Are UBS and Oil Search Really Whiter than White?

In 2014, the national government borrowed A$1.2 billion from the Swiss banking group UBS in order to make a financially disastrous investment in the stock of Oil Search Limited.

PNG’s top corruption watchdog has released a report that finds the loan deal was unlawful. According to the Ombudsman Commission as many as fifteen different laws were broken by the then Prime Minister Peter O’Neill and his cohort who bulldozed the deals through.

The two major beneficiaries of the scheme were UBS itself, which made more than A$120 in arrangement fees and interest, plus ‘significant’ trading fees, and Oil Search. As a result of the timely injection of capital Oil Search was able to buy a $900 million stake in the Elk-Antelope gas field in PNG and avert any threat of a rumoured takeover.

But for everyday people, the unlawful deal was financially ruinous. The State lost more than A$420 million (over K1 billion) when the value of the Oil Search shares plummeted and it was forced to cut its losses and sell the failing investment.

Now, the government of newly elected Prime Minister James Marape is promising a Commission of Inquiry into the whole scandal. In response, UBS and Oil Search have both issued statements claiming they did nothing wrong.

However, a close examination of those denials reveal some interesting spin from the Swiss financial institution.

For example, UBS is quoted as saying “The Ombudsman Commission report makes no findings against UBS, nor suggests any impropriety by the bank or its staff”.

The implication of this statement is fairly plain – following a thorough investigation of the facts the Ombudsman Commission made no adverse findings against UBS.

What UBS doesn’t say is the Ombudsman Commission [OC] had no powers to investigate UBS. The inquiry was limited to an examination of the conduct of those politicians and bureaucrats subject to the PNG Leadership Code.

UBS also ignores the fact that despite its limited focus, the OC report is critical of the role and actions of UBS’s legal team which comprised Ashurst Lawyers and their local agents, the Pacific Legal Group.

The OC report reveals that it was the lawyers acting for UBS who drafted the National Executive Council submission that led to the NEC giving its approval for the loan and share purchase. The Ombudsman claims that approval was unlawful for a number of reasons including the failure to secure Parliamentary consent and conduct an open tender process. The OC says the drafting of the NEC submission by lawyers acting for UBS  was “highly irregular”, as was the non-involvement of government legal officers.

The OC report also reveals that it was again UBS’s lawyers who drafted the Board resolutions and other legal documents that needed to be signed by state owned entities party to the loan agreements and financing. Some of whom felt they were being ‘bulldozed’ into giving their approval.

UBS claims that the loan deal was struck as part of a competitive international tender process. That is something the OC contends is simply not true.

While the national government did approach several financial institutions in 2013 over securing a new loan, it was in relation to a different transaction – recovering Oil Search shares sold by the Somare government. And, in any event, this process was not a formal tender, it was never completed, and during the process the Bank of PNG had reservations over engaging UBS and wanted to pursue other options.

UBS claims the PNG government received independent legal advice from KPMG and Norton Rose Fulbright. It doesn’t mention that the advice which the government received from both its own Attorney General and State Solicitor was that elements of the deal were unlawful. Nor does UBS mention that, according to the OC, the government’s engagement of both KPMG and Norton was done outside proper procurement processes and was also unlawful.

UBS carefully refers to the Loans (Overseas Borrowings) (No.2) Act as the ‘umbrella legislation relied on for various financings by the PNG government’. The Swiss bank claims that the UBS loan was ‘approved on the same basis’ as other loans, including the 2018 sovereign bond issue. What UBS does not say is that, according to the OC, its loan was not approved in accordance with the legislation.

In a similar vein, the statement from Oil Search does not stand up well to critical assessment.

Oil Search maintains that it was an innocent party in the whole affair. It says that the PNG government approached Oil Search wanting to buy a stake in the company; that Oil Search was already ‘well progressed in finalising funding options’ to buy into Elk-Antelope, and that if the PNG government wanted to stop any take-over of the company it already had that power under the Takeovers Code’.

This interpretation of events is not necessarily supported by the cozy tone of a letter sent to Oil Search CEO Peter Botten by then Prime Minister Peter O’Neill:

“I am writing to you following our discussions in Port Moresby on 23 February 2014 regarding a share placement by Oil Search Limited to the State.

“This letter is intended to convey the State’s willingness to participate in the Placement in order to form a long term investment in Oil Search, with a view to further strengthening our existing relationship.”

Whether or not the idea of the share purchase came from the PNG government or Oil Search, either way the government was going to have to take out a new loan to finance the purchase; something Peter Botten, with his long involvement in the country must have been very well aware of. He should also have known that Peter O’Neill personally could not give his consent to such an investment, it needed whole of government endorsement.

That endorsement was never obtained. Neither Parliament or even all the government agencies who should have been consulted knew what was going on. Instead, without going through normal government procurement and tendering processes, O’Neill and Acting Treasury Secretary Dairi Vele, decided, says the OC, to borrow the money from UBS.

Oil Search says it was ‘not involved in, or a party to, the UBS loan’. Oil Search fails to mention though that as part of the whole share placement and financing deal, it was in a contractual relationship with UBS. That relationship, says O’Neill in his letter, included Oil Search benefiting from hedging arrangements undertaken by the bank. 

Oil Search also engages in some hedging of its own in its denials of any wrongdoing; it prefaces its comments about any takeover bid by referring to the Abu Dhabi owned company, OPIC and its possible intentions. Oil Search does not mention though the takeover threat from another Australian based company Woodside, which was reportedly also eyeing a bid before the share placement to the PNG government closed that door.

Both UBS and Oil Search do though say they welcome the proposed Commission of Inquiry.

Lets hope they both cooperate fully and openly and that the Commission is able to fully probe the actions of all the overseas based organisations and individuals involved in the scandal.

In the meantime, next week, PNGi will be publishing its own more in-depth analysis of the role played by UBS, Oil Search and the anonymous middle men who cooked up the deal which costs PNG a billion Kina in losses.