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OSH edited earnings call - jft310 - 02-24-2016
http://finance.yahoo.com/news/edited-transcript-osh-ax-earnings-071747027.html
RE: OSH edited earnings call - jft310 - 02-24-2016
The forecast guidance we've given does include Antelope 7, but it's worth noting that that well is still very contingent, and dependent on the results of Antelope 6. We also have increased discretionary spend on exploration drilling in PNG, particular at the Muruk and Barikewa well
RE: OSH edited earnings call - jft310 - 02-24-2016
Elk-Antelope in PRL 15, we think is likely to be a very positive story based on the well results, and Ian will talk more about that in just a little while. In terms of where we need to focus for 2016, really this is about protecting our investment in PNG, protecting the investment in our oil fields, our own operated areas
RE: OSH edited earnings call - jft310 - 02-24-2016
Oil Search believes the undeveloped resource base to support expansion will be confirmed around 10 tcf during 2016. We would expect volumes from the low cost high liquid fields to be required to meet the forecast LNG supply shortage in the next decade, as less competitive global projects are deferred or shelved indefinitely. An attractive fiscal regime is in place in PNG and the government's highest priority in the resource industry is supporting project sanction of the next phase of LNG.
RE: OSH edited earnings call - Palm - 02-24-2016
Very nice. Thanks JFT
RE: OSH edited earnings call - jft310 - 02-24-2016
Edited Transcript of OSH.AX earnings conference call or presentation 23-Feb-16 12:00am GMT
Preliminary 2015 Oil Search Ltd Earnings Presentation
Sydney, New South Wales Feb 23, 2016 (Thomson StreetEvents) -- Edited Transcript of Oil Search Ltd earnings conference call or presentation Tuesday, February 23, 2016 at 12:00:00am GMT
TEXT version of Transcript
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Corporate Participants
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* Rick Lee
Oil Search - Chairman
* Peter Botten
Oil Search - MD
* Stephen Gardiner
Oil Search - CFO
* Julian Fowles
Oil Search - Executive General Manager
* Ian Munro
Oil Search Limited - Executive General Manager
* Keiran Wulff
Oil Search Limited - Executive General Manager
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Conference Call Participants
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* Ben Wilson
RBC - Analyst
* James Redfern
Merrill Lynch - Analyst
* Dale Koenders
Citigroup - Analyst
* Kirit Hira
Macquarie Group - Analyst
* John Hirjee
Deutsche Bank - Analyst
* Nik Burns
UBS - Analyst
* Pei Zhi Ling
Societe Generale - Analyst
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Presentation
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Rick Lee, Oil Search - Chairman [1]
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Well good morning all, my name's Rick Lee, I'm chairman of Oil Search, and I'd like to welcome you to this morning's results presentation. Thank you very much for your interest in the company, and for your support of Oil Search.
Well as you would know, 2015 has been a tough and challenging year for all companies in the Oil and Gas sector, and 2016 is shaping up as no different. Oil Search has continued to pursue the strategy that we announced towards the end of 2014, and reviewed an updated in early 2015 in response to the falling oil price.
You'll see in these results, evidence of our continuing commitment to PNG. Evidence of operational, and productivity improvements in both operated and joint venture producing assets. Evidence of progress in the pursuit of expansion of the PNG LNG project, and the development of Papua LNG, with joint venture partners, PNG Government and other stakeholders.
To quickly and as prudently as possible expand those projects and commit to them based on strong underlying fundamentals. You'll see evidence of maintaining our sound financial position.
You'll see evidence also of our continuing engagement with PNG on community Government, and communities in particularly those around our areas of operation, to ensure that the country and these communities share in the benefits of oil and gas developments.
It's a strategy crafted to deliver value to all stakeholders, and despite market uncertainties we remain positive about the progress towards these goals. But very mindful of the challenges that this kind of market presents. I'll handover now to Peter, and his leadership team for the results presentation, and thanks again for your interest.
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Peter Botten, Oil Search - MD [2]
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Ladies and gentlemen, thank you very much for your attendance in person here today, and also obviously virtually through the various pieces of technology that are available to us.
Today we're going to obviously disclaimer. We're going to go through in reasonable detail the results for 2015, I'm going to call upon key members of our management team to provide you with various aspects of the result.
Stephen Gardiner, our CFO is going to give you a financial overview. PNG production will be described by Julian Fowles, and gas development by Ian Munro, exploration by Keiran Wulff, and I'll do the wrap and the summary. It is a comprehensive program and as our chairman says, it is a very dynamic time in the oil and gas business.
Oil Search has a distinguishing feature of having highly profitable barrels of oil. But also two tangible projects for growth that still work in a very dynamic, and volatile resource pricing environment. We'll discuss that in some detail as part of my own talk.
A clear highlight for the year was the excellent performance of PNG LNG, and strong performance from our oil fields delivering a record production of $29.25 million barrels of oil equivalent. In some 80 odd years that is a record, and a very strong record for the company.
Revenue for the period was just over $1.5 billion marginally down on 2014, and that obviously is a reflective of significant falls in the average oil price and gas pricing. With oil price down 47% on 2014 to just over $51 a barrel. And gas pricing fell falling 32% to just under $950 MMBtu.
This delivered a core profit after tax as $359.9 million, and however our final reported profit was impacted by a decision to write down the carrying value of the Taza PSC. Which when brought to account, delivered a loss for the year of $39.4 million. We'll obviously discuss this later in the presentation.
Progress was made across the board on continued expansion of PNG LNG, and debarment of Papua LNG, with successful appraisal running continue at Elk-Antelope. Both these developments offer the potential for superior returns, even given a depressed oil and gas pricing outlook.
And are very competitive with other LNG expansion, and development options in our region, a distinguishing feature of Oil Search over other oil and gas companies. At least in our region we have tangible growth projects that work in this environment.
Like all oil and gas companies 2015 was very much about addressing the lower oil and gas price environment, improving efficiencies, adjusting our cost base to the realities, have appeared to sustain low commodity prices.
Oil Search is blessed in having a series of production assets in the lowest quartile of cost, where our cash operating margin is one of the highest in our region at about 73%. We have been successful in reducing our cost base from over $12 a barrel, to a very competitive $10 a barrel with more to come in 2016.
Obviously reducing cost, focusing on efficiencies in our business will continue throughout 2016. The 2015 results had a series of one-off costs which impacted the overall success of those programs. But at the end of the day 2016 will tell all, and further details will be given by Stephen about that program.
We're very well placed now for a low oil price environment, we're cash flow positive at less than $20 a barrel. And even when you count all our activities: debit servicing, interest, principal, repayments, sustaining capex and cash opex, we still make money in the low thirties per barrel. That's a real distinguishing feature for our organization.
We obviously have a very strong balance sheet at something over $1.6 billion of liquidity, and that is available to support growth programs, should all price fall below many of the level of $30 odd. But we do have a very strong balance sheet which is now being applied judiciously to invest in growth, I'll discuss that later.
If I move to a core part of our business is safety, a core objective obviously is to keep our people safe. 2015 was very much a year of disruption with changes to our organization structure, and redundancies across the organization, in common with many oil and gas companies.
That obviously causes some concerns within our workforce. When you deliver a year where there was a zero loss time incidence during in our operations for all our staff and contractors, it's an outstanding achievement that we're very proud of.
We also see improvement in total recordable incident rate frequencies, down to 1.8 incidences per million hours worked, again an improvement on the year before in a difficult environment. We also see progress on process safety management, and managing our aging facilities, better reporting of our incidents, and better training.
That remains core focus for improvement in 2016, but overall a pretty good safety performance at a difficult time. If we now turn to a total shareholder return, clearly the returns in Oil Search in comparison to other industries, are impacted by lower oil pricing.
And clearly this year on a one year basis, our TSR was minus 12.3% against the median for the ASX 2000 Energy of minus 50. On a five year basis we just about made a positive TSR of $0.40 against the indices of $0.70. On a 10 year basis clearly we're demonstrating consistent positive returns, where our -- over a 10 year basis TSR is still sitting up there at around 112%.
Against our peer group in Australia we're clearly performing well, and with our core assets as they stand right now, and the strength of the company, we believe we can continue to deliver superior returns in this environment.
With that I'll pass you over to Stephen Gardiner, our CFO who will then run you through the numbers.
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Stephen Gardiner, Oil Search - CFO [3]
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Thanks Peter, and good morning ladies and gentlemen. Peter's done a very good job of hitting on the highlights of the financial performance for 2015, but let me just re-emphasize a few of the key points.
Firstly the core results clearly reflect a full year of excellent performance from the PNG LNG project -- woops we've done slides, that's better thank you. Our core profit of $360 million, although down 25% on the prior year, was still the third highest core profit in the company's history. And it does demonstrate the resilience of our operating assets.
Our operating cash flow remain very healthy, only marginally down on last year and despite the collapse in the oil price. And it underwrote a very strong closing liquidity position. As Peter mentioned, we're just under $1.7 million of liquidity including cash and undrawn credit lines, and our balance sheet is in excellent shape.
Finally, we've declared a final dividend of $0.04 per share, bringing our full year payout to 42%. That was right in the middle of our guidance on our dividend policy.
There we go -- okay turning to cash, and cash is king at the moment. As Peter mentioned our operating margins are still very healthy, despite the collapse in the oil price.
Realized oil price is down $47 on the prior year on an average basis for us, our overall cash margin only declined by 5% to 73%. Part due to the full year contribution from the higher margins of the LNG project, but also due to the efforts to reduce costs both in our own operated assets and in the LNG project itself.
The PNG LNG cash margin at 83% include shipping costs, with over a quarter of the LNG cargo ship last year, delivered ex ship. Our average realized LNG and Hides gas price of $9.44MMBtu's for 2015, was down by $4.50 on the prior year, but it was cushioned by the somewhat roughly three month lag between stock prices and LNG contract prices.
Turning to some more detail on the financial results, our revenue was stable year-on-year with LNG sales more than -- virtually offsetting the collapse in the oil and gas prices that I've just referred to.
A costs of production and non-cash charges increased due to a (inaudible) of LNG costs, however our unit cost of production did decline by 17%. Other costs were up on the year, and they included a full year of LNG shipping costs, and one-off expenses. Including asset disposals, business optimization costs, and other advisory costs that incurred last year, that won't be repeated hopefully this year.
Our exploration costs expense halved in the year, with the only exploration well that we did write off was the Hides Deep well exploration component. As noted already we did incur an impairment charge of $399 million from the full impairment of the Taza asset with no tax deductions available on that impairment.
Our producing assets were assessed for impairment using both short and long term prices flexed on the downside cases that we've run, and our current values were supported at those downside prices.
The increase in financing cost recorded in the PNL for the year really reflects the four year borrowing cost, from the PNG LNG project that were expensed, and were previously being capitalized prior to financial completion.
Our tax expense for the year of $148 million dollars equates to an effective tax rate of 29% on our core profit, that's in line with the PNG statutory rate for gas field income.
Turning to our cost structure in a little more detail, total cost for production increased by $57 million, it was mainly due to the full period of PNG LNG operating costs. However, as already mentioned, unit cost for production are reduced by over $2 a barrel of oil equivalent, to $10.08 in 2015.
Due to the impact of low LNG unit costs, and also the cost reduction programs that we'll go into a bit more detail on later. But we were also helped by the fact that that LNG plant was running at about 7%, above nameplate capacity in 2015.
Compared to 2014, PNG LNG gas production costs increased due to higher well work cover costs, and a number of one-off restructuring costs. Cost to reduction initiatives implemented during the year partially offset these, and if we do strip out those one-off costs then our actual production costs declined by 9% on the prior year.
The full year benefit of restructuring that we undertook last year, will really be seen in 2016. With initiatives completed or underway already, that are set to deliver at least a 25% reduction in our Oil Search managed production costs.
Some more detail around cash flows, the full year of PNG LNG sales of course supported our operating cash flows, they were only down 4% on 2014. Our operating cash flow equated to a $32 per barrel of oil equivalent in cash, and are consistent with the very strong operating margins that we mentioned earlier.
Our overall cash position declined by only $50 million just over the course of the year, despite of substantial debt repayments, and a $0.04 special dividend paid during the year.
Our investment spend was driven by outlays on Taza, and Antelope appraisal activities, and the remaining component of the PNG development -- the PNG LNG development.
Our cash dividends totaling $0.18 per share we've paid during the year, that equated to a cash payout of $274 million, which also impacted on our closing cash position.
Surplus funds from the first release of cash from the PNG LNG project we received during the year, and are used to repay all outstanding corporate debt, about $150 million. We also achieved a net debt repayment against the PNG LNG project debt of $33 million.
With that sort of cash flow our balance sheet remains very solid, we're very well placed to face the disciplines imposed by this current oil price environment. Our overall liquidity increased by $100 million over the course of 2015 to $1.66 billion, despite the drop in oil prices.
We have about $750 million of undrawn capacity under our credit lines, and cash of $910 million at year end. That includes $270 million in the PNG LNG debt service accounts.
Towards the end of the year, we refinanced $250 million of our credit lines. That was done on improved terms with our existing lending groups, so it was very satisfying given the external environment we're in at the moment.
When PNG LNG financial completion was achieved -- ahead of expectations I might add -- in early February last year, cash distributions from the project commenced. Since that time we've received a total of $1.2 billion of net cash from the project.
As previously mentioned the dividend reinvestment plan will remain suspended for the time being, in light of our robust financial position.
A little more detail around our debt profile, it's a subject of obvious interest at the moment given low oil prices. Our total debt at the moment stands at $4.23 billion, and a net debt at $3.3 billion.
When the PNG LNG project achieved financial close in February last year, the lenders released our corporate guarantee. The project debt in place during the construction phase of the project, so that debt is not full nonrecourse.
We have principal repayments on that LNG project debt that commenced in June last year. Last year there was a modest initial payment of principal scheduled totaling $103 million, that ramps up to a fairly steady state going forward.
Principal and interest will be continued to be paid semiannually over the next 10.5 years, with principal repayments rising as the interest component declines over time. It's a classic mortgage style servicing profile.
From our point of view, that's a very positive profile, it means that our annual repayments are phased, they're predictable, and they're very manageable. For example, the 2016 interest and principal repayments will only use about $16 of every dollar we generate from the oil and gas, and LNG we produce in 2016.
Also, as Peter's already mentioned, we only need to realize just over $30 a barrel of oil equivalent on our 2016 sales to cover debt servicing, cash opex and sustaining capex.
Moving from the past, and looking to the future, our investment outlook for 2016. We're looking at a total capital spend of around the $360 million mark, that's down 35% on last year. And it's the lowest since we entered into the construction phase of the PNG LNG project.
Our capex spend is very much focused on value adding opportunities in the context of the current low oil price. It includes a high level of discretionary spend, particularly on exploration which we can flex downwards if oil prices deteriorate further.
Our forecast exploration spend is down a little on last year, due to the completion of Taza appraisal drilling. However, we had ongoing appraisal activities on Antelope and P'pyang, incuding (inaudible) spend on both projects.
The forecast guidance we've given does include Antelope 7, but it's worth noting that that well is still very contingent, and dependent on the results of Antelope 6. We also have increased discretionary spend on exploration drilling in PNG, particular at the Muruk and Barikewa wells.
LNG project construction spend does tail off finally in 2016, with only a modest outlay for on preparations for tying in the Angore wells that we drilled last year, and some rig demobilization costs.
Our development forecast include spend on moving at the PNG power initiative are forward as well, just to note that.
Our production capex spend is down 50% on -- forecast to be down 50% on 2015. We're not drilling any development wells, we have no capex work out as planned, and we're focused on reducing our sustaining capex to be focused on activities that reduce risk, and or add new term value to Oil Search.
So finally turning to guidance for 2016, our full year guidance does incorporate other various initiatives to drive efficiencies, and optimize work programs in response to the weak oil and gas prices we're currently facing.
As previously reported the production outlook for the full year is $27.5 to $29.5 million barrels of oil equivalent. Our production costs we're targeting in a range of $8 to $10 per barrel of oil equivalent. That reflects the initiatives to reduce control of the costs across all activities, and as already mentioned we intend to deliver at least a 25% reduction in productions costs, on operated oil and gas assets in 2016.
Our other operating costs will be lower than 2015, due to lower gas purchase costs in line with the lower oil price, cost reduction initiatives. And the impact of one off restructuring asset disposal, and advisory costs that we did incur in 2015, that as I said, that won't be repeated this year.
That will be partially offset by slightly higher LNG shipping costs with the higher volumes from the LNG project.
Our non-cash charges on a daily basis will be up a little compared to 2015 due to a higher proportion of LNG production, which has a higher depreciation rate compared to oil and gas.
In summary, I believe we're very well positioned both operationally and financially to ride through these challenging market conditions. And on that note I'll handover to Julian, thank you.
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Julian Fowles, Oil Search - Executive General Manager [4]
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Good morning ladies and gentlemen, and thank you very much Stephen for going through that. I'm going to talk about the production, and our production performance that has really underpinned the core financial performance, that Stephen has just talked about.
See if I can work this -- of course the headline for this is what we've seen in 2015 has been our highest full year of production ever in Oil Search's history, that really reflects the first full year of PNG LNG production of course. But also it reflects very good performance from our own operated oil and gas fields in the highlands in PNG.
In terms of the numbers, full year production of $29.25 million barrels equivalent, which is some 52% higher than 2014. That of course reflects really what has been outstanding performance from PNG LNG, and I'll talk a little bit more about the details of that in a minute.
And the stable performance, as I've said from our own operated fields, including the oil fields, the Hides GTE included in that as well. 7 million barrels there are very similar to what we saw in 2014.
First of all, looking at the PNG LNG project itself, this has been producing well above nameplate capacity. If you remember the nameplate capacity on LNG project is 6.9 million tons per annum, the 2015 performance there has been operating an average of 7.4 million tons per annum.
And that really reflects the uptime but also the high performance that we've seen, not only from the wells up at Hides, but also the Hides gas conditioning plant, and the LNG plant itself of course. That's been going very well.
We do expect in 2016, to see further upside in that performance, and we look forward to tracking through this year. In terms of sales, we achieved the plateau against a 6.6 million tons per annum contract, achieved plateau in the fourth quarter of last year. That's ongoing now and the cargos above that of course are sold into the stock market.
There are production optimization activities which are being led by the operator, those are progressing very well. We're looking at potential debottlenecking opportunities, that work is still ongoing.
What we've really done, is test the capacity of components in the main facilities, so at Hides and down at the LNG plant. Tested the capacity of those, so we haven't really gone through any debottlenecking as such at the moment, and we're busy identifying those opportunities -- or the operator is as we go through this year.
Of course there was a milestone for the Angore field, we drilled two development wells on Angore, those have been completed and unsuspended, and are now ready for tieback into the Hides gas conditioning plant.
In terms of our own Oil Search contribution of course, we produce gas from our associated gas fields. Through 2015 we contributed about 12% of gas into the LNG project. Some of that coming from South East Gobe, which of course is a third party gas sales into the contract.
Together with that we handled about 30 thousand barrels a day of condensate coming out of the project, that's in addition to our own oil production.
Part of the work we were doing during 2016 in terms of our own operated fields, was looking at the long-term life of our assets, looking through to end of field life. We've done that in a number of areas, specifically that has thrown up a couple of opportunities.
And one of those is shown here, it's an opportunity to accelerate gas supply from our own operated fields, accelerate that gas supply into PNG LNG. There are a number of benefits that we could see with that. If you think of the options that we have in PNG LNG to tie in future supply then, of course, we're looking at the lowest gas options coming in first, and that's one thing that we're able to clarify through this work. So we really optimise our capital by bringing in potentially low cost gas supply earlier on from our own fields.
There are also of course other benefits with that. We've got ageing facilities. We would accelerate the end of field life in some of those ageing facilities and hence we would see that we'd reduce the long-term field operating costs for those.
We do see that this has potentially materially economic value. It's very early stages. There's feasibility work going on at the moment. We have a project team that's been formed and they're getting after this full-time this year. So we'll see how that progresses.
We're already in conversation with the PNG LNG operator on this and, as I said -- have to say, those conversations have gone very well and we both see good advantages to bringing this in.
A little bit about our own operated oil fields. We've seen, as I said, good stable contribution from those fields. That reflects a lot of the work that we've done over the last few years in drilling infill wells, new development wells if you like, within our existing fields. Those wells have been performing very well.
The [Estano] field is one which is outstanding there, and I think that is -- has been going great guns. The Agogo field also and some of the new wells that we drilled in 2014 and 2015, also in the Moran field, they've been doing very well.
Our own net operated production of seven million barrels, that reflects a gross production of some 35,000 barrels equivalent per day, as I said, similar to 2014. In May last year we started gas supply from the south-east Gobe facility, and that now produces gas as third party gas into the PNG LNG project. Of course, that has seen quite a marked increase now in the amount of barrels equivalent, if you like, going through the Gobe processing facilities, and they've bneen performing very well. Good stability in those facilities.
Of course, as we produce oil and gas we make amendments, annual amendments to our reserves and resources position. On this slide you can see in the top right there's a summary, in terms of 2P reserves and 2C resources, of what's going up and what's going down. On the left-hand side there's a little bit more detail around that, so we've obviously had a record year of production, so that's brought down some of the reserves in oil and gas.
P'nyang, we've gone and had a look at that and there's some work which Ian will talk about in a little while, where we see an increase in our contingent resources. Taza, which has been touched on by Peter and by Stephen -- and Keiran will go into this in more detail -- that has seen a reinterpretation of the structure there based on the seismic and, of course the well results, resulting in a downward revision based on what we see as being recoverable from there.
We continue to do new mapping also and revised mapping in all of our licences, retention licences, and our licences in PNG. That has in PRL 14 led to a revision of the structure around one of our fields, the Cobra field, and that results in a reduction in the contingent resource there.
Elk-Antelope in PRL 15, we think is likely to be a very positive story based on the well results, and Ian will talk more about that in just a little while. In terms of where we need to focus for 2016, really this is about protecting our investment in PNG, protecting the investment in our oil fields, our own operated areas.
We're very focused on facilities integrity, our wells and the processing facilities in the plants. We're very focused on process safety, as Peter has touched on at the start. We see -- we've seen some good improvements in process and personal safety through the last few years and obviously that's a major focus for us as we continue to go forward.
We're obviously focused on budgets and our 2016 budgets. We've -- obviously, we're squeezing those, reducing them in the light of the current oil price. We expect to see really some of the payoff of the 2015 business optimisation program that we've gone through, we expect to see some of the payoff in reduced operating costs in our fields in 2016.
In terms of our deliverables into PNG LNG, of course, continuing with the supply of gas, the reliability of that gas has been excellent in 2015, and we plan to maintain that obviously in 2016 and going forward. The high facilities uptime that we see in our liquids export system, we've seen effectively no downtime in that system whatsoever through 2015 and we obviously are focused to continue with that.
There'll be further work on optimising the production in PNG LNG and on debottlenecking coming from the operator there and, of course, we'll progress our work on the accelerated gas opportunity that I highlighted.
In terms of the outlook for 2016, you can see on the chart the comparison back over the last few years. Of course what we've seen from 2013 through to 2015, we've quadrupled our production, our net production, overall. It's gone from a little under 7 million to something over 29 million barrels equivalent per year, and so quadrupling of that production over four years.
The plan is for 2016 we expect to see a slight decline in our own operated oil field production and that, as I said earlier, we expect to see continued improvements in PNG LNG production and that will be offset to some extent. So the numbers are up there for you. We expect to see between 27.5 million and 29.5 million barrels equivalent in 2016.
So that's really all I want to say and with that I'll hand over to Ian.
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Ian Munro, Oil Search Limited - Executive General Manager [5]
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Thank you Julian. Good morning ladies and gentlemen. I'll briefly summarise the gas development part of our business.
The delivery of high returning LNG trains in PNG remains the key growth focus for Oil Search and we see the potential to double our production by the early-2020s. Both PNG LNG expansion and Papua LNG made material progress on appraisal and development activities during 2015.
Oil Search believes the undeveloped resource base to support expansion will be confirmed around 10 tcf during 2016. We would expect volumes from the low cost high liquid fields to be required to meet the forecast LNG supply shortage in the next decade, as less competitive global projects are deferred or shelved indefinitely. An attractive fiscal regime is in place in PNG and the government's highest priority in the resource industry is supporting project sanction of the next phase of LNG.
Further, in the current operating environment, Oil Search is increasingly convinced that there is a compelling value driver for parties to cooperative to optimise to short-term capital investments and longer term operating costs.
Development of the north-west gas hub and expansion of PNG LNG is progressing very well. At a time of low oil prices, a third train at existing plant site would importantly utilise the spare capacity in the export pipelines and the downstream common user capacity at the plants, including control rooms, storage tanks, shipping channel and jetty.
The 2CF resource base for P'nyang has been increased to 3.5 tcf and is regarded by Oil Search as being sufficient to underpin a train 3. There may be -- also be additional volumes quantified as part of the recertification of the Foundation fields following the excellent production performance to date. The planned drilling on P'nyang later this year will migrate resources from the 2C to 1C category to support LNG marketing activities. The joint venture is currently working closely with government on the activities such as landowner development forums that are undertaken prior to production licence award.
In addition to appraisal and development activities on P'nyang, Oil Search and our co-venturer Exxon Mobile are also actively exploring in the north-west gas hub to identify volumes for additional LNG trains and also the domestic market.
A well regarded prospect at Muruk will be drilled during the second quarter of this year, the well test continuation of the Hides trend to the north-west and, if successful, it would have a significant follow on potential in the area.
Moving over to the gulf gas hub and the PRL 15 joint venture has made strong progress on commercialisation of Papua LNG. Total has of course assumed operatorship and is ramping up its presence in country, and we remain on track to complete the appraisal of the Elk-Antelope field this year and make the all-important concept select decision.
The key outstanding issue will be to determine whether the resource can underpin one or two trains. Once this is known, the development can comfortably move into the feed phase in 2017. There's a clear opportunity through lessons learned from PNG LNG to commit to targeted pre-investment in early works to protect the execution schedule ahead of the 2018 final investment decision.
The appraisal program on Elk-Antelope has to date exceeded our expectations from when we acquired our interest. The well results and the initial testing at Antelope 5 have demonstrated both excellent reservoir quality and deliverability in the core part of the field.
The recently completed longer term interference test -- and we removed the gauges this week -- and the completion of the drilling of Antelope 6, which is expected to see lower quality reservoir on the eastern flank of the field, will both further narrow the resource range.
One of the key activities for 2016, which will be closely watched by multiple stakeholders is the Oil Search resource certification. Two industry leading certifiers will provide the first up-to-date independent assessment of volumes in the field.
Now those certification results will be available around about mid-year and no later than mid-July. Also in parallel to the appraisal program, the joint venture is maturing a number of high quality exploration leads and prospects in PRL 15 to drill-ready status. The objective will be -- determine which of those structures is drilled first, and most likely in 2017.
Now once the resources are quantified across the project, the marketing activities will noticeably ramp up. While the near-term LNG market is extremely challenging, a number of well-respected forecasters show there is expected to be a sizeable volume of LNG demand opening by the middle of the next decade. It is this window, and particularly high quality Asian customers that train 3 in Papua LNG will actively target.
Given the reputation that PNG is building for reliable supply of high heating value gas into Asia, we believe that both projects can successfully place long-term volumes at attractive prices into a market that may have upwards of 100 million tonnes per annum of uncontracted demand in the late-2020s.
Whilst there are many proposed LNG developments globally, it is likely that a culmination of cost pressure and economic returns will result in deferral of most competing projects. Cost base in PNG allied to attractive stable and fiscal terms provide confidence to both joint ventures that the projects are extremely competitive and will move to timely final investment decisions.
RE: OSH edited earnings call - jft310 - 02-24-2016
Secondly, the Oil Search certification process for Elk-Antelope will provide an independent volume assessment around mid-year. Thirdly and perhaps most importantly, in the current environment is that joint ventures and government are aligned on progressing to the earliest monetisation of resources of both projects, and the colocation near Port Moresby should drive a cooperative agenda and the realisation of material synergies.
Finally, the LNG market is expected to require additional supply by the early to mid-2020s, and we believe that LNG from PNG will be extremely competitive into that market.
RE: OSH edited earnings call - jft310 - 02-24-2016
study we've found that we believe that Papua New Guinea's got in excess of 5 billion barrels of oil equivalent remaining potential. So that's more than 60% remaining potential in the country.
RE: OSH edited earnings call - jft310 - 02-24-2016
So in 2016 our focus has been very much on managing our cost base, looking at focussing on those areas that add significant value, obviously drilling Muruk prospect, Antelope 6 and possibly Antelope 7, depending on Antelope 6 results. We are acquiring a seismic program in and around the fields to support longer term drilling. As I said, we have got quite a few levers that we still have in our possession, in terms of delaying activities if we so desire, around Kalangar and some of the Foreland activity.
RE: OSH edited earnings call - jft310 - 02-24-2016
So in 2016 our focus has been very much on managing our cost base, looking at focussing on those areas that add significant value, obviously drilling Muruk prospect, Antelope 6 and possibly Antelope 7, depending on Antelope 6 results. We are acquiring a seismic program in and around the fields to support longer term drilling. As I said, we have got quite a few levers that we still have in our possession, in terms of delaying activities if we so desire, around Kalangar and some of the Foreland activity.
But most importantly, we are using the time to actually rebuild our portfolio for the future. So whilst it is a challenging time, we definitely see this as a period of opportunity. So thank you very much. I will hand over to Peter.
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Peter Botten, Oil Search - MD [7]
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Thanks Keiran I will now just summarise where we are at and give some general comments about where we see some of the key issues facing our company in 2016. Of course, I can't -- although I am not an expert on oil price or LNG pricing, I can't quite avoid making a few comments about some of the fundamentals that are taking place in our industry and how we look at those into the future.
Clearly, it is a volatile, challenging environment. But also one that I feel is one of the more exciting times in the oil and gas space that I have seen in almost 40 years. I have been couched not to use a quote from Forrest Gump. But life is like a box of chocolates. I like the soft centred one myself. But there are some substantial opportunities that are before us, as this industry evolves through this cycle. In the short term, clearly there is opportunities for the oil price to go lower. Current production is outstripping demand by somewhere between 1.5 million and 2 million barrels of oil per day.
The inventories worldwide are at the highest level in years. Iran is just about to ramp up its production. We also see weak demand for oil in various parts of the world, including China, Japan and Europe. But in other parts, more dynamic and more demand is present. Global industries' reaction has been savage, would make believe that there is over $400 billion of projects stalled. Last year there were only five major projects sanctioned in 2015 versus 40 to 50 in 2014.
Exploration is down 60% to 70% worldwide and obviously there is a major contraction in the business. We estimate somewhere around 35% of oil and gas people and personnel made redundant. Obviously, there is also very severe cost deflation, which is a positive if you want to go and build things in your -- your projects can get sanctioned, with obviously boards and management around the world of oil and gas companies being highly cautious of where the oil price might go and making sanctioned decisions in such a volatile environment.
Clearly I have been known, I think, to be an early and strong supporter of a lower for longer scenario for oil and gas prices. That is certainly the way we will continue to run our business in 2016. However, as you look at the forecast, and I stress they are forecasts in the top right-hand slide. They do see as supply and demand balance out and that there will be a slow, progressive rise of oil price, which actually I endorse. You can see that with the lack of conventional -- of commitment to conventional oil and gas projects, there will over a three to five year timeframe be substantially a material drop in production from those -- from conventional fields, which combined with natural decline, inevitably means that they have to be made up somewhere.
Sooner or later the price will rise. So I am an a medium term optimistic frame of mind, to say that this oil and gas sector in its present form, without fundamental restructure, is unsustainable. I don't think that structural change will be enough to change the fundamentals that supply and demand will take over, with supply being less and demand being slightly more. You don't need very many barrels to change that supply/demand scenario. I don't believe you will see $100 anytime soon, certainly not while I'm working in this business. But at the end of the day, the lower it goes, the faster it will come back.
However, that is all good information. But it's not the way we are running our business in 2016. In reality, we will continue to run it in a lower for longer scenario. But also take judicious views about future investment, given the strength of our balance sheet and the tangible, touchable projects that we have which work in any reasonable oil price scenario in the long term. The LNG pricing outlook is much less clear. Clearly the lower pricing for LNG is driven in part by lower oil prices. But also the actual industry is undergoing what I think to be a significant revolution, with new project commissioning happening through 2016, which will result in a substantial amount of gas, LNG available for spot sales.
You can see LNG pricing going from $8 to $9 and Btu spot sales certainly will be in the $3 to $4, in our view, during 2016. So managing uncontracted volumes is key focus for us, as it, I know it is for ExxonMobil. There is the potential with such a large volume of LNG coming into the market, a potential for oversupply, certainly into the early 2020s. So you have to be competitive if you want to see these things move forward. As the projects simplify, as we are moving away from typical upstream, midstream, downstream projects to tolling arrangements, difficult now in the US.
That this industry is morphing and something we need to be mindful of in the business, in our development business. As we move to a much greater tradability of commodity for LNG around the world. Certainly the best projects are the only ones that will get up and I think we've got two of the best. If I move to PNG, clearly PNG LNG is an outstanding success. It has been developed and operated now in a world class manner by ExxonMobil and they should be very much congratulated in their efforts to date and future efforts clearly focussed on expansion. This is a good project for them. It's a great project for us.
PNG LNG is recognised as a world class project. It is performing well above nameplate. It has had a significant positive impact on the perception of Papua New Guinea, with strong customer financing and investor support across the board. Certainly, the expansion of PNG LNG and Papua LNG remain a very clear focus for both ExxonMobil and Total, with a series of aligned partners and a very supportive government. Ian mentioned, as far as we see, the development -- this environment of stretched or low commodity pricing is an ideal environment to learn the lessons of the past.