Weekend Cogitation on Exxon Deal

[petrengr1]

Here is a thought for you to consider. Exxon wants to buy enough gas to be sure they have enough to run one additional train at their plant. That require 4 - 5 TCF. So if that means 4.5 TCF then that would be about 50% of Elk/Antelope at the present certified amount of  9.4 TCF (Best Case). That is more than the 30 -35% IOC had previously said they wanted to sell. So maybe the idea of “recertifying”  the reservoir was IOC’s idea instead of Exxon’s idea. Exxon’s interest will be based on what it takes for them to own 4.5 TCF after recertification. For example 4.5/9.4 = 47.9%.

Now if the resource volume goes up to say 10 TCF with recertification then Exxon’s percentage ownership will go down. For example 4.5/10 = 45.0%.

I can only see the resource volume going up with the drilling of more wells so I don’t see why Exxon would have insisted on drilling more wells, funding those wells and recertifying the resource volume in order to get a lower percentage of the field. I think this must have been an IOC suggestion to Exxon as a way for Exxon to be awarded a larger percentage than 35% of the field. Maybe IOC said we will sell you enough gas for one train based on the resource volume after drilling two or more wells funded by Exxon. IOC gets two or more wells drilled but Exxon has to pay for the wells and will probably end up with a smaller percentage of the field. The percentage ownership by Exxon determined by this method will apply to all gas discovered in PRL 15 so it is to IOC’s advantage for the Exxon percent ownership to be as low as possible.

If the above represents how things turn out it could be a win/win situation. Exxon has reassurance of the reservoir volume to lower their risk on their investment and satisfy the Banks loaning the money and IOC gets two or more wells drilled and probably will end up with a larger percentage ownership than they would otherwise have had.

My personal opinion is that the additional wells will not change the resource estimate much (just like the last well didn’t change it much) but we get more wells drilled and increased confidence in the field’s resource volume.

Next Phase After the Deal is Announced

IOC retains the right to build a plant in the Gulf Province to process and sell gas directly to the Asian Market. However, whether we build our own LNG Plant or send our gas to the Exxon Plant will depend on the economics involved. I have seen numbers in the media recently where Exxon says the cost for them to add trains to the existing plant will cost as little as $400/ton. http://shareholdersunite.com/mybb/showthread.php?tid=3727&pid=23031#pid23031

If Exxon can build additional trains for $400/ton that puts their cost at about what the original EWC Plant was said to cost. If the additional LNG Plant capacity costs about the same at both locations Exxon will likely adjust the price to be paid to IOC for their gas to make it a win/win situation for both Companies for the gas to go to the Exxon PNGLNG plant.

[ArtM72]

Pet -

Could you comment on the differences between delineation wells and production wells? I've been under the impression the effective difference is only where for reasons of resevoir permeability or access to condensate a decision is made to introduce a horizontal leg. Other than that it is pretty much a matter of blowing holes in the well casing at prescribed locations to change from one to the other.

TIA

[admin]

Thanks for that exposé about the recertification, as that was a source of confusion for some. If Exxon's additional trains are as cheap to build as EWC then the chances of the Gulf plans diminish, although it depends on whether Exxon will let IOC benefit to the full from that. It could very well be that they don't, in which case EWC would still be more profitable for EWC.

However, having a stick build plant in the Gulf becomes quite a bit more difficult to propose, that's likely to be way more expensive.

[petrengr1]

Pet - Could you comment on the differences between delineation wells and production wells? I've been under the impression the effective difference is only where for reasons of resevoir permeability or access to condensate a decision is made to introduce a horizontal leg. Other than that it is pretty much a matter of blowing holes in the well casing at prescribed locations to change from one to the other. TIA

Art -  A delineation well would be a well drilled for the purpose of extending the know limits of the field. After making a discovery a company may drill several more delineation wells to prove the extent of the field. This term is probably used pretty loosely at times and wells within the know boundary of the field may be sometimes referred to as delineation wells but this is technically incorrect.

Wells drilled within the know boundaries of the field might be called production wells but, of course, any well that penetrates the reservoir can be completed as a producing well, including any well that was originally called a delineation well.

[Tree]

To IOC's benefit, the destination of PRL15 gas will be determined by competing economics of IOC ownership stake in PNG LNG trains vs ownership in IOC stake in Gulf LNG trains is result of XOM feed stock deal. Let the best deal win. David has a few stones up his briefs for those Goliaths.
I've been told that capital gains tax issues in PRL 15 have a bearing on the % ownership, drilling and stake that XOM takes. "All is not as it seems" and this deal is complicated with dynamics we cannot fathom.

[Stavros]

To my opinion, XOM will be buying it's stake in PRL 15 from InterOil, Pacific LNG and the PNG Government.
So IOC should still be able to retain a large percentage of the asset even if XOM takes 45%. I envision IOC will go from 60% down to 30-40% ownership, depending on how much the government takes above the 22.5%.

Has XOM insisted that the deal terms include a stipulation from the PNG Government that Shell will be tossed out of the country for good ... possibly.

[jft310]

The additional assets that might be found would be in drilling the 3 prospects that lie within the boundaries of PRL 15. There are three and they have not been drilled and they are NOT part of the current GLJ estimate. Exxon is supposed to paying for those wells also. Exxon is just not buying part of E/A they are buying into PRL 15. Then we have Henry Aldorf's LNG taped conference statements that he thinks E/A has 13 T's later revised verbally to 18 T's. Henry has been in the IOC data room and we need to ask what does he or hope to see with more wells. No one on this Board I don't think has been in the IOC data room. PRL 15 most likely has substantial additional assets size to be determined.

[sageo]

Pet - I just love it when you put your "thinking cap" on.Before he passed on,my brother-in-law from upstate NY ( PhD civil engineer) was a professor at one of our universities ...after a fine Airforce career. we had many great conversations about economics,politics,cultures,fiat currencies,precious metals and other topics . He always seemed to end our talks with" ---(my name),how can I get more people to 'think' rather than to 'feel' )?Best to you . Pet, you often remind me of him....he was and you are extremely good at thinking . Best to you,sir !

[smeltman]

Pet - I just love it when you put your "thinking cap" on.Before he passed on,my brother-in-law from upstate NY ( PhD civil engineer) was a professor at one of our universities ...after a fine Airforce career. we had many great conversations about economics,politics,cultures,fiat currencies,precious metals and other topics . He always seemed to end our talks with" ---(my name),how can I get more people to 'think' rather than to 'feel' )?Best to you . Pet, you often remind me of him....he was and you are extremely good at thinking . Best to you,sir !

And to add on to what your brother-in-law said Sageo, my favorite economist, Dr. Thomas Sowell, has a great book out, "Applied Economics: Thinking Beyond Stage One".  Dr. Sowell demonstrates that it is not enough to just think about an issue and then present a solution. One must then go a step further than the 'quick fix', and always be ready to revisit 'fixes' and alter them if they don't work. A highly readable book I recommend to all. I think some of what Dr. Sowell discussions will be applicable to what we will be going through as we finally get a chance to comb through the deals that will be presented in the near future.

[sageo]

  Smeltman_ Have read many of his writings. Sharp guy ....also a Dr. Walker (can't remember his first name- he used to sometimes sub for Rush) . I believe he at one time taught at George Mason or at Georgetown .Have you discovered the new (for me) guy,Dr. Benjamin Carson ? He was the author of "Gifted Hands" I think. What a miraculous story. He was the one who spoke at the president's breakfast meeting a few weeks ago. GLTY.