Why did our faithful partners, Total and OSH decide to try this “attempted” grand theft? The short answer is they found that stealing our reserves would be much cheaper than paying the agreed price. Of course our Shareholder representative, Dr. Hession, is also complicit since he had to agree to this grand theft so that he could collect his ten pieces of silver.
I believe that both Total and OSH made a huge blunder when they signed agreements with IOC and Pac LNG respectively. I think they only thought they would have to pay for about 7 TCFe. We had a Gaffney and Cline estimate for about 7 TCFe in about 2012. So I think they both went with that estimate even though GLJ was much higher at that time at about 9.9 TCFe. Since they signed these agreements we have had new gravity data, new seismic data enhancement and drilled Antelope-4, 5 and 6 , extensive testing at Antelope-5 all of which showed better results than expected and connectivity between wells 1, 5, and 6. Hession has said that the GLJ report was better than the IOC internal estimate. Their new gravity and enhanced seismic data indicate that the western fault may be further west.
I believe Total and OSH came to the conclusion that the reserves will likely be much higher than they originally thought and their cost will be much higher than they had anticipated and, therefore, their profitability would be much less. No one knows what the certifying companies will come up with but right now it seems to be shifting to a higher number than they anticipated. While no one knows, this is a risk that Total and OSH do not want to take i.e. paying for 10 - 12 TCFe. The only way they can get out of paying IOC according to the contract is to buy IOC or get this grand theft approved by the shareholders.
Why is OSH in trouble?
From the OSH 2013 Annual Report:
“Under the agreement, Oil Search will acquire the shares in Pac LNG for a consideration of: US$900 million, payable at completion; and A contingent payment of US$0.775/mcfe(1) applied to Oil Search’s gross share before PNG Government back-in for any certified 2C contingent resource within the Elk/Antelope fields greater than 7 tcfe(2).”
If the certification number comes in at 10.2 TCFe (The GLJ Number) OSH will have to pay the Pac LNG partners (10.2 - 7 TCFe xUS$0.775/MCFe x 22.835%) or US$0.566 Billion and this does not include the US$0.900 Billion already paid up front.
The only way OSH can buy IOC is by issuing shares and getting Total to pay for 60% of the CVR's.
Why is Total in trouble?
If the certification number comes in at 10.2 TCFe (The GLJ Number) Total will have to pay IOC US$1.837 Billion plus US$0.517 Billion more at FID for a total of US$2.354 Billion. This would make the project much less profitable for them. If they can reduce these costs their profitability improves of course.
Back on 27 May 2015 UBS did an excellent analysis of the SPA deal between Total and IOC which indicated that with increasing reserves Total’s profitability becomes less while IOC’s profitability becomes better. I can not get a link to work for this report but you can go to the Stavros posting of May 30, 2015 and get it. I did a summary of the report in my posting of Sept. 26, 2015. Again can not get the link to work.
In this posting I gave you three possible ways for Total to get out of this crack: 1. Drill Antelope South as soon as possible and make a large discovery at reduced cost 2. Drill Raptor, Mule Deer and White Tail. If discoveries are made they get their share of the gas for their share of the cost of drilling. All could be tied in to the planned LNG development. 3. Buy IOC.
So far they have done none of the above. I think No. 3 is still a possibility after the shareholders vote down this attempted grand theft on July 28, 2015. Right now they are trying to see how low they can set the price and still get shareholder’s approval. After we vote this theft down OSH will have to sweeten the deal or Total will have to make a bid.
From OSH June 15 presentation: http://tinyurl.com/hau3ld5 page 15
Terms of CVR: ‘US$0.77/mcfe for 2C resource over 6.2 tcfe, on 40.1275% (interest sold to TOT), divided by number of IOC shares (51.1m)’
The problem with that is that Total was supposed to pay IOC according to the following scale:
Less than 3.5 TCFe - Zero
3.5 - 5.4 TCFe - $0.60/MCF (US$457 million to be paid at FID.
5.4 - 6.5 TCFe - $0.80/MCF
6.5 TCFe and above- $1.00/MCF
So instead of them starting to pay at 3.5 TCFe OSH doesn’t start paying until 6.2 TCFe and Total doesn’t start paying until 6.5 TCFe and then they only pay US$ 0.77 instead of the US$ 0.80 and US$1.00/MCFe as shown above. Does this mean that Total is now getting their share of the first 6.5 TCFe for free instead of the first 3.5 TCFe as agreed in the SPA with IOC?
Also from Page 15 of the above link:
Other details: “OSH to fund 100% between 6.2 and 6.5 tcfe. Beyond 6.5 tcfe, OSH and TOT fund 40%/60% respectively”.
So actually OSH is not buying IOC. Total will fund 60% of the cost of the CVR’s above 6.5 TCFe. OSH pays 100% of the cost of the CVR’s from 6.2 to 6.5 TCFe and then they split all of the other cost of the CVR’s 40/60.
Once again to see how this works, Total was to start paying according to the above table at 3.5 TCFe. Now they only start paying at 6.5 TCFe and they only pay US$0.77/MCFe instead of the higher rate shown above. They only have to pay 60% instead of 100% and they get a larger piece of Elk/Antelope to boot. Both Total and OSH end up with a larger percentage of Elk/Antelope and Papua LNG. Most of these gains and benefits to Total and OSH are a loss to IOC shareholders. Total also gets 62% of all licenses outside PRL-15, including the discoveries at Triceratops, Raptor and Bob Cat for nothing. Of course OSH also gets their cut of all other licenses outside of PRL-15 including Triceratops, Raptor and Bob Cat for nothing. This is really grand theft by both Total and OSH with the cooperation of our CEO and BOD.
From page 26 of the OSH presentation of June15th http://tinyurl.com/hau3ld5 :
1."» TOT resource based payments to IOC under 2014 SPA have been simplified: — Now comprise two fixed payments US$141.6m on 1 July 2017 and US$230m on FID of Papua LNG Project
2.» Net present value of payments are equivalent in value to previous obligations for 6.5 tcfe resource
3.» Resource downside risk is eliminated, creates certainty for both TOT and IOC / OSH shareholders
4.» TOT to pay 60% of CVR cost above 6.5 tcfe
5.» ‘Wildcard’ post production certification and payment, FID payment, First LNG Cargo payment and other components no longer apply
6.» The previous one-off contingent exploration success payment of US$65.4m per tcf over 1 tcf has been more than offset by the removal of IOC’s obligation to repay the three appraisal well costs (each ~US$50m, 100% basis) and one PRL 15 exploration well (~US$60m, 100% basis)"
Analysis of above:
1. Under the simplified plan Total will now have to pay two fixed resource payments (US$141.6m+US$230m at FID) for a total of US$371.6 million. They would owe IOC US$2.354 Billion at 10.2 TCFe. So a net saving of about US$2 billion less what they will pay on their 60% of the CVR's.
5. All of these items are a loss of value for IOC shareholders.
6. Oh, good!! We do not have to pay back the US$60 million carry cost for the PRL 15 exploration well that has not been drilled.
I will vote NO on July 28th.
