We like to provide some answers (not withstanding the fact that the ‘sceptic’ turned out to be a well known paid basher whose posts have been removed multiple times by Yahoo..)

The questions are:

1. Does the company have any existing reserves?
2. Has any independent verification been obtained regarding the recent Elk effort?
3. Will the gas, if found, still be “stranded” as has been asserted by a number of posters?
4. IF the gas is stranded how many years to build an LNG Plant?
5. How much will an LNG Plant cost to build?
6. Has anyone committed to put up the money to build an LNG Plant?
7. Is there significant risk that a plant may never be built due to lack of funds or other circumstances such as political instability?

1) Does the company have any existing reserves?

• No, but if they had,  would their share price be anywhere near where it is now?
• They are a couple of months away from that (see below under 2)
• The SEC is very strict as to recognizing reserves
• They had the best two flowing wells in PNG and Australia, there clearly is a lot of gas. These tests were performed by third party (IOC doesn’t perform DST test themselves, crew and equipment have to be flown in from abroad for every test)

2) Has any independent verification been obtained regarding the recent Elk effort?

• Not yet in a formal way, but there are one (two I believe Phil said) engineering bureaus (one is Netherland Sewell) working on that right now and Schlumberger is working on a model of the resource
• Boone Pickens has 3M shares, a masters in geology, and decades of industry experience. Wayne Andrews is a highly regarded analyst (and also has a masters in geology), Schlumberger has been working at the well with them, as have several other parties

3) Will the gas, if found, still be “stranded” as has been asserted by a number of posters?

• Yes, until they build the LNG facility or can plug it into someone else’s (Exxon and OilSearch also have plans to build one), it will be stranded. However:
• Even stranded gas has value, P2 reserves go for close to $5 per Mcf, even if stranded (as in the case of Petronas buying part of a coal seam field from Santos in Australia, for which an LNG facilility is planned for 2014. Australian coal seam gas is also more difficult and expensive to extract)
• Gas liquids are likely to provide a much earlier cash-flow generating opportunity, in the last production test, Elk4 flowed 1530 bb/d
• The refinery and retail business have turned around
• The company has almost 9M acres with 40 drilling prospects some of which share the same geology as Elk/Antelope. This is also a resource in short supply

4) IF the gas is stranded how many years to build an LNG Plant?

• LNG is in VERY short supply in Asia (see here, here). It’s not illogical to assume that if there is enough gas to support an LNG facility, one will be built (I’ve provided numerous sources on that on my website)
• But yes, it will take something like 4 years

5) How much will an LNG Plant cost to build?

• $5-7B, but they somehow still get to be build, as the economics behind these have thoroughly changed
• PNG also hold cost advantages over LNG plans in Australia. Wages are a fraction of those in PNG (and those Australian coals seam gas wells do not usually flow before being treated and many more wells have to be drilled and manned), also PNG has few restrictions on using Filipino labour (try that in Australia..)
• The parties that would finance at least part of it are likely to be big oil companies (awash in cash and short in opportunities) and/or Asian utilities scrambling to secure supplies

6) Has anyone committed to put up the money to build an LNG Plant?

• Negotiations are ongoing and are in “legal document drafting stage” according to Phil Mulacek on the recent cc
• The LNG facility is a separate company in which IOC only holds 1/3, the other parties are Merrill Lynch and Clarion Finanz.

7) Is there significant risk that a plant may never be built due to lack of funds or other circumstances such as political instability?

• Yes, if you argue that investment has risks, these risks exist (read IOC’s yearly reports and filings for a list, it’s no secret). But how big are they?

Compared to the risks, the reward is much better. We don’t think anyone in his right mind would short it at this point in time.