One of the longest-lived theories we've thrown around has been that it made the most sense for IOC to somehow partner with XOM because they had the first project, our gas is liquid rich and less expensive to develop, etc. And now that appears to be what's happening. Some say, "Just get the deal done", but as STP said last night and most know, getting any deal done takes time because each operator will have a different scheme.
As Resourcearb stated in his April 30 SA article, it is clear that Exxon (even above Shell and Total) NEEDS IOC's gas to expand:
"The project's LNG storage tanks and jetty can accommodate additional capacity, and the LNG precinct has adequate room for a total of eight LNG trains. Hence, with an economically viable gas resource to underpin PNG LNG's expansion, the marginal returns associated with adding new trains should exceed the project's already world leading economics, as most of the fixed infrastructure has already been constructed."
"If Exxon and Oil Search consider the expansion of PNG LNG's capacity a top priority and if they were truly confident of P'nyang's multi-Tcf size and economic viability in supplying an additional train based on the drilling results and seismic interpretation from the data acquired in 2011, why have they decided to refrain from drilling additional wells in the field pending further analysis?"... "industry experts with whom I've spoken estimate that the development of P'nyang would add $1.5 -$2 billion to the cost of PNG LNG's train 3, taking the total budget for an additional train from $3.5 billion to $5 - $5.5 billion. Assuming 2.5 Tcf of gas is ultimately discovered in the P'nyang field, it would only supply an additional PNG LNG train for 12 years. Hence the PRL 3 joint venture's decision to refrain from drilling additional wells at P'nyang may be indicative of significant risk that the reservoir thickness will be inadequate to justify the cost of building additional infrastructure to supply PNG LNG's train 3."
"The greatest synergies for expanded capacity at PNG LNG would be derived from a large concentrated gas resource that could underpin multiple trains. The PNG LNG pipeline from the highlands cannot accommodate gas for more than three trains, but the aggregation of resources in InterOil's Gulf acreage from its Antelope reef, its prospective Triceratops reef, and its extensive pipeline of additional reefal targets could easily justify the cost of building a brand new 250 mile pipeline between InterOil's Elk/Antelope field and the PNG LNG facility in Port Moresby. If the proposed pipeline were to connect directly to PNG LNG's offshore pipeline, it would span less than 100 miles to transport gas from Elk/Antelope to Exxon's facility. I estimate that at a cost of $4 million per pipe mile across relatively flat terrain, the capex required to transport gas from Elk/Antelope directly to PNG LNG would be $1 billion. Based on discussions with industry experts, the cost of additional trains at an existing liquefaction facility is estimated to be approximately $1,000 per ton per annum. If gas from Elk/Antelope or Triceratops were to underpin two additional trains at PNG LNG, the incremental estimated capex required to double the project's capacity would only be 42% of the capex that Exxon and its partners are spending for the facility's first two trains. Hence, Exxon has a significant incentive to buy into InterOil's resources in order to benefit from the economies of scale associated with its world class project, the construction of which is almost complete. Exxon's only other viable alternative is to hope for future exploration success in PNG, but there haven't been any significant discoveries outside of InterOil's acreage in recent years."
http://seekingalpha.com/article/1385261-the-p-nyang-paradox-and-why-exxon-needs-interoil-s-gas
So, it appears that Exxon has every reason to pay a fair price for the gas it NEEDS for several trains of gas. And O'Neill stated in Parliament and in a meeting aftewards that, “At the moment we are building two trains (or processing units) at the processing site for gas from the Hela and Southern Highlands provinces. The revenue from the export of LNG from these two trains would double the size of our economy (GDP).
“If the talks are successful
and ExxonMobil gains access to gas from Elk and Antelope, we will certainly add one, possible two, more trains, and our GDP would triple in size."
This expansion has national implications for PNG and is seen as a MUST. So what does all of this mean?
1. What happens to OSH in the PNG LNG project if IOC and Exxon conclude talks whereby they immediately buy 4-5 Ts from PRL 15 and likely more to expand PNG LNG to capacity (which is up to 8 trains per Resourcearb)? Does IOC step in as a partner to the project for any trains it provides gas for?
2. Wait a minute. PNG LNG was initially sanctioned for 6.6 million tons per year, but announced in November that due to design efficiencies that capacity is now 6.9 million tons. To add more trains won't they have to be approved for that by the government? According to PNG officials, yes. That would mean an amendment and financing considerations. Not likely huge barriers given that most of the infrastructure is in place and the land is secured, but likely a reason for the 60 days; the PR stated that the government must approve the deal and IMHO will include the approval to expand PNG LNG and possibly add IOC as a project partner and sign on by existing partners and/or new ones. Again, given the demand that exists, not likely a problem. "He (O'Neill) recently travelled to China and Japan, where PNG gas’ big buyers are located, to meet heads of governments there and held talks with investors seeking to enter and develop PNG’s vast natural resources potential. He is planning to travel to Indonesia next month and later to South Korea, Malaysia and Singapore."
3. Gulf Province wants all production in Gulf. Not likely to happen. PNG LNG is a project using gas from the Highlands; a much more populous and more organized province, but the Government decided it was best for the project to be where it is now located. As I mentioned yesterday, there are many ways to earmark National funds for Gulf Province development, and Gulf officials will be made "whole" for the development that the National government determines is right for the Gulf and PNG as a whole.
4. The "Get a deal done" attitude has to be tamed as there are many facets to any deal, but in the end it will be very good for IOC and shareholders. Spartina and others have access to info many of us do not. They are saying it will be very good. Exxon is preventing IOC from saying anything more at this point until all is done and blessed by the government. But Exxon itself stated the talks likely will "not take long".
Any pps weakness we are seeing right now ought to be seen as a buying opportunity. Chandler has seen it and has acted pretty strongly. Smart money will do the same right here and be patient.
