Christine Forster, writing an analysis widely circulated on various marketwires including Shale Market, said it seems there might still be some twists and turns in the long saga of InterOil’s LNG project, with analysts speculating that arbitration proceedings launched by Oil Search are ultimately aimed at replacing joint venture partner Total with ExxonMobil.
Forster stated that Oil Search Limited (OSL) clearly sees itself as the key player in the Pacific nation’s emerging gas sector, by virtue of its 29 percent stake in the new ExxonMobil-led PNG LNG facility near Port Moresby and its significant equity position in the InterOil project.
OSL, with its strong operating history at PNG oil and gas fields, also enjoys a good relationship with the PNG government, one of its major shareholders. The analyst stated that ExxonMobil’s $19 billion (K50 billion) PNG LNG project started ahead of schedule in April.
The foundation development comprises two LNG production trains with a total capacity of 6.9 million mt/year, fed by a gas pipeline from the Hides and other fields in PNG’s highlands. Forster said separately, InterOil’s LNG project is based on gas discovered in the Elk-Antelope fields, covered by the PRL 15 permit in PNG’s Gulf Province.
The project has gone through several iterations over the past six years as InterOil, under previous management, sought to bed down a development plan that would meet criteria set out by the PNG government.
A key requirement was that there be a proven LNG producer on board.
As part of that process, InterOil in 2013 held several months of exclusive but ultimately unsuccessful negotiations with ExxonMobil over the use of Elk-Antelope gas to underpin an expansion train at the operating PNG LNG project.
Shell was also involved in the talks. But Total eventually emerged with the prize, unveiling a deal in December 2013 to acquire a 61.3 percent stake in PRL 15, subject to several conditions including the acquisition of the minority interests in the permit.
That agreement, however, was superseded in February this year when PNG-based OSL swooped in on a 22.8 percent stake in the permit by buying out Pacific LNG Group for $900 million (K1.9 billion) plus contingency payments.
In late March, InterOil announced a revised deal under which Total purchased a 40.1 percent stake in PRL 15 for $401 million (K965) down, plus $73 million (K176) when a final investment decision is taken on the Elk-Antelope LNG project, and $65 million (K156) when the first LNG cargo is shipped.
Under the terms of the transaction, Total will make additional payments depending on the eventual size of the certified gas resource, scaling from $1.6 billion at 7.2 Tcf up to $3.5 billion (K8 billion) if it’s as big as 11.8 Tcf.
Oil Search has challenged the Total buy-in, claiming that its own purchase of Pacific LNG Group’s interest vested it with pre-emptive rights in the joint venture. Both InterOil and Oil Search are claiming confidence that they will prevail in the dispute, set to go to the London Court of International Arbitration for a ruling in late November. A decision is expected during the first quarter of 2015.
Hong Kong-based analysts with Bernstein Research, which previously dubbed Oil Search’s purchase of the stake in Elk-Antelope an "inspired move," are now suggesting the arbitration is designed at opening the door for ExxonMobil."In our view the arbitration is aimed at replacing Total with ExxonMobil to achieve a more timely and efficient development of Elk-Antelope," they said in a recent note.
The analysis stated that whatever the outcome, cooperation with ExxonMobil is clearly on OSL’s agenda as it strives for final investment decisions on expansion at PNG LNG and the development of Elk-Antelope by the end of 2016.
While InterOil is planning appraisal drilling at Elk-Antelope, the PNG LNG partners are working to firm up the P’nyang and Hides Deep gas resources as potential supplies for an expansion train at their project.
According to Oil Search, around $3 billion of potential capital cost savings and about two years production acceleration could be achieved through coordinated development of PNG’s undeveloped resources. Oil Search managing director Peter Botten said it was "more challenging" to achieve an FID on a stand-alone Elk-Antelope project in the projected 2016 time frame.
"That’s one of the reasons why we are encouraging cooperation between the joint ventures," he told journalists last month. According to Botten, cooperation could range anywhere between the development of a second entirely stand-alone project at Elk-Antelope, to a completely integrated development with PNG LNG.
Either way, he has forecast that Oil Search is likely to be participating in a total of five LNG trains in PNG by the early 2020s. For its part, however, InterOil appears to be firmly focused on a stand-alone development at Elk-Antelope. In its latest briefing for analysts it reiterated it was planning to develop its Elk-Antelope gas as PNG’s second major LNG project.
InterOil cited analyst estimates putting the potential cost of an Elk-Antelope development at $2,051/mt of LNG capacity, compared with the $2,324/mt cost of the PNG LNG project.
Bernstein agreed that Elk-Antelope was expected to be significantly lower in cost than PNG LNG on the basis that it would not require an airport in PNG’s Highlands or inter-field infrastructure.
In addition, the pipeline would be 50 percent shorter and over a considerably easier route, and the project could take advantage of synergies from being built on a brownfield LNG site.
But the Bernstein analysts added: "Given the likelihood of a two-train development at Elk-Antelope and the capacity of PNG LNG to accommodate only three trains, the synergies with Elk-Antelope on cost and schedule could be overstated. PNGFacts/PostCourier