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Executives

Wayne Andrews - VP, Capital Markets

Phil Mulacek - CEO

Bill Jasper - President

Colin Visaggio - CFO

Dave Holland - General Manager of Exploration and Production

Analysts

Evan Calio - Morgan Stanley

Sal Ilacqua - Monness Crespi Hardt

Pavel Molchanov - Raymond James

InterOil Corporation (IOC) Q3 2012 Earnings Call November 15, 2012 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the InterOil’s third quarter earnings call. [Operator instructions.] As a reminder, this conference is being recorded. With that being said, I’ll turn the conference now to Mr. Wayne Andrews. Please go ahead, sir.

Wayne W. Andrews

Thank you, operator, and hello, everyone. This is Wayne Andrews, VP of capital markets for InterOil Corporation.

Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meaning of the U.S. securities laws, including such statements as those regarding expectations of future results, general financial performance, future business prospects, and strategies.

These statements are based on management's current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned not to place undue reliance on these statements.

Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the company's filings with the U.S. Securities and Exchange Commission and SEDAR.

The speakers from management on the call today are Phil Mulacek, our CEO; Bill Jasper, president; Colin Visaggio, CFO; and Dave Holland, our upstream manager. We have a presentation to accompany our comments today. The presentation can be accessed on our website at www.interoil.com. You can find the link under the investor relations section on the homepage, and in a banner on the top of the homepage.

So at this time, I’d like to turn the call over to Mr. Phil Mulacek. Phil, please go ahead.

Phil Mulacek

Thank you, Wayne. I’d like to thank everyone for joining us today, and for participating in today’s conference call. We’re glad to report that the prime minister of Papua New Guinea has confirmed to me personally and to others of our project team, including Sir Rabbi Namaliu, that the NEC has recommended for the InterOil Gulf LNG project to go forward, with a starting LNG capacity of 3.8 million tons. We’re now in a position to fast track the project, maximizing the benefits to our shareholders and to all stakeholders.

Some of the key fundamentals are that we are the first developer to have the PNG government take its 22% of equity gas in kind from the Elk and Antelope gas fields for power generation and natural gas related industries.

This will have a significant positive impact on Papua New Guinea, proving electrical capacity for industry, hospitals, schools, businesses, and ordinary people. The PNG government wants to control costs, accelerate production, create a vast number of jobs, and maximize the revenue from the project.

This event paves the way for our LNG bid and sell down process, or as they say, the green flag has dropped, and the final phases of bidding and closure can begin. We expect to finalize our LNG partner agreements [unintelligible] with the state.

To update on other exciting news, as of yesterday we’ve agreed on the last set of commercial farm-in documents with our new partner, Pacific Rubiales. The [ENTT] team can now accelerate activity on our new discovery at Triceratops. The focus will be in three areas, a seismic program to the west to define the Triceratops structure, a new well to be drilled at Triceratops-3 at the [unintelligible] location on Triceratops, and to prepare to test the lower condensate section we saw in Triceratops-2.

We are currently drilling and closing in on the top of the reef of Antelope-3. This will provide further gas coverage and knowledge to the LNG sell-down process and the LNG bidders. In addition, our new drilling rig, Rig 3, has rigged up, or has been rigging up on location Elk-3, which is our last commitment well for PRL 15 for the Elk and Antelope structures. These two wells are designed to provide data on reservoir continuity, aid in shifting resources from 3C, 2C, 2C to 1, and enhance the overall LNG program by adding data and knowledge coverage for our subservice model.

These wells will also allow GLJ to update the 8.59 ECS-certified resource number for 2C and provide that data for other bidders. It will also provide a new milestone for our ability to seek a shift from resources to book reserves after the bid process and LNG FID.

To other business on hand, the third quarter we saw a good recovery in crude oil prices and overall refinery crack spreads, providing a consolidated net profit of $5.3 million, of approximately $19 million in EBITDA.

At this point, I’d like to hand over the call to our CFO, Colin Visaggio, to cover financial matters in more detail.

Colin Visaggio

Thanks, Phil, and welcome to everyone listening to today’s presentation. We continue to progress and expend on our Gulf LNG project to monetize existing resources, and we can also continue to invest in our expiration portfolio, which David Holland will elaborate on.

We have completed another milestone on the Triceratops discovery monetization with the signing of the farming agreement with Pacific Rubiales, which resulted in a further $20 million payment during the quarter.

The additional funds to be received in the next few months on completion of the transaction with Pacific Rubiales, plus the $100 million debt financing completed subsequent to quarter end, will increase our cash position and continue to funding of our near-term accelerated drilling plan.

The asset sell down, once completed, will fund our Gulf LNG project and our longer term exploration program. The InterOil Group, for the quarter ended September 30, 2012 recorded a net profit after tax of $5.3 million. The operating segments of corporate, midstream refining, and downstream collectively derived a net profit for the quarter of $16.8 million, mainly due to an increase in gross margins attributable to the positive crude and product price movement and higher margins from export cargos.

Our balance sheet remains strong, and our debt to capital ratio is 13%. As of September 30, 2012, our total book assets amounted to $1.2 billion, and our total liabilities amounted to $444 million. Our current ratio and our quick ratio were 1.3x and 0.8x respectively.

Subsequent to quarter end, on the 16th of October, 2012, the company entered into a five-year amortizing $100 million secured term loan facility with BNP Paribas, the Bank of South Pacific, and the Australian and New Zealand Banking Group.

It’s important to note that 75% of this loan comes from funding within Papua New Guinea. Borrowings under the facility has also been used to pay all of the outstanding amounts under the term loan granted to the Overseas Private Investment Corporation. With the selling of the interest in the Elk and Antelope fields, we expect to be well-positioned to fund our strategic plans.

So firstly, summarizing the results of the group, and as I mentioned our operating business segments had a net profit of $16.8 million, and the investments in our developing business segment resulted in a net loss of $11.5 million. Our EBITDA for the quarter was $19 million. The increase in net profit for the quarter compared to the same quarter of 2011 of $25.1 million, was mainly due to a $29.4 million increase in gross margin, attributable to positive crude and product price movements and higher margins from exports; a $2.9 million gain recognized on the sale of interest in PPL 237 to Pacific Rubiales, which gain, by the way, does not relate to Triceratops; a $6 million decrease in the loss available to sell investment in the shares in FLEX LNG; and a $4.5 million decrease in exploration costs expensed during the period.

These increases were partly offset by a $5.4 decrease in foreign exchange gains, compared to the second quarter in 2011, due to the weakening of the kina against the USD; the $6.8 million decrease in derivative gains resulting from the derivative losses incurred in the commodity contract settled in September 2012; and a $5.3 million increase in income tax expenses relating mainly to the current period business profit.

The total volume of product sold by us was 2.2 million barrels for the quarter ended September 30, 2012, and that’s compared to 1.8 million barrels in the same quarter of 2011. Bill Jasper will provide further details on our operations. A full detailed analysis for your review is available in the press release and in the filed financials and ND&A.

Analyzing the cash position of the group, as of September 1, we had cash, cash equivalents, and cash restricted of $97 million. This, of course, excludes the recent $100 million term loan, which was closed subsequent to quarter end. Since the 31st of December, we’ve spent $51 million on Triceratops-2 drilling and testing work, $11 million on Antelope-3 site preparation and pre-spud work; $15 million on seismic activity, $72 million on the Gulf LNG project, and $26 million on operating business maintenance upgrades.

As of the 30th of September 2012, the company has capacity to increase its debt levels. A [gearing] of 25%, for instance, provides additional debt cash of $100 million, with a 50% target allowing open debt of some $600 million. This is more than sufficient available cash as we continue progress toward achieving our near term strategic objective.

On July the 27th, 2012, we executed the farming agreement with Pacific Rubiales relating to the Triceratops structure and the participating interest in the PPL 237 license, materially in line with the [hazard] agreement signed on the 18th of April, 2012. Completion of the farming transaction remains subject to satisfaction of additional conditions within 18 months. Some of which Bill has highlighted have been concluded yesterday, including the execution of the JDOA and the PNG government approvals. PRE’s growth participating interest will be subject to the government of Papua New Guinea’s backing rights provided for in development PNG legislation.

As of September 30, PRE has paid us $40 million of the staged cash payments. The first $20 million was paid in accordance with the hazard agreement and became nonrefundable on execution of the farming agreement. Based on the agreement, $3 million of the HOA payment has been allocated to PPL 237, excluding Triceratops, and $70 million of the HOA payment has been allocated to the Triceratops area. The second cash payment of $20 million was paid in accordance with the farming agreement under the advanced payment facility this quarter.

Pacific LNG operations are participating on a 25% beneficial equity basis in the portion of the farming transaction relating only to Triceratops. That is 2.5% net, or 3.2% gross. As a result, Pacific LNG operations will receive credits to offset against cash calls receivable from them for their IPI interest.

The company’s main focus and priority is the commercialization of the Elk/Antelope resources. We are continuing to work with the investment bank on the sell down process, where we are looking to sell down a portion of our interest in the Elk and Antelope fields and the Gulf LNG project and other prospecting licenses.

As of the 31st of December, 2011, we had spent $342 million on the Elk/Antelope fields, of which InterOil has contributed $262 million, and upstream JV partners $80 million. The LNG joint venture has spent approximately $44 million. $102 million has been spent on construction equipment, road construction, logistics, and site work associated with the upstream development sites. And $45 million has been spent on the condensate shipping, front-end engineering, and design, which has been funded by Mitsui. And any of our investors who have visited Papua New Guinea can clearly see the works that are underway.

We are focused on our strategic plan to bring an integrated development project that satisfies the PNG government. We are also working very closely with the government of PNG to keep them updated on all key developments in relation to the project’s early works, the strategic partnering process, and the PDL application.

We have finalized the transaction with Pacific Rubiales, which will bring additional up front cash payments. We have delivered on a successful well in Triceratops, which all goes well for our future portfolio. We have secured new long term debt financing arrangements. We are excited about the opportunities ahead of us, and look forward to maintaining momentum in completing the requirements with the government and the stakeholders to proceed with the monetization of the Elk, Antelope, and Triceratops resources.

None of us should lose the perspective that we are in the right industry, being energy. We are in the right segment, being gas, and we are definitely in the right region, being Asia.

With that, I’ll hand it back to Phil.

Phil Mulacek

Thank you, Colin. Moving to our refining and downstream operations, I’d like to pass the call to our president, Bill Jasper.

Bill Jasper

Thanks, Phil, and good morning everyone. I’m pleased to report that the third quarter was one of recovery for the refinery. This is largely due to a stabilization of crude oil prices. Whereas in the second quarter we saw crude prices plummet from $128 a barrel to $86 a barrel, we have since seen a recovery back to the $112-115 range.

We continue to watch this very closely, with a vigilant hedging program to protect the downside as [unintelligible] as is possible. Diesel and kerosene crack spreads have shown modest improvement this quarter, and we expect them to go higher as world demand and confidence returns.

Naptha cracks too have halted their decline, and show a slight improvement this quarter. But more importantly, we have been able to secure much-improved premium on our new term naptha sales contract, which commenced in June.

It is also pleasing to see that domestic sales this quarter continue to exceed their level for the same quarter in 2011, being 12% higher for the quarter or 13% higher year to date. This reflects the growth in PNG mining and LNG construction activities that I reported on earlier.

The downstream business sales volumes for the third quarter were 201 million liters, which is an 8.2% increase on the 185.9 million liters sold in the third quarter of 2011. The volume for nine months of 2012 at 642.8 million liters is also up over 20% compared to the first nine months of 2011. As mentioned last quarter, this growth is largely due to various oil, natural gas, and mining projects that are being pursued in various points of the country, together with a general increase in business activities.

None of this value recognized would be possible without the continued focus on our safe operations. All it takes is one incident to diminish the upside we recognized. The refinery continues to demonstrate this focus, and has now achieved almost five million man hours without a lost time incident. As reported earlier, our combined total for staff and contractors is over 15 million man hours.

And with that, Phil, I’ll turn it back to you.

Phil Mulacek

Thank you, Bill. Moving to exploration and production, I’d like to hand the call over to our general manager of exploration, Dave Holland. Dave will update you on current activities at Antelope-3, Elk-3, and other forward activities. Dave?

Dave Holland

Thanks, Phil, and good morning everyone. This morning I’d like to provide you with an update on the progress of InterOil’s exploration program. On August 13, 2012, we obtained permission from the Department of Petroleum Energy of PNG to release Rig-2 from Triceratps-2, and we immediately commenced the [unintelligible] to Antelope-3.

Subsequently, on September 30, we spudded the Antelope-3 well - and I’ve included some photos on slide 17 of the presentation. As you have been aware from previous presentations, Antelope-3 is located between Antelope-1 and the Antelope-2 gas wells. At Antelope-3, having set the [unintelligible] at 1,107 meters, approximately [332] feet, we are currently drilling ahead at approximately 1,542 meters or 5,060 feet, in a 12.75 inch hole.

The formation being drilled consists of approximately 70-80% clay stone, 5-10% [unintelligible] stone, and 10-15% sandstone, with a trace to 5% coal penetrating from 1,532 meters to 1,535 meters.

This occurrence of coal is higher than prognosis based on the Antelope-1 offset well. At 1,535 meters, the [calcimetry] measurements were at possibly 6.9% calcium carbonate, or limestone, and 1.75% magnesium carbonate with dolomite. However, at 1,540 meters [unintelligible], the calcimetry increased to approximately 20% limestone and 70% dolomite. As such, we are currently drilling ahead at a controlled rate toward the top of the reservoir and circulating bottoms up at approximately 2-meter intervals.

Background total gas levels have ranged from 0.24% to 0.49%, and have been averaging about 0.34%. These levels are directly comparable to those in the same clay stone interval, above the reservoir, in the Antelope-1 gas well.

The Elk-3 rig site - there’s photos on slide 18 - and the Elk-3 access road are complete, and we are currently moving in the InterOil Rig 3 rig from [unintelligible] to the [unintelligible] road and rigging up on the location to spud before month end.

Progress has continued on the infrastructure development around [unintelligible] [creek] and the northern road network, as shown on slides 19 and 20. [unintelligible] [creek] will be an important [unintelligible] to support both the Elk and Antelope development and the [unintelligible] appraisal of the new Triceratops gas fields as we progress.

Phil and Colin have provided updates on the PRE farming, so I’ll just give some further status. This Triceratops-2 well has been suspended as a new discovery for rig completion at a [unintelligible] in a future production well. Once the analytical work is complete, a resources estimate will be undertaken through year end. Currently, planning of new [unintelligible] and drilling locations are in progress, and will be finalized once the [unintelligible] is complete.

As you are aware, seismic data indicate a large attic in terms of both height and area. And this is shown on slide 22 of the presentation. The new seismic program will be focused on constraining this area of closure. [unintelligible] view that discovery of shell and marine bioclastic limestone and [unintelligible] carbonates in Antelope and Triceratops invalidates all paleogeographic models.

An example of this is showing on slide 23. [unintelligible] paleogeography, [unintelligible] systems at Antelope and Elk clearly should not be [proven]. This model has the Antelope and Triceratops discoveries in a deep marine setting on the boundary between [unintelligible] micritic limestone in pink and [unintelligible] [unintelligible] limestone in blue.

The fundamental question in evaluating the further [prospectivity] of the [unintelligible] base in the mineral licenses is Antelope, a [unintelligible] singularity, or does it signify more significant [shell] and marine development in the region? Based on the new site data, geological field mapping, and the new potential field data, and the Triceratops discovery, it is InterOil’s view that the latter is true, that the Triceratops and Antelope discoveries seem to represent continuation of the shell and marine carbonate system that extends over 3,500 kilometers along the northeastern Australian margin into the gulf of Papua and onshore.

Slide 24 shows a map of the Gulf of Papua. You can see that in the south there are modern-day rigs such as the [unintelligible] reef that has survived sea level rise. Further north, there are down reefs that did not survive sea level rise, and further north, again, there are [unintelligible] reefs that are of obvious interest at the [unintelligible]. These three reefs, Pandora, [unintelligible], [unintelligible], Antelope and Triceratops, are all shell and marine carbonate [unintelligible] that are acting as [unintelligible] and are reservoiring hydrocarbons.

Clearly the continuation of this trend onshore into the [unintelligible] basin [unintelligible]. And the recent results of the [unintelligible] have highlighted numerous exciting new [unintelligible] which will be the focus of our forward exploration in PPL 236, PPL 237, and PPL 238.

Tuna and Wahoo are the southernmost features on this potential [unintelligible] and slide 25 provides an update on these prospects. Our immediate [unintelligible] plans are to drill in [unintelligible] Antelope-3 and to complete the moving and rig up for Elk-3 and to spud before month end.

I thank you for your time. Thanks, Phil.

Phil Mulacek

Thank you, Dave. I’d like to offer a few concluding thoughts before we take questions. Our exploration team and our overall [unintelligible] are strong and activity on Elk, Antelope, Triceratops and new prospects like Wahoo will drive growth and position us for building shareholder value and profitability going forward.

With the prime minister’s confirmation of NEC recommendations for us to begin with a 3.8 million ton gulf facility we can begin that finalization of the sell down with confidence to fast track construction of LNG [unintelligible] that will benefit PNG and maximize returns for all stakeholders.

We have had solid expressions of interest from bidders, including IOCs, NOCs, and Asian utilities for a foundation project of 3.8 million tons. We are pleased with the new partnership with the PNG government and proud to be playing an active part in improving the lives of people in one of the most wonderful, challenging places on earth. This project will benefit all of us, and one of its unique strengths.

I think we’re ready for the conference call to open for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And we’ll first go to the line of Evan Calio with Morgan Stanley. Please go ahead.

Evan Calio - Morgan Stanley

Phil, in your opening comments, just to be clear, you have received official confirmation from the prime minister? Or have you received official notification from the NEC on amendment to your 2009 project agreement?

Phil Mulacek

The prime minister personally spoke to me and Sir Robbie and others in our team. So that informed us that we did have approval of recommendations and we just got notice today of pick off meetings tomorrow on the modifications.

Evan Calio - Morgan Stanley

Congratulations. With NEC approval, can you clarify exactly what you’ll be offering in the sell down? Is it a 25-32.5% of a three spot eight [TPA] facility? Meaning, how many Ts of gas are you looking to offer in the sell down?

Phil Mulacek

All the details are all still with the state. We’re just at that point to finish everything. The key event is that normally you have to build LNG capacity on behalf of the government. But they have a lot of unique problems, like mortality rate. So hospitals lack electrical capacity. No stable power, no vaccines. They have a real crisis on infrastructure.

So they’ve asked us to be a pioneer and take 22.5% in kind, and develop this, complete all the documents. So this is the foundation key driver that the government asked. And that removes the LNG capacity that they want to keep for domestic consumption. And then if there’s incremental capacity above that, that’s what we’ll be working on.

But in the meantime, they said, hey, you have a clear shot, go ahead and kick off. for the sweet spot. In the industry it’s 3.8 million tons, or around 4 million tons. And that was confirmed by all of our IOCs, NOCs, and they all wanted to phase in. So now we have a project that’s coupled with an integrated stay in IOCs. That’s a foundation project. And that gives us the green light to get started.

Evan Calio - Morgan Stanley

And if the government takes, say, 22.5% of its interest in the facility in kind, then InterOil would effectively own 74% of that first [strain], pre-sell down. Is that correct?

Phil Mulacek

Correct, but they said if you’re at 3.8 there’s more than enough gas. So there’s a position that if people want to phase in, and there’s spare capacity, whether we sell to a major integrated or the state needs incremental gas, that’s what we’re going to work on.

Evan Calio - Morgan Stanley

Can you explain how that’s a win-win outcome, and better for InterOil shareholders? I guess to be able to carry them, right?

Phil Mulacek

The real commercial driver is for the GM or somebody to do 7.6 in today’s market is a big hurdle. And you get a lot more competitive value by phasing in LNG capacity. And that was confirmed by every bidder at one point. Nobody wanted to instantaneously build almost 8 million tons. We’ve got a project that’s suited to the market, meaning the people who are interested, and it’s a lot easier to finance. We’re not financing LNG capacity on behalf of the state, because they actually need the gas, and that lowers the financial and all the debt requirements, and it’s just a lot easier project. And that is a beneficial way to accelerate the focus and execution of the key components.

Evan Calio - Morgan Stanley

Any comments at this time - or is it too premature - on the government’s ability to buy, or option to buy, additional gas? I know it’s been reported a couple of times.

Phil Mulacek

It’s been reported, but it’s way too premature. In the meantime, as the prime minister says, hey, get going, and we’ll be establishing commercial terms on what the market is. Then they still have to take their own gas and build power plants and key infrastructure for the country. But we’re trying to be proactive. They have problems with infrastructure throughout the country, and they’ve never had a developer willing to work as a real partner. So it’s a milestone event. It lowers our financial hurdle rate, because we don’t have to build capacity of LNG, but the state also needs energy to improve the standard of living and healthcare for the whole country. And you’ve been there. Go to [Karamont], that hospital. No vaccines are valid, because there’s no stable power. And that’s just rampant throughout the country. So the government is very excited about it.

Evan Calio - Morgan Stanley

Maybe one last question and I’ll leave it for others. A different topic. I know you can’t publish really a reference to the Gaffney, Cline report as you’re only legally permitted to have one resource report. Yet there have been assertions made that the estimate is lower than the GLG estimate. Can you give us any comment on whether the C1-C3 results differ materially from your GLG?

Phil Mulacek

One is a certified, so [GLJ], number one in Canada. They handle a lot of public companies. And that is a certified number of 8.59. And then GLJ did a quick review, and they were on 2C of 6.5. So both confirmed that we had more than enough to do 8 million tons of capacity. And you’re not going to stop there. Look at it in simplicity. It’s similar to Exxon. They only had one well in Angora. They only had a couple of wells in [Juha]. Yet they’re building a $19 billion project, without full definition on shifting resources and 3P-2P, to get LNG. We’re the same. And 3 will help at that.

Operator

Our next question is from Sal Ilacqua with Monness Crespi Hardt. Please go ahead.

Sal Ilacqua - Monness Crespi Hardt

In light of the statement that Phil quoted at the beginning, by the prime minister, with respect to the issuance of the permit through the NEC, are we in a position to sign up somebody or do we still have to wait until the real approval is issued by the NEC.

Phil Mulacek

I think it’s both. First of all, it now scopes it to the sweet spot as I was trying [unintelligible]. So people now know what to bid on, whereas before there was a lot of pushback on 8 million tons or 7.6. So it’s going to make it a lot easier. And we’re working that in parallel [as a cut off]. But the state is just kicking off a team meeting tomorrow all through next week. So we’re running those in parallel. But at least the definition is there, people realize that finally the state’s taking their gas in kind. There’s a number of key benefits and it allows us to go forward.

Sal Ilacqua - Monness Crespi Hardt

Now, the government specified they want a certain type of bidders, mainly big, supermajors. And where do we stand on that? Are all parties still eligible? Are you talking to both?

Phil Mulacek

Yes, all parties are still eligible. We’re working with the government. The original agreements just bring in some proven capacity, whether that’s contract. And we’ve always said that we bring those capacities in. And we’re in active engagement with parties that qualify.

Sal Ilacqua - Monness Crespi Hardt

Right. If you go with a supermajor, financing is easy. If you go with a smaller company, you’d have to put up more equity money on the part of InterOil. Do I read that right? It’s a different type of financing.

Phil Mulacek

It’s different, but the parties that we have spoken to, everyone has addressed their financing, whether it’s IOC, NOC, or a utility. And the quality of those partners in that will address that, and how they fund. So we don’t see that as an issue. We’ve talked to banks and significant capital on the process. The areas, we finally have a green light to get going, and the shape is really where we concluded, is from the active engagement with bidders and the government. So we can have a win-win. The government needs their gas in kind, and we wanted a foundation project that can get started, close it, and then go from there.

Sal Ilacqua - Monness Crespi Hardt

You referred to the modular approach a while back. Does that assume that the EWC is back in the mix? Or have they been in the mix all along?

Phil Mulacek

Everybody’s been in the mix. The bidders will dictate that final outcome. If it’s an IOC, they could do conventional to EWC. All of them are on the table. And the final bidders will dictate configuration. And we’re open to whatever.

Sal Ilacqua - Monness Crespi Hardt

And finally, all I read about the supply of LNG around the world, it’s growing, and some surpluses are cropping up here and there. With respect to anything in the negotiations you’re doing, is the price that you’re looking for going down, or going up, or remaining about the same as it was in the past?

Phil Mulacek

We actually don’t see that. With the current costs out of Australia, we see less being available, less that they’ve had contracted. We see major declines in Malaysia and Indonesia, up to 30-40 million tons, which, in the short term, eradicates any type of talk. There’s a lot of talk out there. But on real, physical depletion, you look from Thailand, Indonesia, and Malaysia, which has been the breadbasket in the supply for gas for all of Asia, they have a crisis. And the incremental capacity that’s actually being done will barely make a dent. It’s that lack of supply coming in in 2014 through 2016. And we don’t see any material shift on price, not in Asia. We saw it in Platts, governments buying at 15 [slopes] approximate through Qatar, and they couldn’t fix volumes until 2016. Long term.

Operator

Our next question is from Pavel Molchanov with Raymond James. Please go ahead.

Pavel Molchanov - Raymond James

Let me get clarification on two points. The number of 3.8 million tons, does the initial plan have to be precisely that? Or is that a maximum? Or is that a minimum?

Phil Mulacek

That’s a starting. So if somebody says they want to build 4.2, that’s just you have to have a starting point. Those are minor issues. And everyone has got their own. We’ve seen bidders that we’re engaged with, like 4.2. One said almost 4.9. Others are 3.8. So that gave us a starting point that covers everybody that we’re engaged with.

Pavel Molchanov - Raymond James

And what role would the condensate stripping facility play in this development with Mitsui?

Phil Mulacek

A bidder may just want to do it all themselves. Mitsui is engaged. They have their own consortium. So as I said, within IOC they would just do cash themselves. Mitsui has provided us a financing option for a CSP, and that’s where it stands.

Pavel Molchanov - Raymond James

Another clarification. The approval or notice of approval that you received verbally from the prime minister, are there any formalities that need to happen before that becomes official? Does the cabinet have to vote on it?

Phil Mulacek

No, my understanding is there’s recommendations approved, and then they are putting in a state team. We just got confirmation just a few hours ago. So they wanted to get kicked off immediately. That starts tomorrow. So we have a team meeting in Port Moresby tomorrow.

Pavel Molchanov - Raymond James

And then question for Colin, if I may. You were quoted in PNG Industry News several weeks ago as saying that at least two supermajors have placed bids on the project. Can you confirm that quote? And can you elaborate on what you were conveying there?

Colin Visaggio

Clearly it’s a quote by myself, which I can confirm. And as Phil has stated, we have national oil companies, we have majors, and we have utilities who are involved in the process. So very happy to say that I have made that quote, based on very clear details and information that we have, unlike other sources, which are often quoted, which people will not put their name to. I think when someone does not put their name to a quote or a statement, I think you cannot attribute much to that statement or quote.

Operator

And ladies and gentlemen, that’s all the time we have for questions today. Mr. Mulacek, any closing comments today?

Phil Mulacek

We’d like to thank everyone for participating. You’re discussing absolutely real time issues, and we’re glad to provide the updates to the market. And if you have any other questions, call us. And thank you.

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