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Executives

Wayne W. Andrews - Vice President of Capital Markets

Phil E. Mulacek - Chief Executive Officer and Director

Gaylen J. Byker - Chairman, Chairman of Compensation Committee, Chairman of Nominating & Corporate Governance Committee, Member of Audit Committee and Member of Reserves Committee

Collin Francis Visaggio - Chief Financial Officer

William J. Jasper - President and Chief Operating Officer

David John Holland - General Manager of Exploration and Production

Rabbie Langanai Namaliu - Chairman of PNG Advisory Board and Director

Analysts

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Sal Salvatore Ilacqua - Monness, Crespi, Hardt & Co., Inc., Research Division

Evan Calio - Morgan Stanley, Research Division

Jason Gammel - Macquarie Research

InterOil (IOC) Q2 2012 Earnings Call August 14, 2012 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to InterOil's Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Wayne Andrews. Please go ahead.

Wayne W. Andrews

Thank you, Robert, 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 on the call today are Phil Mulacek, our CEO; we also have Bill Jasper, President; Collin Visaggio, CFO; and Dave Holland, our Upstream Manager, and our 2 of our board members are joining us on the call today. 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.

At this time, I'd like to turn the call over to Phil Mulacek, our CEO. Please go ahead, Phil.

Phil E. Mulacek

Thank you, Wayne. We'd like to thank everyone for joining us today and for participating in today's conference call. These are exciting times for us. We've been very busy recently and I've just been meeting with a number of new members and existing and old members of the PNG Government, many of the same ministers we have been working with and a number of the new ministers which are all anxious to get back to work.

But before we get started, there have been also number of changes in our Board of Directors that we'd like to mention. Dr. Gaylen Byker, an original founder and board member from the company's start will be spending more time with us as Chairman since his retirement as President from Calvin College. We've also added 2 new board members, Sir Rabbie Namaliu, a former Prime Minister of Papua New Guinea; and Mr. Sam Delcamp, former Executive Director and Chief Investment Officer of the Fuller Foundation. We have both Dr. Byker and Sir Rabbie with us today, and I'd like to turn the call over to Gaylen from a few brief remarks. Galen?

Gaylen J. Byker

Thanks, Phil. It's been a long history of working with Phil and InterOil. I joined the board in 1997, that actually helped start the company already in 1995. The company has delivered impressive results over these last 15 years, and it's taken a lot of guts and determination and perseverance on all fronts to arrive at the enviable position that the company is in today. I'm pleased to be working now as Board Chair in a more direct role with InterOil's management team in these thriving and challenging times. We plan to finalize our LNG partnering arrangement and develop the Antelope fields with the approval of the newly elected Papua New Guinea government. And we are going to hear about the prospects of the new delineation program for Triceratops with our partner, Pacific Rubiales. Our prospect inventory has never looked more promising and we have an accelerated exploration plan for the next 12 months. So it's exciting times, and with Sir Rabbie and Sam on the board, we've got some new added expertise, and we're pretty excited about that, and delighted to be in the call and spending time in Singapore and PNG every month now.

I'm turning the call back now to Phil and the management team.

Phil E. Mulacek

Thank you, Galen. On to the business at hand. The second quarter, we saw a dramatic slide in Brent Crude Oil prices from over $128 in late March to $88 in late June, almost a $30 swing. This swing had the biggest impact on our financial results. Our second quarter loss of $31.7 million included $28.3 million of inventory write-downs as a result. Excluding the write-downs, our operating business still generated a profit even though we had reduced Refining margins and the timing of crude purchases. In refine product sales, our downstream business was strong. Fortunately, the moves of energy works both ways, so we're off to a better start for the third quarter with Brent rising from the lower $88s to over $113 today, a healthy $20 to $25 swing. Collin will cover these in more detail shortly.

The most exciting news, as mentioned by Gaylen, was our new discovery at Triceratops. This is great news for PNG as well as InterOil to collectively. The discovery comes at the right moment, as the entire LNG industry looks for LNG expansion opportunities and PNG is emerging in front and center in the world today. There is no doubt in our minds that we have discovered a significant resource and look forward to delineating this valuable resource with our new partner, Pacific Rubiales Energy. We'll be evaluating the data from Triceratops-2 and developing a production development oil program in conjunction with new seismic data over Triceratops to fully evaluate and develop this discovery.

We have completed preliminary farm-in agreements with PRE from Columbia and signed the final farm-in documents over the past couple of days -- in the last couple of weeks. We've closed on the sale with 12.9% gross working interest and an interest of 237, which includes this Triceratops structure. The transaction is subject to standard PNG regulations and approvals. The final LNG [ph] terms are accretive to both companies as reported earlier and established a proven benchmark for quality assets in Papua New Guinea. Terms of cash, initial payments of $116 million over term, a work program and other development carries on Triceratops and forming exploration wells in 237.

Triceratops is proven to be the second largest gas structure that we have drilled in PNG and this was documented in Triceratops-2. The recent surprise during testing operations was a high condensate yield [ph] we recovered in Triceratops-2. This recent high condensate data will likely have us revise the drilling and completion strategies of Triceratops-3. The liquid side of the business is a proven strength of our joint venture partner, Pacific Rubiales, and we'll be working over the coming weeks on this revised execution strategy, looking at potential early condensate sales and early cash flow. This high condensate was done with low flow rates because we had limited capacity for swabbing with no swabbing units in the country and limited on perforating and skin damage without the ability to do any significant acid wash other than a light wash on the purse.

Since the PRE transaction, a number of other visitors have engaged for possible farm-in tour acreage. We've recently just completed seismic on 2 significant structures in 236, which Mr. Holland, Dave, will cover a little bit later. We've had discussions with partnering opportunities to accelerate activity on this license, but as PRE will -- help us will lead to established the benchmarks and proven our commitment to the sell down process, we'll have molded [ph] to PRE as a partner as we go forward.

In the meantime, we're embarking on our first 2 well drilling program on the Elk and Antelope structures. These 2 wells are designed to provide data on reservoir continuity and aid in shifting resources from 3C to 2C and 2C to 1C to enhance the overall LNG program. These wells will assist in our overall field production and development plan as well.

I'd like to turn the call over to our CFO, Mr. Collin Visaggio, to cover the financials in more detail.

Collin Francis Visaggio

Thanks, Phil, and welcome to everyone listening to today's presentation. Just a few opening remarks. We continue to progress and expand on our Gulf LNG project to monetize the existing resources, and we also continue to invest in our exploration portfolio for the future. We had completed another milestone on the Triceratops discovery monetization, with the signing of the farm-in agreement with Pacific Rubiales Energy, which Phil just highlighted.

Completion of the agreement in the next few months, in addition to the debt financing proposed, will increase our cash position and fund our near-term accelerated drilling plans. The assets sell down will fund our Gulf LNG Project and our longer-term accelerated exploration program. Once this sell down is concluded, we will consider our optimal capital structure and potentially return funds in excess of our requirements to shareholders. Additionally, we will consider creating trading liquidity through a stock split.

The group recorded a net loss after tax of $31.7 million for the quarter ended June 30, 2012. The loss for the quarter includes a $23.8 million inventory write-down resulting from the decline in crude oil and related commodity prices during the period. Excluding the $23.8 million inventory write-down, operating segments of Corporate, Midstream, Refining and Downstream Collectively derived a net profit for the quarter of $7.5 million. We are seeing reversals in this cyclical event, as crude and product prices rise in the current quarter where we expect to return to headline profit.

Our balance sheet remains strong with our debt-to-capital ratio being a low 13%. As of the 30th of June 2012, our book assets amounted to $1.2 billion and our total liabilities amounted to $412 million. Our current ratio and quick ratio were 1.4x and 0.7x, respectively.

Just summarizing the results for the group. Including the write down, our operating business segment have a combined net loss of $16.3 million and the investments in our developing business segments resulted in a net loss of $15.4 million. The EBITDA for the quarter ended June 30, 2012 was a negative $36.5 million. The decrease in net profit for the quarter ended June 30, 2012, compared to the same quarter in 2011, was $55.3 million. This was mainly due to a $46.7 million decrease in gross margin attributable to lower crude prices of approximately $30 per barrel. We hold approximately 800,000 to 1 million barrels of inventory in just our refinery operations, which results in an inventory losses we mark-to-market under the International Financial Reporting Standards.

Current quarter also saw a relatively stable Kana, which meant that there was a $15.6 million decrease in foreign exchange gains compared to the same quarter in 2011 when compared to the Kana increase from $0.39 to $0.435. In addition the $4.2 million decrease in the gain on the Balbosau [ph] investment in the shares in FLEX LNG and the $4.7 million increase of administrative and general expenses mainly due to higher salaries and wages, further decreased the net profit. These decreases were partly offset by a $20.9 million increase in future income tax benefits relating mainly to the current period, carried forward business losses and foreign exchange movement.

The total volume of all products sold by us in the quarter was 1.7 million barrels compared with 1.8 million barrels for the same quarter of 2011. The difference was primarily due to the timing of certain export cargoes of 0.3 million barrels, which sailed a few days after quarter end in order to facilitate required cargo size. A full detailed analysis for your review is available in the press release and in the filed financials and MD&A.

Analyzing our cash position, as at the 30th of June 2012, we have cash, cash equivalents and cash restricted of $61 million. Since the quarter closed, we have drawn down an additional $20 million from profits held in our available working capital facilities, providing ongoing cash requirements as we conclude further debt arrangements. Since December 31, 2011, we spent $42 million on Triceratops-2 drilling and testing works, $13 million on seismic activity, $48 million on the Gulf LNG Project and $14 million on operating business maintenance upgrades.

The company has capacity to increase debt levels. A gearing of 25% provides additional debt cash of $100 million, with a 50% target allowing open debt of some $600 million, more than sufficient available cash as we continue progress towards achieving our near-term strategic objectives. We are undertaking initiatives in relation to securing new long-term debt facilities by leveraging our operating segments which have low levels of debt, and we expect to close a refinery asset-backed financing transaction in the coming weeks.

On April 30, 2012, we signed a binding heads of agreement with Pacific Rubiales Energy, PRE, to be able to acquire a 10% net participating interest in PPL 237 onshore Papua New Guinea, including the Triceratops structure and exploration acreage located within that license. The transaction contemplates staged cash payments totaling $116 million, an additional carry of 25% of the cost of an agreed exploration work program and a final resource payment. PRE have paid the initial $20 million of the staged cash payments. And subsequent to quarter end, on July 27, 2012, we executed the farm-in agreement with PRE relating to the Triceratops structure and the participating interest in PPL 237.

Additionally, Pacific LNG Operations are participating on 25% beneficial equity basis in the portion of the farm-in transaction relating to the Triceratops structure by reducing the indirect participating interest by 2.5% net. The company's main focus and priority is the commercialization of Elk and Antelope resources. We are continuing to work with the investment banks on the sell down process, where we are looking to sell down a portion of our interest in the Elk/Antelope field and other prospecting licenses, in addition to selecting an LNG operator and the sell down of our interest in the PNG-LNG joint venture.

In terms of investments so far, as at December 31, 2011, $343 million has been spent on the Elk/Antelope field of which InterOil has contributed $263 million and Upstream joint venture partners, $80 million. The LNG joint venture has spent approximately $38 million, $91 million has been spent on construction equipment, road construction, logistics and site works associated with the Upstream development sites and $33 million has been spent on the condensate shifting funding engineering and design, which has been funded by Mitsui.

We are focused on the strategic plan to bring an integrated development project that abides by our LNG Project agreement and satisfies the PNG Government. We are also working closely with the government of PNG to keep them updated on all key developments in relation to the project early works, strategic partnering process and the PDL [ph] application, which is currently being progressed towards finalization and filing. We have a matured asset sell down process and a matured gas sales process, which we are expected to compete in the near future. We have finalized the transaction with Pacific Rubiales Energy, which, when completed, will bring in additional upfront cash payments.

We have delivered on a very successful well in Triceratops, which all goes well for our future portfolio. We are securing new long-term debt financing arrangements, which will be concluded in the coming weeks. We are very excited about the opportunities ahead of us and look forward to maintaining momentum and competing these transactions, which are accretive to our shareholders.

With that, Phil, it's back to you.

Phil E. Mulacek

Thank you, Collin. I'd like to move on to our core business areas of Refining and Downstream operations. I'd like to pass the call over to our President, Mr. Bill Jasper.

William J. Jasper

Yes, thanks, Phil, and good morning, everyone. The second quarter of 2012 has proven to be a challenging environment in which to operate a refinery as a large proportion of our sales lag after crude purchases, and we thus are faced with a significant crude oil and refined product flat price decline. As prices recover, we expect to regain those losses, and we're off to a much better start for the third quarter already. Nonetheless, there have been some positive factors for this quarter and the first half of 2012. The crude diet for the first half of 2012 was very favorable and resulted in a middle distillate yield of 59.5%, being 4% higher than the same period for 2011. This crude diet and the restart of our reformer also resulted in a reduced naphtha yield from 29.7% to 21.7%, which is important in a low naphtha price environment.

Domestic sales for the first half of 2012 at 14,100 barrels a day, are 13% higher than the first half of 2011 and the highest half year period for any years since the refinery started out. This reflects the growth in PNG mining and LNG construction activities. Export sales, which are our lowest value products, were 9.5% lower than the first half of 2012.

Downstream business sales volumes for the second quarter of 2012 were 188.3 million liters, which is a 13.3% increase on the 163.2 million liters sold in the same period in 2011. The volume for the first half at 377.2 million liters is also up 13.1% compared to the first half 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 parts of the country, together with a general increase in business activity.

And -- our safety performance continues to reflect our dedicated commitment to safe operations. Our combined InterOil operating companies have now achieved 8.2 million man-hours without a lost time incident and 6.5 million man-hours for our contract staff, which is -- it just continues to thrill me that we've got folks that are that focused on safe operations.

So with that, Phil, I'll turn it back to you.

Phil E. Mulacek

Thank you, Bill. Moving to exploration. I'd like to hand the call over to General Manager of Exploration, Dave Holland, who will update everyone on the brass-related activities, including the testing of Triceratops-2, the condensate yields, new seismic and current activities at both Antelope-3 and Elk-3. Dave?

David John Holland

Thanks, Phil, and good morning, everyone. This morning, I would like to provide an update on the progress of InterOil's exploration program since my last presentation in early May. The key events in that time -- at the time of my last update, we had completed a total of 7 DSTs and had DST#8 in progress. Subsequently, DST#8 was a successful gas test in the upper limestone, and while it was followed by a further successful test in DST#9 in early June. Both DST#8 and DST#9 flowed gas at rates up to 28 million cubic feet of gas per day, with a condensate gas-to-gas ratio of approximately 17 barrels per million cubic feet of gas.

The CO2 content, as analyzed on location was approximately 0.3% and comparable with the offset Bwata-1 well. These tests have confirmed gas in the 397 feet thick upper limestone, with a gas on rock or -- with a gas on rock contact, which means basically that there was no water contact observed in the upper limestone. The reservoir pressures of these tests line up with the Bwata-1 reservoir pressures as shown in the upper right panel on Slide 16 in the accompanying presentation. Based on this and the similarity in the gas composition with the Bwata-1 well, we used the Bwata-1 water contact for the upper limestone. The aquifer pressure in Bwata-1 sits on the regional aquifer gradient, which correlates with pressures in the offset wells at coring 1, 1A and 1B and coring 1, 2 and 3 and InterOil's most 1 and 2 wells. This is the regional aquifer.

In the lower limestone unit, below the argillaceous limestone in Marl the pressure data from DST's 1 and DST 2 define a higher pressure aquifer gradient. This is shown also in the upper right panel on Slide 16 and labeled the TT-2 aquifer gradient. As discussed in my last presentation, this provides evidence that the 2 limestones are vertically pressure isolated and act as independent reservoirs.

In early June, with the agreement of the Department of Petroleum and Energy, we submitted a notice of discovery for Triceratops-2 and in mid-June, the department declared Triceratops-2 a discovery and at that time, we received directions from the department to conduct further works on Triceratops-2.

In line with these directions, Triceratops-2 was cased and cased hole logging and testing conducted in the lower interval. The testing aimed to determine the presence of hydrocarbons in this lower interval and potential liquids. During drilling, we had lost over 17,000 barrels of drilling fluid and water to the lower formation, and to complete this, we needed to unload the well and this required swabbing.

Subsequently, 2 tests, DST#10 over an interval from the 5,151 feet to 5,676 feet, and DST#10A over a shorter interval with a higher contact at 5,151 feet and the lower contact at 5,325 feet were conducted. DST#10 had initial gas flow, which subsided as the well was gradually killed by the fuel fluid load. As swabbing continued with the initial trace of small amounts of a light oil or condensate before breakthrough of small volumes of gas, as we continue to swab, we had gas and condensate cut, but unfortunately DST#10 was not able to recover a flow to surface and was subsequently ceased.

And after that, a retainer was set at 5,360 -- through 5,336 feet. And after reacidizing the well, a DST#10A was conducted. A rapid reaction after a very light acid treatment and with limited swabbing, the well came on and flowed gas. After the cleanup period, the well flowed gas at rates of 3 million cubic feet per day. The recovered gas had a higher field reported condensate yield of 45 to 60 separated barrels of condensate per million cubic feet of gas. This is significantly higher than the field reported condensate yield of the upper limestone at approximately 17 barrels per million cubic feet. PVT samples were collected during these tests and extensive laboratory analysis will be conducted to confirm this condensate yields.

In addition, the analysis of the DST#10A gas revealed a slightly higher CO2 content, averaging approximately 0.75% CO2 and a variable -- and variable H2O levels were reported. Also, production logging on shutting during DST#10A established a gas water contact at 5,285 feet.

To summarize, the open hole and case hole testing of Triceratops-2, of the Triceratops-2 well, has confirmed gas with different composition above and below the intraformational Marl. Our current model is that we are working with 2 separate -- 2 stratigraphically separate limestone reservoirs, separated by -- vertically by an intraformational argillaceous limestone in Marl's field.

Triceratops-2 represents the first penetration of this lower limestone with a potentially, significantly weathered gas leg. Triceratops-2 was a significant new discovery for InterOil, and it is our third discovery in succession after the Elk and the Antelope discoveries.

We believe that the diagenetic features, principally the presence of the dolomite, the biostrategraphic results and the results of an independent FMI sedimentary facies interpretation by Schlumberger support the interpretation that the Triceratops-2 well is on the flank of a shallow marine carbonate and reefal build up. This provides significant encouragement going forward for the drilling of an added [ph] well to penetrate the reservoir up dip on the main buildup that we see on the seismic directly to the south of Triceratops-2. Ongoing detailed petrophysical and petrographic studies of the rotary coal plug samples are in progress.

In addition, based on the independent formation evaluation of the wire line logs by Schlumberger, the reservoir development in TT-2 is significantly better than the offset wells in the field at Triceratops-1 and at Bwata-1 and also significantly better than Elk-4 well, which lies in a similar location and a similar setting on the Antelope reef. Please refer to the

[Audio Gap]

for a comparison of these results.

Our forward plans. InterOil suspended the Triceratops-2 well yesterday at 6:30 a.m. PNG local time. The well has been suspended as a future producing well. And with a consent of the PNG Department of Petroleum and Energy, we have released Rig#2 from the Triceratops-2 location. Rig#2 will now be moved to Antelope-3 for future drilling. In addition, our Rig#3 is being readied for deployment to the Elk-3 location to the north of Antelope. With the access roads from the north and the south and central camp development completed and in place, InterOil is set to begin the drilling of these 2 important obligation and appraisal wells in PRL 15.

During the drilling of these new Elk and Antelope wells, InterOil, along with its new partner, Pacific Rubiales Energy, will analyze data from the Triceratops-2 well and from samples currently undergoing laboratory analysis, and also with an integration of the potential new -- the new potential field data, we will be in a better position to plan additional new seismic to appraise the fields. Once all the results are received and after thorough analysis, we will also conduct a revised resource assessment with knowledge reservoir.

The additional seismic data acquisition, focused on identifying the limits of the western and northwestern extent of the field, will potentially extend the closure beyond the current estimate of approximately 125 square kilometers. Also, an objective of the seismic will be to provide in-fill data to define the distribution -- to better define the distribution of the shallow marine facies and map the vertical and lateral extent of the separate limestone reservoirs. Also with Pacific Rubiales Energy, a Triceratops multi-well appraisal program will be finalized.

In the PPL 236 and 238, in my last presentation, I reported we had conducted the acquisition -- I concluded the acquisition of the Tuna and Kwalaha seismic strike line program. Subsequently, processing and detailed mapping of this new seismic, along with the available legacy seismic that was acquired by previous operators in the past has been completed. The results of this mapping have defined 2 significant 4-way dip closures on potential reefal build ups. Based on this mapping, potential exploratory well locations for our future PPL 236 and PPL 238 obligation wells have been completed.

In conclusion, clearly the Triceratops-2 discovery represents a major event for InterOil and our partners. And with the resumption of drilling in the Elk and Antelope fields, and beyond that in the future to the drilling of exploration wells at Wahoo/Mako in PPL 236 and Tuna in PPL 238 and the new appraisal seismic and appraisal wells at Triceratops, we are entering a very exciting and extremely busy period for InterOil.

With that, I like to conclude and pass you back to Phil.

Phil E. Mulacek

Thank you, Dave. There's a quite a bit there and to put a sort of a layman's analysis, it's one of the largest columns that we've had. It's the second largest that we've drilled. The gas at the upper zone clearly is significant. All of these testings were in limited capacity. We're through not big bull [ph] completions like we had at Elk and Antelope, but limited capacity. We had no industry equipment for swabbing, so we were using sort of non-industry equipment for a limited swabbing, limited completions. So the rates were relatively low and -- because we couldn't do conventional standard large acid jobs, just a light acid wash that we would have to airlift limited barrels of acid for trying to clean out perforation. So that's -- the flow rate's at 3 million were indicative for us to confirm the hydrocarbons. The great news that we saw to reiterate was the high condensate yields, which will delineate how we go forward, maybe some horizontal work with PRE and Triceratops-3. Not only are we going to go up dip to reefal location, but we'll look at unique analysis and completion work to understand the commercial viability of the heavier condensate. And we think that combination with PRE will add great value.

Moving on to the sell down process on Elk and Antelope, we've reached a stage where we're absolutely confident that any concerns with the state will be met in regards to competing the LNG Project in compliance with the project agreement. This was confirmed this evening in meetings with the reelected Head of Petroleum, Mr. Duma. As stated before, we have received conforming and nonconforming bids for the LNG partnership being processed and the sell down of an interest in Elk and Antelope, which will be accretive to all shareholders. The LNG partners have 3 characteristics: international oil companies, IOC's; national oil companies, NOC and utilities. The end result of this partnership to process is now paved to proceed and to fully satisfy all the terms of the 2009 LNG Project agreement.

PNG has just completed a new election process, and the reestablishment of Peter O'Neill as Prime Minister. Having just completed the first meeting with Duma, Mr. Duma in conversations with the Prime Minister, the Prime Minister has confirmed the current government will be ready to move the project forward. On PNG matters, we're proud to have Sir Rabbie Namaliu here to outline his commentary and comments that he's had with a number of the Minister's on the election. I'd like to pass the call over to Sir Rabbie.

Rabbie Langanai Namaliu

Thank you, Phil. Yes, the election in Papua New Guinea has turned out to be a great success, particularly for interested investors in the country. The election was a transforming event. The Papua New Guinea Parliament foreground with the confusion, arising from the Supreme Court decisions regarding the Prime Minister over the last few months. Today, we have the strongest coalition government formed in the country's history. Three former Prime Ministers, including Mr. Michael Somare, have come together with their political parties to formally back Peter O'Neill as Prime Minister. Peter O'Neill was elected with an overwhelming majority on the floor of Papua Parliament.

With its LNG partnering process well advanced, InterOil is positioned to satisfy all conditions of the 2009 project agreement with the PNG state. The seasoned expertise of returning Petroleum and Energy Minister, William Duma, with the support of the Prime Minister, should facilitate the approvals required to move forward with our LNG Project.

To demonstrate their commitment, as we've just heard, Minister Duma met this afternoon with Phil of Christian and Henry and a similar meeting will be held tomorrow with the Prime Minister on this project. There is the commitment that the Prime Minister has given, and has obviously moved quickly to back it up with actions. I have spoken to a number of ministers, including the new Deputy Prime Minister, and they are on support of the Gulf LNG Project.

Thank you. I will now turn the call back to Phil.

Phil E. Mulacek

Thank you for your views and the strength of new governments, Sir Rabbie. We look forward to getting right down to business with the Prime Minister and the Petroleum and Energy Minister in the NEC to move the project forward. We're off to a swift pace.

Overall, InterOil is firmly committed to our shareholders, the commercial drivers of an accretive sale on part of the Elk and Antelope asset being the most beneficial to shareholders and to accelerate more LNG capacity for increased earnings growth through this partnership. The company is extremely excited of the large gas reservoir and Triceratops as through the Triceratops-2 testing, the larger condensate numbers in the lower section and the large up dip position of the structure with clear reef seen on seismic as described by Dave Holland.

As stated before, exploration team and -- is in a unique position. It's unmatched by any past or current company in PNG. We continue to organically outperform the industry, even though the normal industry equipment is not available here in Papua New Guinea, we've overcome a number of hurdles that a number -- others have never in the past. These activities continue to drive value, but significantly we're more cost competitive than our other alternative LNG projects within the region, and this will all add value to InterOil and PNG as a whole.

Recent commercial discussions have indicated a very accretive multiple value to our shareholders on the Elk and Antelope process, and now following recent discussions with government, we'll be in a position to move forward.

In closing, we welcome our new partners, PRE, on a -- as a proven operator to assist us in the liquids that we're seeing in Triceratops-2 and to close with LNG partners and the government in the near future.

We'd like to thank our shareholders, all the staff and workers and all in the PNG Government in achieving this common goal.

I think we're ready for calls and the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Phil, about 2 months ago at the annual general meeting, you used much of the similar language regarding the existence of multiple bids, as you put it, at significant multiples of current share price. In the 2 months since then, what have been the additional milestones in the LNG partnering process?

Phil E. Mulacek

Well, the process is both on the main theme was who was going to be in the government. And we resolved that in the last week to 10 days and a number of them are just actually here today, just flew overnight into Port Moresby. So both NOCs and IOCs, the pricing has improved by a number of parties and we have comfort on basically their due diligence, the infrastructure and the execution plan. But the outstanding hurdle has been what would be the political tapestry, so to speak. And we had a good meeting with Minister Duma this evening, so we're just now getting started. This is the first kickoff meeting with the government as stated by Sir Rabbie. And so it's really -- this is -- the green flag is just now dropped with the completion of the election.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay, and if you can help us with kind of the sequencing here. Is it do you have to identify a specific partner before you receive project approval from the DPE? Or do you get project approval from the DPE before you can identify a specific partner? Is there a sequence to it?

Phil E. Mulacek

That's what -- that's the sequence I'm not able to elaborate. It's what we're working with the Minister this evening and the Prime Minister, and that's what we're working on over the near-term. That's -- we're all here today, just kicking off that process and we're all meeting with the heads of state, including the Prime Minister first thing in the morning. So those are part of the processes that everybody wants to elaborate. I can't elaborate it on the call.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay, last question for me. In the past, you've talked about late 2014, early 2015 for targeted startup of LNG production. Can you reaffirm that? Or has the timeline changed?

Phil E. Mulacek

The timeline would change. It's taken about a year to get through this process, so you're shifting everything in a 2015 -- we're still able, depending on the partner, to do it late 2015. Depending on the partner, it can be an early 2016. So that will be more final partner selection versus our capacity. I mean, there's a lot that's been done, a lot risk mitigated, infrastructure that we've taken care of, but we can't change a 36- or 42-month start to finish on LNG construction. That is the industry norm.

Operator

And next we'll go to the line of Sal Ilacqua from Monnes, Crespi, Hardt.

Sal Salvatore Ilacqua - Monness, Crespi, Hardt & Co., Inc., Research Division

Phil, on this 6-well program that you're going to do on the T-2 financed largely by Pacific LN, whatever it is, they're not going to be in the same terms as you have before, the same financing so that there will be another several hundred million dollars coming in to the company because of this? Am I reading that correctly?

Phil E. Mulacek

Yes, it's not -- we'll be covering about 65%. Our partners cover about 20%. So yes, it's -- we're all there putting a significant skin in the game but PRE does cover a portion but it's a credited -- it gets credited toward their resource payment. So ultimately they get the full benefit of it. So it's a well-balanced structure for the appraisal. The uniqueness was, like I tried to elaborate, swabbing equipment, there's no conventional swabbing gear that's highly portable out in the jungle. So we've had to be innovative, and that really is only a partial capacity of what we could delineate. We couldn't pull the load water off even with limited equipment. We can't quite acidize, so we have limited results. We can perforate a little bit, get some isolated tests, and it was mainly to confirm where the hydrocarbons are, what the quality of the hydrocarbons. Now that we have that, we can delineate through drilling, we're also mobilizing our logistics group to special purpose and build while we're drilling Antelope-3, highly portable swabbing and more advanced testing equipment, which we've always resolved those technical issues in the past. So we're absolutely confident we'll get that done and be ready for enhanced drilling and testing on an up structure reefal location at Triceratops-2. So hopefully, that sort of puts everything back in layman's, but we're very confident and extremely excited on what we have, sort of like the early Elk results. We know that we're not yet on the reef and we haven't even drilled the best positions and the best sweet spots of Triceratops yet.

Sal Salvatore Ilacqua - Monness, Crespi, Hardt & Co., Inc., Research Division

And you mentioned, or it was mentioned that there was 45 to 50 barrels of condensate through 1 million cubic feet of gas. I don't think I've ever heard of a number that high. Is it really...

Phil E. Mulacek

No, it's is big number. The rate was between 40 and 60 -- 45 to 60 barrels per million, which is -- we knew we were looking at standalone economics at Elk at 1/3 of that rate. So it changes the whole dynamic, and I've mentioned that in the call. It really does put a different commercial light to it, and that's inherently one of the greatest strengths of our partner, Pacific Rubiales. They've been able to execute. We look at -- they've offered to succumb a number of key people to help accelerate that and we'll be in a position to have that. Those skill sets and that experience will be very warmly received to look at a fast-track operation at Triceratops.

Sal Salvatore Ilacqua - Monness, Crespi, Hardt & Co., Inc., Research Division

Right. Phil, with respect to the potential LNG partnership, several years ago, Pacific LNG put out some ambitious projections on cash flow for the year, $1,500, $1,800. I think there's been some changes in and the structure that you're putting together right now. Should we look upon those projections as still realistic? Or could they be lower than that or higher? Do you have any comment on that?

Phil E. Mulacek

We're so close, we're just now with the government. I mean, that will be finalized. For the very first time all the stars have come to alignment. We have exploration success, people are seeing that we're able to do commercial transaction with the industry, with PRE, the issues that Sir Rabbie raised on the political front have cleared up and we're working with the government. There's some compromises on everyone's part, that was discussed this evening. We hope to conclude that, and with then that clarity, we can give very easy in the near-term.

Sal Salvatore Ilacqua - Monness, Crespi, Hardt & Co., Inc., Research Division

Phil, I'm very optimistic and I'm pleased at Mr. Duma's statement today in the plat endorsed the other project. That was terrific. I think we're right on the cusp of doing this.

Phil E. Mulacek

That was concurrent. He spoke to us after. We weren't even aware of his comments, so it was concurrent to those same things. We're all here to work together. We've been here a long time, we're here to find the common ground and we know it's beneficial for everybody.

Operator

We'll go to the line of Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

I guess I have one question on Triceratops, and clearly, a pretty exciting flow rate out of the DST#10 [indiscernible] but what is the pace of further exploration and delineation for the Triceratops and is there a potential -- now that your partner facilitates bringing additional kind of rigs to [indiscernible]

Phil E. Mulacek

Evan, we're getting about 50% of what you're saying. I'll try to summarize it. I think you asked on what's the speed of development in Triceratops. There's a lot of core data, subsurface work that we've got that's foundation and building block material for both ourselves and PRE. We just signed a definitive agreements. We're working through the final joint venture operating agreement. We'll have a technical and operational committee. We are looking at bringing in additional equipment for testing and completions. We'll be working on, if necessary, an additional rig with PRE. These are issues that we'll be working on the technical committee over the next 30 days that we'll be getting together. We hope to have most of the long lead items purchased so that by the time we finish Antelope-3, we can look at dedicated equipment just for the back-to-back development of Triceratops. That will include, as Dave said, and iterative seismic program because we have never found closure. And we will begin looking at drilling the reefal locations, focusing on the near-term objectives of the higher condensate, which could be a stand-alone development on its own accord, as well as expanding and trying to establish how big the structure is. The gas column looks significantly larger than anything we have at Antelope with over 5,000 fluid of pay, still above where we deem an estimated contact. And with a clean reefal structure, we really don't know if the contacts that we have were because we're on the flank and it's still a tight system with limited completion capacity that we had on location. We'll have all that completion technology available. We'll have additional completion units. We're looking at standalone work over rigs and pulling units that can help expedite the overall development. I think, and I'm sorry for -- we're here in Papua New Guinea, but we couldn't hear everything that you asked. But I hope I summarized it in detail.

Operator

And we'll go to the line of Jason Gammel from Macquarie.

Jason Gammel - Macquarie Research

Wanted to ask one about Triceratops. When you talk about being on the flank of the structure and potentially finding thicker pay, would that be in both reservoir intervals or just one of them? Second, if you could just give a little more color on the 2 exploration prospects that you have identified in the other 2 blocks, Mako and I'm sorry, I don't have the other one in front of me, just in terms of whether they're reefal structures, if you have any sort of predrill potential. And then just one housekeeping question, is there a tax affect on the inventory write-down that was taken in the quarter.

Phil E. Mulacek

Okay, I'll cover the tax affect first. Collin, if you can address that.

Collin Francis Visaggio

Simple answer is yes.

Jason Gammel - Macquarie Research

Is there a number on that?

Collin Francis Visaggio

We paid 30% tax.

Jason Gammel - Macquarie Research

Okay, got it.

Phil E. Mulacek

Okay. On Mako and Tuna, Dave, if you could elaborate, please.

David John Holland

Yes, no, I think with the detailed mapping that we've completed, we are seeing all of the seismic character and all of the site, the geometries that we observed at Antelope and also in some of the offshore wells. So I think our confidence that we will have reefel or shallow -- at least shallow marine reservoir at Wahoo and Tuna is very high. We're very confident that we've got that right. The -- we haven't completed final resource assessments. That will be coming as we finalize the drilling program and prepare further for the drilling.

Phil E. Mulacek

Surface area compared to Elk and Antelope on scale, is it one smaller, [indiscernible] other same size?

David John Holland

Yes, I think Tuna is probably about a 1/4 of the gross rock volume and Wahoo and Mako would be comparable to Antelope in gross rock volume.

Phil E. Mulacek

Okay, that's helpful. Going to the last question...

David John Holland

Comparable sizes.

Phil E. Mulacek

The last one was on the 2 reservoir, and Jason, a good question, because remember we drilled this structure specifically on a rich line high, not in the reefal location because it was more in a valley. We were concerned about blowouts, so we specifically we're off the flank and did not hit the sweet spot that we saw on seismic. And so that is the first thing that we have to bring back into contents. We were wanting to step our way into what looked as a very significant reef and understand the subsurface pressure gradient so we could understand how to drill it and what type of drilling mod [ph] program we would need. Now that we have that, we can comfortably execute. But on the reservoirs as far as the continuity that shale go and as there are 2 systems, I'll let Dave address the 2 systems as we go toward the reef.

David John Holland

Yes, no, I think at the moment, that's what we are planning to review with the seismic mapping and focus the new seismic on. My current kind of view I guess, I did elaborate it a little bit, is I think that the aquifer pressure in the lower limestone would make it, I think, to be a closed system. So I'm thinking it's probably likely to be localized around the reef, I would think. That the major contact for the field, I still think, is the Bwata-1 water contract, which would be the contact that we have in all of the presentation material that we've provided today. But -- so I guess at the moment, that's what the new program will try and determine.

Jason Gammel - Macquarie Research

Okay, that's really helpful, guys. If I can just sneak in one more. Do you have approximate spud dates for the first appraisal well at Triceratops and then for the first, the exploration wells?

Phil E. Mulacek

I'll cover -- it's right after -- we're shifting, we're flying the rig components, so we've been flying rig components this week to Antelope-3. So as soon as we're complete, we're going to be looking at the reefal location for Triceratops. So it's not a date, we just say it's consecutive, and that's why we brought in the land-based rigs. And we have roads and infrastructure that we're completing currently, so that people that are coming out will be able see a finished road and infrastructure for the Elk and Antelope. That will free up Rig#2 for all of the highly portable and early explorational appraisal work. If we need additional rigs above that, that's one of the things we'll discuss with PRE that I tried to cover with Evan.

Operator

And ladies and gentlemen, due to time constraints, that was the last question for today. And I turn it back over to your host.

Phil E. Mulacek

I'd like to thank everyone for participating. If you have any further questions, it's coming close to midnight here, and we've all flown all night just to get to Papua New Guinea, but we'll be happy to address any questions. Feel free to contact Wayne in the U.S., and thank you very much for participating in the call.

Operator

Ladies and gentlemen, that concludes your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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