PORT MORESBY - As the infamous UBS loan inquiry commences here in the national capital, let's take a quick look at how we got here.
The Papua New Guinea government had a 17.6% interest in Oil Search when Oil Search merged with Orogen Minerals in 2002.
When the PNG LNG project crystallised in 2009, and the final investment decision had to be made, the government's legislated funding obligation kicked in.
But the government needed to first repay 19.5% of the sunk cost to exercise its so-called 'back-in-rights' and hence acquire equity in the massive project.
And then, once it was in, the government needed to fund its share of the construction costs.
To be able to meet these huge funding obligations, the government entered into an exchangeable bond arrangement with the Middle-East based IPIC to raise US$1.1 billion.
At this time, PNG effectively sold its 17.6% stake in Oil Search. This point needs to be made clear. This was when we sold our Oil Search shares.
A press release announcing the IPIC bond on the Oil Search website clearly spelled out IPIC’s intention to convert the bond to Oil Search shares upon maturity.
So IPIC had always intended to own the shares in Oil Search once held by PNG government.
The reason the deal was transacted as a bond rather than as an outright sale and purchase of shares was because the value of our Oil Search shares wasn't sufficient to provide the amount we needed (US$1.1 billion) but there was potential for the shares to grow to that amount over time.
The bond was structured to limit the downside risks for the Arabs whilst allowing PNG to pre-sell its shareholding in Oil Search. It was a smart deal. Anyone who says they could have done a better job than Arthur Somare and his team at that time would be lying.
Given the intent of the IPIC exchangeable bond as I’ve explained, there was no need to refinance it upon maturity. The Arabs were always going to grab our Oil Search shares to redeem their bond. That had been their intention from day dot.
And by some stroke of luck or ingenuity, the value of those shares had increased over that time to sufficiently cover the bond principal as originally envisaged in the deal. Stars were aligned and it was a case of tok idai!
On our part, we leveraged a less valuable asset (Oil Search shares) with an uncertain dividend stream to acquire a more lucrative asset (a share in PNG LNG) with an excellent dividend stream.
So we never lost anything. It was a smart move that created real value for PNG. There was no need to keep our Oil Search shares once they were taken by the Arabs under the terms of the IPIC bond.
Given all this, the UBS loan should never have been negotiated in the first place.
Even if PNG had negotiated it in the hope of redeeming the IPIC bond, the loan should simply have been cancelled when it became clear that the Arabs weren't giving up the Oil Search shares. It was that simple.
When Peter O'Neill ran out of excuses for the disastrous UBS loan that was unnecessary, he used the nonsensical argument that the PNG government needed to remain a significant shareholder in Oil Search because it was the largest employer in PNG and needed to be protected from outside interests.
Well guess what? We are no longer a shareholder, the Arabs are now a substantial shareholder, and Oil Search is still going strong.