What does "In-Kind" Mean

[Putncalls]

It said two separate facilities. Not two separate LNG facilities.

[admin]

Well, we'll just have to see. I'm assuming that the IPI's and Civelli are also on the hook here so the absolute worst case scenario is we lose what? 20% of E/A, thereabouts. That would quite surprise me, it's against their own law, there isn't any precedent for it on PNG, it goes against the everything we've heard of a cooperative relation, etc.

The most probable case is it would be sold at commercial terms, that is, the same terms as the partner buy-in. There might be a few other concessions on tax regimes, but I can't see this as something terrible:

• Much of it has been priced in already, exactly on this fear did we go from $90 to $60
• I've long argued in favor of, when necessary, conceding on terms and/or selling more of E/A in order to be able to explore and develop more of these possible reefs. There are quite a few of these..

Liam Fox argued it was a $3B deal. Yes, he also argued that it's not clear where that money will come from, but there are more than one possibility here: Shell, Exxon, offtake agreements, to name a few. My money would be on Shell, they came to PNG for a purpose, but who knows. What I do know is that half E/A contains more gas to power PNG several times over, they clearly have a customer for it, or at least in mind.

Little of that is likely to be upfront, but IOC will get enough money from the other sell-down to accelerate exploration, and they could do a few more PRE-type farm-ins as well.

In exchange, much of it will be derisked, we'll have a path to monetization and accelerated exploration. The only ones who will be really disappointed are the ones who counted on a super dividend, but I wasn't amongst them, I have to say.

[Hoosier1]

Is that doc real? I couldve created something to look better than that... just asking..
h1

[Hoosier1]

nevermind... got the post courier article

[jft310]

I have not discussed this with the Company but my guess is that the Government will still have to pay a tolling fee for the CSP and pipeline. They will also have to pay their share of the sunk cost for the field development. “In Kind” means they will take their share of the gas (22.5%) as “dry gas” instead of money. They then have the option to use the dry gas for any purpose they want without having to pay for 22.5% of the LNG plant. They will also be entitled to 22.5% of the condensate but they may prefer to let IOC handle it for them for cash instead of taking it "in kind". They could use their gas for power generation, fertilizer plants or any other gas based industry. Here is one for you from left field. They could sell it to Exxon while they are waiting for their Power Plants, distribution network and Fertilizer Plants to be built. They could probably get $5-$7/MCF for it without having to pay for an LNG plant. Just something that occurred to me and, therefore, just an opinion

 Pet we agree 100%. Its possible PNG govt buys IOC NG at maybe $2.85 the PRE price metric,IOC makes money. Then  Exxon buys from the PNG govt at the $5-7 and then PNG govt gets money to build infrastructure. Could happen. Exxon agreement is just terrible for the people of PNG. Exxon has contracts to sell their LNG at $16 mmbtu. Poor Exxon only makes 100% or so on their money.IOC and the PNG govt do quite well in this scenario

[TxPm]

I just re-read the entire CC transcript and I really feel like we are missing a piece of the puzzle here. Phil mentioned on 4 different occasions gas-in-kind something just isn't adding up.

[bertl05]

I feel the same way Txpm. But for the life of me I can't make sense of it. The dots aren't connecting for me tonight.

[Palm]

I believe the connection is this. When these projects are done they are fully integrated. The partners all pitch in a % of the development costs, then at production, through offtakes, market value revenues are received creating a return for investors which is then divided proportionally. With this arrangement PNG is basically saying that they have these great needs for hospitals etc to have electricity but it's silly for us to pay market value for the gas as fuel to power plants when that power is for our own gov owned facilities. So for our share of the gas for these uses we will take the gas itself as payment in-kind toward our investment in the project. Basically we want to break even on that 22.5% investment here to have cheap fuel for the power plants which energize necessary development. We are saying we will offer free healthcare and education so we need low operating costs. This helps us develop more quickly.

This is why they then need the option of buying in a higher % of EA. As Puts has said, there will be more than enough gas especially initially above what PNG needs for power and they can then get more return to help offset the break even portion. The "magic" will be in the estimates they come up with for the domestic needs and then how much they feel they need above the 22.5% to give them a good overall return. Then of course is how they fund that "extra" %. I have a feeling though that China and others are much more willing to provide loans/carry for PNG because they will see specific projects being carried out.

The next 2 weeks will be very active as they get this figured out. The thing we have to realize is that this is very god for IOC. They are the first developer to work with PNG like this and my guess is that the price PNG pays above the 22.5% sunk cost will be fair and equitable for both sides. And again, I think we will see EWC providing the power plants. For LNG I think they also have a good chance.

[Palm]

Here is a link to a paper that explains (from a US perspective) how an in-kind royalty payment works. It explains how the states of Louisiana Texas and California have used it for different state run or state funded facilities. You have to think about all of the funding sources here in the US for these programs and the idea is to overall cut the funding needs by keeping overall costs low.

http://dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&pid=191

[jft310]

It is not nationalizing the asset. The O&G Act clearly states that the State pays sunk cost for its initial 27.5% and must pay market for anything above. It also states this must be hammered out by Nov 30, 2012. PNG must be able to prove that it can front the additional 27.5% of upstream development cost to make the project bankable. They state this is a very important project and by making this election must be sure that it can be "fast-tracked". So is this how Shell will buy in? Who knows but this is anything but bad.

Confused read Palms post!!!