    Statement of Wapu Sonk dated 22 February 2022, pp 5-6.

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  • 27.28 When Mr O’Neill was asked whether his primary consideration as to when to sell the
    shares was a politically acceptable narrative he answered: “That is not quite true. A
    politically acceptable [sic] does not determine share prices. It will depend entirely on
    shares of value reflected on the stock market for Oil Search and that is for the Board to
    consider.”409 But the fact remains that the vital strategic need to own Oil Search shares
    disappeared very quickly – leaving not only large losses but the questions – what did the
    UBS Loan achieve – and what was it ever intended to achieve.

    27.29 On 1 August 2017, Mr O’Neill was formally re-elected as the Prime Minister. This
    development may have cleared the way for the sale of the Oil Search shares. However,
    when it was put to Mr O’Neill that he waited until he won the election to approve the sale
    of the Oil Search shares, he replied: “That is not quite true; no.”410

    27.30 KPHL obtained advice from Mr Tony Kelly on 10 August 2017 that:411

    (a) an Oil Search closing price of $6.48 was “in the money”;

    (b) KPHL could “request Early Termination of both Collar Loans” and “the Back
    Collar Confirmation Agreement… requires that all parties agree to each tranche
    termination date. In practice, this means that the banks need to be allowed to
    complete their Delta hedging programme underlying each Collar Loan in an
    orderly market. … the banks are obliged to notify [KPHL] of the settlement
    amount within [one] business day of the agreed Termination dates”;

    (c) KPHL would “receive back from UBS and JPM the pro rata amounts of pre-paid
    interest relating to the unexpired period of the two Collar Loans”; and

    (d) the “approximate amount of interest to be repaid [at a share price of $6.48] is
    A$20,878,656” and “the approximate net proceeds to KPHL of an early
    termination given today would be approximately A$155 million”.

    409
    Evidence of Peter O’Neill, T3783.

    410
    Evidence of Peter O’Neill, T3785.

    411
    WIT.0036.0007.0445.

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  • 27.31 In his statement of 10 August 2021, Mr Sonk said that in or about August or September
    2017, he was told by his chairman, Sir Moi Avei, who had met with Mr O’Neill that
    KPHL could now sell the Oil Search shares. Sir Moi said that Mr O’Neill would manage
    the politics of the situation and defend the decision.412

    27.32 Sir Moi Avei provided a statement to the Commission dated 5 November 2020. The
    statement does not mention the meeting with Mr O’Neill or the instruction to Mr Sonk but
    states that at the 11 August 2017 KPHL board meeting, Mr Sonk recommended that he
    and Sir Moi should speak to Mr O’Neill as the Kumul Trustee about the risks and strategy
    KPHL should consider in advance of the maturity date.413

    27.33 When Sir Moi Avei gave oral evidence to the Commission, he denied that he had met Mr
    O’Neill to discuss the sale of the Oil Search shares.414

    27.34 The 19 September 2017 board meeting of KPHL approved the unwinding of the collar
    and sale of the Oil Search shares.415

    27.35 Mr Wato recalled that:416

    On 19 September 2019 [sic: 2017], the KPHL Board decided to seek the Prime Minister
    [sic] consent to the sale of the Oil Search shares, but defer seeking and obtaining the
    National Executive Counsel’s [sic] approval until after first selling the shares. Then
    subsequently seek the approval and ratification of the National Executive Counsel [sic].
    This was necessary to manage share price sensitivities in the market because any leakage
    of news that KPHL is about to sell the [Oil Search] shares would affect the [Oil Search]
    share price and have a negative impact on the margin due to KPHL from the sale or

    412
    Statement of Wapu Sonk dated 10 August 2021 [66] Exhibit NNN, WIT.0036.0006.0004

    413
    Statement of Sir Moi Avei dated 5 November 2020, Exhibit DDD, WIT.0074.0003.0002

    414
    Evidence of Sir Moi Avei, T2383

    415
    10 August 2021 statement [68], WIT.0036.0006.0004.

    416
    Statement of Rogen Wato dated 8 June 2021, Annexure RW-17 WIT.0038.0004.0004

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  • might even result in a total loss. I understood that the Prime Minister’s consent to this
    approach was received prior to the Board’s decision to sell the shares in this way.

    27.36 Mr Sonk said the following in his statement to the Commission dated 13 November 2020:

    (a) Before 19 September 2017, he met with Peter O’Neill to discuss the possible sale
    of the Oil Search shares.417

    (b) On 19 September 2017, KPHL had a Special Board Meeting at which multiple
    options to reduce or cease the shareholding in Oil Search were canvassed.418 The
    board resolved to ‘authorise a physical unwind of the collar structure to allow the
    KPHL group to terminate the collar and for KPHL to have “no further exposure to
    the [shares]’.419

    (c) Between 19 September and 21 September 2017, Mr Sonk met with Mr O’Neill as
    the Kumul Trustee regarding the board’s decision to terminate the collar loans and
    sell the shares.420 No written approval of the sale was issued by Mr O’Neill.

    (d) KPHL announced its decision to sell the shares after the close of trading on 21
    September 2017.421

    (e) KHPL sold the shares held by Kumul Investments on 22 September 2017422 or 26
    September 2017.423

    27.37 Mr Sonk gave oral evidence to the Commission confirming that:

    417
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [142]

    418
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [144]

    419
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [146]

    420
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [148]

    421
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [149]

    422
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [125]

    423
    Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [150]

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  • (a) He met Prime Minister O’Neill on 19 September 2017 to seek his consent to the sale of
    the Oil Search shares and unwinding the collar loans. He had some PowerPoint slides
    which he showed to Mr O’Neill that, in Mr Sonk’s view, demonstrated that it was the right
    time to sell the shares. Mr Sonk cannot now locate those slides.424

    (b) He had a second meeting with Mr O’Neill discussing the sale of the shares.425
    From paragraph 148 of Mr Sonk’s statement of 13 November 2020426, it would
    seem likely that this meeting took place on about 21 September 2017.

    27.38 In his statement of 10 August 2021, Mr Sonk stated that:427

    From in person discussions I understood that the then Prime Minister Peter O’Neill
    considered that he would be able to sell a narrative that the sale of the shares at that time
    was in fact “made money” [sic] because:

    (a) The sale was at above market price, being the difference between the market price of
    AUD$6.70 and the average strike price of the put options at AUD$7.38 creating what is
    described as a residual profit;[is this the difference between cash and ‘val