InterOil Daily Distortions No. 32

Some of these journalists should do their homework. Really….

Doubt cast on Canadians’ ambitious PNG plan
November 2, 2009

AN OIL refiner hoping to exploit the region’s gas boom, Canada’s InterOil, faces a wave of scepticism over its plans to export liquefied natural gas from Papua New Guinea.

InterOil, which has its regional base in Cairns and RBS Australia as adviser, aims to build a second LNG plant in PNG alongside ExxonMobil’s $US12.5 billion ($13.6 billion) venture with Oil Search.

The company has lofty ambitions to build a similar sized plant to export 8 million tonnes of gas a year through two production units, or trains, for just $US6 billion. It aims to sell its first shipment as soon as 2014.

However, some Australian industry insiders and analysts are doubtful whether InterOil has enough gas. The group has no certified reserves, but it has detected gas flow rates at the Elk/Antelope field that it says are the strongest recorded in PNG.

In the highest-case scenario from an independent evaluator, InterOil hopes to find reserves of 4.73 trillion cubic feet (tcf), but analysts contacted by BusinessDay said this looked marginal for one train, let alone two.

In comparison, Woodside’s Pluto 2 project off Western Australia will require up to 5.1 tcf of gas for one train and 10.2 tcf for two.

The market is also edgy because the geology around InterOil’s oil and gas assets is different from the area where Exxon and 34 per cent partner Oil Search are planning their LNG plant.

”It’s a new area and it does not have the production history of the Southern Highlands, where Oil Search is,” said an analyst who asked not to be named.

A website, has sprung up attacking the company’s claims.

An InterOil spokesman rejected the criticism and said the company was on track to deliver LNG, adding that scepticism appeared to have come from its competitors.

”We have no reason to believe that we won’t have sufficient [gas] to underpin a minimum of one and possibly two trains,” the spokesman said.

In March, InterOil opened its data room and retained RBS and BNP Paribas to sell a project stake of up to 25 per cent, but it has yet to sign up a big partner.

The refiner, listed on the New York stock exchange, has seen its market value almost quadruple this year after discoveries in PNG.

Despite local scepticism, US analysts have said booking reserves was not essential for making a final investment decision on an LNG project, as the rival Exxon project had booked only minimal reserves.

———–[End of Article]———–

It really is time these reporters do some homework before they start writing (and this is the most friendly assumption used here)

1) 4.7Tcf not enough for one train? Ask Marathon Oil, who started an LNG project in Equatorial Guinea with just 1.5Tcf. The Exxon/OilSearch project has about 9Tcf and there is already talk of a third train.

2) The 4.7Tcf (from the GJL reserve report) is a rather old figure, essentially pre-Antelope1. Just to reiterate what Antelope1 brought:

  • A net payzone of 2277ft (compare that to Elk1&4, at 88 and 166ft respectively, see p.13 of this presentation)
  • An average porosity of 8.8% (higher than the Elk wells)
  • A flow rate of 382MMcf/d with the choke only 1/3 open.

So, it’s no surprise that in a newer report from Knowledge Resource, Antelope1 has significantly increased the resource estimate to 6.7Tcf (and this is the lower P2 number, not the best case). Since Antelope2, some 2.2 miles south of Antelope1, has identified the formation, gas, the reef, and all that some 345ft higher than expected, it is likely the  resource estimation will further increase.

Antelope1 nor Antelope2, the new well, arn’t even mentioned in the article…

3) You might want to check what an October 28 update from Morgan Stanley has increased the share price target to $73, even without increasing the gas numbers (still 6.7Tcf). However, it has a bull case in which it increases it’s target price to $142 per share, increasing it’s gas estimate to 8Tcf (adding 100Mbbs of recoverable oil as well.)

4) One might want to check what Morgan Stanley had to say about those FDI (the force behind that InterNOOil website) claims about the geology; check p6 of their first, very thorough report on InterOil (dated September 18, 2009).

You might also want to check p.8 of that same MS report, where the project economics are compared and that lowlands geology turns out to be an advantage, not a disadvantage..

5) No, InterOil hasn’t done any deal yet, and the reasons are entirely obvious. It first wants to figure out what it has, as there is considerable upside with liquids and oil. It even has horizontal drilling equipment available to look for better porosity/permeability low in the formation where the oil is.

The liquids/gas ratio at the top of Antelope2 was also very promising (that ratio can only increase with depth) for the prospects of a liquids stripping plant (we again refer you to that Morgan Stanley update). It can hardly come as a surprise that either liquids stripping or oil production would be very profitable, considering that InterOil runs a 36.5Kbbs/d capacity refinery on PNG. The cash-flow generated will be more than enough to finance it’s part of the LNG plant.

6) Since this newspaper is from Sidney, the location of both OilSearch (OSH) headquarters and Bronte Capital, long in OSH and short in IOC, we wonder whether that source who declined to be named was Bronte..

7) At least, the article doesn’t repeat that old hand favourite basher nonsense, arguing that because InterOil has no reserves, it cannot build an LNG plant:

  • “US analysts have said booking reserves was not essential for making a final investment decision on an LNG project, as the rival Exxon project had booked only minimal reserves.”


3 thoughts on “InterOil Daily Distortions No. 32”

  1. I see this as another planted story. Or nice try Bronte!!!Best to deal with current facts vs old stale facts as regards IOC assets.

  2. Wrote a letter to the editor of this newspaper and complained about this reporters lack of DD. With STP’s proof

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