shareholdersunite.com

Opportunities in smallcaps

shareholdersunite.com header image 2

OilSearch versus InterOil I

July 2nd, 2009 · 7 Comments

Both having energy resources at Papua New Guinea (PNG), both are planning to build an LNG faclity on the Island. We will compare these two projects..

OilSearch partners with Exxon in the PNG LNG project to construct an LNG facility. Here are some some notable quotes from the OilSearch 2008 yearend report

  • The proposed PNG LNG Project, a world scale liquefied natural gas (LNG) development, will have a transformational impact on Oil Search. Oil Search expects to have approximately a 30% interest in the Project, which will commercialise some 65% of the Company’s existing 2C contingent PNG gas resources.
  • When a positive Final Investment Decision is made, Oil Search will move approximately 580 million barrels of oil equivalent (mmboe) from its 2C resource to the 2P reserves category, more than eight times the Company’s current 2P reserves of 67 mmboe. Once in production, the Project will contribute approximately 20 mmboe annually, net to Oil Search, tripling Oil Search’s production and representing a 20 – 30 year legacy project for the Company, with additional growth opportunities. [p18]

The latter is quite notworthy. A simple investment decision moves a heck of a lot of gas resources into reserves category. It’s interesting to not that something similar will happen with InterOil. Even the announcement of the liquids stripping plant, which now seems all but certain, could put some reserves on the books for InterOil.

  • The Project has a number of advantages over competing LNG projects in the region:
  • – PNG LNG is a conventional LNG project and existing technology will be utilised in its development.
  • – There is an existing discovered resource base.
  • – The economics are helped by the high liquids content of the gas which will supplement gas revenues.
  • – The Joint Venture is aligned and the PNG Government is very supportive of the Project. [p18-9]

We will be comparing the projects soon but it’s noteworthy that all of this is applicable to InterOil

  • One of the key attributes of the PNG LNG Project is the stable investment climate that exists in PNG. PNG has a good track record with oil and gas projects, assisted by a favourable political and legal framework and supportive regulatory regimes. The PNG LNG Project is the number one priority of the PNG Government and during 2008, all Government deliverables were met in a timely manner. This included the finalisation of fiscal terms to apply to the Project, including a Fiscal Stability Agreement which has recently been approved, the granting of licence renewals and the passing of a range of legislative and regulatory amendments. [p21]

Once again, the same advantages to InterOil.

  • Recent world events have impacted short term demand for LNG, which has resulted in a more cautious approach by customers to signing new LNG offtake agreements. However, there remains a shortfall in LNG supply into the Asia Pacific region commencing in 2012 – 2014. This reflects an increasing use of LNG in customers’ fuel mix and the fact that between 2006 and 2008, only five new LNG projects globally were approved, providing less than half the LNG required to meet forecast demand. In addition, some demand in this period relates to the replacement of existing LNG supply sources, which are reducing production due to depleted resources. [p19]

It’s noteworthy that there now are offtake agreements in place, and the quite remarkable thing is that OilSearch has been sold out even before a final investment decision has been taken on the LNG facility.

  • One of the benefits of the present difficulties in the world is that the cost of materials and equipment is falling, taking pressure off the capital costs of the PNG LNG Project. In addition, the order books of the major contractors have significantly reduced over the last six months as a direct result of the world financial crisis. There is a high probability that PNG LNG could take advantage of both a lower capital cost and deliver its gas and liquids into a market with potentially higher oil and gas prices in 2013/14. [p20]

A double advantage which will benefit InterOil as well.

  • Oil Search has approximately 1.6 tcf of gas plus associated liquids, totalling some 300 mmboe, of existing discovered gas resource not committed to the PNG LNG Project. Studies undertaken by the Company have shown that developing further LNG trains, which can leverage off the infrastructure to be constructed as part of the PNG LNG Project, represents the highest value use of this gas. As such, further LNG train development is a high priority. [p22]
  • Discovered gas resources committed to the Project exceeds 9 tcf. Approximately 80% of the gas supply will come from the Hides, Angore and Juha gas fields, with the main gas processing plant located at Hides. The remainder of the gas supply will come from the Kutubu, Moran and Gobe Main producing oil fields, operated by Oil Search. These resources will support a production plateau of 14-15 years based on 1C resource estimates and over 20 years based on 2C resource estimates. [p25]

InterOil is not that far behind wit 6.7Tcf alread, almost certainly enough for a two train LNG facility.

  • A preliminary scoping study completed in early 2008 estimated a total capital cost for the initial development of between US$10 – 11 billion in real 2007 dollars, US$12.5 billion in nominal terms. A final cost estimate will be available once FEED is completed during the third quarter of 2009. Critical marketing, financing, environmental and community affairs activities are expected to be completed in the third and fourth quarters of 2009 prior to a FID in late 2009. Oil Search expects to have a participating interest of approximately 30% after PNG Government and landowner back-in, subject to the final equity determination process which will take place prior to the FID. [p25]

The InterOil LNG plant is budgeted at $5-7B, substantially lower.

  • Extensive discussions were held with large LNG buyers in Japan, Korea, China, Taiwan and India. [p26]

Noteworthy, as we now know they have sold out and we hear the same rumours about buyers for the InterOil LNG. Some customers, like the Koreans, had to be turned down, which is interesting as well.

  • Production figures
  • – oil and condensate: 44,588BOE/d; net to OSK: 7,707
  • – gas (Hides)14.31mMmcf/d; net to OSK: 5.236Mmcf/d [p33]

Unlike InterOil, OilSearch does actually produce oil and gas already, which is why some of its oil and gas is called reserves, rather than a resource. But then again, InterOil has a refinery which stands to gain substantially from the construction of the Exxon/OilSearch LNG project (boosting demand for diesel) and proably also from it’s own liquid production.

Tags: IOC

7 responses so far ↓

  • 1 kencooksam // Jul 3, 2009 at 1:59 pm

    Good DD piece again.

  • 2 Lexinvest // Jul 3, 2009 at 10:53 pm

    Oil Search is much stronger Financially. As of Dec 31 2008 – Oil Search vs IOC in Millions. Net Cash Flow 191 vs 5. Total Assets 2005 vs 592. Having producing oil wells helps explain the big Financial differences.

  • 3 kencooksam // Jul 4, 2009 at 2:34 pm

    Lex
    Which company is more shareholder friendly?Oil Search has 1.1 Billion shares with their 2005 assets and IOC has 45 million shares with their 592 assets.With farm out partners IOC can build the stripping plant and get a lot closer to OIl Searches cash flows.If not exceed them. I still see OIl in IOC’s future.A when question not an if questions. The refinery should produce positive cash flow of $50-60 million this year per Sal Illaqua of Moness Crespi Hardt..

  • 4 Lexinvest // Jul 6, 2009 at 1:57 am

    Hi Ken. With such a big Cash Flow, Oil Search and Exxon can pretty much build any project they want. Now as to your question about being shareholder friendly depends on what you mean by shareholder friendly. If you mean eye popping, upward growth potential, potentially doubling or more over a year or two, and possibly being 4 or 5 times the current price in a few years more — why Interoil!!

  • 5 kencooksam // Jul 6, 2009 at 3:41 am

    Why not Interoil..

  • 6 Lexinvest // Jul 6, 2009 at 6:25 am

    why Interoil!! was a cheer, not a question. I may not have written it clearly, i see my previous response as being poorly written and ambiguous. Interoil could have really superior returns over the next few months, and years.

  • 7 kencooksam // Jul 6, 2009 at 1:59 pm

    Ah I like that better. I thought you were one of the perma Bulls.smile.. Thxs for the clarification.