Most of this we’ve argued before, but there is a new interesting metric we found. It also crucially impinges on the difference between ‘contingent resources’ and reserves…

We’ve already painstakingly explained the difference between ‘contingent resources’ and reserves (here). IOC’s gas find is classified as ‘contingent reserves’. The difference between the two categories is not a discovery risk, it’s a difference of development risk.

That is, for the amount of gas in the ground, it doesn’t matter whether it’s a resource or a reserve. What differs is that reserves are guaranteed to be developed and resources are not.

The development risks largely depend on the economics, at what cost can these resources be developed and at what prices can they sell. Luckily, IOC is both close to the most lucrative LNG markets and it’s project metrics promise very competitive development costs, as it has a couple of crucial advantages:

Locational advantage

• PNG is close to the most lucrative LNG markets, Asia Pacific
• PNG has very low labour and regulatory cost
• PNG takes a modest amount in taxes and royalties

Project advantages

• Compared to Australian coal seam gas: no drilling, treating, and manning thousands of wells what can be achieved by a couple of wells at Elk/Antelope (the Conoco/Origin project needs to drill 20,500 wells to supply a four train LNG facility, and the expensive treatment with water carries large environmental risks).
• And then these development cost are compounded by the high (labour and regulatory) cost environment in Australia (compared to PNG).
• The project cost (capital spending) are in the tens of billions of dollars, compare that to IOC’s $5-7 billion.
• Compared to Exxon/OilSearch, IOC has advantages in much more profusely flowing wells, a pipeline that needs to be only 1/3 of the length of the Exxon/OilSearch one, one resource in the lowlands compared to scattered resources in the highlands and important infrastructure already in place (InterOil does not have to build a harbour, housing, power facilities, water facilities, deep water jetty system and InterOil already has land rights).

Now read the following quote from a comment to a Seeking Alpha article

• A typical gas well has a less than 1 BCF, a lifespan of 3-10 years (producing most in the first 1-3 years), huge drill costs ($1-$5M/well).

Now, compare that with the 1.5TCF per well in Elk/Antelope and you’ll realize that this ain’t no ordinary resource…

Which is why we argue that it’s development risks are low.