Every Potential Molecule of Gas

[efi426hemi]

As everyone knows, conversation is ongoing re: drilling Ant 7 prior to certification.  I hope to shed some light on the IOC mindset with this course of action.  First, there are always pros and cons.  Let’s start with the cons:

• Cons
  
  • Delay in certification payment
    • 3-9 months
  • Cost to drill
    
    • It was communicated to me at the AGM that IOC would own this drilling cost
      
      • For the record, that doesn’t make sense to me as I would think the JV would share this cost, anyways, moving on
  • Potential to add no discernible increase in resource size
• Pros
  
  • Potential increase resource to size

Now, when I pointed out at the AGM that 1^st quarter cert payment might end up being 2^nd quarter 16*, Hession responded that I should be more worried about every potential molecule of gas as opposed to timing.  Fair enough, I think it gives a pretty clear answer into how the company is thinking – more gas > time delays to cert payment.  So, the question then becomes, why is every extra gas molecule so important?  To answer this, I think there are 2 things to consider:

1. Current project FID timeline of 2^nd quarter 2017
   
   1. Drilling Ant 7 will have zero impact to pushing out the FID date
2. Operational cash until 2021 LNG plant go live

To determine necessary operation cash lets calculate our expenses first (high level back of napkin approach):

1. Expense Details
   
   1. LNG Plant: 16 billion times 36.5% IOC interest times 30% cash down = 1.752 billion
   2. Drilling**: 4 wells/year at 50 million/well times 6 years = 1.200 billion
   3. Seismic***: 50 million/year times 6 years = 300 million
   4. Other: 25 million/year times 6 years = 150 million
2. Total Expense: 3.4 billion

So what is our income:

1. Income Details
   
   1. Current Cash: 394 million
   2. Certification payment: Assume 9.9 Tcf = 1.717 billion
   3. FID payment:  517 million
2. Total Income:  2.628 billion

772 million shortfall - through to 2021. This could be addressed by:

1. Farm-in deals
   
   1. not good unless prospect is proven up based upon what we saw from the Total deal any their unwillingness to pay for gas potential
2. Dilution
   
   1. 25-40% dilution – ouch!
3. Don’t drill Tri, Wahoo, Raptor etc
   
   1. Now we wait 5 more years before additional trains are added or juicy farm in deals are completed
4. Spend an additional 3-9 months and drill Ant 7 and Ant 8 if necessary
   
   1. 400 million for every extra Tcf over 7 Tcf
   2. No impact to FID date or LNG plant go live

So, if we choose option 4 and certify 12 Tcf instead of 10 Tcf – our 772 million dollar shortfall disappears.  After seeing this, I believe I know why Hession said that I should be more worried about every potential molecule of gas and why he  isn't so worried about my above listed negatives.  But that is just me, you decide.

Health and Happiness,

Hemi

p.s.  I also confirmed that they will not drill Ant 7 unless they feel it will add >= 1 Tcf to the resource size and of JV approval.

 

*Cert date timelines - Ant 6 spud 2^nd half 15 (assume Sept 1), assume 60 day drill and 30 day test, plus 4-6 months to analyze the data and which pushes us out to May 31^st.

**50 million may to too much per well, however we would like to drill more than 4 wells per year as we found out from the Total deal – companies won’t pay for potential or p10.   Would like to see 6-7 wells in Tri, Raptor, Wahoo, etc

***28 million in 4^th qtr/14 and 51 million in 1^st qtr/15 – seismic costs

[jft310]

Excellent points . No secondary keeps your percentage ownership position constant vs owning a lower percentage of the outstanding shares .
Hession clearly is hoping for higher certification numbers per the Morgan Call with him.
Thanks Hemi.

[Dr. Wu]

As everyone knows, conversation is ongoing re: drilling Ant 7 prior to certification.  I hope to shed some light on the IOC mindset with this course of action.  First, there are always pros and cons.  Let’s start with the cons:

• Cons
  
  • Delay in certification payment
    • 3-9 months
  • Cost to drill
    
    • It was communicated to me at the AGM that IOC would own this drilling cost
      
      • For the record, that doesn’t make sense to me as I would think the JV would share this cost, anyways, moving on
  • Potential to add no discernible increase in resource size
• Pros
  
  • Potential increase resource to size

Now, when I pointed out at the AGM that 1^st quarter cert payment might end up being 2^nd quarter 16*, Hession responded that I should be more worried about every potential molecule of gas as opposed to timing.  Fair enough, I think it gives a pretty clear answer into how the company is thinking – more gas > time delays to cert payment.  So, the question then becomes, why is every extra gas molecule so important?  To answer this, I think there are 2 things to consider:

1. Current project FID timeline of 2^nd quarter 2017
   
   1. Drilling Ant 7 will have zero impact to pushing out the FID date
2. Operational cash until 2021 LNG plant go live

To determine necessary operation cash lets calculate our expenses first (high level back of napkin approach):

1. Expense Details
   
   1. LNG Plant: 16 billion times 36.5% IOC interest times 30% cash down = 1.752 billion
   2. Drilling**: 4 wells/year at 50 million/well times 6 years = 1.200 billion
   3. Seismic***: 50 million/year times 6 years = 300 million
   4. Other: 25 million/year times 6 years = 150 million
2. Total Expense: 3.4 billion

So what is our income:

1. Income Details
   
   1. Current Cash: 394 million
   2. Certification payment: Assume 9.9 Tcf = 1.717 billion
   3. FID payment:  517 million
2. Total Income:  2.628 billion

772 million shortfall - through to 2021. This could be addressed by:

1. Farm-in deals
   
   1. not good unless prospect is proven up based upon what we saw from the Total deal any their unwillingness to pay for gas potential
2. Dilution
   
   1. 25-40% dilution – ouch!
3. Don’t drill Tri, Wahoo, Raptor etc
   
   1. Now we wait 5 more years before additional trains are added or juicy farm in deals are completed
4. Spend an additional 3-9 months and drill Ant 7 and Ant 8 if necessary
   
   1. 400 million for every extra Tcf over 7 Tcf
   2. No impact to FID date or LNG plant go live

So, if we choose option 4 and certify 12 Tcf instead of 10 Tcf – our 772 million dollar shortfall disappears.  After seeing this, I believe I know why Hession said that I should be more worried about every potential molecule of gas and why he  isn't so worried about my above listed negatives.  But that is just me, you decide.

Health and Happiness,

Hemi

p.s.  I also confirmed that they will not drill Ant 7 unless they feel it will add >= 1 Tcf to the resource size and of JV approval.

 

*Cert date timelines - Ant 6 spud 2^nd half 15 (assume Sept 1), assume 60 day drill and 30 day test, plus 4-6 months to analyze the data and which pushes us out to May 31^st.

**50 million may to too much per well, however we would like to drill more than 4 wells per year as we found out from the Total deal – companies won’t pay for potential or p10.   Would like to see 6-7 wells in Tri, Raptor, Wahoo, etc

***28 million in 4^th qtr/14 and 51 million in 1^st qtr/15 – seismic costs

Great points Hemi - After speaking with Hession and others at the AGM, I am convinced they will seek a Total-like sell down deal on Wahoo or Triceratops, assuming as you say, these are successful.  That will also provide additional cash necessary.  The big upside will come if as you and Pet suggest, the recert is alot higher.. Thanks again

P.S.  I challenge anyone to outdrink Hemi - it simply cannot be done..

[Palm]

Nice job Hefi! On Ant 7; I can't believe that they really mean it would be all on IOC. Being part of PRL 15 it would be very unusual for one JV partner to go it alone on such a well. I understand that there would be no carry from Total, but IOC has said that they are awaiting JV approval which tells me the costs would be split on % basis if approved.

As far as funding the program, I think there are other options than using the shelf that they just registered. One is the untapped loan facility (unless you included it in your numbers above). The other is that when they declare FID they will create asset reserves on their balance sheet which Colin had always said could be borrowed against. A smaller source would be the govt buy-in once FID is reached.

Will have to look at those slides again where they cover some of this.

[admin]

Good to see you back here Efi, especially with such an interesting post!

[ArtM72]

Is it correct to state Totals greatest interests lay in Antelope South as well as the western border of PRL15 towards Raptor? Those might hold enough gas to begin long term expansion planning...and that is cheap gas.

[vidon]

Hemi is one smart Canuck ! I put him on par with Pet , but for different expertise. I have learned a lot from both these men over the years.
I would like Hemi to contribute more often

[Li'loilady]

Yeah, it's great to be hearing from you again, Hemi.  Helpful analysis on the economics of delay.

And from the sublime (your post) to the ridiculous:  uh ...mo' gas proven...uh...mo' investment house and retail enthusiasm...uh...mo' pps...uh...mo' $$ for us schmos.

And let's remember jft's post:  per IOC, the two, chosen, independent resource evaluators will get started analyzing data before we complete our last well (or 2??) and then calculate in the stragglers.

If doing it right means delays then, bring it on.

Peace to us all as we wait for the cert. T count.

[jft310]

To my mind I can't see how new wells can be drilled in jointly owned property without costs being shared . The carry aspect I would bet goes away just get everyone to pay their pro rata share of ownership . The PNG govt announced they were raising money to buy into Antelope LNG so the idea of a carry must have gone by the wayside . The govt must pay its share of past costs to buy in which are well over $500 million today usually timed at FID. No small amount . Booking our pro rata share of 10-12 T's will greatly increase our ability to borrow money also . It's one powerful footnote on the balance sheet .

Lots of ways to skin the cat .

Negative of certifying more assets would be we might build a 2 train LNG plant at 5 mtpa per train that's been estimated at $20 Billion rough estimate . Or it costs us more to build our ownership share of the plant .

[MartiniStocks9756]

I think Hession says it well here. Its in all of the parties interests to do it right and get all the appropriate information before the building of the LNG facilities.  So from exploration, assessment, analysis and even as it gets bigger as Hession says the pie gets bigger for everyone and everyone will make more money. So the notion that even as the TCF's grow that TOT and OSH won't make money does not seem completely accurate.

Where I am at the moment is, LNG facilities cost tens of billions of dollars to build. And if you’re Exxon, you’re Total, or InterOil, or you’re Woodside, you don’t want to waste money by wrong sizing this plants. Historically, this industry has lost a lot of value by under sizing plants and wasted a lot of value by actually over sizing plants. So, there is a billion dollar dial there as well. So Total, Oil Search, ourselves, Papua New Guinea, we've all got an absolute interest in making sure we put the right amount of kit and right amount of capital equipment on the right type of reserve, and so that’s about capital efficiency. But also, as this thing grows, the pie gets bigger for everybody. Total will make more money, Oil Search will make more money, we will and Papua New Guinea will as well. So we’re all lined up. It’s one of those beautiful situations in business where strategically, you’re all lined up in the same direction, which sometimes is not the case.