PNG's proposed second LNG project remains an enigma

INTEROIL proved to be an enigmatic company even before it discovered the world-class Elk and Antelope gasfields in PNG’s Gulf Province, and it continues to be baffle observers with its successful joint venture tie up with the French oil giant, Total SA. by Wantok.

Is there any shareholder or analyst out there who believes that InterOil has done a better deal with Total than what had been on offer from ExxonMobil?

That uncertainty was enhanced by the immediate market reaction to the Total deal and the big plunge that occurred in InterOil's share price on the New York Stock Exchange.

It is probably likely that InterOil did not see too much upside in ExxonMobil's offer to purchase outright some 4.6 trillion cubic feet of natural gas and to leave the remaining 4-5 TCF at Elk and Antelope open for a separate deal or for use in a standalone LNG facility.

This is a far cry from the Total joint venture's proposal to build an LNG operation, possibly matching the output of the pioneering PNG LNG Project, at a greenfields site in Gulf Province.

But there are still many i's to be dotted and t's to be crossed before a decision can be made on this latter facility by 2016.

Total has agreed to fund three appraisal wells at Elk and Antelope next year to raise the confidence level on exploitable reserves contained in these fields, and it has an option to take up equity in other attractive exploration leases held by InterOil.

One of the reasons the market may have felt a sense of uncertainty, and the continuing enigma of InterOil, was that despite the world scale size and scope of the joint venture agreement, the two parties failed to put out a joint statement of commitment and intent on their proposed LNG project.

Indeed there were variations in the information presented and InterOil saw fit, after its initial joint venture announcement and market reaction, to put out an explanatory statement to try and show that benefits it could accrue from the deal would be massive.

Shareholders were largely unmoved by the elaboration. One of the big points left out in both its initial statements but contained in the initial Total media statement was that both parties had agreed that Total's 61.3% equity in PRL15 and InterOil's remaining equity could be sold down by a further 19.3% prior to the PNG Government uptake of its legislated 22.5% stake.

As Total put it, "Total and InterOil Corporation retain the flexibility to farm down an aggregate of up to a 19.3% interest (before any election by the government to exercise its option to join the project with a 22.5% interest) to a strategic partner."

This leaves some scope for possible entry by PNG's biggest oil and gas industry player, Oil Search, which has intimated that it is in discussions on this score.

That ability to further sell down equity may sound like a deliberate and sensible effort to lower the risk profile of a venture that could cost in the vicinity of US$20 to build on a full scale.

Coming at this stage and after years of the apparent search for a joint venture partner, this provides an added element of uncertainty.

It is going to take two years or more before front-end engineering and design, costing in the vicinity of a cool $US1 billion, and a subsequent final investment decision can be concluded.

Prior to that a gas agreement will have to be signed with the PNG government, which is in a somewhat avaricious mood given the imminence of LNG exports from the PNG LNG Project.

InterOil may have to live down its previous promise of providing 50% of the gas reserves to the National government to be used for whatever purpose it wished, at a price that was never discussed or negotiated.

In its early years as an LNG hopeful, former InterOil chairman Phil Mulacek often spoke of overtaking ExxonMobil to become PNG's first LNG export project.

With the uncertainties discussed in this column, some may even ponder whether InterOil in fact would host PNG's second LNG project or whether it may even slip into third spot behind the Horizon Energy-Talisman joint venture that now includes Mitsubishi and Osaka Gas.


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