Natural gas bidding war, they all want to supply to Asia

We might have to change our name to soon, but here is another boom story on the topic of natural gas, especially in Asia. A bidding war from one of the gas properties has begun. We keep saying, gas in Asia is hot..

ConocoPhillips Joins Origin in $8 Billion Gas Venture (Update2)

  • By Angela Macdonald-Smith
  • Sept. 8 (Bloomberg) — ConocoPhillips, the second-biggest U.S. oil refiner, agreed to pay as much as $8 billion to join Origin Energy Ltd. in a natural gas venture in Queensland, potentially trumping a hostile takeover bid from BG Group Plc.
  • ConocoPhillips will initially contribute $5 billion to take a 50 percent stake in the venture, which will convert coal-seam gas into liquefied natural gas for export to Asia, Houston-based ConocoPhillips said in a statement distributed on Business Wire. Origin, Australia’s biggest producer of gas from coal seams, surged as much as 28 percent to a record in Sydney trading.
  • LNG demand is set to increase by 10 percent a year through 2015, more than five times projected gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup Inc. Sydney-based Origin last month short-listed bidders for a coal-seam gas venture, saying this would provide more value for shareholders than BG Group’s takeover offer.
  • “This is a massive deal and the sum that ConocoPhillips is prepared to pay really puts a firm valuation under Origin,” said Gavin Wendt, a senior resources analyst at Fat Prophets Funds Management in Sydney. “It makes it impossible now for BG with its current offer.”
  • Origin rose as much as A$4.34, or 28 percent, to A$19.99. The shares were at A$17.50 at 10:27 a.m. local time. Credit Suisse Group is advising ConocoPhillips on the transaction.
  • `Decade of Growth’ The venture with ConocoPhillips “will transform Origin,” Managing Director Grant King said in a separate statement sent to the exchange. “We will have the financial strength to fund a decade of growth.”
  • Origin reiterated its recommendation that shareholders reject BG’s offer. An independent expert valued Origin at between A$28.55 and A$30.71 a share, compared with BG’s A$15.37 a share bid, it said. Grant Samuel & Associates Pty’s value range for Origin’s coal-seam gas unit alone is A$18.70 to A$19.49 a share, assuming completion of the ConocoPhillips transaction.
  • Origin plans to start buying back as much as A$1.275 billion of shares once the transaction is completed. It will also pay an immediate extra dividend to shareholders of 25 cents a share, doubling the 2008 distribution.
  • The companies plan initially to build two LNG production units, each with a capacity of 3.5 million metric tons a year, with deliveries scheduled to start by 2014. Origin will operate the coal-seam gas production part of the venture, while ConocoPhillips, which already operates an LNG plant in northern Australia, will operate the LNG output.
  • `Australian LNG Hub’. “With this investment, ConocoPhillips has gained access to the leading coal-bed methane resource in Australia,” Jim Mulva, chief executive officer of ConocoPhillips, said in the statement. “The company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets.”
  • ConocoPhillips will own 50 percent of Origin’s gross resource of 42 trillion cubic feet of coal seam gas. Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed.
  • LNG is natural gas that has been chilled to liquid form, reducing it to one-six-hundredth of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. On arrival, it’s turned back into gas for distribution to power plants, factories and households.

This article really demonstrate our thesis we have put forward on a regular basis on this site very neatly:

  1. Natural gas, being both a lot cheaper and cleaner than oil, is set to boom
  2. This is especially the case in Asia, where there is less gas, it’s main exporter Indonesia is cutting back exports, and economic growth increases the need for energy more than in other parts of the world and pollution does the same with demand for clean energy
  3. Oil majors, short on drilling prospects due to nationalization and awash with cash due to the energy boom, are really very interested in developing any possible opportunity

It’s all very relevant for InterOil

  1. InterOil’s gas is a lot cheaper to develop compared to coal seam gas due to a series of factors. Coal seam gas doesn’t normally flow before wells are treated, therefore, a lot more wells have to be drilled and manned, and labour cost are a fraction in PNG compared to Northern Australia where the coal seam gas properties are located. Australia also has tax and carbon emission disadvantages.
  2. InterOil’s resource is not yet quantified by a third party (but this will be done before the year is out, probably sooner), but that they have a lot of gas, sufficient to support an LNG facility, can hardly be in doubt. Their new estimates are between 10-15Tcf, which would be enough for a two train LNG facility
  3. Can it be in doubt that numerous oil majors would be interested not only in InterOil’s gas, but also in it’s 9M acres with many more promising drilling prospects? read the link under 3 above if you have such doubts..
  4. There are other possible parties, Asian utilities, the ones who are scrambling for the gas supplies. Click here for several good newspaper articles covering this
  5. We know that in another coal seam gas deal, $4.75 per Mcf was paid for P2 reserves from Santos (by Petronas) with monetization by an LNG an equally long time (2014) away (you can read that here in the article about Origin’s rejection of BG’s offer). BG offered not much less for Origin, you’ll notice that this stuff gets hot. PNG is on the radar screen of the majors, you can bet on that.

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