Daily Distortions no.17. One weird theory’s only piece of ‘evidence’ falls by the wayside, and it offers us another window to assess what’s going on.

Last week, there was this news story on Reuters:

• PERTH, Aug 13 (Reuters) – Canadian oil firm InterOil Corp (IOL.TO: Quote, Profile, Research) is looking to sell about 20 percent of its core oil and gas assets in Papua New Guinea to help fund its share of costs for a proposed liquefied natural gas (LNG) project in the country, its chief executive said on Wednesday.
• Phil Mulacek said the joint venture for the proposed LNG project, comprising of InterOil, Merrill Lynch Commodities (Europe) Ltd and investment firm Pacific LNG, was also planning to sell between 10-20 percent of the project.
• “We are looking to sell about 20 percent of our core oil and gas assets in Papua New Guinea over time. The LNG joint venture will also be selling about 10-20 percent of the project,” Mulacek told Reuters in a telephone interview from Houston in the U.S.
• InterOil’s assets, which are primarily in Papua New Guinea, consist of petroleum licenses covering about 9 million acres. They also include four discoveries, including the Elk and Antelope gas fields which will feed the planned LNG project.
• The joint venture, Liquid Niugini Gas Ltd, plans to build a $5-$7 billion LNG plant near the PNG capital Port Moresby with a production capacity of 5 million tonnes per annum from a single processing unit, with the option to add a second processing train.
• Mulacek said the proposed LNG project has attracted strong interest from energy majors, while about a dozen end-users in North Asia and Europe have also approached the venture to discuss taking a small equity stake in the development.
• InterOil and Merrill Lynch each have a 35 percent stake in the LNG joint venture, while Pacific LNG has a 30 percent interest. (Reporting by Fayen Wong)

Note that Phil said selling 20% over time. We explained yesterday why he is not in a hurry. These are complex negotiations anyway, for two reasons:

1. Terms might stretch out far into the future (for instance, an offtake agreement of LNG), many contingencies will have to be dealt with
2. The appraisal of the Elk/Antelope field is in no way finished (although it’s pretty certain there is enough gas to support an LNG facility).

Now today, this appeared:

• OIL SEARCH is looking to pick up more prospective areas in Papua New Guinea to help commercialise those of its gas resources not committed to an ExxonMobil-led $US11 billion ($12.6 billion) liquefied natural gas project.
• After reporting a half-year profit of $US133.3 million from continuing operations – up from $US46.9 million last year and in line with expectations – Oil Search’s managing director, Peter Botten, said his company was interested in expanding in PNG.
• The Canadian company InterOil, part of a rival liquefied natural gas project in PNG, last week told Reuters it planned to sell 20 per cent of its oil and gas assets in PNG to help fund the project development.
• The sale will include three licences wholly owned by InterOil in the eastern Papuan Basin, north-west of Port Moresby. Mr Botten yesterday said his company would examine the resource base and the robustness of the licences. “PNG is our backyard,” he said. “We want to be represented in as many commercial opportunities as we can.”

So OilSearch could be the buyer, and publicly (by it’s CEO Peter Botten), shows an interest in InterOil’s licenses in the Eastern Basin. This is not surprising to us, but it must be surprising to some of the colourful character that have featured prominently in our Daily Distortions series.

We summarize:

1. According to a certain Jaxson905 writing at the ‘Value Investors Club in 2005 and 2006, the Eastern Basin has different geology compared to where InterOil is drilling
2. It’s fractured limestone, which will produce “collapsing wells”, which is why nobody was interested in the IOC licenses
3. He did not come up with any geological source, but told us that this remarkable piece of insight was based upon… a phone call to…. OilSearch!
4. We already showed that this “collapsing well” theory is not, and cannot be based on anything remotely related to reality. Apart from not supported by a single fact, source or geologist, it’s also logically inconsistent, as it’s two proponents claim that it is both widely known (well enough for the two supporters, who are definitely not geologist to be familiar with it), yet cannot come up with anybody who had taken it seriously. In all these years, at all these industry conferences, investor presentations, analyst meetings, etc. nobody ever asked anyone related to the company whether InterOil was not afraid of their wells collapsing… Yet these two non-geologist knew, based on a simple phone call to OilSearch..
5. We have already dealt with the gaping holes in this “theory” (Daily Distortions no.1 and no.6).

But now, even this last (already ridiculously thin) piece of “support” falls by the wayside. Turns out OilSearch is interested in those licenses after all. Could it be, that our explanation that these licenses are much more valuable now that:

• Energy prices have shot up
• InterOil made two huge discoveries

were a little bit more to the point? Boston the only purveyor of that Jaxson theory even vehemently argued aganst this, but he’ll argue vehemently against just about anything, as one person from another board familiar with him noted here.

It’s noteworthy that InterOil sold 25% of just 8 out of 40 drilling prospects to a group of investors for $125M three years ago. With those discoveries and energy prices going to the roof, these licenses can only have increased in value. No wonder OilSearch is interested in them.

We still remain incredulous that such a person posting the most weirdest, easily verifiable nonsense, actually gets support from UCLA professor Eric Sussman:

• He’s actually smarter, certainly having done more work on the geological side than I, and anybody objective would have to answer the most logical of questions boston raises. Where are the very, very deep-pocketed majors, if there is so much promise in the region? Some of you were even touting IOC as a buyout candidate, which made me laugh. But at a certain level, you’re right. Why wouldn’t one of the big boys/girls just buy out IOC and all its promise, or at least make a run at the company? Oh, yeah. It’s all about that poison pill they implemented last year (hadn’t seen that in awhile) and the fact that Mulacek is just holding out for more money. The longs have these ridiculous answers (read: naive) for everything. Day after day, I become more and more convinced. It is not an “if” IOC implodes, but a “when.” [Eric Sussman]
• I don’t know who you are, or where you came from, but I think you are correct in many of your statements and assertions. I have made similar arguments over the years, and have been pretty much MIA these days, as I figured time would be the ultimate determinant here. Anyhow, my bets and predictions align with your own. Welcome… [Eric Sussman]

Very impressive science Eric, basing an easily deconstructable “theory” on a single phone call. Is that what you teach at UCLA?

And what’s worse, it’s hardly the only case when he steps in and defends this guy when he’s at it again, producing easily deconstructable nonsense..