In a previous article on the economics of liquid natural gas (LNG), we concluded that a structural increase in demand for energy, especially clean energy like LNG, combined with technological improvements have combined to improve the economics of LNG production in a fundamental way.

Here, we’ll focus in on the situation in Papua New Guinnea (PNG).

Again, from the excellent Joseph Dancy, Adjunct Professor of Energy Law at Southern Methodist University and fund manager of the LSGI Technology Venture Fund L.P.

PNG’s largest gas field, the Hides field, was discovered only 20 years ago. Development has been slow due to low natural gas and oil/liquid prices and the remote location.

Five years ago LNG was a difficult sell – today companies cannot keep up with the skyrocketing demand. Even the U.S. is projected to substantially increase LNG imports domestic natural gas production stagnates and Canadian imports decline. One trade publication last month described developments in the LNG market this way:

• “The LNG industry is set for a large and sustained expansion, as during the past decade, improved technology has reduced costs and improved efficiency along the entire supply chain. This shift in natural gas market dynamics will further commoditize and diversify gas in the global market. New LNG carriers are 1,000 feet long, and require a minimum water depth of 40 feet when fully loaded. The existing global fleet of LNG carriers reached 217 by the end of 2006, with more than 11 million tons of LNG capacity. The order book for new LNG marine carriers to the year 2010 is some 120 firm and 32 proposed, meaning the fleet may exceed 370 vessels by then. The fleet had just 90 vessels in 1995 and 127 vessels in 2000. The current fleet transports more than 140 million metric tons of LNG every year (converted to 7Tcf), about 23 percent of gas trade internationally and about 6.5 percent of gas consumed worldwide.

Another article last month in the Petroleum Economist reflects the business environment for LNG from facilities in the PNG – Australian area:

• ‘With world demand expected to double by 2010, Australia’s Woodside Petroleum can’t make LNG fast enough. Perth, in Western Australia, may be the most isolated city in the world, but – says Woodside Energy’s chief executive – that doesn’t stop people visiting. “It’s amazing the guest list we have at our office,” says Don Voelte. “It’s everybody – from the US to Europe. Chile. Everybody.” They’re all after one thing: liquefied natural gas (LNG). “You couldn’t give the stuff away four years ago. Now we can’t keep up with demand.”

Gas demand is so robust that until now Woodside has not had to look further than Japan and South Korea. When it planned its marketing campaign for LNG from its fully owned Pluto project, off the coast of Western Australia, it started with a shortlist of established customers. “We went to three; two of them (Tokyo Gas and Kansai Electric Power) sold us out. Immediately.”

What this demonstrates is that LNG was not seriously developed in PNG in the past, but rising prices and improving technology is rapidly changing that. Interoil has had a good deal of luck (or one could actually call it foresight) in getting early in the game.

On the shift from the pipeline to LNG in PNG

Originally, there were plans to build a pipleline for the gas to Austrialia. Stocklemon (now Citron) was jubilant when a proposed pipeline for natural gas to Australia was scrapped as according to them, this implied the gas was ‘stranded’, an argument that is still echoed on the message boards.

However, that pipeline was never a good idea in the first place, as you can read in the following article (registration is required, so we publish it as a whole here).

NOW that Oil Search has finally admitted that the PNG pipeline was not a good option, attention has shifted to liquefied natural gas as a way of commercialising Papua New Guinea’s gas resources. In just a few years, the country could have as many as three LNG projects operating.

The PNG pipeline’s most passionate backer, Oil Search, has now conceded that LNG is a much more attractive option for commercialising PNG gas.

Piping gas across the seabed into one of the world’s cheapest gas markets always seemed to be a marginal proposition, and it is clear now that the pipeline’s backers failed to understand the potential of Queensland’s coal seam methane blocks.

But LNG might well deliver where the pipeline could not.

Oil Search managing director Peter Botten told journalists and analysts in a conference call that overseas companies were showing great interest in PNG’s LNG potential. “Subject to the right participation by the right partners, the market is there for PNG liquefied natural gas,” he said.

Oil Search was considering two separate projects, one led by ExxonMobil and another led by British major BG, according to Botten. The company was very likely to participate in an ExxonMobil-led LNG development that would draw on the Hides gas fields, according to Botten.

Oil Search’s Kutubu fields could also be linked with the Hides LNG project or they could supply a separate LNG project led by British major BG. It was also possible that Kutubu gas would be used for petrochemical projects rather than LNG, he said.

According to Botten, a study completed by Exxon Mobil showed there were sufficient reserves in the Hides and Angore fields to underwrite a “single mid-sized train LNG development”, with first deliveries targeted for around 2013.

Another study done in partnership with BG found that the Kutubu joint venture, if backed by one or more other gas fields in Oil Search’s portfolio, such as Juha, could proceed with an LNG facility with an annual capacity of between 3 million and 4 million tonnes that could be ready for first shipments by 2012.

Botten said the potential cost of liquefaction ranged between $600 and $800 per tonne of capacity and Oil Search was in commercial discussions with BG Group on developing the LNG plant and BG’s possible entry terms.

“We are targeting to have a decision on which horse to back, which project to pursue, by mid-2007,” he said. But ExxonMobil has warned that an LNG plant drawing on Highlands gas fields would face similar cost pressures to the pipeline project.

“The remoteness of the gas field from a suitable plant and marine terminal site will add to costs and the initial sizing of an LNG plant will be limited to a single train by currently available reserves,” said ExxonMobil.

Botten himself has previously conceded commercialising Highlands gas via LNG would be difficult. “An LNG project without other projects coming to help the infrastructure will always be a very, very tough business in PNG,” he said last August.

“That’s not to say it can’t be done, especially in this present gas price market. But I don’t believe it is the optimal first development.” Oil Search has previously indicated it was looking at liquefaction plant sites near Wewak on PNG’s north coast, as this port has good shipping access to giant Asian markets.

But Oil Search has a rival that is planning to develop lowland gas fields for shipment from Port Moresby in southeast PNG.

PNG LNG [now Liquid Niugini, shareholdersunite], the privately held company that will develop the $US4-6 billion LNG project, has set itself a schedule that could see two LNG trains built at its proposed site in Port Moresby, with the first LNG shipment ready by 2011.

Set up by project partners InterOil, Merrill Lynch and Clarion Finance, PNG LNG has had a coup in recruiting former North West Shelf director Jack Hamilton as its chief executive.

While other players in the region such as Oil Search, ExxonMobil and Santos have LNG project studies underway, PNG LNG is the only company to be moving on a plan.

The current one-train program is based on reserves from InterOil’s Elk discovery and anticipated reserves to come from the nearby Antelope prospect, which together are expected to hold more than 3 trillion cubic feet (Tcf) of gas. Good results from a second Elk well and Antelope-1 would give PNG LNG the confidence to start work on the first train in the second quarter of 2007.

Hamilton said as long as results from Antelope “don’t hold any surprises” contracts would be awarded for basis of design (BOD) and front-end engineering and design (FEED) work on the plant, which would begin in August 2007.

InterOil will start upstream work at Elk at the same time. The plant will be built next door to InterOil’s 30,000 barrel a day oil refinery at Port Moresby, negating any landholder issues and providing access to infrastructure.

BOD and FEED work should take about 15 months, which would take PNG LNG through to the third quarter of 2008. Design and engineering success, along with the results from another three wells that will upgrade the reserve, will be used to secure finance. Financial close is expected by the end of 2008.

By this schedule, the first cargo is due by December 2011, with the second train a distinct possibility a year later. It is estimated that about 5000 people will be needed to build the plant, with 150 to maintain it once it is operating.

Labour would be sourced from the Philippines and Indonesia, Hamilton said, with professional engineering services to be outsourced. He added that the tight skills market was unlikely to cause significant problems for PNG LNG because many of the projects currently planned in the Asia-Pacific region would not go ahead.

Hamilton said he was sceptical of rival LNG plans, saying it was unlikely that more than one LNG project in Papua New Guinea would come to fruition, and gas reserves owned by other companies would find their way to the first economic project for refining and shipping.

“There’s always the potential for more LNG projects but the reality is that there’ll probably be only one,” he said. “It would be a significant waste of resources [to have more than one LNG project]. It’s far easier to develop a brownfields project and continue to expand it than try to do three greenfields projects.”

PNG had about 30Tcf of gas upon which significant gas businesses could be based, Hamilton said. “If we keep pushing ahead on the Elk discovery, hopefully commercial commonsense will prevail and other companies will look to sell gas to us.”

So far that article.

It shows there is serious thinking about building several LNG facilities. IOC and partners (Merrill Lynch and a vehicle from Clarion Finanz) formed Liquid Niugini, which seems to be well placed to win this race due to the favourable location (lowland, in stead of highland, as its competitors) of the Elk-Antelope properties and infrastructure already in place.

Here is another article, arguing much the same (and another one)

Feeding the Hungry Chinese Dragon
Malcolm Bucholtz B.Sc, MBA Analyst

The writing is on the wall. China National Oil Company (CNOC), Exxon, Merrill Lynch and Interoil are all scrambling to secure one of the few remaining untapped oil and gas regions in the world.

And with $30 billion already slated for investment, you can bet we’ve reached the tipping point for the 50 TCF of natural gas these energy giants once wrote off as completely useless.

Papua New Guinea (PNG), with its largely tribal society, dense rain forests, and rugged mountain terrain, tucked away just north of the booming resource production of Southeast Asia and Australia, seemed absolutely worthless. With nearly 50 TCF of land-locked gas ready for production, gas resources cast off as “uneconomical,” are set to become wildly profitable and the making of billions of dollars will begin.

Papua New Guinea is loaded with gas. But if you can’t move it, you can’t produce it, and if you can’t produce it, you can’t sell it, so it’s absolutely worthless. But not for much longer….

China National Oil Company (CNOC), Exxon, Merrill Lynch and Interoil have now declared they will be building the $30B key to unlock PNG’s reserves. They’re building Liquefied Natural Gas (LNG) terminals. The 50 TCF of “worthless”gas in PNG isn’t going to be worthless anymore.

LNG has seen the most profound pricing agreements in commodity history over the last 6 months.

Invicta Oil & Gas – Creating a Stir on the Street

Invicta is wrapping up a C$45 million private placement financing priced at C$0.56 with no warrants attached to hold back the future value of the stock. C$25 million is earmarked to acquire a 90% interest in 8.4 million acres of land right in the gas-rich heart of Papua New Guinea.

These acres cover 6 large blocks of property, as illustrated below. Neighbors include InterOil, Exxon/Mobil, Woodside and even Oil Search Ltd. who currently is in negotiations for a $5B buyout. The big boys are moving in.

China, Japan, India and others are fighting over LNG contracts and with Papua New Guinea located within easy shipping distance, the LNG effort not only makes sense but is going to make early investors big time profits.

Invicta has already made a swift move ahead of the closing of the acquisition by asking one of its neighbors to the dance floor. Invicta has signed a memorandum of understanding (MOU) with InterOil that provides for some joint exploration activity and also for Natural Gas off-take agreements to the LNG plant to be built by the consortium that includes InterOil.

This is a huge move, for building a plant would have cost IGG in the range of $2 Billion. InterOil, by allowing IGG to tap into their plant, makes finding any gas economic. Now IGG won’t need to find a trillion cubic feet (TCF) of gas to be wildly successful.

Even an economic ¼ TCF will be worth big bucks when one stops to consider that in Papua New Guinea 1 TCF of gas equates to $1 Billion worth of LNG. The team at Invicta will be wasting precious little time in making progress in 2008. Invicta’s neighbors have already identified an estimated 25 trillion cubic feet of gas resource and with cash in the bank, Invicta is picking up the pace.

$800 million gas producer and Invicta’s PNG JV neighbor, InterOil, has already uncovered a hydrocarbon pay zone of 3255 feet. This is enough to make even the most emotionally hardened of investors weep tears of joy. Invicta’s plans call for an airborne magnetic survey, 150 line kms of 2-D seismic, and up to 4 wells to be drilled. Invicta will not be sitting around.

Look for news from all the neighbors including Interoil, their proposed JV partners. What could really drive the stock is approval on any one of the proposed LNG terminals. Once approved, a now uneconomic pool of gas becomes wildly profitable and land valued at $10 per acre should start selling for multiples.

I have seen prospective land in North America surrounded by 50 TCF’s of economic gas sell for well over $300 per acre. Invicta has 8.4M acres.

That puts Invicta’s pre-exploration value at $300 million. Invicta’s market value is mere $30 million. That’s a 90% discount and Invicta has not even ramped up the drilling…yet!

Put Invicta on Your Radar Screen. At the Market Traders, we will be watching the Invicta story with intense interest. We are initiating coverage of Invicta with a Speculative Buy rating on the stock. Invicta has all the makings of something special. However, there are still a few questions to be answered.

For instance, how much oil and gas is contained on Invicta’s property? And, what will be the economics of the gas resources discovered on Invicta’s property?

Nothing is a sure bet. And Invicta isn’t a 100% sure bet either. But with the likes of conservative heavyweights ExxonMobil, Merrill Lynch, and CNOC betting billions on the deal, Invicta’s about as close as you’re going to find.

Conclusions from these articles

1. Technological advancement and large price increases have made erstwhile uneconomic natural gas reserves in PNG very profitable
2. There is intense interest in natural gas from PNG and there would be plenty of financing sources for LNG facilities
3. IOC (through its 1/3 stake in Liquid Niugini) seems well placed to profit due to the favourable location of Elk and the infrastructure already in place at Port Morseby
4. Even if Liquid Niugini loses the race to build a LNG facility, it seems likely one will be build, giving gas from Elk a market anyway.