Section 3.6- Final Resource Certification (And Payment)

[Palm]

I believe people should read Section 3.6 which is part of the Sale. We have focused on the Completion Payment, the Interim Payment, the FID Payment, The Discovery Bonus, and the First Cargo payment. However, why no mention of the Final Resource Payment in Section 3.6?

"3.6 Final Resource Certification

(a) At any time during the period:

(i) commencing on the date that the First LNG Cargo leaves port; and

(ii) ending on 60 days after the last day of the calendar month in which Hydrocarbon Gas that is produced from the PRL 15 Fields reaches twenty-five per cent (25%) of the amount of the PRL 15 2C Resources set out in the Interim Resource Certification, the Seller, by notice to the Buyer under this clause, may require a Final Resource Certification. The date on which that notification is given is the “Trigger Date” in relation to the Final Resource Payment. Following this Trigger Date, the parties will procure the Final Resource Certification in accordance with Schedule 6 and the Final Resource Certification Instruction. Any notice purportedly given under this clause on a day that is not within the period described in this clause is invalid and ineffective. If the Seller fails to give notice under this clause 3.6(a) prior to the date specified in clause 3.6(a)(ii), the “Trigger Date” in relation to the Final Resource Payment shall be the date specified in clause 3.6(a)(ii).

(b) If the Final Resource Payment is:

(i) greater than the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8), then the Buyer must pay an amount equal to the Final Resource Payment minus the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8) to the Seller; or

(ii) less than the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8), then the Seller must pay an amount equal to the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8) minus the Final Resource Payment to the Buyer.

All payments under this clause 3.6(b) must be made in Immediately Available Funds without counter-claim or set-off within ten (10) Business Days after the Final Resource Payment Date.

© The Buyer must consult or must procure that the Operator consults in good faith with, and keep the Seller duly informed at all times, of the progress and the amount of Hydrocarbon Gas production from the PRL 15 Fields in accordance with the PRL 15 JOA."

I believe this offers a great potential even though it only is obtained if we actually get the LNG project. This payment is subject to the Interim Payment table whereby anything above Interim period amounts is added to the Interim amounts.

Also elsewhere it states that what is included in the final certification is "any future well" which ends up being included in the PRL15 fields. So we may get Discovery Bonus payments "only" on the amounts proven up by one well, but further delineation and certification gets us additional amounts down the road from Total for the amount they end up owning in PRL15.

If anyone reads this differently, obviously you will speak up. I believe this was missed because the Section 3.6 title is Final Certification and the "Final Payment" wording is buried within it. If this is the case, how common is it for a SM to do this? Did others see this and already mention it? If it is correct, how big can this be for us in our calculations?

[jft310]

Glad Hession dumbed it down this is complicated and you don't get it all the first time through

thanks Palm

[Palm]

Thing is I doubt shorts missed this and it's why they are saying Total only thinks there is 5.4 TCFE or less. But I believe otherwise. The Interim table includes the $1.00 as "anything" above the top of 6.5 TCFE. And they mention all of the payments EXCEPT the FINAL RESOURCE PAYMENT. So they will argue 5.4 or less is what Total expects or that no project will ever get built because they know the huge upside potential blows their arguments out of the water. Yes, it's down the road, but it also is why Hession used large numbers in the CC for the upside potential when discussing the "Elephant". If Deep Antelope is there and by pressure communicates with Ant, and it's as large or larger than Ant, it's all subject to the high tier /mcfe amount at whatever Total owns at Final Certification less what they paid at Interim.

[Crippsfl]

Thing is I doubt shorts missed this and it's why they are saying Total only thinks there is 5.4 TCFE or less. But I believe otherwise. The Interim table includes the $1.00 as "anything" above the top of 6.5 TCFE. And they mention all of the payments EXCEPT the FINAL RESOURCE PAYMENT. So they will argue 5.4 or less is what Total expects or that no project will ever get built because they know the huge upside potential blows their arguments out of the water. Yes, it's down the road, but it also is why Hession used large numbers in the CC for the upside potential when discussing the "Elephant". If Deep Antelope is there and by pressure communicates with Ant, and it's as large or larger than Ant, it's all subject to the high tier /mcfe amount at whatever Total owns at Final Certification less what they paid at Interim.

Not being as informed on some of these transactions as many of you are, would someone correct me if I have this wrong??  As I read this, none of this occurs until 25% of the amount od the interim resource estimate has actually been processed and shipped.  So at that point we will do additional resource estimates  to determine what is probably left in the field.  At that point, if they find that there is more gas than originally thought, IOC get a final resource payment based on the agreement.  If the amount is less than originally thought, IOC gets to write a check to Total for the difference.  Obviously, this is quite a bit down the road considering we haven't even started building an LNG plant.

[Palm]

Cripps,
That is almost correct. Note Seller is the one who calls the time of Final Certification and they can call for it at ANY time after first cargo but NO LATER THAN the 25% of production. One would almost have to assume that IOC would call for it just after first cargo. If they waited until the 25% it would be because waiting that long provides for material upside from first cargo, and they have substantial cash already in hand. And it's not for any excess above what's been produced; its for:

"The Final Resource Payment shall be calculated in accordance with the following formula:

(a) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is less than 3.5 Tcfe, a nil amount; or

(b) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is equal to or exceeds 3.5 Tcfe but is less than 5.4 Tcfe, an amount of 0.60 US$ for each such mcfe in excess of 3.5 Tcfe to a maximum of 5.4 Tcfe, multiplied by the Assigned Interest; or

© if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is equal to or exceeds 5.4 Tcfe but is less than 6.5 Tcfe:

(i) the amount calculated in paragraph (b) above using 5.4 Tcfe; plus

(ii) an amount of 0.80 US$ for each such mcfe in excess of 5.4 Tcfe to a maximum of 6.5 Tcfe, multiplied by the Assigned Interest; or

(d) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification exceeds 6.5 Tcfe:

(i) the amount calculated in paragraph © above using 6.5 Tcfe; plus

(ii) an amount of 1.00 US$ for each mcfe in excess of 6.5 Tcfe, multiplied by the Assigned Interest"


Again, it provides for far more cash than shorts and even some here before now likely felt IOC could get EVER. Compare this to any resource payment OSH received from Exxon for PNG LNG. Anyone know how much OSH received for resource I. That project?

[Thylacine-2]

Cripps, That is almost correct. Note Seller is the one who calls the time of Final Certification and they can call for it at ANY time after first cargo but NO LATER THAN the 25% of production. One would almost have to assume that IOC would call for it just after first cargo. If they waited until the 25% it would be because waiting that long provides for material upside from first cargo, and they have substantial cash already in hand. And it's not for any excess above what's been produced; its for: "The Final Resource Payment shall be calculated in accordance with the following formula: (a) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is less than 3.5 Tcfe, a nil amount; or (b) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is equal to or exceeds 3.5 Tcfe but is less than 5.4 Tcfe, an amount of 0.60 US$ for each such mcfe in excess of 3.5 Tcfe to a maximum of 5.4 Tcfe, multiplied by the Assigned Interest; or © if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification is equal to or exceeds 5.4 Tcfe but is less than 6.5 Tcfe: (i) the amount calculated in paragraph (b) above using 5.4 Tcfe; plus (ii) an amount of 0.80 US$ for each such mcfe in excess of 5.4 Tcfe to a maximum of 6.5 Tcfe, multiplied by the Assigned Interest; or (d) if the volume of PRL 15 2P Resource plus the volume of Hydrocarbon Gas or Condensate produced from the PRL 15 Fields prior to the date of the Final Resource Certification exceeds 6.5 Tcfe: (i) the amount calculated in paragraph © above using 6.5 Tcfe; plus (ii) an amount of 1.00 US$ for each mcfe in excess of 6.5 Tcfe, multiplied by the Assigned Interest" Again, it provides for far more cash than shorts and even some here before now likely felt IOC could get EVER. Compare this to any resource payment OSH received from Exxon for PNG LNG. Anyone know how much OSH received for resource I. That project?

Palm, as I read it, the agreement provides a payment for any increase in the Final Resource Certification of the PRL Fields (Elk and Antelope)  from the Interim Resource Certification.  How can you be sure that is such a large amount of cash?

[Palm]

Thylacine, really can't be "sure" of anything. But what this allows for is whatever upside can be proven up to the time of 25% production as specified. We have all had great confidence in what IOC has. The great line is, "I have confidence in the resource, but not in management". But that now seems to be in question because shorts, etc have made everyone think that the value of this deal (even ultimately) will be based on no more than 5.4TCFE. And why? Because of a PR by Total which mentions 5.4 TCFE; the minimum on which they have to pay much of anything at Certification.

I have a very hard time believing that Total REALLY thinks all that's there is enough for one train. $613 million at close is not "cheap insurance" if you really think there's 5.4 TCFE or less in PRL15. Shorts want to value the deal mainly on the basis of the PR. I don't think most PRs are able to fully encompass the extent of a deal such as this.

So do we really believe in the resource, or did we really just want a big payoff upon deal announcement? Because if we believe in the resource, then we'll eventually get paid for it upon Final Certification. As Hession said, most times things are very much slanted to FID, but then many games can be played. We are getting the $613 million at Completion, then we get anything above the 5.4 TCFE in an Interim Payment at the initial Certification. Then at FID we get the 3.5 - 5.4 tranch AND we can monetize the asset. Hession's main goal well could have been getting us to monetization and a very sure LNG project of which we have ownership. FID either with an Exxon expansion train or this project are likely about the same time-wise.

Currently the market is valuing based on a PR but I think after last week's investor meetings the analysts have a more clear understanding of what the deal is and what it can be. We were all thrown a curveball instead of a fastball down the middle. But as I pour through the SPA more, I find more and more potential for us IF we assume that the resource really is what have been thinking all along. If FID is about the same time for Exxon as it is for Total, and the resource is for real, which deal ultimately is better? With Total we will ultimately get paid for the resource that's there, and if GLJ's numbers end up bring closest, it's a nice payoff probably not long after first shipment. I don't think many realized that. Even though it's later than most would have liked, did we really expect it all to be paid up front? How common is that except in a complete buyout?

Nothing's for sure, but as I keep working on this model new upside continues to pop up. That's if you still believe in the resource as we knew it. In the end one of the best scenarios is that they can get to the GLJ P50 at Certification or at least close. Then if they can show "communication" even better. If the one exploration well hits AND there's communication, we'll get some Discovery bonus at then then highest tier. But then we have until at least First Cargo to further delineate that or other fields within PRL15 which have communication. We then get compensation per the tier structure at Final Certification and Final payment. It's impossible to know today whether there are one or more fields in communication, but at any point from now until Final Certification those can be discovered and delineated as much as possible to maximize and Final Payment per the tier structure.

[SamAdams]

Thanks for all the work Palm. People need to realize this was the best deal for IOC, both on a $ per mcf basis and for sure on the LNG participation stake. There was no big payoff from XOM tossed aside to take this deal. TOT is comfortable with the size of E/A ( my inference 2 trains) per MH. The tranches, re-certification is all SOP. MH and new management got the deal done. They did not want to get stuck with the XOM deal from MAY, but they should have reset price expectations sooner on the sell down. If they had done that when the stock was in the $60s, perhaps the stock would have moved up instead of talking up getting the deal done knowing the $ per mcf was out of whack with the few street analysts and most all longs. Water under the bridge but a mistake on their part. Good deal LT but this will all take time.

[Palm]

Agree Sam, no doubt disappointment, especially by those with short time horizons and/or expectations. Fortunately I can live with what now appears to be the better deal and it's time horizon. I also agree with your 2 train at least comment. I think this is structured as fairly as an SM can do. They know they have to keep IOC lean and focused on reaching necessary goals; much like OSH us for XOM. But Total is willing to reward IOC for what they prove up by Certification and then at Final Certification and Payment because at that time they have cash flow galore. They give IOC enough at Completion, Certification, and FID for them to operate and do some drilling outside of what Total carries.

Also once a PDL is granted the gov will kick in 22.5% of the sunk costs. BTW I believe Schedule 4 of the SPA gives us the info we need to calculate the sunk costs of PRL15. It's defined as the Petroleum Information and says that part of the Completion Payment ($613 million) is $337,840,401 which is Total's portion (61.3%). That likely means that PRL15 sunk costs are $551,126,266. So the gov opt-in for sunk costs likely will be $124,003,410 at granting of PDL.

Seems hard to believe that a SM would be willing to compensate for proven and possible new discoveries with communication like this, but on the other side, if there's no communication they get a bit of a bargain. Hession and Dave Holland seem pretty sure we have the goods. So prove it up boys.

[ebster123]

I too agree from here forward will be a grand future. If there is a total takeout this will be even sooner ( all be it less than long term). However, I suspect if many who git in 3 years ago ( negating the $39's dip) knew it would be another 1.5-4+ years until real payout they might not have invested then. In the end, the stock should do very well from here and for any with extra $$ or anyone lucky to not have been invested before, this seems like a great place to jump in!!!