Henry explains monetization process

[Palm]

Some time ago Henry Aldorf was interviewed regarding the constant short line that IOC has no reserves. Phil was part of this interview also, but got into some of his analogies that was less clear than what Henry has to say. Read this then relate it to what we know today. This is also a place Henry makes his now famous claim to 25 Ts in IOC's license areas.

"Henry Aldorf:

I’ve been in the energy business for a long, long time. My last function was at a major called Marathon. I was the VP of Global Upstream Business Development and part of the executive team leading that company. My claim to fame at Marathon was the building of a LNG facility. Marathon had built a LNG facility, indirectly, about 40 years ago in Kenai, Alaska together with ConocoPhillips. But Marathon didn’t do anything until 2003. Didn’t have anybody who knew integrated gas. I was at the time the head of Marathon for Asia. They asked me to come back and see if we could get a nat gas project running. So we developed what is today the standard of LNG projects as far as speed, cost are concerned.

I should say one more thing. I’m not working for InterOil. I work for the large shareholder Pacific LNG which is affiliated with Clarion Finanz, which is affiliated with Carlo Civelli, the major partner in that.

A little bit about Pacific LNG because nobody knows totally what it is. Set up by Clarion Finanz AG in Switzerland. Pacific LNG owns about 20% of the Elk Antelope Fields. We own about 47.5% of Liquid Niugini which has the project agreement with the government of Papua New Guinea and is therefore licensed to develop gas in Papua New Guinea. We are also a major shareholder of InterOil. So we have a lot riding on this investment.

Where are the Elk Antelope Fields? This is the southeast area of Papua New Guinea. Port Moresby is right under here. And InterOil owns about 3 million acres in that area, which is a huge portfolio. Exxon is up here in the heights. Out of this 3 million acres, the Elk Antelope field is only less than 2%. There are many arteries around here, which are today exploration potential. We say that the comparable is 18Tcf. I think the area could be as high as 25 to 30 Tcf. I can say that because I’m a private company!  Exxon has about 25. It’s in all different type of areas, very far apart. And a big mountain ranges between it. One of the biggest problems is to aggregate all that gas and bring that all the way down to the coast and then send that all to Port Moresby.

This is what is misleading and people who don’t understand gas have to understand what is the difference between resource and reserves. Resource becomes reserves once you have what we call a gas sales agreement and you have a SPA contract in place to develop the gas. These are the SEC rules. Therefore, some people say, well, InterOil doesn’t have any reserves. No. Nobody has huge gas resource and has not yet put a full development plan forward and has not signed these particular contracts that can claim reserves. But their resource goes immediately to reserve category once the gas sales agreement and SPA contract are there. It has nothing to do with whether the gas is there."

[admin]

There they are, finally, those mythical 18T. Now, let's drill (baby, drill) and see whether they can be localized. Pet was here yesterday guessing that by March, we could have drilled three new resources. Dave Holland's percentages seem to be pretty good, so it's perhaps not all too unreasonable to expect at least one hit. Even a well chosen location for an appraisal well in Triceratops could already do wonders..

[Palm]

And drill they will. The interesting thing is that doubters claim OSH may hold and try and exercise some veto power over XOM bringing in IOC's gas. That's a pretty unsafe bet IMHO. As Henry states above and we know, IOC's gas gives PNG LNG the best chance of keeping costs in line. The writing is on the wall and PNG has made it clear; they want no cost blowouts. So PNG has a huge say in the expansion of PNG LNG. Even Mr Duma mentioned that at one point last year. They have approval for the first 2 trains but not yet for expansion. PNG wants economical future trains online ASAP.

And up to this point PNG has been more concerned about OSH's well being than they might be in the future. But Artie Somare put a limit on that interest. When PNG hocked their 17.5% holding in OSH to Abu Dhabi's IPIC as collateral for bonds they issued to IPIC to raise $1.1 billion to fund their share of PNG LNG, those bonds had an expiration; either late this year or early in 2014 (hence the importance that PNG LNG start producing in 2014). When PNG hocked this interest in OSH those shares were valued at A $4.50 or so. But to swap those shares to pay off those bonds shares have to appreciate to approx A $8.55. Goldman Sachs (yes Goldman Sachs) was PNG's advisor on this transaction and all parties likely were "sure" that value would be there because that cash flow (or anticipation thereof) would obviously cause share value to get there. So far so good as recently shares were just over A$8. If the shares don't reach that A $8.55 or so level, PNG must not only hand over the shares but they must pony up the difference. Who better than XOM and GS to make sure it works. This is also why I've said many times that there was no way IOC would beat PNG LNG to production. No way with all those bigs putting all resources toward getting PNG LNG up and running by 2014.

And now as production approaches there are rumors that someone like Woodside might pay $10-$14 to buy OSH because if the instant production and cash flow that brings. Good for OSH, PNG, GS if that happens (even rumors TOT or others might take a run at OSH). So, assuming that all happens, one way or the other PNG no longer owns 17.5% of OSH. So at this point I would think O'Neill and NEC are saying "We need to look beyond OSH". "That worked and we have our ownership in PNG LNG paid for. Yeah for us, but expansion of PNG LNG needs to be done economically and right now IOC is the key as they have lots of very cheap and valuable NG and liquids. XOM, we will approve all the trains you want, but you need to bring in IOC now."

It's a lot cheaper and more profitable for PNG to go down this path. Same goes with XOM and other partners. PNG and XOM are the very strong hands here and if PNG wants the project expanded, expanded it will be. Fat chance of someone like OSH stopping it IMHO.

http://www.arabianbusiness.com/property/...uinea-deal

[jft310]

Interesting note Henry made these comments before Triceratops and before seismics had been run on 236/8. Wonder what he would say today. Arun had 25 T's and that was 50% of Mobil Oil's profits for 20 years in a row.
I hope certain other posters make a note of what Henry said this time.
Ya see Henry has been in that data room and most others have not seen the data. With his background and with what his eyeballs have seen he surely knows more than others. Or IOC has selectively released data.
Then we have the Reuters interview with Phil Mulacek in 2009 where Phil stated IOC could save $1 Billion a year with its own feedstock to Napa Napa. Oil was higher in price then and Phil made some production estimates. But it easy to see where IOC today could earn over $500 million a year with production of its own condensates. Oh and yes IOC can use condensates at Napa Napa. New contract with Horizon to process their condensates at Napa Napa. Assume 24,000 barrels a day in production times 250 operating days and condensate prices at $90 a barrel and $10 processing costs. Phil had different inputs.Not hard to see where Phil got the numbers

[Tree]

Nice leeetle find Palmer.
Profound comment is that XOM has 25T's, however, those T's cannot be economically aggregated.
I wonder if XOM realizes the bulk of their gas is 'stranded'?
Easily aggregated huge 'resource------>reserve' resource in PRL15 must look pretty darn good to XOM and the other 5 bidders.

Sign an SPA and book all those reserves.

[jft310]

So Tree will they book GCA estimates or GLJ estimates.Duh!!!

[ArtM72]

So Tree will they book GCA estimates or GLJ estimates.Duh!!!

When asked that question at the AGM WA was non committal on whether they would be booking anything more than  the XOM agreement.  Colin said there was a fairly broad application of the title "reserves" and IOC has been conservative in the past.

A side note, maybe related, was Jasper stated the XOM pipeline was good for 3 trains.  Rather than adding a compressor station in the Gulf or an onshore pipeline he believed a second parallel pipeline would be laid to handle more gas.

[jft310]

Art-Thanks for the info. Its known Exxon is negotiating for a second train. That would solve most of the booking issue.with two trains.
One source agrees the third train in the existing pipe and then a new parallel pipe. Exxon to pay all most of the expense of the pipe for obvious reasons. IOC would use 1/3rd of new pipe.
EXCITING!

[Tree]

Makes sense Art. Upon SPA the resource becomes reserves. That SPA is for 4.6T's. That 4.6Ts will represent XOM's % ownership in PRL15 after 6 more delineation wells. Subsequent deals will move resource to reserves. Like raising cattle. Beef them up. Slaughter them. That is when they become Rib-Eyes.

[Palm]

As a follow-up to the OSH info, here is an article from when that transaction closed back in March 2009. Note that the swap of the bonds mention means that IPIC will take the OSH stock in exchange for the bond and at that point become OSH's largest shareholder. If the date of this article is correct as far as when that transaction closed (March 2009) that exchange would take place sometime around next March, right when PNG LNG is expected to start first production. Funny how that worked out. It will be a job well done by XOM and a reason for PNG to be very grateful toward XOM by working together to expand the PNG LNG project quickly. Now all are hoping that OSH's pps (today at A $7.77) gets to A$8.55 by next March, or they get bought out giving PNG the funds to pay off IPIC bonds. Should we be rooting for OSH?

http://www.asialaw.com/Article/2124271/C...funds.html