There have been a couple of weeks without any news, we’re waiting for the results of the next DST test, but behind the scenes, there is a lot going on.

Basically, two things:

• There is extensive analysis of the logs (and it might also be noteworthy that the logging was done by Schlumberger, there are third parties at the well analyzing it)
• The well ‘suffers’ from very high pressures, securing it is of the utmost importance. We have reasons to believe that they’re preparing it for a final DST test where they won’t use the small pipe they’ve used until now, and which was one factor in limiting the flow rates (which were pretty substantial nevertheless). It might not be the next DST, but an open well DST test might be on the cards, we believe, or at least a test with a bigger pipe (and new measuring equipment, which was another limiting factor in the first two tests).

So, what are they testing? Basically the gas/liquids composition: this is of prime importance, for a number of reasons:

• It determines design parameters in the proposed LNG facility, the design needs to be fine-tuned for optimal results, and that fine-tuning depends in important ways on what kind of natural gas they’re dealing with
• Second, to quote a research update by Raymond James this morning, “natural gas with a high liquid content can dramatically increase the value of the entire LNG project.” This is a very promising focus, as we know from the two previous DST’s that the liquids are increasing with depth. It’s also a crucial parameter in the negotiations with the strategic partner, more liquids, higher value, simple as that
• If those liquids reach a threshold, around 25 Bbls/MMcf according to Raymond James, a liquids stripping plant could be a viable option. This would provide near instant cash-flow, and further increase the value of the resource dramatically.

There are also reports in the press that the PNG government is inclined to renegotiate the pricing arrangement with InterOil, as a result of the high oil prices. These reports are just that, reports. They are pretty unlikely as:

• The PNG government reaffirmed the pricing agreement less than half a year ago
• InterOil cannot be blamed for high oil prices
• The refinery, although performing better than the first couple of years, is hardly raking in huge monopoly profits
• Taking strong action, like unilaterally negating on the agreement, would damage the PNG’s reputation for being a friendly place for foreign investment, just at a time when foreign investment is warranted in large quantities. The PNG economy is set up to boom big time as a result of various proposed natural gas facilities, we don’t think the goverment really wants to risk that.

It’s much more likely that they will subsidize fuel prices, or change the tax structure for refined products in some form (although we also think that subsidizing fuel wouldn’t be a good idea, but that’s not terribly relevant at the moment).

For those that are getting tired of waiting, Raymond James argued that the full results from the well would be in by the end of the month, which would then set in motion a couple of deals:

• A strategic partner, taking a stake in Elk/Antelope, which would be very interesting as it would put a value on the resource that might surprise some
• An LNG offtake agreemenent, a financing deal for the proposed LNG facility, and an agreement with the PNG government for the LNG facility.

In short, although delays are still possible, but the fun should start pretty shortly.