11-16-2012, 02:39 PM
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.
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.