More twists coming for PNG’s emerging LNG industry?

[Getitrt2]

I've made that same point 100 times JFT. I wasn't addressing that as the point Relker was making was someone stepping in for Total should OSH prevail in the Dispute. My point was that only OSH should be considered as being able to execute preemptive rights, since they are a party to PRL 15, not Exxon. Whether PNG recognizes them as an LNG operator able to step into any deal that they would accept is a whole different issue. That's the point (I believe) in this: OSH has said that they want the deal with Total set aside as they were not properly given the opportunity to the same deal terms first. They have also said that if they prevail, they do not see themselves substantially if at all increasing their PRL 15 ownership. I think that's why; their goal just might be having the whole deal tossed out due to the manner it was put together. I don't think many people understand that this is likely their objective.

If OSH does not want to step in in place of Total, perhaps in conjunction with some side deal with Exxon, why would they want to have the deal set aside, to enable new bids or what?

[jft310]

Palm- setting aside the Total deal means delay. A no win for anyone . I can't see the arbitrator setting aside the Total deal . Odds of that are near zero .
Interoil states OSH wants to replace Total . That can't happen for many reasons .
Botten blows smoke !!! Throws it up to see what happens !!
Civelli screwed up his timing and will lose is my take if it goes that far .
More realistically we have a grand deal of some type . Lot's of possibilities for deal components .
With more assets at PRL- 15 or outside PRL-15 the deals get interesting.
One analysts states Exxon has an Interest in the excess gas . That makes perfect sense.
How much is excess might be of issue . One or 2 for Total ?..

[Palm]

As we know Botten says something different every time he talks about the arbitration/Dispute as to how they see it playing out, what their "objectives" are, etc. But he has several times said that they can see the deal being set aside altogether since they were not properly offered the right to match the deal first. Ever since the filing of the Dispute he has talked about cooperating with IOC/Total in this and the goal is to develop the assets in the best and cheapest way for PNG, blah, blah, blah. But we can't underestimate what getting the deal set aside threatens; think about it. Ultimately it could be that it is just that; a threat which brings everyone together to make everyone, including PNG, "happy". way too (two to) many scenarios which can play out, depending on how much "cooperation" can be achieved before, during and after the arbitration is ruled upon.

But the "threat" of the deal being set aside is very real in Botten's mind. He says as much recently in the transcript of their recently published Strategic Review. When asked what OSH feels the result of the arbitration on PRL 15 will be Botten asks to be allowed to comment. He first expresses his grief over the death of Total's CEO, mentions how his mustache is inferior to Christophe's and that nighttime charter flights can be very dangerous and that's why OSH avoids them (strange comment), and then says:

"From the point of the view of the arbitration process. The arbitration is in the last week in November, that process is a clean process. It's not subject to appeal. It'll be either Oil Search has pre-emptive rights or it doesn’t. If it has pre-emptive rights it opens up a range of discussions and various outcomes can flow from those discussions. Right now I'd prefer not to go through the detail of that because obviously it has some commercial sensitivities. But at the end of the day represents an opportunity for cooperation, just having it there is an opportunity for cooperation whether deals stand or go away. But at the end of day we think in our analysis there's very substantial value in a cooperative approach. We've all seen examples where cooperation was not carried out, and unfortunately that seems to be a norm around the LNG business.

I think we sit, as does the government, with an almost unique position across all licences. Government as a regulator and a shareholder in Oil Search, and a 22.5% owner of every project. To consider how to legitimately bring the best possible outcome for the government and in this respect I think we're pretty well aligned with government to drive a sensible, commercial outcome which delivers value to all parties. But that doesn't mean to say that we'll succeed because other factors can play a role. But the next 12 months or so is exactly the opportunity for us to push very, very hard for as much cooperation as possible. Because it does bring value both in terms of capital and operating cost savings and time. We will be pushing very, very hard as a core part of our strategy to deliver that."

See that? "....there is an opportunity for cooperation whether deals stand or go away." He paints the "cooperation" picture as being fairly rosy, but I see it as OSH feeling they have a bit of a hammer, and it's up to IOC/Total as to whether they feel their attorneys are better than OSH's and/or this process is worth the risk of seeing it through to its end. As Botten says, it's a "clean" process with no right for appeal, etc. So the "Art Of The Deal" is being played out behind many closed doors with many possible outcomes.

[Palm]

Palm- setting aside the Total deal means delay. A no win for anyone . I can't see the arbitrator setting aside the Total deal . Odds of that are near zero . Interoil states OSH wants to replace Total . That can't happen for many reasons . Botten blows smoke !!! Throws it up to see what happens !! Civelli screwed up his timing and will lose is my take if it goes that far . More realistically we have a grand deal of some type . Lot's of possibilities for deal components . With more assets at PRL- 15 or outside PRL-15 the deals get interesting. One analysts states Exxon has an Interest in the excess gas . That makes perfect sense. How much is excess might be of issue . One or 2 for Total ?..

The arbitartor gives a rip about "delay"; his role is to rule on whether the Dispute is valid or not.  He's sitting in England and has no care about whether this could cause delays or not.  You may not see the arbitrator setting the deal aside, but what is that based on?  He will have volumes of information from both sides in front of him and listen to all kinds of verbiage from both sides.  We don't have squat other than the few bits we see in print or hear management spit out which is a tiny fraction of what the arbitrator will have.

As I said above, this is all about The Art Of The Deal; that's what these guys do on a daily basis in this industry, and they use all kinds of methods to try and strike a deal.  OSH/Exxon wants to max their project as quickly as it makes sense to do.  They'll do most anything to get the gas they need.  But they also have to keep the PNG government happy.  Lots of give and take, but the arbitrator could care less about the ultimate result of his ruling; he is there to rule on the Dispute.

[2126]

As I see it, the crux of the dispute that is being arbitrated is whether or not the OSH purchase of the PACLNG interest in PRL 15 invalidated the TOTAL/IOC agreement of December 6, 2013. If so, OSH would have pre-emptive rights by virtue of its purchase of the minority PACLNG interest which had those rights under the PRL JOA of 9/26/12 between IOC and PACLNG. I would imagine that the OSH argument is that when TOTAL/IOC reached a new agreement on March 26, 2014 (the SPA), the new agreement invalidated the original TOTAL/IOC deal in December 2013, thus triggering the OSH pre-emptive rights, which were acquired on March 13, 2014 with the OSH purchase of the PACLNG interest in PRL 15. Of course all of this is a bit complicated by the various entities involved: the SPA is actually between SPI (208) Ltd. (as IOC) and Total Holding International B.V. (at TOTAL). However, SPI (208) Ltd. was also a party to the PRL 15 JOA of 9/26/2012 with PACLNG, so that should not be much of an issue. The waters are further muddied by the SPA of 3/26/14 defining the 'completion date' as the date of the SPA (3/26/14) but the  'effective date' of the SPA as 1/1/14, which predates the OSH purchase of the PACLNG minority interest on 3/13/14. IOC could argue that the either the pre-emption rights went into effect on 12/6/13 with the intial TOTAL/IOC Agreement or, alternatively, the pre-emption rights went into effect on the 'effective date' of the TOTAL/IOC SPA on 3/26/14, which is 1/1/14.

Another wrinkle is that under the 12/6/13 TOTAL/IOC Agreement, there was a condition precedent that IOC purchase the outstanding minority interests, although TOTAL had the right to waive this condition. When OSH purchased those minority interests in March 2014, there is an argument that the condition precedent had not been met and thus, the 12/6/13 TOTAL/IOC Agreement is invalid and that it is only then, on 3/13/14, with the OSH purchase of the PACLNG interest, that the pre-emption rights came into effect. A further argument, by IOC, that is possible is that the PACLNG pre-emption rights began with the 12/6/13 TOTAL/IOC Agreement and that those rights had expired by the time OSH purchased the PACLNG interest, and that the SPA of 3/26/14 was merely a modification of the prior Agreement of 12/6/13 and not a new Agreement which would trigger a new pre-emption rights time period.

Another wrinkle is that IOC (through SPI (208) Ltd.) agreed to indemnify TOTAL for any losses, whether direct or indirect, due to the Indirect Participation Agreement (which by definition in the SPA includes the Indirect Participation Interest Agreement or IPI Agreement), whether such losses are before, on, or after the 'effective date' of the SPA. (See Articles 1.1 and 4.6 of SPA of 3/26/14). This indemnification clause could prove important depending how the arbitration turns out.

Often in complex arbitration cases, the parties will reach an agreement prior to either the arbitration hearing or the announcement of the decision. My feeling is that OSH's case is somewhat weak and that they hope to use the uncertainly of the eventual decision to push for some agreement with TOTAL/IOC to use E/A gas for additional an train or trains at PNGLPG. It will be very interesting to see the outcome of this case. I also agree that it is unlikely that, even if OSH were to succeed in overturning the TOTAL/IOC Agreement, the PNG government would allow OSH to step into the shoes of TOTAL.If OSH cannot do so, then their potentially hard-won pre-emption rights will be a moot point, only succeeding in delaying the entire process of moneteztion of E/A.

I welcome any corrections or additions to my analysis. I think that the IOC position is far stronger than the OSH position in this situation.

[jft310]

I am with 2126 .

[trans]

As I see it, the crux of the dispute that is being arbitrated is whether or not the OSH purchase of the PACLNG interest in PRL 15 invalidated the TOTAL/IOC agreement of December 6, 2013. If so, OSH would have pre-emptive rights by virtue of its purchase of the minority PACLNG interest which had those rights under the PRL JOA of 9/26/12 between IOC and PACLNG. I would imagine that the OSH argument is that when TOTAL/IOC reached a new agreement on March 26, 2014 (the SPA), the new agreement invalidated the original TOTAL/IOC deal in December, thus triggering the OSH pre-emptive rights, which were acquired on March 13, 2014 with the OSH purchase of the PACLNG interest in PRL 15. Of course all of this is a bit complicated by the various entities involved: the SPA is actually between SPI (208) Ltd. (as IOC) and Total Holding International B.V. (at TOTAL). However, SPI (208) Ltd. was also a party to the PRL 15 JOA of 9/26/2012 with PACLNG, so that should not be much of an issue. The waters are further muddied by the SPA of 3/26/14 defining the 'completion date' as the date of the SPA (3/26/14) but the  'effective date' of the SPA as 1/1/14, which predates the OSH purchase of the PACLNG minority interest on 3/13/14. IOC could argue that the either the pre-emption rights went into effect on 12/6/13 with the intial TOTAL/IOC Agreement or, alternatively, the pre-emption rights went into effect on the 'effective date' of the TOTAL/IOC SPA on 3/26/14.

Another wrinkle is that under the 12/6/13 TOTAL/IOC Agreement, there was a condition precedent that IOC purchase the outstanding minority interests, although TOTAL had the right to waive this condition. When OSH purchased those minority interests in March 2014, there is an argument that the condition precedent had not been met and thus, the 12/6/13 TOTAL/IOC Agreement is invalid and that it is only then, on 3/13/14, with the OSH purchase of the PACLNG interest, that the pre-emption rights came into effect. A further argument, by IOC, that is possible is that the PACLNG pre-emption rights began with the 12/6/13 TOTAL/IOC Agreement and that those rights had expired by the time OSH purchased the PACLNG interest, and that the SPA of 3/26/14 was merely a modification of the prior Agreement of 12.6/13 and not a new Agreement which would trigger a new pre-emption rights time period.

Another wrinkle is that IOC (through SPI (208) Ltd.) agreed to indemnify TOTAL for any losses, whether direct or indirect, due to the Indirect Participation Agreement (which by definition in the SPA includes the Indirect Participation Interest Agreement or IPI Agreement), whether such losses are before, on, or after the 'effective date' of the SPA. (See Articles 1.1 and 4.6 of SPA of 3/26/14). This indemnification clause could prove important depending how the arbitration turns out.

Often in complex arbitration cases, the parties will reach an agreement prior to either the arbitration hearing or the announcement of the decision. My feeling is that OSH's case is somewhat weak and that they hope to use the uncertainly of the eventual decision to push for some agreement with TOTAL/IOC to use E/A gas for additional an train or trains at PNGLPG. It will be very interesting to see the outcome of this case. I also agree that it is unlikely that, even if OSH were to succeed in overturning the TOTAL/IOC Agreement, the PNG government would allow OSH to step into the shoes of TOTAL.If OSH cannot do so, then their potentially hard-won pre-emption rights will be a moot point, only succeeding in delaying the entire process of moneteztion of E/A.

I welcome any corrections or additions to my analysis. I think that the IOC position is far stronger than the OSH position in this situation.

Bravo, very good thoughts 2126.  Way above my head.   Your nontes will open other minds on this situation.  My concern is that OSH has been delaying IOC progress for a long time, one instance or another.  This time around, they may want to delay progress into the November 2015 license deadline.   I've never trusted Botten.  Hope this concern is unfounded....trans

[Putncalls]

Palm,
If the deal was tossed out wouldn't IOC have to give back 400 million to Total?

[Palm]

That would be the case Puts. But I really don't think it will come to that. My worst case point here it to help people realize why PPS is at this level. Markets price in worst case with a company like IOC. These guys in the end want to get deals done and everyone has their "best case" they want to get to. No one will get all they want. It's how deals are made.

[Putncalls]

That is a concern given that would make IOC bankrupt. Vultures love bankruptcies.