De-facto, not yet de-jure…

Worst case scenario: delay of a couple of months. But it basically means it’s in the bag…

A Summary:

1. After 13 drafts, there is a final agreement
2. Some cabinet ministers expressed objections, which are ather silly
3. So what’s really going on?
4. And finally, when can we expect a formal agreement?

Let us expand on these a bit.

1) Final Agreement

• A final project approval was submitted to the cabinet and nobody suggests it’s a bad deal. So it’s not likely there has to be any renegotiation. In fact, clearance has also been obtained from the Department of Petroleum and Energy and the State Solicitor.

2) Objections

• The reason stated by those who objected was that InterOil has not yet proven the commercial viability of it’s gas. Although formally correct, there really is nobody in his right mind who believes that.
• According to independent bureau Knowledge Reservoir, Elk/Antelope has 6.7Tcf of gas resources
• OilSearch itself has just 70.5Bcf of proven and probable reserves, although a good deal more resources, just like InterOil.
• With wells flowing at 20 times the rate and drilled at 1/3 of the cost of those of OilSearch, it is already pretty difficult to argue OilSearch’ project has better metrics. Add to that the fact that OilSearch wells are scattered in 5 different resources in the highlands at 3 times the distance to the prospective LNG facility compared to InterOil’s wells in a single resource in the lowlands, and InterOil’s LNG facility budgetted at half the cost of OilSearch’s, and it becomes more silly still
• Yet nobody argues OilSearch project is not economically viable, and how can anyone, with average long-term offtake agreements at $12 per Mcf and a cost base of $3 per Mcf
• The only possible way that InterOil’s project is less viable is if their wells peter out surprisingly quickly. In response to that, well respected petroleum engineer quipped the following: “With the thickest onshore vertical zone in the history of the World and the largest flow test in the history of the Universe I am not worried about depletion” One might also want to take this engineer’s wonderful understated sense of humor into consideration…
• And how silly will the argument look when Antelope2, which is weeks away from the top of the payzone, will confirm the reef, extending the resource much further and increasing it’s size?

3) So what is going on?

• Rumor has it, the rival (Exxon/OilSearch) want to delay InterOil’s project until they are secured financing (efforts are underway as we speak). Although we cannot ‘prove’, we nevertheless believe these rumors have a very high probability of being true.
• Although we do not believe that OilSearch and InterOil are fishing for the same financing sources, they (the Exxon/OilSearch project) apparently feel threatened and want to control as many eventualities as possible
• This confirms what industry insiders know, the InterOil project is in many respects considerably better (see above for some of the details)
• To a considerable extent, some plain silly competition could also be involved. Men will be men

4) The upshot

• De-facto Government agreement is there, albeit not jet de-jure
• It’s a matter of time before the latter will happen. The formal objections are already quite silly, and with pending Antelope2 results shortly, they will in all likelihood become more silly still
• The market knows de-facto Government agreement is in the bag, potential partners know it, at worst, it can only delay formal stuff, not anything material
• InterOil might have some cards up their sleeve to speed up the formal part. We hope you’ll understand we won’t go into details..
• So all this has largely become a non-issue, which is quite reassuring as the lack of an agreement and the lack of transparency was our only remaining worry.