Total's Papua New Guinea Venture Makes Modest Start

07/23/2013 | 03:59am US/EasternRecommend:

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By Ross Kelly

SYDNEY--Total SA's (>> Total SA) foray into Papua New Guinea has gotten off to a shaky start after two exploration wells failed to find much natural gas, according to the French company's Australian partner in the project.

Oil Search Ltd. (>> Oil Search Limited) said in a statement Tuesday that the first two exploration wells in a campaign to tap new natural gas resources in the country--Flinders and Hagana--had yielded only "relatively modest" amounts of the fuel.

Oil Search said both wells, though, had intersected good quality types of rock--possibly indicating the presence of larger natural gas reserves nearby that could be targeted with further drilling. A Perth-based spokeswoman for Total declined to comment, and a call to Oil Search, whose shares fell 2.6% in Sydney, wasn't immediately returned.

Papua New Guinea, an impoverished southeast Asian nation that lies just north of Australia and to the east of mainland Indonesia, has around 22.6 trillion cubic feet of natural gas reserves, U.K.-based consultancy Wood Mackenzie estimates--about equal to U.S. annual consumption of the commodity. That likely underestimates the true potential, however, as the country has so far only been lightly explored for oil and gas.

Recent big discoveries by the likes of Exxon Mobil Corp. (>> Exxon Mobil Corporation) have transformed Papua New Guinea, better known for its jungles and lawlessness, into one of the world's hottest energy plays. Its promise as a hub for new sources of natural gas has begun to lure an increasing number of larger oil companies, including Total, looking to feed Asia's growing appetite for fuels that burn cleaner than coal.

Rival Exxon's US$19 billion liquefied-natural-gas project, dubbed PNG LNG, is among the more advanced in Papua New Guinea. The facility is scheduled to ship its first LNG cargos to Japan, China and Taiwan next year, while more recent gas discoveries have led Exxon and its partners already to begin planning an expansion of the project.

Aiming to mirror Exxon's success, Total last year bought stakes ranging from 35%-50% in five exploration blocks owned by Oil Search in the Gulf of Papua that it hoped would underpin the creation of another big LNG plant in the country. The French oil producer has a strong foothold in the Asia-Pacific region already, having spent billions of dollars buying up stakes in two large LNG projects in neighbouring Australia.

Total bought into the Papua New Guinean blocks by promising to cover the drilling costs for Oil Search, a much smaller player. No specific price tag was ever disclosed.

Andrew Williams, an analyst at RBC Capital Markets in Melbourne, said the first two wells hadn't delivered a significant discovery, but described the drilling results as "mixed" in view of the quality of the rocks encountered by the wells.

"The play remains high risk but encouraging enough to commit to another well in the current programme," Mr. Williams said, noting that Oil Search had identified more than 30 potential drilling prospects in the area. Hagana is still drilling ahead to its targeted depth, while a third well is also being prepared.

"Although the volumes at Flinders and Hagana are likely to be relatively modest, the company has been sufficiently encouraged to take up a further well option, and will drill the Kidukidu prospect once Hagana-1 is completed," Oil Search said in its statement.

Underscoring the country's perceived potential, Exxon has also started talks to invest in U.S.-based InterOil Corp.'s (>> InterOil Corporation (USA)) Papua New Guinean natural gas assets, and Japan's Mitsubishi Corp. (>> Mitsubishi Corp) agreed, in February, to a US$280 million deal to buy stakes in several natural gas discoveries made by Canada's Talisman Energy Inc. (>> Talisman Energy Inc.).

Write to Ross Kelly at ross.kelly@wsj.com

Stocks mentioned in the article : Total SA, Exxon Mobil Corporation, Talisman Energy Inc., Oil Search Limited, InterOil Corporation (USA), Mitsubishi Corp