Some trouble in paradise.

Morgan Stanley on the political problems in PNG

MS IOC political problems

Since the remarks by Potape are factually extremely questionable (modular LNG and FLNG are not new technologies but new configurations of existing technologies that has the backing of the likes of Siemens, Samsung, Chart, MITI, Tokyo Gas, Shell, Deawoo, etc.) and it’s clearly not in the interest of PNG to torpedo the FLNG project.

We don’t think this will last. This is what Raymond James had to say this morning:

InterOil Corp. – Outperform 2;
Companies Mentioned – IOC
IOC: Thoughts on Floating LNG Project After Minister`s Skeptical Comments
Analyst(s): Pavel Molchanov & Cory J. Garcia
[Industry Classification: Energy/Exploration and Production]

* The National, a newspaper in PNG, published an article last night that quoted the country’s new energy minister making some skeptical comments about InterOil’s proposed floating LNG project. The article quotes Francis Potape as saying that he does not want PNG being used as a “guinea pig” for new technology. He added “we will not allow technology that has not been accepted and that has not been internationally practiced and approved.”

* Here are the observations we would make following this article. First, the headline risk resulting from the minister’s comments is obviously unhelpful, hence today’s weakness in IOC shares. Anything that increases uncertainty, even superficially, is inherently negative from the market’s perspective.

* Second, the substance of this is not something about which we would be overly worried. The minister is brand new in his position, and we would not be surprised if he is trying to create some waves to get his views in the spotlight. It is also important to note that the PNG government as a whole has historically been supportive of floating LNG; in fact, the national oil company, Petromin, is planning its own floating project. In addition, it is objectively misleading to call floating LNG a “guinea pig” technology. While it has not been historically commercialized, companies as large as Shell are pursuing such projects in multiple jurisdictions, including nearby Australia. Floating LNG is not in any sense a “science experiment.” For all these reasons, we do not believe it is likely that the PNG government will force InterOil to cancel its floating LNG project.

* Third, even assuming the worst-case scenario – the remote possibility of InterOil having to cancel its floating LNG project – the underlying natural gas would simply be reallocated to the onshore LNG component of the overall natural gas development. The two million ton per year floater could easily be replaced by an additional onshore modular plant of equal size. Ultimately, gas is gas – the resource is fungible.

* Finally, notwithstanding these comments, the PNG government remains broadly supportive of InterOil’s resource development. If anything, the government is encouraging the fastest possible timeline for development, with an eye to next year’s elections. In fact, in a July 1 article published in The Post Courier, another PNG newspaper, Francis Potape discussed a “fast track” regulatory process to support InterOil’s resource development.