Progress on LNG expansion opportunities in PNG

“Key events for Oil Search during the first half included the early appraisal results from the Antelope drilling campaign and agreement by the PRL 15 Joint Venture, with endorsement from the PNG State and Gulf Province governments, of the site locations for the proposed Papua LNG project development, which will be underpinned by the Elk-Antelope gas fields. Initial appraisal and testing activities have been encouraging and though further appraisal work remains, should the forthcoming drilling programme prove successful, we hope to enter Front End Engineering and Design on this globally competitive project during 2016. In addition, a major step forward was made on the potential expansion of the PNG LNG Project, with the signing of a Memorandum of Understanding between ExxonMobil PNG Limited and the PNG Government early in the year. This agreement sets out a schedule for the proposed development of the P’nyang gas field, to support the provision of gas for domestic use and for PNG LNG Project expansion, including a potential third train. Preparatory works for the P’nyang South 2 appraisal well, in the south-east of the structure, are currently underway. The well, which is targeted to spud in the first half of 2016, is designed to help further constrain the 1C and 2C resources in the field, to support financing and marketing discussions. Engagement with the PNG Government on the formal award of a Petroleum Development Licence (PDL) is presently underway. Once the PDL has been awarded, the intention is to integrate P’nyang into the PNG LNG Project. We support ExxonMobil’s view, expressed in its recent second quarter 2015 earnings call, that an expansion of the PNG LNG Project is “very well positioned to compete” in the current global environment. A potential third train would benefit from the foundation Project’s successful delivery and strong operating performance to date, a competitive cost structure plus stable and transparent fiscal terms. In addition, the operator has captured a range of learnings from the foundation development that will help maximise future returns.”

From OSH presentation today:

"Elk-Antelope appraisal programme to be completed 2h15, certificaton 2Q16"

"Antelope 4 ST1 sidetrack to be spud shortly, using OSH Rig 103"

"Elk-Antelope field has sufficient resources to underpin one 5 MTPA LNG train (basis for entry into PRL15) with approx 5tcf 2P, or depending on outcome of appraisal, potentially two PNG LNG-sized trains requiring >7 tcf 2P"

Resource of >7 tcf would deliver higher returning LNG project (PNG LNG "look-alike" and trigger certification payments (US$0.775/mcf if volume >7 tcf based on average of two certifiers- Gaffney Cline and NSAI)"

"Potential PNG LNG Project expansion and Papua LNG Project globally very competitive, with attractive returns even under revised oil price scenario."

"Antelope South exploration well- PRL 15 (OSH 22.8%). Adjacent to and downdip from Antelope.  Large upside potential."

There is no mention of Ant 7 in their narrative or on the drilling schedule; so it appears that the JV still has it on the table, but no decision made to proceed.  Ant 6 is shown as a 4th qtr spud.

From the Oil Search presentation.

What I find interesting in all this (and perhaps has been lost by the stock price), is that not only does Interoil have the present EA resources to complete a 2 train project, but that between Triceratops, further delineation of Ant 7, Ant South and potentially a very large Raptor, there is significant tie back potential to greatly expand Papua LNG trains once the plant is complete.  These kinds of additional resources are exactly what Exxon and OSH had envisioned being available to expand PNG LNG, but of course aren't.  Of course we are all looking what's on the windshield (engergy prices, Ant 4, 6 and recertification), but we should all keep this in mind, albeit down the road, but it does impact valuation for an acquirer.  .