What does "In-Kind" Mean

[CesiumFormate]

My understanding is that the PNG government is entitled to a share of 22.5% of the gas as long as they pay their portion of the development and participate in financing the production.  $340 million has been spent so far on Elk/Antelope.  From Phil's words on the call and the way the Morgan Stanley report was written, I understand that PNG will get 22.5% of the gas "in-kind", with no investment/cost on their part.  They are free to do with the gas what they want; however, they will not be a participant in the LNG production project requiring them the put in their share of capital, nor will they have to pay 22.5% ($80M) of the development costs so far.  Can anyone clarify that I am thinking of this correctly.  If so, I believe it is a great deal for IOC and shareholders.  It takes many handcuffs off of IOC, and gives them much more flexibility in the future.  $80M is a small price to pay for what is likely $16B+ in value for E/A alone.

CF

[petrengr1]

I have not discussed this with the Company but my guess is that the Government will still have to pay a tolling fee for the CSP and pipeline. They will also have to pay their share of the sunk cost for the field development.

“In Kind” means they will take their share of the gas (22.5%) as “dry gas” instead of money. They then have the option to use the dry gas for any purpose they want without having to pay for 22.5% of the LNG plant. They will also be entitled to 22.5% of the condensate but they may prefer to let IOC handle it for them for cash instead of taking it "in kind".

They could use their gas for power generation, fertilizer plants or any other gas based industry.

Here is one for you from left field. They could sell it to Exxon while they are waiting for their Power Plants, distribution network and Fertilizer Plants to be built. They could probably get $5-$7/MCF for it without having to pay for an LNG plant.

Just something that occurred to me and, therefore, just an opinion

[Putncalls]

If they get 22% of the initial production that would be about 1MTPA. At 7 bucks/MCF that is 350$/tonn or 350 million per year. If they used that energy at 45 MJ/Kg that would be 45 trillion joules per year there is 3.6 million joules in a KWH. If 2 thirds of that was lost generating electricity that would be 15 million KWH a year.

[Putncalls]

OOOPs th,at 45,000 trillion joules for a megatonn. or 4.5 billion KWHs

[TxPm]

Pet, in your opinion then is this very beneficial to IOC & if so in what ways or is it neutral.

[CesiumFormate]

I have not discussed this with the Company but my guess is that the Government will still have to pay a tolling fee for the CSP and pipeline. They will also have to pay their share of the sunk cost for the field development. “In Kind” means they will take their share of the gas (22.5%) as “dry gas” instead of money. They then have the option to use the dry gas for any purpose they want without having to pay for 22.5% of the LNG plant. They will also be entitled to 22.5% of the condensate but they may prefer to let IOC handle it for them for cash instead of taking it "in kind". They could use their gas for power generation, fertilizer plants or any other gas based industry. Here is one for you from left field. They could sell it to Exxon while they are waiting for their Power Plants, distribution network and Fertilizer Plants to be built. They could probably get $5-$7/MCF for it without having to pay for an LNG plant. Just something that occurred to me and, therefore, just an opinion

Pet,

I don't think that is from left field at all.  Getting gas to the Exxon plant from E/A helps everyone.  I believe I posted a couple of months ago that I thought that the Exxon plant would be the quickest way to get FID.  Once the gas is no longer stranded, the resource can go on the books even if IOC does not get cash flow from it.  It would only take an approved plan to get gas to the Exxon pipeline.  The FID on the 3.8 MTPA plant then becomes a secondary decision albiet, very important for cash flow.

CF

[petrengr1]

If they get 22% of the initial production that would be about 1MTPA. At 7 bucks/MCF that is 350$/tonn or 350 million per year. If they used that energy at 45 MJ/Kg that would be 45 trillion joules per year there is 3.6 million joules in a KWH. If 2 thirds of that was lost generating electricity that would be 15 million KWH a year.

They will undoubtedly  have far more gas than they can use for electricity for the local people. Early in the life of the field they will have to sell it or use it for industrial purposes. They do not have enough distribution or enough people in the local area to use all of the gas for electrical generation. They will need some power generation for their newly installed industry and some for the people as they get the distribution infrastructure installed.

[petrengr1]

Pet, in your opinion then is this very beneficial to IOC & if so in what ways or is it neutral.

I think it is beneficial for IOC, for the Government and for the people. It let's the project move forward to the sell down phase so that the LNG plant can be built and the gas sent to market. The Government gets to opt in for their 22.5% without having to come up with their share of money to pay for the LNG Plant. The Government can then use its money to develop the infrastructre for the people i.e. roads, bridges, power lines, hospitals, schools etc. Once gas sales begins from the LNG Plant the Government and People should receive further benefits from the taxes paid by the Operating Partners.

[TxPm]

Thanks. It seems to me like the greatest benefit to IOC is that now there is no reason for PNG to delay the NEC approval or FID. If all the govt has to come up with is $80Mil for sunk costs & they don't have to worry about the project running over budget & coming up with additional funds like they are with the Gulf project then it's in their best interest to get the project up & running ASAP & get the gas out of the ground. The govt could easily get Exxon to cover their share of the sunk cost In exchange for a piece of their gas or better yet get their official partner Shell to cover the sunk costs in exchange for a piece of their gas

[ArtM72]

If they get 22% of the initial production that would be about 1MTPA. At 7 bucks/MCF that is 350$/tonn or 350 million per year. If they used that energy at 45 MJ/Kg that would be 45 trillion joules per year there is 3.6 million joules in a KWH. If 2 thirds of that was lost generating electricity that would be 15 million KWH a year.

My calcs are a little different, showing 1 MTPA to be roughly 659 megawatts of electric generator capacity running 24/7.  Key conversion factors being  49,200 cubic feet per metric ton, .2931 watt-hours per BTU, 1,000 BTU/cf, 40% generating plant thermal efficiency.

So  my bottom line would be that 1 MTPA would be plenty adequate for around 1,000 megawatts of electric power generation capacity.  Somebody with a "rule of thumb" handbook should confirm.