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  • The InterOil Saga Coming To A Close 2 comments
    Nov 6, 2012 3:06 PM | about stocks: IOC

    One of the most significant events in the InterOil saga was the recent announcement that the company will give 100% of its production above 4Tcf to the Papua New Guinea government. I take this as an admission that no energy major was interested in partnering with InterOil because of the dubious value of its resources.


    Now that the billion dollar question is out of the way I am feeling nostalgic for the days when I would listen to InterOil bulls talk about how Exxon was going to buy them out and other such nonsense.

    In 2010 I met Phil Mulacek, InterOil's CEO, and Henry Aldorf, an executive at Pacific LNG. I had always been skeptical of InterOil because of heavy criticism from short sellers, and I went into the meeting with Mr. Mulacek and Mr. Aldorf with a closed mind. Mr. Aldorf talked about the difference between resources and reserves, a controversial point regarding InterOil, and this put the short sellers' criticism more into perspective. I do not believe InterOil is committing fraud. I do, however, believe that it may not be economically beneficial over the long run to build the LNG project that InterOil has proposed and therefore I have a bearish view on the stock.

    Some highlights from our meeting:

    Phil Mulacek:

    There's several questions about reserves and resources. Resources are how you build LNG. Every LNG project is built on finding natural gas and it's classified. You sign a little piece of paper saying that you have identified X amount of gas, and there's no difference in the gas. That gas molecules have been there for 4 million years and they haven't changed in two days. Then you sign a contract. The difference between reserves and resources is signing a contract.

    It's like asking a cattle rancher in New Mexico that's got 10,000 head of cattle and asking "Does he have beef?" You know, the guy has to slaughter a cow, put it in the fridge, but is he gonna kill all of his cows just to justify somebody saying that it's not prime rib? No! No one would do that! You have to maximize the value and sell it over time and try to put meat on the hoof. And appreciate that value. That's what a rancher does. We do the same thing in energy. We take in natural gas, and we remove as much risk as we can.

    Henry Aldorf:

    I've been in the energy business for a long, long time. My last function was at a major called Marathon. I was the VP of Global Upstream Business Development and part of the executive team leading that company. My claim to fame at Marathon was the building of a LNG facility. Marathon had built a LNG facility, indirectly, about 40 years ago in Kenai, Alaska together with ConocoPhillips. But Marathon didn't do anything until 2003. Didn't have anybody who knew integrated gas. I was at the time the head of Marathon in Asia. They asked me to come back and see if we could get a nat gas project running. So we developed what is today the standard of LNG projects as far as speed, efficiency are concerned.

    I should say one more thing. I'm not working for InterOil. I work for the large shareholder Pacific LNG which is affiliated with Clarion Finanz, which is affiliated with Carlo Civelli, the major partner in that.

    A little bit about Pacific LNG because nobody knows totally what it is. Set up by Clarion Finanz AG in Switzerland. Pacific LNG owns about 20% of the Elk Antelope Fields. We own about 47.5% of Liquid Niugini which has the project agreement with the government of Papua New Guinea and is therefore licensed to develop gas in Papua New Guinea. We are also a major shareholder of InterOil. So we have a lot riding on this investment.

    Where are the Elk Antelope Fields? This is the southeast area of Papua New Guinea. Port Moresby is right under here. And InterOil owns about 3 million acres in that area, which is a huge portfolio. Exxon is up here in the heights. Out of this 3 million acres, the Elk Antelope field is only less than 2%. There are many arteries around here, which are today exploration potential. We say that the comparable is 18Tcf. I think the area could be as high as 25 to 30 Tcf. I can say that because I'm a private company! [Waits for audience to laugh.] Exxon has about 25. It's in all different type of areas, very far apart. And a big margin ranges between it. One of the biggest problems is to aggregate all that gas and bring that all the way down to the coast and then send that all to Port Moresby.

    This is what is misleading and people who don't understand gas have to understand what is the difference between resource and reserves. Resource becomes reserves once you have what we call a gas sales agreement and you have a SPE contract in place to develop the gas. These are the SEC rules. Therefore, some people say, well, InterOil doesn't have any reserves. No. Nobody has huge gas resource and has not yet put a full development plan forward and has not signed these particular contracts that can claim reserves. But their resource goes immediately to reserve category once the gas sales agreement and SPE contract are there. It has nothing to do with whether the gas is there.

    Disclosure: I am short IOC.

    Stocks: IOC
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Comments (2)
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  • getitrt2
    , contributor
    Comments (93) | Send Message
    It is very telling that any article a short writes or can get anyone to write about InterOil is an incompetent piece of unsupported trash.


    This writer cannot even get his facts straight from the Australian WSJ article he references. The leaked proposal (not "announcement") was said to offer Papua New Guinea (on commercial terms reflecting market value) the right to "the NEXT 4 Tcf of gas supply from the Elk and Antelope fields that it could use for a smaller LNG project as well as meeting domestic power needs", NOT "100% of its production above 4Tcf", as this writer states. He then concludes from just that, "I take this as an admission that no energy major was interested in partnering with InterOil because of the dubious value of its resources", without any support or even explanation whatsoever, a conclusion directly contradicted by such parties as a consortium of Japex, Kogas, and Mitsui, and also Shell, and by multiple independent world-class resource engineering firms certifying the resources on multiple occasions.


    PNG wanted some domestic gas access from the Exxon/Oil Search project, but the latter's concerns about the amount of gas available were too great; InterOil has plenty of gas and no such concerns. Therefore, InterOil is offering that option to PNG, partly for the benefit of the country and partly in connection with a more flexible and phased project with earlier cash flow for it and its partners, working with PNG toward a win-win agreement for both.


    The writer states then that "the billion dollar question is out of the way", without any explanation of what that is about.


    Finally he concludes, also without any support or further explanation, that "it MAY not be economically beneficial over the long run to build the LNG project that InterOil has proposed and therefore I have a bearish view on the stock". If he would bother reviewing published information comparing InterOil's Gulf LNG project with other LNG project in PNG and Australia, he would find that it is much more economically viable and expected to be much more profitable than any of those. He also apparently is not aware that the Company already has off-take commitments for the first 4 Tcf of gas, not to mention a ready market for the lucrative condensates from the project. It perhaps should also be mentioned that PNG's Prime Minister and Petroleum Minister have recommended approval of the project to the National Executive Council.


    This writer says he is "focused on misunderstood securities". He obviously still misunderstands this one after supposedly focusing on it. He needs to do a great deal more due diligence on it, along the lines of what professional energy analysts at Morgan Stanley, Macquarie, and Raymond James have done. I hope he stays short on the stock.
    6 Nov 2012, 06:28 PM Reply Like
  • pjd11
    , contributor
    Comments (2) | Send Message
    This article is simply factually inaccurate - no gas is going to be given away. Read the attached article where it states the gas would be sold to PNG at market price.
    7 Nov 2012, 12:24 AM Reply Like
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