Landowner Funds Mismanaged on a Grand Scale: Gobe Petroleum Part 2
Oil has been flowing from the Gobe oilfields in the remote hinterland of Papua New Guinea for almost 25 years. The revenues from that oil has fed the profits of several international oil companies and bloated the incomes of some PNG politicians and bureaucrats, yet, as PNGi has recently exposed government indifference and incompetence means the people whose land is being drained of its natural wealth are still waiting on their royalty payments.
The lack of regular payments to local landowners is a result of the government’s failure to conclusively identify who they are and how the royalties should be divided among them. Orders from both the National and Supreme Court in 2000 and 2016, directing the government to establish a Land Titles Commission to settle the ownership issue, have been ignored.
There is another side though to the scandal that surrounds landowner benefits from major resource extraction projects – what happens to the landowners’ equity interests that are managed on their behalf by the Mineral Resource Development Corporation? The annual revenues from these equity interests are meant to be invested to provide long-term incomes which can fund local services. Today’s investigation reveals reality is very different.
PNGi has conducted an in-depth investigation into the MRDC’s management of the Gobe landowners equity interest in their oilfield. What we have found is a litany of mismanagement, bloated expenses, improper accounting, poor investment decision making, bureaucratic infighting and no transparency or accountability.
PNGi has also uncovered a presumptuous bid by the MRDC to take control of almost K200 million in Gobe landowner royalties through a legal battle that has pitched different arms of the State against each other in a protracted legal battle, contested at the landowner’s expense.
State versus State
In 2014, the State owned Mineral Resource Development Company and its wholly owned subsidiary, Petroleum Resources Gobe Limited (PRG), made an audacious bid to seize control of the Gobe landowners’ royalties.
Petroleum Resources Gobe Limited was incorporated in 1997 to manage the Gobe landowners’ 2% equity interest in the Gobe oil project. It is not a landowner representative body, it is wholly owned and managed by MRDC.
The Mineral Resource Development Company, “… manages, control [sic] and runs all PRG’s corporate financial investments and other affairs”.
Despite apparently having no claim or authority to take control of the landowners’ unpaid royalties, in May 2018, the Mineral Resource Development Company and Petroleum Resources Gobe Limited obtained a court order awarding them over K180 million in royalties.
The case though was never argued on its merits, the plaintiffs convinced the court to summarily find in their favour based on the State’s total failure to defend the legal action.
What was one State owned entity doing suing other arms of the State to get control of landowners’ money and why did the State not try to defend the case?
The Opposition, led by Patrick Pruaitch, cried foul alleging a plot to defraud the government and landowners.
“There are many elements in this case that deserve scrutiny by the Ombudsman Commission in terms of the Leadership Code. It is inexplicable that MRDC should make a claim on behalf of the Gobe landowners over outstanding royalty payments”.
Pruaitch pointed out that the MRDC Chairman at the time was the Prime Minister’s own Chief Secretary, Isaac Lupari, and that the MRDC reported directly to the Prime Minister, Peter O’Neill.
Also, said Pruaitch, the Ombudsman Commission should investigate the circumstances that led to the absence of government lawyers to defend the case ‘especially since the Office of the Auditor General and other government agencies have reported no royalties were owing to MRDC and the Gobe landowners’
Despite the Opposition’s clamour, and the resulting sacking of the State Solicitor by Attorney General Davis Stevens, the State did not appeal the court’s decision within the prescribed time limit.
It was not until October 2018, three months after the time limit for an appeal had expired, that the State belatedly filed an application in the Supreme Court seeking leave to review the National Court’s decision.
Fortunately for Gobe landowners, the Supreme Court has looked favourably on their plight. Despite the negligence and inordinate delays by the Solicitor General’s office, the Supreme Court has ruled the State can pursue an appeal.
At the Supreme Court hearing, the State argued that the appeal had not been filed within time because the lawyer with carriage of the case had been off work sick.
This, said Justice Hartshorn, was not a reasonable explanation for not complying with a statutory time limit:
“To miss a statutory deadline to file an appeal in a case in which judgment has been entered against the State for over K180 million with the reason being given that it was because a lawyer was absent from work for medical reasons is simply inexcusable and indefensible.”
There was then a further delay by the State of another three-months before it filed its application seeking leave to appeal. This delay, the State argued, was because of the time it took their lawyers to get instructions from the Department of Finance, and due to staffing issues. These reasons, said the Court, were “not reasonable” but understandable.
Despite finding the State’s excuses for not filing an appeal within time and for the delay in filing an application for leave, were unreasonable the Court said there were exceptional circumstances that meant the delays should be overlooked.
“In my view the fact that the State failed to file an appeal within time against a judgment of over K180 million and then uses a lawyer’s sickness as the reason, is in itself an exceptional circumstance.
“That the State, the people of Papua New Guinea, could potentially have to pay over K180 million because of the basic elementary failure of lawyers at the office of the Solicitor General, in itself constitutes not only an exceptional circumstance, in my view it is simply extraordinary.”
More than 18 months has now passed since the Supreme Court gave the State leave to appeal the default judgement awarding the MRDC K180 million, there has been no further word on the progress of that appeal.
In the meantime, an examination of the financial records filed by Petroleum Resources Gobe Limited point to serious questions over its financial management by the MRDC.
Petroleum Resources Gobe Limited (PRG) is a company set up by MRDC to manage the Gobe landowner’s 2% ownership of the Gobe oilfields. MRDC manages and controls all the affairs of PRG and charges it a K1 million fee every year for doing so.
PRG’s records filed with the corporate registrar show MRDC is not doing a competent job.
Firstly, in breach of the law, the MRDC has failed to file an annual return on behalf of PRG for any year since 2014, and that return was only filed in 2020 – five years late.
Secondly, in its audit report for that year, 2014, PRG’s auditors, Deloitte, for the third year in a row, recorded an ‘adverse audit opinion’.
Deloitte concluded that PRG’s financial statements ‘do not give a true and fair view of the statement of financial position, and of its financial performance and cash flows’.
This adverse finding was based on three factors. First, non-compliance with generally accepted accounting practice by including in the accounts sums that are held in trust and that are therefore not beneficial owned by the company. Second, the accounts included a K22 million investment in unquoted equities but the shares were listed at cost and their current value had not been assed. Thirdly, in breach of international accounting standards, the accounts of the wholly owned subsidiary company, Gas Resources Gobe, had not been consolidated into its parent’s accounts.
Despite the auditor’s findings, the PRG directors have signed off on the accounts, stating that in their opinion the financial statement’s are ‘true and fair’. One of the signing directors, Augustine Mano, is also Managing Director of the MRDC. He may be thought to have a conflict of interest in making such an assessment.
A closer look at the 2014 accounts for Petroleum Resources Gobe reveal that Gobe landowners are not receiving much return from the 2% equity in the Gobe oilfields that the company manages on their behalf.
This is, in part, due to the heavy expenses that the company is incurring.
From a revenue of K5.7 million in 2014 from oil and gas sales, after payment of all expenses, just K736.874 was left at the end of the year. This lowly figure was though an improvement on the previous year, when there was a K2,344,000 loss.
The biggest single expense in 2014 was the K2,877,024 paid back to Oil Search Limited as a contribution to the cost of the oil field operations. This is a salient reminder that equity interests come with both costs and liabilities as well as the potential for profits.
In addition, there was the K1 million paid to MRDC as a management fee. There is no indication how this flat annual payment bears any relationship to actual work done.
Similar or higher fee arrangements are in place for other MRDC managed landowner companies, including Petroleum Resources Moran, Petroleum Resources Kutubu, Petroleum Resources Enga, and Mineral Resources Ok Tedi and Mineral Resources Star Mountains.
For example, in the case of Petroleum Resources Kutubu the management fee charged by MRDC is reported to be K6.25 million in the last available audit report.
The Auditor General, however, has found that the collection of these management fees has often been done with ‘no legal basis’.
In his Part IV Report for 2011, the Auditor General records management fees were paid to the MRDC without any legal agreement in place by Petroleum Resources Kutubu and Petroleum Resources Gobe in 2009, by Petroleum Resources Enga from April to December 2007 and the years 2008 and 2009, by Mineral Resources Star Mountains from November to December 2008 and the whole of 2009, and by Mineral Resources Ok Tedi from February to December 2009.
“I am of the view that there was no basis for the fees received [by MRDC] in the period not covered by an agreement”.
In addition to the landowner equity companies already listed, MRDC controls and manages a further five landowner mineral resource companies, eleven landowner gas resource companies and another three petroleum resource companies, making twenty-four in total.
Do most or all of these companies also pay an annual management fee to MRDC and where does all that potential revenue go?
Returning to the Petroleum Resources Gobe 2014 accounts, in addition to the management fee paid to MRDC, other governance costs for the year amounted to almost K700,000. K346,095 was paid in Directors fees (equivalent to over K57,000 for each director) and K339,435 was paid for board meeting expenses.
Also listed in the annual accounts are operating expenses of K468,598 for public relations and K157,452 in professional fees. In addition K1,306,507 in ‘other’ expenses are declared, but are not detailed.
Petroleum Resources Gobe also has a wholly owned subsidiary, Gas Resources Gobe Limited, registered in 2009. This subsidiary, which also falls under the management of the MRDC, has not filed an annual return for any year since 2010. Its financial statements for that year reveal a loss before tax of US$940,000 and a net debt of $735,000.
Despite the loss, three of the company’s directors, Augustine Mano, Philip Kende and George Kisi, shared fees of US$113,243 (around K400,000).
Not only is the MRDC charging the Gobe landowners high fees for managing their equity interest while failing to properly maintain the financial accounts, there have also been some highly questionable investment decisions made.
It was the MRDC on behalf of Petroleum Resource Gobe and Petroleum Resource Moran, that unwisely invested landowner funds in the ill-fated Port Moresby casino fiasco.
K22 million in landowner money was handed by the MRDC to the Korean company CMSS (PNG) Limited to finance and build a hotel and casino complex in the Port Moresby suburb of Boroko. CMSS was supposed to inject K200 million into the project in return for a 90% stake but its funding never materialised. Although Transparency International has recommended MRDC be subject to legal proceedings as trustee for the landowners funds, MRDC and its officers have never been held accountable for their lack of due diligence and poor investment decision making.
While MRDC Managing Director Augustine Mano has tried to distance his organisation from any responsibility, in 2016 police advised they had begun a fraud investigation into the project. It was alleged in the media that the original Korean owner of CMSS has been deported, ownership of the company had been fraudulently transferred and the incomplete building was structurally unsound and would have to be demolished.
Nothing appears to have ever materialised from that investigation but, bizarrely, earlier this month, the police announced they were starting another investigation into the same matter.
As well as improper accounting, heavy expenses and catastrophic investments, it is alleged some of the Gobe landowners equity returns have been simply been misappropriated by the MRDC.
It is alleged that in November 2018, K30 million was taken out of the bank account of Petroleum Resources Gobe and transferred to two other MRDC subsidiary companies, Petroleum Resources Kutubu and Minerals Resources Star Mountains. The money was needed, it is suggested, to cover for a shortfall in finances for the construction of the Hilton Hotel and Star Mountains Plaza in Port Moresby.
Augustine Manohas denied there was any wrongdoing, but admitted a police investigation was instigated, as evidenced in a letter from the Fraud Squad to the Bank South Pacific ordering a halt on three bank accounts.
According to the police, ‘the perpetrators have colluded with BSP bank officers and did the transactions of K30 million without following any proper process and procedures’.
The outcome of that police investigation has never been revealed, but a year later it was this scandal and other allegations that led the late former Prime Minister, Sir Mekere Morauta, to call for a full-scale inquiry into the affairs of the MRDC and its management of landowner funds.
The Prime Minister, James Marape, promised a new police investigation and also that updated audited accounts would be made public. Neither promise appears to have been fulfilled.
Transparency International has also raised questions about the Hilton Hotel development, including how the land was acquired and whether it has delivered any investment returns for PNG and the landowners who funded it.
MOA funds and more questionable investments
Yet more questions have been raised by the Auditor General over the MRDC and its involvement with the financial benefits from the Gobe oilfields that are meant to flow to local communities.
In the Part IV Report on the Accounts of Public Authorities and Statutory Bodies for 2011, the Auditor General records that in December 2009 the MRDC received K20 million in Memorandum of Agreements funds for distribution to the Moran and Gobe oilfield landowners. The funds were paid to the MRDC by the Department of Petroleum and Energy.
According to the Auditor General, the Oil and Gas Act does not provide for the MRDC to manage MOA funds on behalf of landowners.
The Auditor General also records there was no trust agreement between the MRDC, DPE and the Department of Finance to govern the control and disbursement of the K20 million.
There is no audit trail that shows what happened to funds once in the hands of the MRDC.
The same Auditor General’s Report also reveals that in April 2008, the MRDC bought 1 million shares in City Pharmacy Limited. During 2009, MRDC sold 449,627 of those shares to Petroleum Resources Gobe.
The Auditor General says that, in breach of the MRDC’s own investment policy, there was no deliberation and approval for the sale by the MRDC’s investment advisory committee or final approval from the MRDC Board.
It also seems unlikely that Petroleum Resources Gobe received substantive independent advice on the transaction, as it is the MRDC which controls the management of the company.
Whether the sale was a deal that favoured the MRDC over the Gobe landowners is a question that is unlikely to ever be answered. It does though, again, point to the general lack of transparency around the MRDC’s management of landowner interests.
Another investment decision made by the MRDC on behalf of the Gobe oilfield landowners that has raised questions is the purchase of three adjacent commercial building in the central business district in Cairns, Australia, for $7 million in 2008.
The MRDC is the owner of the properties at 42-44 and 46-50 Spence Street and 53 Grafton Street. The properties were purchased using funds contributed in equal 25% shares by the MRDC, Petroleum Resources Gobe, Petroleum Resources Kutubu and Petroleum Resources Moran.
Despite the equal contribution of funds, the Auditor General has recorded that the three properties are owned exclusively by the MRDC and the landowner companies have no legal interest, despite having contributed 75% of the funds.
In his Part IV report for 2009, the Auditor General notes some further irregularities in the purchase of the properties.
Firstly, according to the Auditor General, there is no evidence that the MRDC Board deliberated on and approved the purchase of the properties and the MRDC did not have an independent property valuation done before making its tender offer.
The report also reveals the properties were initially purchased directly by the MRDC as a registered foreign company in Australia, but were later transferred to a newly registered Australian entity, Petroleum Resources Properties (Australia) Pty Ltd. According to the MRDC, the decision to incorporate PPP(A) and transfer the ownership of the properties, was done on the advise of the MRDC’s tax agent and solicitor based in Cairns.
In his Part IV Report for 2012, the Auditor General further records there is no evidence the MRDC sought approval from the State for registration in Australia as an overseas company.
Strangely for a company that manages a multi-million dollar property portfolio, supposedly on behalf of dozens of rural Papua New Guinea communities, Petroleum Resources Properties (Australia) Pty is a company with only two directors. They are the ubiquitous Augustine Mano, and the MRDC Public Relations officer, Iona Sharon Reto.
In the records of the Australian Securities and Investment Commission, Iona Reto is listed as living at an address in Townsville, Queensland. She was appointed to the Board of Petroleum Resources Properties (Australia) Pty in September 2020, replacing Augustine Mano’s long-time business partner, Sundaram Srinivasan.
Spaces in the three commercial properties are leased to a range of tenants including a law firm, the PNG Consulate and a fashion boutique. There is no public record of how much rent is being pocketed by Petroleum Resources Properties (Australia) Pty each month, how much it spends on operational costs nor how much is returned to the landowners equity companies.
Deloitte’s in its 2014 audit of Petroleum Resources Gobe Limited, notes an independent valuer in Australia, Taylor Byrne, conducted an independent valuation of the Cairns properties in 2009. He judged the purchased properties to be worth A$5.6m as of 31 December 2009. This potentially indicates the $7 million price tag paid for the Cairns properties by MRDC was above their market price.
The management of landowner revenues, royalties and equity interests in oil, gas and mineral projects through state run companies is a general scandal the nation has yet to fully reckon with. The money is routinely mismanaged and squandered, with little or no transparency.
For landowning communities, the monetisation of their natural resources is often seen as the only way of obtaining revenues to improve derelict state services. But the promised revenues rarely reach the people living in rural areas and expected investments in local schools, health services, roads and communications never materialise.
Meanwhile the disputes over who is entitled to the revenues are frequently bitter and acrimonious, last for decades but profit only lawyers and the hotels and gambling dens in Port Moresby that are home to the squabbling clan leaders.
Meanwhile, it is the politicians and bureaucrats in Waigani who are the real beneficiaries of the resource rents that are meant to fund rural services.
New mines, oil and gas projects and logging, are all sold to landowners by resource companies, bureaucrats and politicians who all know that they will be the real beneficiaries.
They sell the dream of riches to a nation of gold, floating on oil, surrounded by gas, knowing the significant revenues generated ironically only serve to strengthen the chains that hold the nation down.
The accumulated landowner benefits amounting to many billions act as a shadow sovereign fund, which provides ample opportunities for abuse, alongside the on books state budget that is also preyed upon.
The result is that while a small group of power brokers get rich, natural resources are squandered without local benefit, and foreign extractive enterprises return massive profits to their shareholders abroad and senior management teams, who live lives of of luxury and opportunity.