Since we’re so close to the culmination of the InterOil story, one that will lead to either an explosion or an implosion of its share price (we believe the former is more likely), we’ll increase our coverage.

Below a really interesting story from pngindustrynews.net that had escaped our attention when it was published. It discusses Elk2, but the really interesting conclusions to be drawn are about Elk4 and the LNG facility. Here is the article:

Elk upgrade supports PNG LNG plan: InterOil *UPDATED*
Thursday, 4 October 2007
Bevis Yeo

INTEROIL has upgraded estimated in place reserves at its Elk gas field in PNG, supporting indications it could support a proposed PNG liquefied natural gas project.

In a review of the Elk-2 well, the company upgraded in-place reserves at the Elk field from between 3 trillion cubic feet to 15Tcf of gas to 3.5-18.9Tcf.

“The drilling and subsequent test of the Elk-2 appraisal well has confirmed conductive fractures, porosity and deliverability, and a larger rock volume and better-than-anticipated reservoir quality, which indicates increased potential gas resource in the Elk structure,” InterOil chief executive Phil Mulacek said this week.

The well, which has been suspended for possible re-entry, intersected 202m of net reservoir, and the stratigraphic thickness of both the Puri and Mendi limestone targets were thicker than pre-drill estimates at 533m and 292m respectively.

InterOil said technical data from the full suite of logs had given it comprehensive understanding of the Elk reservoir, and the well had met most pre-drill expectations. Future drilling would focus on confirming oil and gas reserves. Despite the positive news, shares in the company sank 18.63% to $C23.32 ($A26.44).

InterOil vice president investor and public relations Anesti Dermedgoglou told PNGIndustryNews.net that the market may have lost sight of the fact that Elk-2 was drilled to establish gas reserves for an LNG project.

“The only thing I can imagine is perhaps the market has been expecting more talk of oil and the picture of why we are actually developing the LNG had been lost,” he said. He added that once more established market players revisit the reasons why InterOil was developing the Elk field, they would realise Elk-2 had improved the field’s likelihood of “supporting not just one but a two-train LNG project [emphasis by shareholdersunite]”.

The drop mirrors a similar fall of almost 19% in June this year after the company released early results from the well. The company will now move the rig to drill the Elk-4 well, about 1.6km south of the Elk-1 discovery. InterOil’s Elk and Antelope gas fields are intended to provide gas for Liquid Niugini Gas’ proposed LNG project in PNG.

Liquid Niugini, which is an equal joint venture between InterOil, Merrill Lynch and Clarion Finance, is planning to build a two-train LNG plant capable of producing up to 9 million tonnes of LNG per annum from 2012.

So far the story. There are really a couple of interesting point to make here.

1. Shorts argued that Elk2 was a disaster. If it was, they sure managed to hide that pretty well. Resource estimates were increased..
2. One of those ‘more established market players’ who apparently did ‘revisit those reasons why InterOil is developing the Elk field’ was no less a player than industry legend T Boone Pickens. His fund, and him personally greatly increased their holdings after the Elk2 info came out
3. Both partners in that proposed LNG facility, Merrill Lynch and Clarion Finanz, not only didn’t withdrew their support, they actively participated in two private placements, as we have shown here.
4. Analyst Wayne Andrews from Raymond James also argued that the positives outweighed the negatives (the limestone was below the water contact was the main negative)
5. Perhaps the following quote is actually most significant: “they would realise Elk-2 had improved the field’s likelihood of “supporting not just one but a two-train LNG project.”” This lowers the bar further for Elk4. It must really be a disaster to scupper those LNG plans..