How much $$ must OSH pay PAC LNG after certification?

[Stavros]

It's my understanding that OSH acquired 22.84% of E/A from Pacfic LNG. The payment was for up to GROSS of 7 tcfe in E/A (i.e., 0.2284 x 7 = 1.6 tcfe acquired by OSH). This comes to $0.563 per mcf.

To my knowledge, OSH must pay an additional $0.77 per mcfe for any 2C Resources certified above 7 tcfe.

Suppose the 2C Resource Certification (Gas + Condensate + Oil) comes in at 10 tcfe. That means OSH would be required to pay for an additional 3 x 0.2284 = 0.685 tcfe.

For the additional 0.685 tcfe OSH would pay $0.77 x 685,000,000mcf = $527 Million

Does anyone have better numbers than these?

[Putncalls]

I thought it was an extra 200 million if the 2C E/A certification wast above 7TCF?

[Stavros]

The extra payment depends on how much larger the resource is.
Are you saying $200 million extra per additional one tcfe resource?

By my calculation it comes to $176 million per additional tcfe .... a bit lower

[jft310]

Are you thinking Oil Search might be short money to cover payments to PAC, Exxon 3rd train and Papua 2 train .
What's your estimate of a PNGLNG 3rd train build ??is $8 Billion close..?Oil Search 29 percent
What's your estimate of Papua 2 train build ?is $16 Billion close ?Oil Search 22.8 percent .
Assume 70 percent financing . .

[Stavros]

JFT:

1. PNG LNG Train 3 (one additional copy): I would guess on the order of $6 Billion since there's no investment required for Gas Conditioning Plant, Pipeline, Airport, Storage Tank, Site Preparation, etc, and costs have come down by as much as 20% in the past year of turmoil.

OSH contribution is 29% ... $1.74 Billion in total; 30% CA$H ($525 million) and 70% LOAN ($1.21 Billion)
Of course, the cost is spread over a period of about 4 years with about 30% spent in the highest-cost year 2.

2. Cost of the Papua LNG 2-Train Build of course depends on the capacity of each Train. If we say 3.5 million tons per annum per train (ie same as what has been demonstrated by PNG LNG) then $16 Billion is a reasonable first guess.

OSH contribution is (22.84 x 0.775)% after Govt takes their 22.5% .... $2.83 Billion in total; 30% CA$H ($850 Million) and 70% LOAN ($1.98 Billion)
In this case, the period is more like five years and the maximum might be 25% in Year 3.

3. Payment to Pacific LNG - Unknown $$$. Let's hope it's $600 Million all paid in CA$H in mid-2016

Lots of new borrowing would be required .. but spread over the next 6 years, during which time they would have revenue from PNG LNG but pay Dividends plus Operating Expenditures plus repayment of existing debt.

A key point is that OSH's "Gearing Ratio" at the end of 2014 was about 40% (US$10.7 Billion assets and US$4.4 Billion in total Debt)

In their Annual Report they said:

"We remain focused on rigorous financial management and fiscal discipline, with capital, gearing and liquidity to be conservatively managed. Our aim is to be in a position where we can fully support the required investment in our key potential lng growth projects, while still rewarding shareholders with dividend distributions, in line with the new dividend policy."

WILL THEY BE SHORT OF MONEY?
It seems to me that the answer is YES ... BUT I'm only a Chemical Engineer!

[Tusker]

It's my understanding that OSH acquired 22.84% of E/A from Pacfic LNG. The payment was for up to GROSS of 7 tcfe in E/A (i.e., 0.2284 x 7 = 1.6 tcfe acquired by OSH). This comes to $0.563 per mcf.

To my knowledge, OSH must pay an additional $0.77 per mcfe for any 2C Resources certified above 7 tcfe.

Suppose the 2C Resource Certification (Gas + Condensate + Oil) comes in at 10 tcfe. That means OSH would be required to pay for an additional 3 x 0.2284 = 0.685 tcfe.

For the additional 0.685 tcfe OSH would pay $0.77 x 685,000,000mcf = $527 Million

Does anyone have better numbers than these?

What is the difference between 2C and 1P in your calculations?

[Stavros]

Great question Tusker:

MY UNDERSTANDING:

1P is Proven Reserves - 90% probability of being in place.

Other categories are 2P and 3P

Official Business Definition of 2P: "Quantity of energy sources estimated with reasonable certainty, from the analysis of geologic and engineering data, to be recoverable from well established or known reservoirs with the existing equipment and under the existing operating conditions."

These reserve categories are totalled up by the measures 1P, 2P, and 3P, which are inclusive, so include the previous safer measures as:

"1P reserves" = proven reserves (both proved developed reserves + proved undeveloped reserves).

"2P reserves" = 1P (proven reserves) + probable reserves, hence "proved AND probable.

"3P reserves" = the sum of 2P (proven reserves + probable reserves) + possible reserves, all 3Ps "proven AND probable AND possible

2C Contingent Resources are not yet Reserves.

2C is in general equivalent to 2P.

TAKE A LOOK AT THE ATTACHED PRESENTATION PACK FROM GAFFNEY CLINE & ASSOCIATES

It's the best summary I've come across.

Perhaps Petrengr1 can summarize it in less than the 40+ slides it took GCA????

[Putncalls]

If OSH is trying to conserve money can they slow down the certification process by pushing for the slow road?

[Stavros]

If OSH is trying to conserve money can they slow down the certification process by pushing for the slow road?

Personally I don't see how OSH can slow anything down. Below are some of my thoughts:

OSH pays Pacific LNG for "overage" after the drilling/testing data is available from TOTAL and IOC who did the work. That's a contractual obligation OSH has in their agreement with Pac LNG. It has nothing to do with the appraisal/testing program being undertaken by TOTAL/IOC.

The SPA between IOC and TOTAL spells out exactly how the E/A certification process plays out (see attached).

Once all the agreed Appraisal Wells are drilled and the final piece of data is collect, they must immediately hire two independent Experts to do the evaluation. So TOTAL can slow down the process if they so choose.

Today TOTAL have 12 million ton per annum capacity; they want 20 million by 2020.

BUTT ... I can't fathom how TOTAL plan to get there without counting Papua LNG because ...

1. The 6.7 million ton per annum Balhaf LNG plant in Yemen is shut down so NO CASH FLOW from the 40% owned by TOTAL (2.7 million tpa); Ergo they cannot currently produce the target of 12 million per year. Will it ever come back on stream and be a reliable LNG production sourse for TOTAL?

2. The upcoming Ichthys LNG Plant is 8.4 million tons per year; TOTAL has 30% share. That comes to 2.5 million tpa of the 20 million tpa capacity they plan to have by 2020. That's a measurable part of the +8 new capacity they want to start up by then

3. The Yamal LNG Plant in Russia will EVENTUALLY be three trains, each at 5.5 million tons per annum. In the Investor's Day Meeting Patrick Pouyanne stated very clearly that the three trains will come onstream consecutively. He refused to say when the first one would start up. He only said that overall "Progress" of Train 1 is 30%. Currently they are struggling to get financing and then complete its construction by the end of 2017. TOTAL has 20% ownership, which comes to 1.1 tons per annum per train.

SO ... how the heck do they get to 20 million tons per annum by 2020? There are many options in the LNG universe. Three of them are:

1. Aggressively go ahead with Papua LNG and start it up by the end of 2020. It can theoretically be done if they reach FID by 3Q2016. Their 40% share would be 2.5-3.5 million tons per annum depending on the final size. ==> POSSIBLE

2. Buy out Santos from PNG LNG (16%) and immediately get roughly 1.1 tons per annum LNG production. ==> POSSIBLE; but they would be foolish to acquire Santos itself with their bad Australian investments in coal-based gas

3. Acquire OSH (29%) and thereby get their 2 million tpa share of PNG LNG ==> NOT LIKELY