Long-Stalled LNG Project Moves Toward FID

An agreement between US independent InterOil and the government of Papua New Guinea will see th e latter acquire an additional 27.5% stake in the Gulf Liquefied Natural Gas (also known as the Liquid Niugini LNG project). While this will raise the government ' s share in the project to a substantial 50%, including a previous entitlement to 22.5%, it will allow the long - delayed project to advance. Inte r Oil 's failure to secure supply agreements and bring in a larger partner had led to a series of missed deadlines , which in May 2012 prompted the government to issue a threat to cancel the project entirely .

Although this threat was later rescinded, the outlook for the project remained uncertain, as negotiations between Royal Dutch Shell and InterOil, had at the time of writing, failed to secure an agreement despite the Anglo- Dutch major's interest in entering PNG ' s gas sector (see our online service, October 15 2012, ' Total Targets Asian LNG With Latest Farm-In').

The PNG Cabinet has now approved the project and InterOil has said it will advance a smaller than originally proposed 3.8mn t onnes per annum (mtpa) facility that was planned to come online by 2015. Having sold to the government half the Elk and Antelope gas fields that will provide feedstock for the terminal, PNG CEO Phil Mulacek said the project would now be 'fast-tracked' and the 'final phase of bidding and closure' would begin . T he company expects LNG partner agreement s to be finalised ' immediately ' . The swift advancement of the project will be supported by a special cabinet committee designed to quickly commercialise PNG's second LNG export terminal.

The announcement was good news for InterOil, which was battered by markets in May following the announcement that the project was at risk of being cancelled ; however , with the company's share price higher on the news, it may gain the momentum to exit its current downtrend.

InterOil Could Trend Upwards With Advancing LNG Project
InterOil Corp Stock Performance YTD (US$)

Forecast On Watch For Upward Revision, But Risks Remain

The government ' s support of the project , and the fact that the gas supply for the terminal has been identified and pre-front end engineering and design (FEED) largely completed, make s the project well poised to advance. However , InterOil has delayed a final investment decision (FID) on the project several times in its history, most recently in April 2012, and with agreements between the government and potential farm-in partner s yet to be finalised, we will await formal a FID before including Gulf LNG volumes in our forecast. In August , InterOi l suggested it may extend the deadline for a FID until December 31 2012 ; yet , on the back of an agreement with the government , we believe a formal decision on the project will come before 2013.

In its latest investor presentation from September 2012, the company cited heads of agreement (HOA) provisions with Noble Group , Guvnor , ENN and the Philippines Power Project for a total of 3.8mtpa of gas under 10-15 year supply agreements. While not binding, HOA agreements bode well for securing the formal supply agreements that will de-risk the project and support a positive FID.

Progress on the Gulf LNG project reinforces our bullish outlook for the PNG gas sector, and we highlig ht the positive role that the government played and looks set to continue playing, in advancing the project as a potential turning point in what remains a challenging business environment ( see ' Policy Improvements Seen As Resource Interest Grows ' , November 19 2012 ). This will help sustain growing interest in commercialising the country's gas, with Total recently entering the country ' s upstream with plans for an LNG project ( see ' Total Target s Asian LNG With Latest Farm-In ' , October 15 2012 ). The country's strategic location for exports to key growth markets in Asia and relatively underexplored acreage will sustain interest in its gas potential going forward.

PNG could even benefit from concerns regarding the future of an existing leading LNG exporter, with growing fears over reso urce nationalism supporting an increasingly uncertain outlook for Indonesian volumes ( see 'BPMigas Falls Victim To Resource Nationalism' , November 19 2012 ).

Yet , beyond the continued risks to upstream gas exploration from an absence of infrastructure, challenging environment and local opposition , as well as a unique land tenure agreement, we also cite the risk of cost overruns. While ExxonMobil ' s PNG LNG remains on track for 2014 first gas, costs had exploded by more than 20% to approximately US$19bn as a result of exchange rate movements, record rainfall over the past 2 years and wide-scale disputes with native landowners. While costs remain below neighbouring LNG projects in Australia , should development costs increase further it would undermine a key competitive advantage for LNG projects in PNG .

Table: PNG & Australian LNG Projects Compared
Project Schedule Capital Expend (US$bn) (US$bn) Plant Production (MTPA) Plant Type Cost Per MTPA (US$mn)
*InterOil Proposals From September 2012; Source: BMI Research
Ichthys (Australia) 2016 34 8.4 Phased 4047
Pluto 2012 (Australia) 2012 15.2 4.3 Phased 3536
Prelude (Australia) 2017 12.6 3.6 Vessel 3500
Wheatstone (Australia) 2018 30 8.9 Phased 3370
Gorgon (Australia) 2015 45 15 Phased 2933
PNG LNG (Australia) 2013 15 6.6 Phased 2272
Gladstone (Australia) 2017 16 7.8 Phased 2051
InterOil (Papua New Guinea) 2016* 9.3 (intial 5.2mtpa 2015)* 8 Phased 1160
PNG LNG (Exxon Led; Papua New Guinea) 2014 19 9 Phased 2111
This article is tagged to:
Sector: Oil & Gas
Geography: Papua New Guinea, Papua New Guinea, Papua New Guinea, Papua New Guinea

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