Fate of remaining half of E/A

[Tree]

Duma has made a point to clarify that last Nov., NEC  provided conditional approval for IOC to develop half of the Elk-Antelope gas resources.  That is 4.6 T's+- and that would feed a 3.8 Mtpa Gulf plant.   4.6 T's is now eyed (legally) for a sale to XOM for PNG LNG expansion train.  Kavo/Duma are now vocal opposition in press.  Kavo/Gulf were expecting an LNG project and all the bribes, errr I mean wealth, associated.  What was intended for the other half of E/A approx. 4.6T's last Nov.?, apparently not a SPA with XOM.  Gov't does have  the right to opt in for half of E/A that's a  full 4.6T.  They would abandon their interest in the sale of 4.6Ts for PNG LNG.   Duma's antics are hard to explain unless he and Kavo are pushing hard for Gov't to act on that extra 4.6 T's gas and partner with RDS for a 3.8 Mtpa project in Gulf.  If so, RDS would want more gas than 4.6T and need to compete with XOM for it.  It was explained that Gov't opt in option is at same commercial rates as IOC/XOM deal for first 4.6T's and this could end run XOM and IOC for the 2nd 4.6 T's.  This is likely why 4.6Ts and IOC LNG optionality were outlined in the IOC/XOM exclusivity PR.

[Tree]

This also explains Duma's recent 180 day threat to IOC.
'IOC, if you don't commit to Gulf LNG, I the Hon. Wm. Duma will cancel your project agreement and bring in a ready RDS to develop 4.6 T's of E/A'
Problem is, if Gov't opts in to SPA then Gov't cannot also opt in for the remaining 4.6T's in E/A, that would leave RDS and Gulf without a Gulf project - yet. The time to obstruct is now and Duma/RDS know it. We know what O'Neill supports and that is to rapidly maximize PNG LNG first. RDS cannot/will not attempt a takeover of IOC as they cannot/will not win a bidding war with XOM and a 3-train brownfield expansion . Won't happen. RDS will either need to find their own gas or wait until XOM has all IOC's gas they want before RDS has a shot at LNG in PNG.

[ArtM72]

I doubt there is any grand plan in Duma's gyrations other than to delay and frustrate. Trying to find logic beyond that is pointless. Duma has simply argued too many clearly contradictory positions.

I'm not sure "commercial rates" for any gas PNG wants will be able to be defined, only approximated, by any IOC/XOM deal. In the IOC/XOM deal there will be any number of elements that will include risk as a consideration. Further, it will be some time before PNG will be able to use any natural gas, and the future value of gas is very questionable. Certainly Gulf Province won't be able to use any signficant quantity of gas soon, although Port Moresby with its switch to gas turbine fired electric power should be able to use some within the next couple of years.

As to XOM's primacy in any contest for IOC's gas, I think you are correct. That doesn't mean though RDS is out of the game. There is a lot of margin available between $2 and the projected value of natural gas in the next 20 years. RDS might have to pay a relative premium to compete, but that doesn't mean they can't.

My bet still is that Gulf gets its LNG, although with a big enough incentive package (i.e. transportation infrastructure including port facilities and a petrochemical park not dependent upon LNG) the second LNG could end up in Western Province. After all, an operating LNG plant only provides so many jobs after it is built. The real job creator is the spin-off industries, especially agriculture, that will be facilitated by transportation and refrigeration becoming readily available in the region. As it has been suggested any number of times on this board. Kavo's anti-pipeline position may simply be his best negotiating strategy.

[Palm]

Excellent points Tree. And if one goes back and reads the statement that was issued by O'Neill, in retrospect some things become more clear:
http://www.pngindustrynews.net/web_multi...ject_2.pdf

This speaks specifically to EA and so far the talks with XOM have centered on EA (drilling, development, etc). I believe that possibly this whole scenario was anticipated by the government and that the 3rd train of PNG LNG was very high on the list. The government stated, "... the project may be commercialized equally and simultaneously on a 50/50 basis between the State and Interoil based on available saleable gas, using two separate processing facilities." Right now the "available, saleable gas" seems to be agreed as 9.2Ts at EA. The governmment likely talks to XOM quite regularly and knew back then that XOM was expressing concern in finding enough gas for the very necessary 3rd train. So, the government said, "If there is 9.2Ts at EA and XOM needs 4.6 Ts for an additional train, we want the right to mandate at least 50% of that gas will go to PNG LNG. IOC you can participate in that if things can be worked out with XOM, or you can have the other 4.6Ts for your own plant and it can be in the Gulf."

This well may have evolved into what we see today and IOC obviously likes the idea of working with XOM. The government is supporing this and in the end they may opt in by taking only half of the additional 27.5% (total of 36.25%) on train 3 for PNG LNG leaving IOC/Pac LNG an "equal" 36.25% and Exxon gets the balance of 27.5% (or something along those lines as long as IOC/Pac LNG and the government end up equal and XOM is "happy"). This meets the "two separate processing facilities" statement in the government agreement as PNG LNG would be one and a Gulf LNG project would be the 2nd. Duma obviously does not like this, but he seems to be on the outside right now. But Gulf gets its project with the 2nd 4.6Ts since the government stated in the same agreement that startup could be 3.8 mtpa instead of the original 2009 amount of 7.6 mtpa.

I also believe XOM will have first dibs on the Gulf LNG project, and they'd be crazy not to opt in, even if it's a lower % in the actual plant. They want good returns on projects and if as they drill EA (and possibly other IOC prospects) they will want in. But I agree that Shell is in a similar situation as Duma. They hitched their wagon to Duma, and they suffer a similar fate. I also agree on the buyout; if XOM doesn't do it, I think it doesn't happen. But I think Total is in the on deck circle as far as developing anything XOM decides not to. They made it vey clear that they are very interested in PNG and O'Neill reacted positively. But they also may need XOM to be involved as a recognized operator, or they could bring Shell in.

When the deal with XOM is announced, the muddy waters will clear up substantially.

[Tree]

Thanks for your, as usual, thoughtful and well reasoned response Palm.

Job 1 is to facilitate XOM in PNG LNG expansion with as much gas to which XOM can commit .   Job #2 will be to determine 'optionality' with Gulf plans,

XOM is fortunate to have IOC resource available and I'm sure they realize that.  They will not lose out on PRL15+.  It kinda smells like an SPA has been completed doesn't it?

[Tree]

That 'two LNG facilities' phrasing sure is interesting.

Did PNG play matchmaker for IOC/XOM lash-up for 50% of saleable gas in exchange for Gulf LNG approval and leniency on operator requirements?

Remember that odd March 13 full page ad Duma placed in The National?

Interesting quotes from the pdf of the full page ad, signed by Duma:

"Minister Duma also said that in relation to the 50/50 proposal by InterOil, the National Executive Council (NEC) has given only a conditional approval to a proposal by InterOil to develop it's share of 50% pf the available saleable gas with certain conditions, including but not limited to the following.

*  The upstream and the midstream must be operated by an internationally recognized and experienced operator or operators satisfactory to the State

*  Any agreements with IOC to be conditional on the State executing all agreements necessary to develop it's commercialization project

*  The acquisition of the additional interest in the license above the State's back in entitlement be negotiated and executed by any party designated by the State.

*  The 2009 Project Agreement shall remain on foot and enforceable until all the condition precedents in the 50/50 proposal become unconditional"

[Palm]

Kind of looks that way; they at least knew the XOM need for gas for future trains was there. Other interesting thing is that the NEC statement released by O'Neill on says, "an internationally recognised and experienced operator shall operate the upstream facilities....". No mention of midstream like Duma does. The LNG plant is part of the Midstream operations. So, did the NEC and O'Neill open or leave open the possibility of EWC/Flex/Daewoo, etc setting up shop without the need for Exxon/Total/Shell being the operator? Seems so, since O'Neill's statement was in writing, and Duma is simply blabbing and possibly trying to make us think that will not be possible.

[jft310]

The EWC stock price is talking. Whose listening?? Is it done well no I don't think so but the odds have gone higher.