We have written a lot about InterOil (NYSE:IOC) before. It operates in Papua New Guinea, and has discovered a massive natural gas and gas liquids resource called Elk/Antelope.
On count by GLJ InterOil has 3.43Tcf in resouces, a later report including the record braking Antelope1 figures by Knowledge Reservoir puts that number at 6.7Tcf.
The Antelope1 well was so good that even long-term sceptics Ross Smith Energy Consultants became a fan. Not difficult to imagine, with a net pay zone of some 2000 feet, average porosity of 8.8% (with parts of the reef reaching 30%), and a gas flow of 382MMcf/d (plus 5000 barrels of liquids) with the 6 inch choke only open for 1/3.
The company has hired investment bankers to strike deals with interested parties (there have been rather a lot of these, see summaries here, here, and the latest development, Indian Petronet wanting to buy the whole project output) to sell of parts of the resource and stake in the LNG project.
A potential bottleneck is Government approval of the project, and there was news on that this morning.This appeared in the Post Courier:
By Eric Tapakau
PAPUA New Guinea will continue to carry the “developing nation” tag if leaders do not make good decisions on the number of liquefied natural gas projects that the country would like to have. It will also not be good if members from the ruling National Alliance Party are split over which LNG project they are backing.
Senior NA Party ministers objected last Wednesday to a cabinet submission made by Prime Minister Sir Michael Somare and Minister for Petroleum and Energy William Duma in a bid to get cabinet approval for the development agreement to proceed with their LNG project development. Liquid Niugini Gas Limited (LNGL) is a subsidiary company of a consortium of financial and industry partners led by InterOil Corporation to develop PNG’s second LNG project at an initial investment output of $US5 billion.
The project is expected to source gas from InterOil’s massive Elk-Antelope gas fields at Upper Purari River in Gulf Province. Mr Duma explained to cabinet on Wednesday that the State and InterOil had exhaustively negotiated all the terms and conditions in the project development agreement over the last two years and the project agreement then before cabinet on that day was project agreement draft version number 13.
At that stage (last Wednesday) the Department of Petroleum and Energy had formally granted its clearance for development of development of the LNG carrier pipeline from Gulf Province to Port Moresby and for development of the LNG export plant facility development to be developed at Napa Napa adjacent to InterOil’s oil refinery inside Port Moresby Harbour. Minister Duma also explained that the submission before Cabinet also came with State Solicitor’s clearance of the LNGL project development agreement.
After Mr Duma’s explanation his colleague ministers mostly members of the Ministerial Economic Sector Committee strongly objected to the submission saying that PNG was not ready for a second LNG project at this time. According to Government officials, one of the main arguments for the committee was that the gas found at Elk and Antelope needed to be proven to be commercially viable to support such a massive project before any commitment is made to approve the second LNG project.
So let's summarize:
- After exhaustive negotiations, there is Government approval and approval by all the relevant and necessary state agencies.
- On a ministerial level, there exist some objections, but nobody is suggesting it's a bad deal.
- The arguments used for those objections are completely bogus (see below).
- Lets also not forget what's at stake here for the PNG, the Government, and the economic prospects of the country. The government is already participating rather significantly (22.5%) in the project. A project like this will more than double the size of the economy over a six year period.
Surely the Government doesn't want to run the risk of delaying these opportunities and taint the image of PNG for years to come?
Let's look at the argument the opponents use for a moment. Lack of proven reserves. A relevant question would be how much proven and probable reserves the alternative project, the one led by Exxon(NYSE:XOM) and OilSearch has. The answer is surprising. Surprisingly little, that is. Just 70.5Bcf - that's not even 0.1Tcf.
They have ample resources (in fact, there is already talk of a third train for their LNG project), but so has InterOil, 6.7Tcf according to a report by Knowledge Reservoir that included the data of Antelope1, by far the most prolific well. (An earlier report by GLJ largely excluded these data and nevertheless arrived at 3.43Tcf).
In a couple of weeks, when the reef will be confirmed at Antelope2, the "argument" of the opponents will look even more ridiculous. The claim that Elk/Antelope might not be economical already is just that, ridiculous. With wells that are 20 times as productive for 1/3 of the cost compared to OilSearch, and coming from a single resource in the lowlands, rather than six different resources in the highlands as is the case for Oilsearch (forcing the latter to build a pipeline that is three times as long), it is not reasonable to argue this, to put it mildly.
No idiot is questioning the viability of the OilSearch project, despite the fact that many of Elk/Antelope metrics are actually better, much better. And the economics for OilSearch are already good. It has long-term offtake agreements averaging $12 per Mcf, while its cost base is just $3 per Mcf. InterOil's project, with the resource so much more economical and an LNG facility budgeted at half the cost of OilSearch's, can only be better.
So something funny is going on there with these ministers who are objecting. It is the only rational conclusion possible.We won't spell it out, but we have some ideas.
They will look rather silly when InterOil strikes the reef in Antelope2. They could conceivably look a whole lot more silly still when InterOil announces a preliminary deal with a third party (off-take, farm-out, participation, could be anything like that) before (and dependent upon) formal Government project agreement. That would create a pretty awkward situation for the Government.
Such a situation would basically be tantamount to InterOil demonstrating that they've done their part, "over to you, Government, do you really want to be the one delaying progress?" Would these Government ministers want to be seen as the bottleneck? We don't think that is likely.
Surely the PNG Government wants to avoid a situation in which InterOil would not be able to progress because of the lack of Government agreement. Such a situation could potentially be exploited politically by the opposition (and political tensions between Government are already rather high).
InterOil's track record shows it has been a good corporate citizen (one really can't say that of all foreign companies operating on PNG soil), and there is no sign or suggestion they make unreasonable demands. Even the ministers with objections do not argue that the agreement on the table is not a good one.
But ultimately, no Government is going to delay a golden goose of this magnitude..
In fact, we conclude this is actually good news:
- There is a Government agreement.
- Nobody, not even the detractors, suggests it's a bad agreement.
- The 'arguments' of those who object are silly, and will become a whole lot more silly soon.
- So this objection is not likely to last too long.
And in fact, the market seems to agree with this reading, as the price is recovering from yesterday's sell-off. We think there is compelling value in InterOil's shares, it is profitable, has greatly cleared up its balance sheet, sits on ample resources that are only in the first state of exploration (it has a further 4.6 million acres to explore with many interesting structures besides Elk/Antelope) and the economics of the LNG and liquid stripping plant are compelling.
There is also a reasonable chance that the oil found at the bottom of Antelope1 will flow in commercial quantities at Antelope2, as the porous rock is situated deeper in the latter well.
That would turn their 36,500 barrels capacity refinery which operates at just over 20,000 barres refinery which presently imports crude overseas into a real money spinner.