My take from all that is that VAR wanted to give it as offside, but then the assistant VAR chimes in with, "I think it might be this" and so rather than it being a clear and obvious error it's a couple of blokes who aren't quite sure if it should be a penalty or not, deciding to tell the ref he has to give a penalty. The ref going to the monitor was pointless because they just told him to give the penalty (because he didn't know what they were on about). Michael Owen is baffled by it and thinks it's offside, so Howard Webb gives a rambling explanation which explains why they gave a type of penalty that has probably never been given before, and will never be given again.
My explanation of it is probably just as unclear and rambly.
Also, if the VAR had stuck with his original plan to rule it out for offside (before his assistant decides to suggest giving a penalty anyway) I cannot believe anyone from Newcastle would have complained that they didn't get a penalty. So while Smith is stupid for pulling the shirt, this isn't a clear and obvious mistake by the referee.