Commission of Inquiry into the UBS Loan – Final Submissions by Counsel Assisting
Mentions of people and company names in this document
It is not suggested or implied that simply because a person, company or other entity is mentioned in the documents in the database that they have broken the law or otherwise acted improperly. Read our full disclaimer
Document content
-
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.1We 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.ME_195780697_5
-
Page 2 of 171
-
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.’Page 2
ME_195780697_5
-
Page 3 of 171
-
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;Page 3
ME_195780697_5
-
Page 4 of 171
-
· 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.Page 4
ME_195780697_5
-
Page 5 of 171
-
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.Page 5
ME_195780697_5
-
Page 6 of 171
-
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;
Page 6
ME_195780697_5
-
Page 7 of 171
-
(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 thePage 7
ME_195780697_5
-
Page 8 of 171
-
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”.41.4 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 our4
Chief Dr John Momis GCL, oral evidence; transcript (29 April 2021) at page 173.Page 8
ME_195780697_5
-
Page 9 of 171
-
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—
Page 9
ME_195780697_5
-
Page 10 of 171
-
(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;”65
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.Page 10
ME_195780697_5
-
Page 11 of 171
-
(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.101.13 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).Page 11
ME_195780697_5
-
Page 12 of 171
-
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.131.16 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.Page 12
ME_195780697_5
-
Page 13 of 171
-
(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.161.21 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.Page 13
ME_195780697_5
-
Page 14 of 171
-
(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 and17
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.Page 14
ME_195780697_5
-
Page 15 of 171
-
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.Page 15
ME_195780697_5
-
Page 16 of 171
-
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
Page 16
ME_195780697_5
-
Page 17 of 171
-
2.3 The Right Honourable Grand Chief Sir Michael Somare GCL GCMG CH CF SSI
2.4 Mr Arthur Somare;
Page 17
ME_195780697_5
-
Page 18 of 171
-
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;
Page 18
ME_195780697_5
-
Page 19 of 171
-
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;
Page 19
ME_195780697_5
-
Page 20 of 171
-
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;
Page 20
ME_195780697_5
-
Page 21 of 171
-
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.Page 21
ME_195780697_5
-
Page 22 of 171
-
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.2119
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)].Page 22
ME_195780697_5
-
Page 23 of 171
-
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.
Page 23
ME_195780697_5
-
Page 24 of 171
-
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 the23
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.Page 24
ME_195780697_5
-
Page 25 of 171
-
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 dutiesPage 25
ME_195780697_5
-
Page 26 of 171
-
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 UBSPage 26
ME_195780697_5
-
Page 27 of 171
-
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.263.3 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.283.4 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.2925
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.Page 27
ME_195780697_5
-
Page 28 of 171
-
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.303.6 On 3 April 2002, the merger (by way of Scheme of Arrangement) was approved by the
National Court.313.7 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.323.8 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. 333.9 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.353.10 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 Search30
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.Page 28
ME_195780697_5
-
Page 29 of 171
-
shareholders but also to the [Papua New Guinean] Government”.36 In this regard, Mr
Botten stated:37One 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.393.12 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. 403.13 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 in36
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).Page 29
ME_195780697_5
-
Page 30 of 171
-
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.424.2 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.434.3 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.Page 30
ME_195780697_5
-
Page 31 of 171
-
(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.454.5 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.464.6 The advice to the State from ABN AMRO also considered (but recommended against)
various other proposals.475. 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.Page 31
ME_195780697_5
-
Page 32 of 171
-
6.1 The PNG LNG Project is one of the most significant (if not the most significant) natural
resource projects in the Independent State.486.2 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 2014.506.5 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.Page 32
ME_195780697_5
-
Page 33 of 171
-
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 toPage 33
ME_195780697_5
-
Page 34 of 171
-
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.0056.0006.0021Page 34
ME_195780697_5
-
Page 35 of 171
-
(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.5653
Bond Deed Poll, Annexure A, cl 7.5 WIT.0056.0006.002154
Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.002155
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]Page 35
ME_195780697_5
-
Page 36 of 171
-
(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.Page 36
ME_195780697_5
-
Page 37 of 171
-
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.587.7 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.0027.0001.0538Page 37
ME_195780697_5
-
Page 38 of 171
-
(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.Page 38
ME_195780697_5
-
Page 39 of 171
-
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 TreasuryPage 39
ME_195780697_5
-
Page 40 of 171
-
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.598.12 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.618.13 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.628.14 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.638.15 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 were59
NEC Decision 82/2008, WIT.0026.0001.072260
PwC Report, “Transaction Review Project Kumul”, p7 WIT.0056.0005.000161
PwC Report, “Transaction Review Project Kumul”, p43 WIT.0056.0005.0001 and Affidavit of Glenn Blake, 20
December 2021, [23-24] Exhibit WWW WIT.0092.0001.000162
Affidavit of Glenn Blake, 20 December 2021, [29] Exhibit WWW WIT.0092.0001.000163
Affidavit of Glenn Blake, 20 December 2021, [31] Exhibit WWW WIT.0092.0001.0001Page 40
ME_195780697_5
-
Page 41 of 171
-
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.658.18 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.0026.0001.074165
Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770Page 41
ME_195780697_5
-
Page 42 of 171
-
(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 record66
WIT.0026.0001.0770Page 42
ME_195780697_5
-
Page 43 of 171
-
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.678.23 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.0104.0002.023968
Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770Page 43
ME_195780697_5
-
Page 44 of 171
-
(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”.Page 44
ME_195780697_5
-
Page 45 of 171
-
(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.0027.0001.0506Page 45
ME_195780697_5
-
Page 46 of 171
-
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.728.32 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.7370
WIT.0104.0002.009571
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.0104.0002.003773
Letter Lazard Freres to Prime Minister, 16 October 2008, WIT.0104.0002.0173Page 46
ME_195780697_5
-
Page 47 of 171
-
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 financing74
NEC Submission 167/2008 dated 20 October 2008 [22] Exhibit BB, Annexure T, WIT.0027.0005.0216Page 47
ME_195780697_5
-
Page 48 of 171
-
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.0028.0004.0003Page 48
ME_195780697_5
-
Page 49 of 171
-
(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.Page 49
ME_195780697_5
-
Page 50 of 171
-
(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.0097.0005.0213Page 50
ME_195780697_5
-
Page 51 of 171
-
(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 timePage 51
ME_195780697_5
-
Page 52 of 171
-
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 and77
Letter, Department of Treasury to IPBC 21 October 2008, WIT.0056.0006.0762Page 52
ME_195780697_5
-
Page 53 of 171
-
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.788.46 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 the78
PNG LNG Project State’s Equity Financing “Exchangeable Bond Option” Presentation to the NEC 22 October
2008, WIT.0097.0005.021379
NEC Decision223/2008 Exhibit BB Annexure R, WIT.0027.0005.017480
Minutes of IPBC board meeting 24 October 2008, WIT.0026.0001.0789Page 53
ME_195780697_5
-
Page 54 of 171
-
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.811(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 on81
Affidavit of Glenn Blake, 20 December 2021, [46] Exhibit WWW, WIT.0092.0001.0001Page 54
ME_195780697_5
-
Page 55 of 171
-
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.
Page 55
ME_195780697_5
-
Page 56 of 171
-
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.Page 56
ME_195780697_5
-
Page 57 of 171
-
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 transactionPage 57
ME_195780697_5
-
Page 58 of 171
-
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.8210.5 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. 8310.6 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.8410.7 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. The82
Affidavit of Glenn Blake, 20 December 2021 [26], Exhibit WWW, WIT.0092.0001.000183
Affidavit of Glenn Blake, 20 December 2021, [21] Exhibit WWW, WIT.0092.0001.000184
NEC Decision 82/2008, WIT.0026.0001.0722Page 58
ME_195780697_5
-
Page 59 of 171
-
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.8610.11 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, raised85
NEC Decision 189/2008 was made at Special Meeting No: 30/2008 WIT.0027.0001.049886
Affidavit of Glenn Blake, 20 December 2021 [21], Exhibit WWW, WIT.0092.0001.0001Page 59
ME_195780697_5
-
Page 60 of 171
-
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.8710.12 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 share87
Minutes of Meeting No. 1 of 2008 of the Board of Directors of IPBC WIT.0026.0001.073088
PwC Report, “Transaction Review Project Kumul”, p21 WIT.0056.0005.00018989
Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.0021Page 60
ME_195780697_5
-
Page 61 of 171
-
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.0132.0001.000291
Bond Deed Poll, Annexure A, cl 7.2 WIT.0056.0006.0021Page 61
ME_195780697_5
-
Page 62 of 171
-
(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.0056.0006.0021Page 62
ME_195780697_5
-
Page 63 of 171
-
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 was93
PwC Report, “Transaction Review Project Kumul”, p40 WIT.0056.0005.0001Page 63
ME_195780697_5
-
Page 64 of 171
-
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 both13.1 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 USPage 64
ME_195780697_5
-
Page 65 of 171
-
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.9414.6 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.9514.7 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 funds94
Affidavit of Dairi Vele, 26 April 2021 p25-26, Exhibit QQ WIT.0014.0007.000195
PwC Report, “Transaction Review Project Kumul”, p10 WIT.0056.0005.0001Page 65
ME_195780697_5
-
Page 66 of 171
-
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.9614.11 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 being96
Affidavit of Glenn Blake, 20 December 2021, [36] Exhibit WWW WIT.0092.0001.000197
PwC Report, “Transaction Review Project Kumul”, p12 WIT.0056.0005.0001Page 66
ME_195780697_5
-
Page 67 of 171
-
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;Page 67
ME_195780697_5
-
Page 68 of 171
-
(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.Page 68
ME_195780697_5
-
Page 69 of 171
-
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 thePage 69
ME_195780697_5
-
Page 70 of 171
-
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.9814.20 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.0132.0001.0002Page 70
ME_195780697_5
-
Page 71 of 171
-
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.Page 71
ME_195780697_5
-
Page 72 of 171
-
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.
Page 72
ME_195780697_5
-
Page 73 of 171
-
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 beingPage 73
ME_195780697_5
-
Page 74 of 171
-
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.Page 74
ME_195780697_5
-
Page 75 of 171
-
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 shares16.1 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.10016.4 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.10299
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.Page 75
ME_195780697_5
-
Page 76 of 171
-
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.10516.6 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;110103
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.0155.0001.1597Page 76
ME_195780697_5
-
Page 77 of 171
-
(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”Page 77
ME_195780697_5
-
Page 78 of 171
-
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 2014.11217.3 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.”11317.4 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 1976.11417.5 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”.11517.6 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.11617.7 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.Page 78
ME_195780697_5
-
Page 79 of 171
-
(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.11817.8 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.11917.9 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.12117.10 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 the117
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.0036.0001.0284Page 79
ME_195780697_5
-
Page 80 of 171
-
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 2017.12317.12 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.12417.13 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.”125What 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 the122
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.Page 80
ME_195780697_5
-
Page 81 of 171
-
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.
…
Page 81
ME_195780697_5
-
Page 82 of 171
-
(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 bePage 82
ME_195780697_5
-
Page 83 of 171
-
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.12617.23 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.Page 83
ME_195780697_5
-
Page 84 of 171
-
(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 andPage 84
ME_195780697_5
-
Page 85 of 171
-
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.12817.29 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.12917.30 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.Page 85
ME_195780697_5
-
Page 86 of 171
-
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.13117.31 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:132The 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 and130
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.Page 86
ME_195780697_5
-
Page 87 of 171
-
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.13417.33 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.”13517.34 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.13617.35 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
2014.13717.36 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.140134
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.Page 87
ME_195780697_5
-
Page 88 of 171
-
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.14117.38 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
2014.14217.39 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.147Our 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, is141
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.Page 88
ME_195780697_5
-
Page 89 of 171
-
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 the148
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.Page 89
ME_195780697_5
-
Page 90 of 171
-
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.Page 90
ME_195780697_5
-
Page 91 of 171
-
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.15717.46 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 of156
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.Page 91
ME_195780697_5
-
Page 92 of 171
-
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.15917.51 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.16017.53 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.16117.54 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.162158
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.001.001.5052159
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.Page 92
ME_195780697_5
-
Page 93 of 171
-
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.Page 93
ME_195780697_5
-
Page 94 of 171
-
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 loan17.61 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.0132.0001.0002Page 94
ME_195780697_5
-
Page 95 of 171
-
(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.”16717.64 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 1976.16817.65 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.Page 95
ME_195780697_5
-
Page 96 of 171
-
(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.16917.67 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.17117.68 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.17217.71 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 that169
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].Page 96
ME_195780697_5
-
Page 97 of 171
-
transaction such as a nominee of the State acquiring an interest in the PNG LNG
Project.17318. 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.”17418.3 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 2014.175Q: 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 at173
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.Page 97
ME_195780697_5
-
Page 98 of 171
-
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-15.17718.5 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”.18018.6 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.18218.7 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 for176
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.Page 98
ME_195780697_5
-
Page 99 of 171
-
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.18318.9 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.Page 99
ME_195780697_5
-
Page 100 of 171
-
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.”18518.11 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.”187Oil 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.Page 100
ME_195780697_5
-
Page 101 of 171
-
(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.”19018.16 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.19118.17 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 its189
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.Page 101
ME_195780697_5
-
Page 102 of 171
-
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”.19318.19 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.195192
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.Page 102
ME_195780697_5
-
Page 103 of 171
-
(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 responsible196
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.Page 103
ME_195780697_5
-
Page 104 of 171
-
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”.199Mandatory 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.201198
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].Page 104
ME_195780697_5
-
Page 105 of 171
-
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.20218.23 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.20318.24 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.20418.26 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 noted202
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.Page 105
ME_195780697_5
-
Page 106 of 171
-
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.20518.27 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.20618.28 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-15.20718.29 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.20818.30 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); or205
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.Page 106
ME_195780697_5
-
Page 107 of 171
-
(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.20918.32 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.21018.33 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 2014.21118.34 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.001.001.5578Page 107
ME_195780697_5
-
Page 108 of 171
-
(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.Page 108
ME_195780697_5
-
Page 109 of 171
-
(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:Page 109
ME_195780697_5
-
Page 110 of 171
-
…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. MsPage 110
ME_195780697_5
-
Page 111 of 171
-
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.Page 111
ME_195780697_5
-
Page 112 of 171
-
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 shares19.1 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.216215
NRF.001.001.3693; NRF.001.001.3694.216
NRF.001.001.3697.Page 112
ME_195780697_5
-
Page 113 of 171
-
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”.21719.4 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.21819.6 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.22019.7 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 the217
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].Page 113
ME_195780697_5
-
Page 114 of 171
-
authorised purpose of “purchasing equity in companies”. The advice included a
requirement that the decision be ratified by a decision of the NEC.22119.8 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.22219.9 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-15.22319.10 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.001.001.5061223
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.Page 114
ME_195780697_5
-
Page 115 of 171
-
(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”.228Findings
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.Page 115
ME_195780697_5
-
Page 116 of 171
-
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 AUD14,555,759.231229
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.Page 116
ME_195780697_5
-
Page 117 of 171
-
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 AUD18,000,000.23220.7 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.23320.8 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.23420.9 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.23520.10 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 for232
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.Page 117
ME_195780697_5
-
Page 118 of 171
-
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.”23620.11 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.”23720.12 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.23820.13 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.”239236
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.Page 118
ME_195780697_5
-
Page 119 of 171
-
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 1995.24020.15 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 Loan240
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].Page 119
ME_195780697_5
-
Page 120 of 171
-
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).24521.3 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].Page 120
ME_195780697_5
-
Page 121 of 171
-
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.Page 121
ME_195780697_5
-
Page 122 of 171
-
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.’248247
Bridge Facility Agreement – Drawdown Notice, WIT.0015.0002.1265 at 1266.248
TS2506.8-14 (2 August 2021).Page 122
ME_195780697_5
-
Page 123 of 171
-
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.24921.15 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.25021.16 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 2014.25121.19 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.252249
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].Page 123
ME_195780697_5
-
Page 124 of 171
-
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.Page 124
ME_195780697_5
-
Page 125 of 171
-
(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.Page 125
ME_195780697_5
-
Page 126 of 171
-
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 2014.26321.26 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.26621.28 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.Page 126
ME_195780697_5
-
Page 127 of 171
-
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”.26821.30 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.27321.33 However, emails provided to the Commission by NRF indicate that Mr Vele, despite
supposedly leaving Pertusio Capital, continued to use his Pertusio Capital email address267
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].Page 127
ME_195780697_5
-
Page 128 of 171
-
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 2014.27521.34 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.27821.36 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].Page 128
ME_195780697_5
-
Page 129 of 171
-
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.27921.38 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 in279
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.Page 129
ME_195780697_5
-
Page 130 of 171
-
order”.282 On 27 February 2014, Mr Beattie responded to Mr Moe and confirmed the
advice from Ashurst was in order.28321.42 Shortly after 26 February 2014, PLG was engaged by NRF following discussions between
Mr Beattie, Mr Latimer and Mr Maladina.28421.43 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.28521.44 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].Page 130
ME_195780697_5
-
Page 131 of 171
-
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.28621.46 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].Page 131
ME_195780697_5
-
Page 132 of 171
-
(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.29221.48 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”.29321.49 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. It289
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.Page 132
ME_195780697_5
-
Page 133 of 171
-
would not make much sense to do that based on the effect issues that we would
have.”29521.50 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.29921.52 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”.300295
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).Page 133
ME_195780697_5
-
Page 134 of 171
-
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.30221.53 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”.30421.55 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).Page 134
ME_195780697_5
-
Page 135 of 171
-
(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 and305
NRF.001.001.7065; NRF.001.001.6871306
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.001.003.4739Page 135
ME_195780697_5
-
Page 136 of 171
-
(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.31321.56 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 and313
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).Page 136
ME_195780697_5
-
Page 137 of 171
-
Shareholder of Flavalea Limited318 and a director and shareholder of Property and
Investment Consultants Ltd.31921.59 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.”32021.60 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 …
“.322KPMG
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.”323318
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.Page 137
ME_195780697_5
-
Page 138 of 171
-
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.32421.63 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.32521.64 On 28 February 2014, representatives of KPMG, Mr Mortensen and Mr Latimer attended
the UBS offices in Sydney to review the collar loan facility.32621.65 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.Page 138
ME_195780697_5
-
Page 139 of 171
-
(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.33021.67 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.33221.68 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.Page 139
ME_195780697_5
-
Page 140 of 171
-
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 noPage 140
ME_195780697_5
-
Page 141 of 171
-
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
AmountUnwind payment from February 2016 (35.1)
Collar LoanPage 141
ME_195780697_5
-
Page 142 of 171
-
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.Page 142
ME_195780697_5
-
Page 143 of 171
-
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”. 33423.9 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. 33523.10 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.Page 143
ME_195780697_5
-
Page 144 of 171
-
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. 33623.13 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. 33823.15 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 public336
Transcript 10 February 2022, TS3990.5-10.337
Transcript 10 February 2022, TS3990-3991.338
Transcript 10 February 2022, TS3991.6-7.Page 144
ME_195780697_5
-
Page 145 of 171
-
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. 34123.18 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. 342Conclusion
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 Counsel339
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.Page 145
ME_195780697_5
-
Page 146 of 171
-
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 inception24.1 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.34524.3 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 that343
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].Page 146
ME_195780697_5
-
Page 147 of 171
-
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.35224.8 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>).Page 147
ME_195780697_5
-
Page 148 of 171
-
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.35324.10 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 15.35424.11 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.35624.12 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.35824.14 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.359353
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.Page 148
ME_195780697_5
-
Page 149 of 171
-
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.36124.16 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.362History 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.36424.19 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
15.365360
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).Page 149
ME_195780697_5
-
Page 150 of 171
-
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 15.36624.21 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.36724.22 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:369During 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 InterOil366
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],