Interesting story and perspective of the situation in which IOC and OSH sit.
Having spent much of last year living at commercial, and occasionally quite personal, loggerheads, the folk at Oil Search and emerging PNG gas exotic InterOil quite suddenly found that their once very separate interests have now firmly aligned.
The lens of this new intersection is, of course, Woodside Petroleum. Australia's pioneer in liquid natural gas has set its sights on becoming a regional power in the seaborne gas trade and that means it is seeking, rather belatedly, to acquire a beachhead in the coming LNG powerhouse that is Papua New Guinea.
This interest is a bit of a surprise only because it had long been held that Woodside was not up for the risk implied by massive, long investments in a politically volatile nation that has often struggled with the concept of sovereign risk.
That shibboleth was cast aside last month with Woodside's all-scrip $11.6 billion bid for Oil Search. Woodside's pitch was dismissed even before Woodside chairman Michael Chaney and his chief executive Peter Coleman got to deliver it to the target's board.
But there is thoughtful speculation here and the US that the New York listed InterOil might offer a cheaper and more easily secured pathway into PNG's big gas fields. There is speculation too that Woodside is involved in the great Santos fire sale and that the West Australian's very particular interest is a 13.5 per cent stake in the PNG LNG project that motivated Coleman's interest in Oil Search.
That other options exist could well have informed the calm that saw Coleman make it clear to Oil Search that he has little interest in increasing the offer spurned.
This appears to be of little concern to Oil Search. On Tuesday its cannily robust chief executive, Peter Botten, took the opportunity of a quarterly production report to remind his owners that the Woodside approach was "highly opportunistic, grossly undervalued the company and diluted the growth profile available to Oil Search shareholders".
"In addition, the Board saw very few synergies given there is no asset overlap (with Woodside)," Botten advised. "Oil Search is in a robust financial position and has access to competitive priced project finance for its LNG growth opportunities, which are operated by highly regarded global majors, ExxonMobil and Total."
And here is where the two streams of our PNG gas story merge.
The Exxon-owned PNG LNG project is fed by a suite of gas discoveries made by Oil Search. Oil Search retains a 29 per cent stake in that project and boasts interests of varying degrees in the gas projects that support it.
French major Total is leading a second LNG project in PNG. It will be fed from gas fields discovered by InterOil. It is an Alaskan incorporated, New York listed, Singapore-based explorer that was fathered by a Texan named Phil Mulacek. He paid $US2 million for a mothballed oil refinery in Alaska back in the early 1990s and then shipped it to Port Moresby where he rebuilt it and opened a chain of petrol stations. Then on hearing there was gas in them thar hills, Mulacek acquired some exploration territory and took a converted minerals drill up there to almost immediately identify the Elk-Antelope gas discovery.
Mulacek and InterOil parted ways early in 2013 with former Woodside executive Michael Hession getting the gig. Hession is convinced Elk-Antelope is the biggest find anywhere in our region for 25 years. By year's end Total was also convinced. It beat out a very grumpy Exxon to be named as InterOil's operating partner in the increasing prospective gas fields.
Exxon had generally been considered the natural partner for InterOil because PNG LNG needed a fair bit more gas to feed the third train that has always been viewed as the cream on the pie for the economics the project. But Hession and Total had other ideas. And so Papua LNG was born.
To Hession's great irritation, in February last year Botten inserted Oil Search into InterOil's future by buying out minority owners in the Elk-Antelope permits. Botten spent $900 million picking up 22 per cent of the fields. Botten then added fuel to the fire in Hession's belly by challenging the Total sale process on the basis that it ignored pre-emptive rights that he had just acquired.
The Total deal survived international arbitration and it paid $US401 million ($551 million) for a 40 per cent stake in the project. That deal embedded a series of milestone payments on certification of the project's gas reserves. Given recent progress of the appraisal program, which has indicated that the resource is bigger and likely to be more productive than previously thought, InterOil is on track for an additional $US1.5 billion of payments from Total. That is the good news.
The worrying reality for InterOil is that the upside of the Total payments sits in uncomfortable alignment with market capitalisation. The oil shock has been indiscriminate in discounting risk. InterOil's share price has more than halved since the heady days of the auction that introduced Total. Today it is valued at about $US1.9 billion ($2.6 billion). And, even after adding a reasonable takeover premium, InterOil finds itself comfortably within the $5 billion range of opportunism that Coleman has consistently defined for Woodside.
Woodside's move on Oil Search has loosed the spectre of industry consolidation on the PNG gas industry. In the land of very big oil, both Oil Search and InterOil stand relative minnows. Having accentuated the positive, both now need to certify the Elk-Antelope resource as fast as technology can make positive.
To that end, ahead of Botten's spiky quarterly, InterOil confirmed it would deliver a second rig to the JV to bring forward the Antelope 6 appraisal well. The race is on."