From Bloomberg, basically confirming what we surmised before, with some observations and conclusions from us at the end. Let us state this clearly. We think the implications are monumental.

InterOil Seeks LNG Customers as Merrill Loses Rights (Update1)
By Angela Macdonald-Smith and Jordan Burke

• Oct. 23 (Bloomberg) — InterOil Corp., partner in a planned Papua New Guinea liquefied natural gas plant, said the venture will secure sales directly with customers after Merrill Lynch & Co. lost the exclusive right to negotiate to buy the fuel.
• The move, driven by the turmoil in financial markets, will “greatly enhance the project,” Phil Mulacek, chief executive officer of InterOil, said today. Merrill retains an equity interest in the venture, he said.
• InterOil said earlier this week that the board of PNG LNG Inc., the holding company that owns the LNG venture company, voted to strip Merrill of its right of first negotiation to buy fuel from the plant. The decision was taken “in response to recent financial unrest,” the Toronto-listed company said in a statement. Merrill Lynch’s commodities unit had held a right to buy all the output of the plant’s first two production units.
• “Interoil’s actions are a direct violation of its contract with Merrill Lynch,” said Bill Halldin, a Merrill Lynch spokesman, in a telephone interview. “We have at all times fulfilled our duties and responsibilities to this venture and will vigorously contest this in court. Merrill Lynch remains committed to the development of the LNG in Papua New Guinea.”
• Redeeming Merrill Shares
• The PNG LNG Inc. board also adopted resolutions to redeem Merrill Lynch’s Class A voting shares in the LNG venture, leaving it only with the Class B shares representing its economic interest in the project.
• “The capacity to do things in the market on a financial off-take was very probable prior to the whole world situation,” Mulacek said by telephone from Singapore. “The whole financial industry is different today. It was a pioneering structure prior to the financial problems in the market. We have to do traditional projects.”
• Merrill sold itself to Bank of America Corp. in a $50 billion, all-stock deal agreed last month as markets slid.
• Jack Hamilton, Melbourne-based chief executive officer of Liquid Niugini Gas Ltd., the project company, said the decision was a matter for shareholders and couldn’t comment further.
• InterOil is developing the LNG project with Merrill’s commodities unit and Pacific LNG Operations Ltd. to tap rising demand from Asian utilities for cleaner-burning fuel. The venture dropped plans to start exports in 2012 and may start up in 2013 or 2014, the company said earlier this month.
• Exxon Mobil Corp., the biggest U.S. oil company, is leading a rival LNG venture planning an $11 billion project in Papua New Guinea. LNG is natural gas chilled to liquid form, reducing it to 1/600th of its original volume, for transportation by tanker to destinations not connected by pipeline.

Well, it is more or less as we reported before. Some conclusions:

1. InterOil will only risk this if they have alternatives in the wings. Why else would they risk upsetting Merrill Lynch?
2. Notice as well that Merrill hasn’t lost its appetite for the project..
3. The more serious these legal problems are, the more unlikely it is IOC would risk these without having already an understanding with another party for an off-take agreement.
4. This would show what the longs have said all along, the Elk/Antelope resource is viable for building an LNG facility. Merrill seems to understand it, they’re fighting to keep in it.
5. About the status of the off-take contract with Merrill Lynch: InterOil has been interested in a an off-take (someone who buys the LNG) agreement with a third party for quite a while, which suggests to us the ‘exclusive’ contract they have with ML might not be that exclusive, otherwise, this wouldn’t make sense. We think the legal battle is more about who gets what. A little give and take could quite easily resolve it. Merril might even be bought out.

And what are Merrill’s chances? Well, not too good, by the looks of it:

• ” Under the agreement, Merrill Lynch Commodities and Pacific LNG will fund cash outlays for front-end engineering and design. Merrill Lynch Commodities is designated as the preferred purchaser and marketer of the LNG output and an affiliate of Merrill Lynch Commodities is designated as the preferred provider of structuring advice for the project financing.”

Now, what does it all add up to?

1. Two parties, one yet to be identified, now clearly seem interested in an off-take from a yet to be build LNG facility. These parties, who are more familiar with information than most if not all out in the public domain, are apparently of the opinion that the LNG facility will be build.
2. That is, they are of the opinion that there is enough gas in the ground to support such a facility, and that there will be finance available to construct such an LNG facility. The latter might very well come at least in part from the party that now seems so interested in direct off-take.
3. We’ve always argued in these pages that the longs had by far the best arguments. They had DST tests, seismic information, other geological data from coring, they could poinvt to the LNG shortage in Asia, to possible partners with deep pockets, to the Raymond James reports, Boone investments, etc. etc. , but now there is the first concrete indications that more than one party is actually fighting for the product of that yet to build (and financed) LNG facility. Until now, the shorts could always say that this would be difficult, and the only thing the longs could point at is that IOC’s gas would be very competitive
4. Now, we have the first signs that this last short refuge is starting to crumble before our eyes. It will be interesting to see what spin they possibly can give this. As we have reported here in our series ‘Daily Distortions’, their ability to redefine reality, with imploding wells, non-existing naked short sellers, etc. etc.  is unmatched. But it will sound distinctly shrill..

We cannot stress enough how important this is. It’s monumental, if you ask us.