A two-train Elk-Antelope project is expected to cost less and earn more than ExxonMobil’s two-train, 6.9 mtpa PNG LNG plant. (ExxonMobil)
Total and InterOil plan to start marketing gas from the promising Elk and Antelope fields in Papua New Guinea this year, while also deciding how to develop an LNG project that stands to benefit from the country’s proximity to Asian buyers.
The French operator, which farmed into the fields last year, aims to begin negotiating heads of agreements (HOAs) for LNG supplies in the second half of this year, and finalise sales and purchase agreements by Q1 2018, InterOil said in a presentation this week.
Furthermore, Total plans to complete the concept selection around mid-2015, carry out FEED work and issue a call for tenders between then and late 2016, and start construction in Q3 2017.
While there is significant optimism around the onshore Elk and Antelope fields – plus nearby, less-explored gas prospects – the timeline for starting offtake discussions may be overly ambitious, said Christopher Haines, an oil and gas analyst at Business Monitor International.
"Talking about HOA discussions from Q3 2015 seems quite optimistic, mainly because Total is still carrying out its own appraisal programme in the Elk and Antelope fields," Haines told Interfax.
The companies may have to proceed more slowly in light of the oil price slump, he added. "Lower oil prices are going to make it easier for LNG buyers to negotiate better contracts, so sellers probably wouldn’t get as strong a revenue stream as they could have a year ago, so negotiating may be harder. They may just want to wait until oil prices have stabilised."
Attractive prices
A two-train Elk-Antelope project is expected to cost less and earn more than ExxonMobil’s two-train, 6.9 mtpa PNG LNG plant, which was lauded last year for coming online six months ahead of schedule and below the cost of similar Australian developments – at $2,750 per tpa (see PNG LNG comes in early, below Aussie project costs, 29 April 2014).
The Elk-Antelope project would have a development cost of roughly $12 per barrel of oil equivalent (boe), break even at just below $8/MMBtu and generate an internal rate of return (IRR) of around 21%, InterOil said, citing Wood Mackenzie research. PNG LNG was developed for around $15/boe, breaks even at close to $16/MMBtu and has an IRR of approximately 12%.
The Papua New Guinea government’s clear support of an Elk-Antelope LNG plant and favourable fiscal regime, as well as the short distance to Asian LNG buyers, also boost the project’s prospects, InterOil said.
Analysts at Goldman Sachs agreed the country’s gas industry looks poised for expansion – at a time when the LNG market is growing by 4-5% per year – but the supply curve looks uncertain outside of the United States, they said in a report last month initiating the bank’s coverage of InterOil.
"We believe there is scope for a major expansion of capacity in Papua New Guinea, proximity to Asia, de-risked gas industry and low costs," the analysts said. "InterOil is a key beneficiary of this and may be able to leverage existing infrastructure – this is not fully priced by the market yet, in our view." They gave InterOil a ‘buy’ rating, with a 45% upside to their 12-month price target.
Risks and uncertainties
Of course, the oil price remains a key concern for the project, Goldman Sachs added. Brent crude slipped below $45.90 per barrel on Wednesday. The decline is taking its toll on long-term oil-indexed LNG prices, which are on a three-to-four-month lag.
But an even bigger uncertainty for the project is the size of the resource, which Total is now evaluating with a three-well appraisal programme.
"We believe funding would be a longer-term concern if the Elk-Antelope appraisal drilling disappoints and/or if capex is higher than we currently expect," the Goldman Sachs analysts said.
The Elk and Antelope fields are the largest discoveries in Papua New Guinea and are about half the distance to shore compared with the fields that supply PNG LNG. After drilling six wells and flow testing four, previous operator InterOil estimated the resource size to be 141-255 billion cubic metres, according to Goldman Sachs.
Nevertheless, a resource base of 150 bcm would supply one 5 mtpa train for around 20 years, Haines noted. "That’s the kind of project companies are going to be looking for, at a minimum, and there are many more prospects in Papua New Guinea as well. There’s more gas to be found, which could support an LNG project in the future, or an expansion of an existing project."
Total spudded two Antelope appraisal wells in September and December 2014 and plans to spud a third by the end of Q3 2015. InterOil is also in the middle of a five-well campaign in nearby fields, which it started in Q3 2014 and expects to finish in late 2015.
Total operates the petroleum retention licence for Elk and Antelope with a 40.1% share. InterOil holds 35.5% and Oil Search, a partner in PNG LNG, holds 22.8% (see Oil Search swoops into InterOil’s PNG permit, 27 February 2014).