OilSearch is hitting a little road-block

It’s not the end of the world for them, but we happen to know a cheaper LNG project. We think that this realization is growing. Perhaps more people noticed that big gap in break-even prices in the Morgan Stanley report..

These break-even prices from the recent Morgan Stanley report were:

  • OilSearch: $5.05 per Mcf
  • InterOil: $3.70 per Mcf (Antelope2 could well lower that a bit further)
  • Australian LNG projects: $6-8 per Mcf

Budgetted project cost are about half for InterOil’s project ($6B) versus the Exxon/OilSearch project ($12B+). Some of these Australian projects, like Gorgon, are much more expensive still, as these are unconventional gas plays (either coal seam gas or offshore).

From Dow-Jones (and here for the official oilsearch-trading-halt request from OilSearch):

Subject: (DJN) =DJ UPDATE: Oil Search Says LNG Stake Sale Ended, Flags Raising

UPDATE: Oil Search Says LNG Stake Sale Ended, Flags Raising 2009-10-19 00:32:11.643 GMT (Adds estimates on value of terminated IPIC deal, background) By Ross Kelly Of DOW JONES NEWSWIRES SYDNEY (Dow Jones)–Oil Search Ltd. (OSH.AU) on Monday announced the shock termination of a deal that would have helped it fund the development of a multibillion gas export project in Papua New Guinea and said it would launch an equity raising instead. Oil Search said in August it was in late-stage talks to sell a 3.5% stake in the Exxon Mobil-led (XOM) PNG LNG liquefied natural gas project to Abu Dhabi-based International Petroleum Investment Co., or IPIC.

The deal was meant to help Oil Search fund its remaining share of the massive development. JPMorgan estimated in May that Oil Search could get US$500 million for selling a 3% interest in PNG LNG, of which Oil Search currently owns about 34%. Australian integrated energy company AGL Energy Ltd. (AGK.AU) agreed to sell its PNG oil and gas assets, which included a 3.6% stake in the PNG LNG project, last October for US$800 million. Credit Suisse Energy Analyst Andrew Williams said in August he would expect Oil Search to get a better price compared with AGL Energy, given the significant de-risking of the PNG LNG project since late last year. That indicates Oil Search could launch a sizable capital raising, possibly close to A$1 billion.

Although the deal termination with IPIC is not an ideal situation for Oil Search or the PNG LNG project partners, which also include Santos Ltd. (STO.AU), it is unlikely to cause much disruption, with Oil Search likely to pull off the capital raising, albeit at a dilutionary discount. The PNG LNG partners are aiming to make a final investment decision on the project by year-end. Most of the funding for its construction is expected to be provided by export credit agencies. Oil Search said in August negotiations with commercial banks for additional funding commenced that month and it could possibly conduct a bond issue.

Oil Search did not provide an explanation for why the deal with IPIC has been terminated, although it is expected to make another announcement to the market later Monday. IPIC already has an involvement with Oil Search and PNG LNG. In March, it completed a purchase of the Papua New Guinean government’s 17.6% stake in Oil Search as the government sought capital to fund its share of the development. That deal, flagged last November, involved the government issuing exchangeable bonds for its holding in Oil Search. The exchangeable bonds have a strike price – the price at which they can be converted to Oil Search shares – of A$8.55 each. Oil Search last traded at A$6.75.

Its shares are currently in a trading halt. Along with the Chevron Corp.-operated (CVX) Gorgon LNG project, PNG LNG is considered by analysts as a frontrunner ahead of about a dozen planned LNG projects in Australia and Papua New Guinea. Unlike some of the other proposed projects, PNG LNG has already underpinned its full 6.3 million tons a year capacity with four separate offtake agreements – although finalization of the agreements into binding contracts remains a work in progress.

By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today’s most important business and market newNOTE: URL removed for security purposes – contact terry.gilsenan@interoil.com for support. NOTE: URL removed for security purposes – contact terry.gilsenan@interoil.com for support. .com/access/al?rnd=IIUIZDZrbtsyFh96OnfViQ%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires October 18, 2009 20:32 ET (00:32 GMT) Copyright (c) 2009 Dow Jones & Company, Inc.- – 08 32 PM EDT 10-18-09