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Could this be the worst deal Peter O'Neill has ever done?

The instruction.....JOHN GARNAUT | Fairfax Media | Extracts

THE bars and lobby lounges of the Grand Papua Hotel are swarming with bankers.

Most are in their bespoke suits, one or two are in shorts and thongs to cope with the pressure and the heat.

They all sense that a billion-dollar deal window is closing.

"He was harassing me like nobody's business," says one senior PNG source, describing how an Australian banker from UBS had been tailing him and aggressively hurling instructions.

"In the end I couldn't stand it, I told him to 'F--- off, you are not my legal advisor'."

This was the atmosphere in which Swiss bank UBS struck a massively controversial deal to land the PNG government with a 10 per cent stake in ASX and PNG-listed company Oil Search. Those shares are seen now as an effective blocking stake to Woodside's ambitions to buy Oil Search, in one of the biggest deals currently in play.

The shares cost $1.2 billion, a staggering 8% of the former Australian protectorate's GDP. The deal has also cost the jobs of the government's treasurer, petroleum minister and attorney-general, while sparking investigations by the Ombudsman and Public Prosecutor.

Despite the scandals, sackings and the official probes, the terms of the deal have remained confidential – until now.

Through a series of leaked documents and interviews Fairfax Media has reconstructed what UBS insiders describe as one of the "most amazing deals" the bank has ever done.

Others, however, say the amazing part is that the bank was able to get away with it. They see a cash-strapped government getting stitched up.

The shares are held by the government-owned National Petroleum Company of PNG. Its confidential board minutes, for a Sunday morning meeting on March 9 of last year, show that at the highest levels there was intense discomfort about the financial wisdom of the terms of the deal, a view confirmed in expert analysis.

The company's chairman Frank Kramer exclaims that the government has "bulldozed" the huge transaction on to his books, despite a lack of information and "irregularity in due process".

Two days earlier, a Friday, the prime minister's chief of staff had written to the company ordering it to "urgently consider and take all actions necessary" to make the deal happen.

Kramer "emphasised" that he did not believe the proposed transaction was "directed to the greatest advantage of the people of Papua New Guinea", as the board minutes record.

The rest of the shocked board unanimously agreed.



A team of 20 or perhaps 30 of the best minds at UBS worked around the clock for a frantic fortnight as they worked the numbers and lined up the people. While they'd been talking with [then Oil Search CEO Peter] Botten, he was not their client. The pay-off had to come from the government of PNG.

"We were the only one who joined the three objectives of facilitating the Oil Search financing, giving the government what it wanted, and allowing outside shareholders into this deal," says the banker.

"The reason that this is seen internally as one of the most amazing deals UBS has done – why internally it is celebrated – is that we found a way to allow Peter Botten to finance his Elk & Antelope investment. This has never been written. It was only we who dreamed this up. Twenty of our best minds…"

UBS is now prepared to acknowledge the elegance of its solution.

"We are very pleased to have been able to provide a tailored solution to the PNG government to enable them to not only maintain their significant investment in Oil Search, but also to provide them with downside protection," says a spokeswoman.

What was obviously an act of brilliance to the sharpest minds in Australia's top-ranked banking team, however, has received a more mixed reception among outside specialists who have reviewed the deal.

Australia's nearest neighbour, and former protectorate, has struggled to convert its abundant mineral wealth into basic infrastructure, health and education services.

While the PNG LNG project has pushed GDP to expand by a quarter in the past two years, welfare measures are going backwards. The Australian arm of UBS can credibly argue that nobody else could have structured that deal with that client on better terms. It can rightly point to the fact that the PNG government wanted a strategic stake in PNG's largest taxpayer.

But did it make sense from the perspective of the 7.7 million citizens of PNG?

Robert Wyld, co-chair of the International Bar Association, says it is "extraordinary" that UBS would approve such a huge, complex and costly deal for this particular client, given the bank's recent history of investigations and fines by international regulatory agencies.

"There are serious questions about this transaction – what did it involve, how and where did the money flow and to who and what was the commercial drivers behind this deal for the PNG people," says the leading Sydney lawyer.

"Where is the commercial logic? You would think that anybody at the highest levels at UBS would have known they were dealing with an incredibly high-risk government with an incredibly high-risk prime minister."

And while prime minister O'Neill battles cascading corruption investigations, he also has a fiscal problem. The gas revenues are starting to flow but prices have fallen.

In some ways, the structure of the collar arrangement has rescued the PNG government from the full force of the unexpected fall in prices for oil, gas and Oil Search. A plain vanilla loan would have left them in worse shape.

"Given the recent weakness in the oil price, this protection has clearly been shown to be valuable for the PNG government," says the spokeswoman for UBS.

Measured in local terms, however, it looks like the government would have notched up a half billion kina book value loss. And the benefit of hindsight does not change the calculus of whether the PNG government should have been buying the Oil Search shares at all.

Sean Russo, the principal at Noah's Rule, points out that once the contract reaches the expiry period of March-June next year, the government will still have to find a way of refinancing the shares.

He says: "If they refinance they will probably likely need to enter into a further collar structure and the costs associated with that will only increase their losses."

The only way is down.

Read the full article here:


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Bernard Singu Yegiora

The PM's response nullified all the good things in this article. The reporter's family connection with the Somares and Sir Mek makes his article less credible.

As I have commented a number of times on Twitter, Peter O'Neill's personal attack on a respected journalist in no way makes up for the prime minister's failure to address the substantiated allegations raised in John Garnaut's articles. Mr Yegiora's critical faculties seem to have deserted him, temporarily one would hope - KJ

mathias kin

I guess you are right Chris. Voter education, awareness, talking to our immediate family members so that hopefully it can wear of positively many years down the track. BUT right now the country would be a better place to live in minus this government and its Prime Minister.

Paul Oates

Ah yes, Mathias, but are the people really responsible, as Michael has correctly pointed out elsewhere, the voters who blindly elected the wrong people as their representatives?

How do you tell a person about a serious problem when they are part of the problem?

It has been suggested that the true definition of insanity is to keep doing that which is known not to work.

Mathias Kin

Chris, very well the cost of living has gone higher. All goods bought at the supermarkets have gone up another 5% on the already existing 10%.

O'Neill and government are in a damage control mode now, even overtaxing to get more money into the government coffers to stay up and floating.

Very very soon...the wheels of justice is turning and hopefully those responsible for the miseries of our people will be accountable.

Michael Dom

Chris - for some of us, what can we say other than "I told you so".

We had a few arguments on PNG Attitude, and elsewhere, about the UBS deal when it was struck - some commentators assigned Peter O'Neil an almost divine right to rule and to do whatever he wanted with the national wallet while he is PM.

(And I was disgusted when poets started singing his praises.)

This UBS deal smelled funny from the start.

National economies are not built by trading at the stock market.

That comes later on, Peter, you greedy little pig.

I doubt if building the national economy can and should be gambled on stock market exchanges - these are a scoreboard of economic activity that is dominated by multinational corporations.

National economies are first built on people and resources.

But through Peter we are chasing people off their land and mortgaging it out to the highest bidder; out sourcing skilled labour and leaving our people jobless; and auctioning and pillaging all our natural resources without plans for longer term sustainability (the updated MTDS is yet to be implemented).

Peter wanted us to take the easy path to development - get a major infusion from LNG investment, like some car crash victim in need of blood.

We'll be stepping over to the other side alright - when we reach the end of this Highway to Hell.

Barbara Short

Thanks Chris.
Very well explained.
I was waiting for someone to have a go at explaining it.

Chris Overland

I am surprised that no-one from PNG has yet commented on this article.

All the self congratulatory chest thumping by UBS does not disguise the fact that the PNG government acquired a 10% stake in Oil Search using borrowed money.

This was a very risky thing to do because, put simply, share prices rise and fall over time, with commodity based companies like Oil Search being especially vulnerable to changes in market conditions.

The PNG government bought its shares at a time when gas prices were much higher than today and the market outlook was for consistent growth in demand.

As we now know, oil and gas are commodities being subjected to tremendous market pressure through a combination of the hugely increased production of shale oil and gas by the USA, the evident slow down in the Chinese economy and the relentless increase in the use of new "green" energy technologies (solar, wind and nuclear) by developed economies.

The market outlook for gas is now much less encouraging than when the PNG government bought into Oil Search.

If this wasn't bad enough, it seems that the loan advanced to the PNG government must be re-negotiated over the short to medium term.

Interest rates were and largely remain at historic low levels across the world, a direct consequence of the world's major central banks engaging in practices like "quantitative easing" (printing money) to flood the world's capital markets with cheap cash.

The aim of this policy was to "pump prime" the world economy to avoid a major economic catastrophe arising out the 2008 Global Financial Crisis.

The problem is that most of this money has found its way into various types of assets like bank shares, government bonds and real estate, with very little appearing to have been devoted to genuinely productive purposes.

Critics of this approach say that all it has done is create very large asset "bubbles" that must inevitably collapse when the supply of easy cash dries up.

Now, there is a very real fear that when, as they must, the central banks begin to slowly raise interest rates to more normal levels, these bubbles will indeed collapse.

In such circumstances, a very severe tightening of liquidity is likely to occur, with loans being much harder to get and then only at much higher interest rates than was previously possible.

For the PNG government, this means that the cost of servicing the loan required to finance its stake in Oil Search will be much higher than planned and this will impact directly upon the "bottom line" for the Treasury.

In short, the risk is that the PNG government will be spending a great deal more money on a loan for shares that are now worth much less than when they were first purchased.

As a consequence, it will have less to spend on meeting its core responsibilities to its citizens, like health, education and transport infrastructure.

I fear that Mr O'Neill's ambitious plans will turn out very badly indeed and, as usual, the poor and the helpless will bear much of the cost.

This was a deal that should never have been done: the only winner is UBS.

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