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The simplicity of investing in InterOil

July 7th, 2009 · 2 Comments

The truth is often really simple. Buy on the dips, things are happening..

Despite all the daily excitement, there are only two basic questions one has to verify for this company to move forward.

  1. Is there enough gas to support an LNG facility?
  2. Are the economics of the LNG project competitive?

The first question can be answered with a resounding yes.

  • The Exxon/Oilsearch project has over 9Tcf in P2 reserves and resources, and they are already talking about a third LNG train. InterOil has 6.7Tcf, which is more than enough for a single train, and most likely also for a two train LNG facility.
  • The upside at InterOil is, in all likelihood, considerably larger, due to the fact that seismics have delineated Elk/Antelope as a large structure and the drilling of it is still in the early stages. Apart from that, there are quite a few other promising structures on the 4.8 million acres that InterOil holds in PNG.

The second question is also easy to answer. The economics of the project are very competitive, due to the following factors:

  • Three wells flow at 600MMcf/d, that’s 120% of the daily needs of an LNG facility, and this keeping in mind that the pipe of by far the most profusely flowing well was opened at just 1/3 of capacity
  • Compare that to anything else in the neighbourhood, for instance to the Exxon/OilSearch project also on PNG. This is what Wayne had to say about that in that famous ‘undercover’ interview:
  • “Our wells here are averaging about one-third the cost. They’re drilling wells for $75 to $100 million. Our wells are costing between $25 and $40 million. The initial productivity of our wells is several hundred million cubic feet a day. Up here, they’re in the 8 to 15 million cubic foot a day range. So we’re 20 times more productive at one-third the cost, 60-fold improvement in economics versus drilling in this sandstone reservoir up here versus the limestone that we’ve discovered here.”
  • “We’ve got the land ready to go to build the LNG plant. We own, we have a 99-year lease on the former Australian Naval Base in Papua New Guinea because so have no landowner rights issues, nothing that’s stopping us. We have a jetty system there. We own the harbor rights.”
  • The Exxon/InterOil project has scattered resources in the highlands versus a single resource in the lowlands at 1/3 of the distance to the planned LNG facility, further significantly reducing cost for InterOil in comparation with the Exxon/OilSearch project.
  • The cost advantages of the InterOil project is also expressed in the relative project budgets. The Exxon/OilSearch LNG facility is budgeted at $12.5 billion, the InterOil one at $5-7 billion
  • Comparing it to other big LNG projects in the area, like Australian coal seam projects is even much more favourable for InterOil.
  • These projects are budgeted at tens of billions of dollars, due to the high (labour and regulation) cost of Australia (versus PNG) and the characteristics of coal seam gas.
  • Coal seam gas doesn’t flow, it has to be treated with large amounts of water, and thousand of wells have to be drilled and treated to get anywhere near the same flow rates of the three Elk/Antelope wells that have already been drilled.

So, it’s safe to say there is enough gas, and the economics of the project are highly competitive. And keep in mind, that Exxon/OilSearch project is already sold out.

So there is also sufficient demand (and keep in mind these are investment projects with 30 year time horizons). From the year-end report of OilSearch:

  • 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.

Could it still go wrong? The only theoretical reason (apart from natural disasters, war, and the like) for the LNG facility not to be build would be money. However:

  1. There is enough gas to support an LNG facility
  2. The economics of the project are highly competitive
  3. There is enough demand for LNG for buyers to step in
  4. The potential buyers (Asian utilities, oil majors) have enough deep pockets to finance these kind of projects. The Asian’s especially are keen on securing supplies as is testified by the speed with which they bought into the Exxon/OilSearch project. It’s like a matter of national security for them.

Tags: IOC

2 responses so far ↓

  • 1 kencooksam // Jul 7, 2009 at 9:34 pm

    nice read, thks

  • 2 Harry Chamberlin // Jul 8, 2009 at 1:47 pm

    Clear , logical, as usual STP. Thanks, I needed a little pick me up.